ECON 2302 - Flashcard | StudyHippo.com

Q: The main reason that firms outsource is that

hiring low-wage workers reduces firms\' costs.

question

You own a pizza shop called "Pizza'R' Us". Currently you are paying your cooks an hourly wage of $20. You sell a medium pizza for $10 a pie. By hiring more cooks, you can increase your pizza production as shown in the following table. What is the total cost per day of hiring 3 cooks if they work 8 hour shifts?

answer

$480

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If one fails to account for opportunity costs in decision making, then applying the cost-benefit rule will be flawed because

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the costs will be understated.

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Refer to the figure above. The total labor cost of 4 employees is

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$38,000

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Jody has purchased a non-refundable $25 ticket to attend a Savage Garden concert on Friday evening. Subsequently, she is asked to go to dinner and dancing at no expense to her. If she uses cost-benefit analysis to choose between going to the concert and going on the date, she should

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include only the entertainment value of the concert in the opportunity cost of going on the date.

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Refer to the figure above. The marginal cost of the 3rd unit of activity is

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$20

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You save $10 on gas every week since you live close to the bus stop. You have class five days a week. What is your average benefit per day for living close to the bus stop?

answer

$2

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You need a TV, DVD player, and CD player. The sale flyer you got in the mail shows the TV that you want to buy is 10% off regular price this week. DVD and CD players are 20% off next week. Last week you drove downtown to save $30 on some concert tickets, a 15% savings. The regular prices for TVs, DVD players, and CD players are: Suppose instead that the DVD player is 20% off and the CD player is 5% off regular price. Should you drive downtown to buy the DVD player and the CD player?

answer

Yes, because you will save $34.

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An editorial in the paper argues that students should only be allowed to attend school so long as the marginal cost of educating that student is less than the marginal benefit of that student's education. The writer's reasoning is an application of

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normative economics

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Dividing the total cost of n units of an activity by n reveals the

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average cost

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Your classmates from the University of Chicago are planning to go to Miami for spring break, and you are undecided about whether you should go with them. The round-trip airfares are $600, but you have a frequent-flyer coupon worth $500 that you could use to pay part of the airfare. All other costs for the vacation are exactly $900. The most you would be willing to pay for the trip is $1400. Your only alternative use for your frequent-flyer coupon is for your trip to Atlanta two weeks after the break to attend your sister's graduation, which your parents are forcing you to attend. The Chicago-Atlanta round-trip airfares are $450. If the Chicago-Atlanta round-trip air fare is $350, should you go to Miami?

answer

Yes, there is economic surplus of $50.

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If the total benefits of watching 1, 2, and 3 baseball games on TV are 100, 120, and 125, then the marginal benefits are

answer

100, 20, and 5.

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Refer to the figure above. The President of What'sAMatterU decides to hire fundraisers as long as the average benefit exceeds the average cost, resulting in __________ employees being hired and a net benefit (total donations minus total labor costs) of __________.

answer

5; $17,080

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In the long-run if the production of all goods increases for a society (there is an economic growth), it will cause the production possibility curve to

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shift outward

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If Scout has an absolute advantage over Dill,

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Scout can accomplish more in a given period of time than can Dill.

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Any combination of goods that can be produced with currently available resources defines a(n)

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attainable point.

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Production Possibilities Curves for large economies generally have an outward bow shape because

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opportunity costs tend to increase with increases in production.

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The main reason that firms outsource is that

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hiring low-wage workers reduces firms' costs.

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Which of the following statements is NOT true about specialization?

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The variety of tasks associated with a particular job grows over time.

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Refer to the figure above. Pat's opportunity cost of delivering an extra pizza is producing _____ pizzas.

answer

2/3

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Dent'nScratch Used Cars and Trucks employs 3 salesmen. Data for their sales last month are shown in this table: Joe's opportunity cost of selling a car is ______ than Ralph's, and Joe's opportunity cost of selling a car is ______ than Larry's.

answer

less; more

question

Earth Movers and Shakers operates 3 iron ore mines. This table shows their daily production rates given the number of miners at each mine. All of the miners work for the same wage. Earth Movers and Shakers needs to fill an order for 100 Tons of ore in a single day, and has no other orders to fill that day. It should

answer

take 75 tons from Middle Drift and 25 tons from Mother Lode.

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Refer to the figure above. Based on their comparative advantages, Pat should specialize in _______ while Corey should specialize in _______

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pizza delivery; pizza production

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Refer to the figure above. The diagram shows Sven's Production Possibilities for one day. For Sven, the opportunity cost of spending one more hour studying

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one hour of paid work

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If a nation has the lowest opportunity cost of producing a good, that nation has a(n)

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competitive advantage

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Dent'nScratch Used Cars and Trucks employs 3 salesmen. Data for their sales last month are shown in this table: Joe's opportunity cost of selling a car is ______ than Ralph's, and Joe's opportunity cost of selling a car is ______ than Larry's.

answer

less; more

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Refer to the figure above. The average benefit of 4 units of activity is

answer

$5

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IBM employs Pam to assemble personal computers. Pam can assemble 1 computer if she works 1 hour, 4 computers in 2 hours, 8 computers in 3 hours, 10 computers in 4 hours, and 11 computers in 5 hours. Each computer consists of a motherboard that costs $200, a hard drive that costs $100, a case that costs $20, a monitor that costs $200, a keyboard at $60 and a mouse that costs $20. The cost of employing Pam is $40 per hour. What is the marginal cost of producing the computers Pam assembles during her 3rd hour of work?

answer

$2,440

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Every time you go to the grocery store, you try to choose the shortest line. But all of the lines always seem to be the same length. Why?

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Everyone else is trying to choose the shortest line, too.

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Economic models are intended to

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generalize about patterns in decision-making.

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In deciding the number of guitars to buy for his shop before the Christmas season, Mark is making a(n) __________________ decision.

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microeconomic

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The logical implication of the scarcity principle is that

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choices must be made

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Most of us make sensible decisions most of the time, because

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subconsciously we are weighing costs and benefits.

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At the very least, Joe Average and Bill Gates are both identically limited by

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the 24 hours that comprise a day.

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Refer to the figure above. The average cost of 4 units of activity is

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$25

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Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry maximizes his surplus by attending

answer

State College, because the difference between the benefit and cost is greatest there.

question

You own a pizza shop called "Pizza'R' Us". Currently you are paying your cooks an hourly wage of $20. You sell a medium pizza for $10 a pie. By hiring more cooks, you can increase your pizza production as shown in the following table. If you operate one hour every day, what is the marginal cost of the 3rd cook?

answer

$20

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Refer to the figure above. Moving from Point D to Point C reduces cattle herding by

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less than the increase in movies made.

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NAFTA helped ______ to exploit a comparative advantage in the production of goods made by unskilled labor.

answer

Mexico

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Refer to the figure above. If this restaurant makes 75 salads in one hour, approximately how many pizzas can it also make in that same hour, assuming efficient production?

answer

30

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This graph describes the production possibilities on the island of Genovia: The opportunity cost of producing one ton of agricultural products in Genovia is

answer

1/50 fewer car.

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Refer to the figure above. This economy might be operating at Point B if

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resources that are best suited for making movies are being used to herd cattle, while resources that are best used for herding cattle are being used to make movies.

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The production possibilities curve is

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the boundary that divides all production combinations into attainable ones and unattainable ones.

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Smith and Jones comprise a two-person economy. Their hourly rates of production are shown below. As Smith and Jones choose to efficiently produce fewer computers and more calculators, __________ devotes more time to calculators because his __________.

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Jones; opportunity costs are lower

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Refer to the figure above. Which of the following is true given the production possibilities shown?

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Points B, C, and E are equally efficient.

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Refer to the figure above. Point t is an __________ point in relation to the production possibilities curve.

answer

inefficient

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The benefits of specialization can be used to explain why

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trade can make both parties to the trade better off.

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Point A on a linear production possibilities curve represents a combination of 12 coffees and 3 cappuccinos, and point B represents 3 coffees and 6 cappuccinos. Suppose coffees are on the vertical axis and cappuccinos are on the horizontal axis. The opportunity cost of a cup of coffee is

answer

1/3 of a cappuccino

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Refer to the figure above. Corey's opportunity cost of producing an extra pizza is delivering ______ pizzas.

answer

1/2

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The following table shows the relationship between the speed of a computer's CPU and the benefits and costs. Assume that all other features of the computer are the same, i.e., CPU speed is the only source of variation. The marginal benefit of upgrading from a 600 Mhz computer to a 700 Mhz computer is

answer

$500

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Which branch of economics is most likely to study differences in countries' growth rates?

answer

macroeconomics

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The study of individual choices and group behavior in individual markets defines

answer

wrong: macroeconomics

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Matt has decided to purchase his textbooks for the semester. His options are to purchase the books via the Internet with next day delivery to his home at a cost of $175, or to drive to campus tomorrow to buy the books at the university bookstore at a cost of $170. Last week he drove to campus to buy a concert ticket because they offered 25 percent off the regular price of $16. Assume the minimum that Matt would be willing to accept to drive to the university campus is equal to the amount he saved on the concert ticket. What would be the amount of his economic surplus if he bought his textbooks at the university bookstore rather than via the Internet?

answer

$1

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Janie must either mow the lawn or wash clothes, earning her a benefit of $30 or $45, respectively. She dislikes both equally and they both take the same amount of time. Janie will therefore choose to _________because the economic surplus is ________.

answer

wash; greater

question

IBM employs Pam to assemble personal computers. Pam can assemble 1 computer if she works 1 hour, 4 computers in 2 hours, 8 computers in 3 hours, 10 computers in 4 hours, and 11 computers in 5 hours. Each computer consists of a motherboard that costs $200, a hard drive that costs $100, a case that costs $20, a monitor that costs $200, a keyboard at $60 and a mouse that costs $20. The cost of employing Pam is $40 per hour. What is the marginal cost of producing the computers Pam assembles during her 3rd hour of work?

answer

$2440

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f Jane works for 6 hours she can rent 12 apartments, and if she works for 7 hours she can rent 15 apartments. The marginal benefit of the 7th hour of Jane's work equals:

answer

3 apartments

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Sean studied 5 hours for his first Economics test and he scored 85; 6 hours for his second Economics test and scored 90; and 7 hours for his third Economics test and scored 95. He also studied 5 hours for his first Math test and he scored 68; 6 hours for his second Math test and scored 78; and 7 hours for his third Math test and scored 88. Sean's marginal benefit from the seventh hour spent studying Math is

answer

wrong: 15

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In deciding the number of guitars to buy for his shop before the Christmas season, Mark is making a(n) __________________ decision.

answer

microeconomic

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Last year interest rates fell. It was the focus of microeconomics macroeconomics economic naturalism marginal economics

answer

macroeconomics

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Which of the following statements is NOT true about specialization?

answer

The variety of tasks associated with a particular job grows over time.

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The slope of any production possibilities curve is __________ because __________.

answer

negative; to produce more of one good means less production of the other

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A country may have a comparative advantage in the production of cars if it imports most of the raw materials necessary to produce cars. its citizens prefer driving cars to other forms of transportation. it has strict environmental protection laws governing automobile emissions. it has the natural resources used to produce steel.

answer

it has the natural resources used to produce steel

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Refer to the figure above. It is __________ for this farmer to grow 1,000 bushels of wheat and no corn relative to growing 500 bushels of corn and no wheat.

answer

equally efficient

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Refer to the figure above. Corey's opportunity cost of producing an extra pizza is delivering ______ pizzas.

answer

1/2

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Refer to the figure above. Which of the following is true given the production possibilities shown?

answer

Points B, C, and E are equally efficient.

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In general, individuals and nations should specialize in producing those goods for which they have a(n)

answer

comparative advantage

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You are the Minister of Trade for a small island country in the South Pacific with the following annual production possibilities curve:

answer

wrong: counter, offering to give them 400 coconuts in exchange for 1,000 fish.

question

Earth Movers and Shakers operates 3 iron ore mines. This table shows their daily production rates given the number of miners at each mine. All of the miners work for the same wage. The opportunity cost of moving one miner from Mother Lode to Scraping Bottom is

answer

4 tons

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"As the price of personal computers continues to fall, demand increases." This headline is inaccurate because

answer

falling prices for personal computers increases quantity demanded, not demand.

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If pizzas are a normal good, then a decrease in the price of pizza will cause a(n)

answer

increase in quantity demanded

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As consumers' incomes increase, the demand for ground beef decreases. Ground beef is called a(n)

answer

inferior good

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Everyone in the neighborhood has been complaining about the deteriorating condition of the park, but nobody has cleaned it up. Why not?

answer

wrong: No single person's reservation price to clean the park makes it worth cleaning it.

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Suppose that both the equilibrium price and quantity of ketchup fall. The most consistent explanation for these observations is

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a decrease in demand for ketchup with no change in supply.

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When the price of a good is below its equilibrium value,

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consumers will bid the price up.

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Suppose one could rent a car or take the train to go to Chicago from Washington, D.C. If the price of train tickets increases

answer

the demand for rental cars will increase.

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As consumers' incomes decrease, the demand curve for bologna sandwiches shifts to the right. Therefore bologna sandwiches are a(n)

answer

inferior good

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Refer to the figure above. Suppose all the sellers in this market started out charging a price of $45 per unit. What is the most likely result?

answer

They would be forced to lower their prices because at $45 there would be excess supply.

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Suppose you bought a concert ticket from Ticketmaster for $50, but when you got to the concert scalpers were selling tickets in the same seating area as yours for $25. What is probably true?

answer

There is an excess supply of tickets for this concert at the Ticketmaster price.

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For two goods, X and Y, to be classified as substitutes, it must be the case that

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when the price of X rises, the demand for Y increases.

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When supply of a good decreases, consumers respond by

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decreasing their quantity demanded.

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A market comprised of a downward sloping demand curve that intersects an upward sloping supply curve is said to be stable because

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at any price other than equilibrium, forces in the market move price towards the equilibrium.

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The equilibrium price and quantity of any good or service is established by

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both demand and suppliers

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As the price of cookies increases, firms that produce cookies will

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increase the quantity supplied of cookies.

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In the market for coffee, for some consumers

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tea is a substitute

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Assume both the demand and the supply of beef decrease. Which of the following outcomes is certain to occur?

answer

The equilibrium quantity of beef will fall.

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If the demand for a good decreases as income decreases, it is a(n)

answer

normal good

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Refer to the figure above. Suppose supply increases substantially. Then

answer

the quantity demanded will increase.

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You have noticed that there is a persistent shortage of teachers in an inner-city school district in your state. Based on this observation, you suspect that

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the wage for teachers at those schools is lower than the equilibrium wage.

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Refer to the figure above. An increase in demand is represented by shifting from

answer

curve C to curve D.

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Refer to the figure above. Suppose all the sellers in this market started out charging a price of $45 per unit. What is the most likely result?

answer

They would be forced to lower their prices because at $45 there would be excess supply.

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A market in disequilibrium would feature

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either excess supply or excess demand.

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Suppose you notice that more and more people are driving gas-guzzling cars. Since you drive an economy car, their increased demand for gas:

answer

causes the price you pay for gas to increase.

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The supply of Shrek action figures is shown below. The bold, solid line is the current supply. Retailers learn that a new Shrek movie will be released next month. That news is likely to cause

answer

an immediate shift in the supply function to Supply A in anticipation of increased prices.

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Suppose that the production of oranges reduces global warming by .1%. The equilibrium price of oranges is _______ because not all of the _________ are accounted for in the marketplace.

answer

too low; benefits

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An outcome is socially optimal if it

answer

maximizes total economic surplus

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According to the equilibrium principle,

answer

market equilibrium exploits all opportunities for individual gain, but may not exploit gains possible through collective action.

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You can spend $5 for lunch and you would like to have two Double Cheeseburgers. When you get to the restaurant, you find out the price for Double Cheeseburger has increased from $2.50 to $2.99. You decide to have two single Cheeseburgers for lunch. This is best described as a(n)

answer

income effect

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Whenever the quantity demanded is not equal to the quantity supplied, the quantity that is actually sold in the market is

answer

the smaller of the quantity demanded and the quantity supplied.

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As the price of a good rises,

answer

more firms can cover their opportunity costs of producing the good.

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If the price of computers increases and the demand for monitors decreases, then

answer

computers and monitors are complements.

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Sellers tend to offer _______ for sale as price increases, and so the supply curve is ______ sloping.

answer

more; upward

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Refer to the figure above. What might cause Demand to shift from the Original Demand to the New Demand?

answer

an increase in incomes

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Assume that Joe is willing to produce another hamburger that costs $1 to make. Mary is hungry and is willing to buy a hamburger for $3. According to the No Cash on the Table principle, Joe and Mary

answer

will make a trade

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Refer to the figure above. At a price of $3, the market will experience ______________ in the amount of _________ units.

answer

excess demand; 5 units

question

The buyer's reservation price of a particular good or service is the

answer

maximum amount one would be willing to pay for it.

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Assume the demand for coffee increases while the supply decreases. Which of the following outcomes is certain to occur?

answer

The equilibrium price of coffee will rise.

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Refer to the figure above. What might cause Supply to shift from the Original Supply to the New Supply?

answer

New technology reduces the amount of coffee beans necessary to make a good-tasting pot of coffee.

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Refer to the figure above. A decrease in supply is represented by shifting from

answer

curve b to curve a

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A market comprised of a downward sloping demand curve that intersects an upward sloping supply curve is said to be stable because

answer

at any price other than equilibrium, forces in the market move price towards the equilibrium.

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Suppose that the equilibrium price of French fries rises while the equilibrium quantity falls. The most consistent explanation for these observations is

answer

a decrease in the supply of French fries with no change in demand.

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Assume both the demand and the supply of beef decrease. Which of the following outcomes is certain to occur?

answer

The equilibrium quantity of beef will fall.

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Gertie saw a pair of jeans that she was willing to buy for $35. The price tag, though, said they were $29.99. Therefore,

answer

Gertie should buy the jeans because the price is less than her reservation price.

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Efficiency is an important goal in economics because it

answer

assures a higher level of output.

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Suppose one knows two facts: first, the market for prescription drugs experiences chronic shortages and second, government sets the price for prescription drugs. One can conclude that the

answer

government has set the price below the equilibrium price.

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Almost every holiday season at least one gift idea achieves fad status. When that happens, prices tend to increase dramatically. Why?

answer

Quantity demanded exceeds quantity supplied.

question

One observes that the equilibrium price of a DVD player increases and the equilibrium quantity increases. Which of the following best fits the observed data?

answer

An increase in demand with supply constant

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Which of the following is not required for total economic surplus in a particular market to be maximized?

answer

Government regulation of the market is needed.

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In Cuba, a bureaucratic committee makes the production decisions for the country's firms and factories. Therefore, Cuba is an example of a

answer

centralized economy.

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If the demand for Personal Computers (PC) shifts to the right (up) as consumers' incomes rise, PC's are

answer

normal goods.

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A good example of central planning at work in the USA would be

answer

New York City's rent control.

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As the price of flour (an input into the cookie production process) increases, firms that produce cookies will

answer

decrease the supply of cookies.

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As coffee becomes more expensive, Joe starts drinking tea, therefore quantity demanded for coffee decreases. This is called

answer

the substitution effect.

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If the demand for steak increases as income increases, this means that steak is a(n)

answer

normal good.

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If supply decreases while demand increases simultaneously, the new equilibrium price is ___________ and the new equilibrium quantity is _________________.

answer

higher; indeterminate

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Jessica's marginal cost for producing a pitcher of lemonade is $0.25. Therefore, $0.25 can also be called her

answer

reservation price.

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A shortage occurs when

answer

quantity demanded exceeds quantity supplied.

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Everyone in the neighborhood has been complaining about the deteriorating condition of the park, but nobody has cleaned it up. Why not?

answer

No single person's reservation price to clean the park makes it worth cleaning it.

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A movement along a demand curve from one price-quantity combination to another is called

answer

a change in quantity demanded.

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If, in a particular market, all unexploited opportunities have been realized, one can conclude that

answer

the market is in equilibrium.

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If the price of cheese falls by one percent and the quantity demanded rises by 3 percent, then the price elasticity of demand for cheese has a value of

answer

3

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Refer to the figure above. The slope of the demand curve (if you ignore the negative sign) is

answer

.5 Rise over run

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Suppose that a new drug has been approved to treat a life-threatening disease. Demand for that drug is shown on the graph below. Prior to approval of this drug, the only treatment for this condition was non-prescription pain relief. Demand for one brand of non-prescription pain reliever is also shown on the graph below. The main reason for the difference in the slopes of the demand curves is that

answer

one drug has many substitutes and the other does not.

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Refer to the figure above. The slope of the demand curve D1 is _____ and of demand curve D2 is ______.

answer

2; 1/2

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If the elasticity of demand for the latest American Idol CD is 1.4, this means

answer

a 5% increase in the price leads to a 7% decrease in quantity demanded.

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The cross-price elasticity of two goods that are close substitutes can never be

answer

negative

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If the slope of the demand curve is -0.167, price is $8 and quantity demanded is 12 units, then demand for this good is

answer

elastic.

question

Suppose that a new drug has been approved to treat a life-threatening disease. Demand for that drug is shown on the graph below. Prior to approval of this drug, the only treatment for this condition was non-prescription pain relief. Demand for one brand of non-prescription pain reliever is also shown on the graph below. The manufacturer of the new drug would _______ total revenue by increasing the price from $15 to $25.

answer

increase

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Suppose the price P gives us a price elasticity of demand equal to 1. It is on the ______ portion of the demand curve.

answer

unitary elastic

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Home football games at your college are free for students and most of the students like to go to the game. What is the non-monetary cost for you to go to the game?

answer

The 5 hours you waited in the line to get ticket.

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The law of demand indicates that as the cost of an activity

answer

falls, more of the activity will occur.

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During the semester, the student union charges $3.00 per scoop. If every student who buys ice cream has the demand curve shown, when there are 1,000 students, _____ scoops are sold per week.

answer

4,000

question

During a regular semester, there are 500 students. Each student's demand for ice cream is as depicted above. When the price of one scoop of ice cream is $2.00, those 500 students purchase a total of

answer

6,000

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In some countries, medical care is provided free to citizens and paid for by the government. In those countries, medical care is

answer

rationed by non-monetary costs.

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Refer to the figure above. The firm earns a ___________ of __________ when it produces 120 units of output.

answer

profit; $64

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Jenny sells lemonade by the street during the summer time. Several other kids also sell lemonade in Jenny's neighborhood. If the market is perfectly competitive and price is already at the equilibrium level, Jenny can increase her revenue if she

answer

keeps the price the same and increases the output.

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Improvement in production technology causes an increase in

answer

supply by firms and an increase in market supply.

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Suppose a firm is collecting $1,999 in total revenues and the total cost of its fixed factors of production fall from $500 to $400. One can speculate that the firm will

answer

earn greater profits or smaller losses.

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Refer to the figure above. What is the seller's reservation price when producing 250 units?

answer

$4

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Refer to the figure above. If the market consists of 50 identical sellers, how much will be supplied at the price of $14?

answer

17,500

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As the market price of a service increases, more people will decide to perform that service because

answer

more people will find that the market price exceeds their reservation price.

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Assume that equipment costs $10 per unit and each worker earns $5. Average Variable Costs are minimized when output is approximately

answer

11 units

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John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7/hr for as many hours as he chooses to work, and cleaning windows for the businesses in downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he cleans a day, as shown in the table below:

answer

$14

question

Refer to the figure above. When P = 3, the price elasticity of demand for the demand curve D1 is ______ and D2 is _____.

answer

1/3; 3

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If the price elasticity of demand for football game ticket is 2, if the price increases by 1% quantity demanded decreases by

answer

2%

question

If the demand for salad dressing increased when the price of lettuce decreased, cross price elasticity would be ________, and we would say these two goods are _______.

answer

negative; complements

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Refer to the figure above. The price elasticity of demand at point A is

answer

5/2.

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If consumers respond to a 10% price reduction by buying twice as much, we would conclude that

answer

the absolute value of price elasticity at the original price was greater than one.

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Firms that produce goods with many substitutes will find that

answer

lowering price increases total revenues.

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If the percentage change in price for a good is less than the percentage change in quantity demanded of that good, then the demand for that good, with respect to price, is

answer

elastic

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Refer to the figure above. At P = 8 and Q = 4, D1 is ______ elastic than D2, which is shown graphically as D1 being _____ D2.

answer

less; steeper than

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Suppose the price P gives us a price elasticity of demand equal to 1. Any price higher than P will move us to the _______ part of the demand curve and any price lower than P will move us to the _______ part of the demand curve.

answer

elastic; inelastic

question

When the price of insulin was $10, consumers demanded 100 units, when the price was $15, consumers demanded 100 units, and when the price was $20, consumers demanded 100 units. Based on this information, insulin must have a(n) _______ demand curve.

answer

perfectly inelastic

question

Why do lines tend to be longer at the bank teller in a poorer neighborhood?

answer

Low-income consumers are not willing to pay for shorter lines.

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After subsistence levels of food, shelter, and clothing are provided,

answer

all other goods and services are "wants."

question

Moe's parents frequently tell him how it was back in their childhoods. They had a smaller house, fewer toys, only one car and one black-and-white TV, but they were happy. In fact, Moe's parents claim that they were happier than Moe and his friends are today even though Moe and his friends all have much more stuff. Moe concludes that

answer

the social forces that influence demand have changed since Moe's parents were young.

question

Refer to the figure above. The market demand curve indicates that at a price of $0.75, _______ cans of soda will be demanded.

answer

50

question

In most markets, scarce goods or services are rationed among competing users, and ______ perform that task.

answer

monetary prices

question

Refer to the figure above. In this market, equilibrium price is ____ and quantity is _______.

answer

$25; 10

question

One implication of the shape of the demand curve that faces a perfectly competitive firm is that

answer

If the firm increases its price above the market price, it will earn zero revenue.

question

The location of a firm will be a _________ factor of production in ________ run.

answer

variable; the long

question

Refer to the figure above. As the firm increases employee-hours from 1 to 2, output increases by

answer

33 units

question

Congestion of the work space and fixed factors of production at the firm

answer

demonstrate the law of diminishing marginal returns.

question

Individual supply curves generally slope __________ because _______

answer

upward; the easiest tasks are completed first.

question

Average total cost is defined as

answer

Total cost divided by output

question

Jenny sells lemonade by the street during the summer time. Several other kids also sell lemonade in Jenny's neighborhood. The lemonade market in Jenny's neighborhood is more likely to be perfectly competitive if

answer

Each lemonade stand sells similar products.

question

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7/hr for as many hours as he chooses to work, and cleaning windows for the businesses in downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he cleans a day, as shown in the table below: What is John's hourly opportunity cost of cleaning windows?

answer

$7

question

Adam Smith believed that the individual pursuit of self-interest

answer

sometimes worked to advance social benefits.

question

Refer to the figure above. The net effect of the subsidy program ______ total economic surplus by _____.

answer

decreased; $500

question

Refer to the figure above. With the subsidy, what is the producer surplus?

answer

$0

question

Refer to the figure above. In the long run, equilibrium price is _____ and an individual firm's profit maximizing quantity is _______.

answer

$15; 3 thousand

question

Refer to the figure above. After the subsidy, consumer surplus ______ by ______ per day.

answer

increased; $6500

question

Normal profits occur when

answer

economic profits are zero.

question

Refer to the figure above. Subsidies are most likely to

answer

reduce total economic surplus.

question

Suppose a market is in equilibrium. The area between the demand curve and the market price is

answer

consumer surplus.

question

Unlike economic profits, economic rents

answer

can't be easily driven to zero by entry.

question

Ingrid has been waiting for the show "Mamma Mia!" to come to town. When it finally does come, ticket prices are $60. Ingrid's reservation price is $75. But when Ingrid tries to buy a ticket, they are sold out. Ingrid decides to try to buy a ticket from a scalper (a person who has purchased extra tickets at the box office with the intent to resell those tickets). If Ingrid finds someone who is willing to sell her a ticket for $70, she should

answer

purchase it, leading to an increase in surplus.

question

Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment. For Pat to earn normal profit (loss), accounting profit would have to be _______.

answer

$35,000

question

Refer to the figure above. _____________ work together to guide resources to their highest value.

answer

The rationing and allocative functions of price

question

Chris was the business manager for a real estate firm earning an annual salary of $40,000. Then Chris decided to become a consultant. Chris hired an administrative assistant at $15,000 per year and rents office space (utilities included) for $3,000 per month. Chris earned $100,000 in total revenue the first year. Chris's accounting profit is _______ and Chris's economic profit is _______.

answer

$49,000; $9,000

question

Excess demand in the market is evidence of

answer

the opportunity for surplus-enhancing trades.

question

Which of the following is NOT guaranteed by the efficiency of the market equilibrium?

answer

Rich and poor will have adequate access to the good.

question

Refer to the figure above. Generally, ______ motivate firms to enter an industry while ______ motivate firms to exit an industry.

answer

economic profits; economic losses

question

Suppose a market is in equilibrium. The area between the market price and the supply curve is

answer

producer surplus.

question

Suppose all firms in a perfectly competitive industry are experiencing economic profits. One would expect that, over time, the number of firms will _______ and the market price will _____.

answer

rise; fall

question

The economic theory of business behavior assumes that the goal of a firm is to

answer

maximize its profit.

question

The Smart for One, Dumb for All principle indicates that

answer

pursuing selfish interests sometimes conflicts with social welfare.

question

At the price of $4.00, sellers offer _____ and buyers want to purchase ____ pounds of oranges a day.

answer

10; 30

question

Refer to the figure above. After the price ceiling at price = G is imposed, consumer surplus _________ and is represented by the area _______.

answer

increases; GAEF

question

Ingrid has been waiting for the show "Mamma Mia!" to come to town. When it finally does come, ticket prices are $60. Ingrid's reservation price is $75. But when Ingrid tries to buy a ticket, they are sold out. The fact that Ingrid cannot buy a ticket to "Mamma Mia!" is evidence of

answer

A situation that is not Pareto efficient.

question

Cost saving developments, e.g., a new production procedure that shortens a production process by two steps, in a perfectly competitive industry lead to

answer

economic profits for a few firms for a short time.

question

Refer to the figure above. Suppose a price ceiling is imposed at $4. The value of the consumer surplus is

answer

$20

question

Refer to the figure above. With the subsidy, the equilibrium price of sugar is _____ and the equilibrium quantity is ______ tons per day.

answer

$1000; 14

question

If owners of a business are receiving total revenues just sufficient to cover all their explicit and implicit costs, they are

answer

earning a normal profit.

question

Refer to the figure above. With no subsidy, the equilibrium price of sugar is _____ and the equilibrium quantity is ______ tons per day.

answer

$1,500; 10

question

Price ceilings above the equilibrium price result in

answer

a market that is able to reach Pareto Efficiency.

question

Refer to the figure above. If the market is unregulated, the value of consumer surplus is

answer

$16

question

Duke is a particularly highly skilled negotiator. The law firm that hires Duke is able to collect twice as much revenue per hour of Duke's time than it can for any other negotiator in town. The increased revenue will

answer

all go to Duke because, if it didn't, another firm could hire Duke away.

question

Explicit costs - measure the opportunity costs of the business owners - are always fixed in the short run - measure the payments made to the firm's factors of production - are always variable in the short run.

answer

measure the payments made to the firm's factors of production.

question

Adam Smith claimed that an efficient allocation of resources was the byproduct of

answer

the involvement of self-interested buyers and sellers.

question

Refer to the figure above. An output level of 25 units results in accounting profits of _____ and economic profits of ________.

answer

zero; -$8

question

If you were to start your own business, your implicit costs would include

answer

the opportunity cost of your time.

question

Chris was the business manager for a real estate firm earning an annual salary of $40,000. Then Chris decided to become a consultant. Chris hired an administrative assistant at $15,000 per year and rents office space (utilities included) for $3,000 per month. Chris earned $100,000 in total revenue the first year. In order for Chris to earn normal profit, her accounting profit would have to be ______

answer

$40,000

question

Market equilibrium is considered efficient because

answer

no more trades remain that benefit some without harming others.

question

Explicit costs - are the only costs that matter to business owners - usually exceed implicit costs - are difficult to measure - appear on the firm's balance sheet.

answer

appear on the firm's balance sheet.

question

Suppose several United States software design companies compete with each other in a perfectly competitive environment. If one company decides to move some of its offices to a low-wage country in order to reduce operating costs

answer

the other companies will also move to the low wage country in order to remain in the industry.

question

Chris was the business manager for a real estate firm earning an annual salary of $40,000. Then Chris decided to become a consultant. Chris hired an administrative assistant at $15,000 per year and rents office space (utilities included) for $3,000 per month. Chris earned $100,000 in total revenue the first year. Chris's opportunity cost of running her own business is ______ which is the _______

answer

Personal savings of the owner invested in the firm $40,000

question

Refer to the figure above. If S2 is the short-run industry supply curve for a maple syrup producer, the profit maximizing output for a single firm is ______ gallons per week.

answer

2,000

question

Refer to the figure above. The cost of subsidy, which must be borne by taxpayers, is

answer

$7,000

question

Refer to the figure above. With no subsidy, what is the producer surplus? - $0 - $6,000 - $7,500 - $17,000

answer

$0

question

The price of $4.00 per pound will lead to a(n) _____ of _____ pounds of oranges per day.

answer

excess demand; 20

question

Which ordering best describes how a perfectly competitive industry would respond to a sudden increase in popularity of the product? The market demand function will shift to the right causing the market

answer

price to increase. Increased profits will encourage new firms to enter, shifting the market supply function to the right. Long-run market equilibrium will be at a higher quantity but at the same price as before the surge in popularity.

question

Superstar professional athletes can sustain their economic rents because

answer

if their current team does not pay, they can take their unique talents to another team willing to pay.

question

The company that owns all of the vending machines on your campus has doubled the price of a can of soda. They notice that they are selling approximately 15% fewer sodas. Price elasticity of demand for sodas from the campus vending machines is

answer

inelastic

question

A change in consumers' income levels

answer

changes demand

question

As one moves down along a linear demand curve (i.e., from high price, low quantity pairs to low price, high quantity pairs), the demand

answer

becomes less price elastic.

question

The demand for a good is elastic with respect to price if the price elasticity of demand is

answer

greater than one

question

If the consumers cannot switch to a close substitute when the price of a good increases, the demand for that good is likely to be

answer

inelastic

question

You have found data that indicates that the income elasticity of demand for generic (unbranded) shampoo is -0.7. You conclude that generic shampoo

answer

is an inferior good.

question

If the price elasticity of demand for chicken is 2, a 20% decrease in the price of chicken will lead to a

answer

10% increase in the quantity demanded of chicken.

question

In surveying their alumni, State U's economics department discovered that ramen noodle consumption declined as soon as students graduated and found jobs. One conclusion the survey team might draw from this result is that

answer

ramen noodles are an inferior good.

question

When calculating price elasticity of demand, if the numerator is positive, the denominator is

answer

When calculating price elasticity of demand, if the numerator is positive, the denominator is

question

When Joe's Gas raises its prices for regular unleaded, total revenue from regular unleaded falls to zero. It must be the case that

answer

the demand for Joe's regular unleaded gasoline is perfectly elastic.

question

At the midpoint of a straight-line demand curve, the price elasticity of demand is always

answer

zero

question

Refer to the figure above. In the equilibrium shown, price is ________, quantity is ___________ and consumer surplus is __________.

answer

$60

question

Refer to the figure above. On the basis of the above graphs, it appears that __________ has the strongest demand for soda.

answer

Mallory

question

Suppose you are a government analyst and you think beans are particularly nourishing. You decide to subsidize beans in order to encourage people to eat more of them. (By subsidizing an item, consumers pay a lower price.) After you successfully lower bean prices, you notice that consumption of beans has fallen. What went wrong?

answer

The income effect caused people's real income to rise so they purchased less of what they considered to be inferior goods.

question

Refer to the figure above. At a price of $2.00, Laura's quantity demanded is______ and Chris' quantity demanded is _____.

answer

9; 14

question

Refer to the figure above. What is the equilibrium price of bananas in this market?

answer

$1/pound

question

Refer to the figure above. Suppose the dairy lobby convinces the government to impose price controls in this market. If the government requires all cheese to be sold for a price of at least $8, consumer surplus would _________ and the market would ________________

answer

decrease; reach a new equilibrium at $8.00.

question

Refer to the figure above. Total consumer surplus received by the buyer is

answer

$100

question

Jenny sells lemonade by the street during the summer time. Several other kids also sell lemonade in Jenny's neighborhood. Suppose that the first week of summer, Jenny charged 25 cents for an 8-ounce cup of lemonade, her next-door neighbor Sam charged 50 cents for an 8-ounce cup of lemonade, and Alex across the street charged 15 cents for an 8-ounce cup of lemonade. What is most likely to happen?

answer

Eventually prices will equalize at all three lemonade stands.

question

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7/hr for as many hours as he chooses to work, and cleaning windows for the businesses in downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he cleans a day, as shown in the table below: Your math professor has assigned 20 homework problems that are due next week. After working for an hour, you notice you have completed 4 problems. After another hour, you have completed 3 more problems. During the third hour, you finish 2 problems. What economic principle best explains this?

answer

The low-hanging-fruit principle: you completed the easiest problems first.

question

Last summer, Casey took fresh vegetables to sell at the Farmer's Market, but this year, Casey did not plant any vegetables and went to work at the local bank. It was easy for Casey to leave the vegetable growing business because

answer

demand for vegetables is price inelastic.

question

An increase in consumer demand for espresso would lead to a(n) ____, while an increase in the number of firms producing espresso would lead to a(n) _______.

answer

increase in supply; increase in quantity supplied

question

An imperfectly competitive firm is one that

answer

has some degree of influence over the price it charges for its output.

question

Refer to the figure above. Suppose a law is passed requiring restaurants to charge no more than $25 per meal. This law would

answer

unambiguously increase consumer surplus and not change producer surplus.

question

If the firm spends $400 to produce 20 units of output and spends $880 to produce 40 units, then the marginal cost of increasing production from 20 to 40 units is

answer

$24

question

Assume that the production technology required to produce goods X and Y are very similar. If a firm that is producing good X notices that the market price of good Y is rising, it will

answer

shift into producing good Y.

question

If resources are misallocated, then the presence of opportunities to profit

answer

will exist and self interests will ensure someone will profit.

question

A price ceiling that is below the equilibrium price will cause

answer

producer surplus to fall.

question

Refer to the figure above. Which of the following would be an example of the rationing function of price?

answer

Bill Gates purchasing the Mona Lisa for $5 billion

question

Price ceilings that are below the equilibrium price result in

answer

shortages

question

E-commerce and an Internet presence are important to many firms, requiring employees with specialized skills that are in short supply. The invisible hand solves the employment problem by

answer

giving selfish workers the incentive to acquire the skills in order to receive high wages.

question

Refer to the figure above. Suppose S2 is the industry supply curve. At the profit maximizing quantity price will ______ the opportunity cost of the resources required to enter the market and firms will _____.

answer

exceed; enter the market

question

The following graphs depicts a perfectly competitive firm and its market. Assume that all firms in this industry have identical cost functions. In the long run equilibrium in this market,

answer

price will equal $5, and there will be 10 firms in the industry.

question

The following graphs depicts a perfectly competitive firm and its market. Assume that all firms in this industry have identical cost functions. The long run equilibrium quantity in this industry is

answer

300

question

An example of an implicit cost is

answer

interest paid on a bank loan.

question

In exchange for a share in the revenues earned on campus, State U has granted CheapFizz the exclusive right to sell soft drinks in the student union and in vending machines on campus. Prior to the deal, three soft drink companies sold beverages on campus; now no other soft drink company is allowed to sell its products on campus or at university events. Prior to the deal, a 12-ounce can of CheapFizz sold for 75 cents. After the deal you would expect a 12-ounce can of CheapFizz to sell for

answer

more than 75 cents because other firms must exit the market.

question

In many towns in the United States, a single firm provides electricity. Those firms are

answer

monopolists

question

Industries in which the firms have large fixed costs and small, constant marginal costs will, over time,

answer

see an increase in the average size of firms.

question

Imagine that you are an entrepreneur, making designer T-shirts in your garage. Your accountant has estimated that your firm's total costs are TC = 300 + 10*Q. If you make 1000 T-shirts, your average total cost is _______.

answer

$10.30

question

The common feature in pure monopoly, oligopoly, and monopolistic competition is

answer

downward sloping demand.

question

The hurdle method of price discrimination usually _____ consumer surplus and _____ producer surplus.

answer

increases; increases

question

Suppose that there are just two firms in a small market. Acme Manufacturing's Total Costs equal $100 + $3 Qty. Generic Industries' Total Costs equal $500 + $3 Qty. Compare cost functions at the two firms. Which statement is true?

answer

Acme and Generic have equal marginal costs.

question

Because the monopolist charges a price in excess of marginal costs, it must be the case that the monopolist

answer

produces less than the socially efficient level of output.

question

A monopolist calculates its marginal revenues to be $15 and marginal costs to be $16. The firm

answer

should decrease output.

question

Relative to a single price monopolist, a price discriminating monopolist generates

answer

more total surplus.

question

Refer to the figure above. The socially efficient price and output combination is

answer

$5 and 7.

question

The monopolist will maximize profits if it produces where

answer

marginal revenue equals marginal cost.

question

To sell an extra unit of output, a perfect competitor __________ while an imperfect competitor __________.

answer

does not alter price; must lower price

question

Refer to the figure above. If the monopolist decreases price from $14 to $12, its total revenue will ______.

answer

increase by $8

question

Campus Bookstore is the only textbook supplier in the town, a profit-maximizing business. Assume that the marginal and average total cost for each book is $12. When the bookstore does not price discriminate, consumer surplus is ________, and when the bookstore can charge two different prices for this book, the consumer surplus will be _______.

answer

$60; $66

question

Refer to the figure above. At the profit-maximizing level of output, profit for this monopolist is _______.

answer

$444.62

question

Campus Bookstore is the only textbook supplier in the town, a profit-maximizing business. Assume that the marginal and average total cost for each book is $12. How much should the bookstore charge for this book if it must charge a single price to all customers?

answer

$36

question

For all firms, the additional revenue collected from the sale of one additional unit of output is

answer

marginal revenue.

question

Campus Bookstore is the only textbook supplier in the town, a profit-maximizing business. Picture Assume that the marginal and average total cost for each book is $12. If the bookstore can charge two different prices for this book, the economic profit for the bookstore is ______.

answer

$114

question

Suppose a drug company introduces a new drug on the market. Its research, development, and testing costs are ________ and the chemicals used in manufacturing the drug are _______________.

answer

start up costs; variable costs

question

If a monopolist finds that its marginal revenue exceeds its marginal costs at the current level of output, it should

answer

expand output until marginal revenue equals marginal costs

question

Refer to the figure above. The firm illustrated in the graph is a(n)

answer

natural monopolist.

question

When marginal revenues are zero,

answer

total revenues are maximized.

question

Refer to the figure above. The __________ at the socially efficient level of output will be __________ at the profit maximizing level of output.

answer

loss; larger than

question

Imagine that you are an entrepreneur, making designer T-shirts in your garage. Your accountant has estimated that your firm's total costs are TC = 300 + 10*Q. Your fixed costs are _______ and your marginal costs are _____.

answer

$300; 10

question

Refer to the figure above. This firm would maximize its profits by selling

answer

Correct the number of units at which Marginal Revenue equals Marginal Cost.

question

Suppose that there are just two firms in a small market. Acme Manufacturing's Total Costs equal $100 + $3 Qty. Generic Industries' Total Costs equal $500 + $3 Qty. Compare cost functions at the two firms. Which statement is true?

answer

Acme and Generic have equal marginal costs.

question

Refer to the figure above. The socially optimal equilibrium would yield consumer surplus equal to the area _______.

answer

GJI

question

The hurdle method of price discrimination is _____ efficient, however, it is ______ efficient than charging a single price to all buyers.

answer

not perfectly; more

question

The reason economists consider monopoly socially undesirable is the monopolist

answer

produces less than the socially efficient amount.

question

Refer to the figure above. The marginal revenue of the third unit of output is

answer

$6

question

A monopolistically competitive firm is one

answer

of many firms that produce slightly different but very similar goods.

question

Refer to the figure above. At the profit-maximizing level of output, the monopolist collects total revenues equal to the area

answer

0CEA.

question

Compared with charging a single price, all else equal, imperfect price discrimination

answer

sometimes benefits customers with low ability to pay while increasing firm profits.

question

Refer to the figure above. The distance representing the profit maximizing price to the monopolist is

answer

0C

question

Refer to the figure above. The difference between consumer surplus given the monopoly market structure and consumer surplus with the socially efficient quantity is the area _______.

answer

GCEI

question

Comparing the non-price discriminating monopoly outcome to the perfectly price discriminating monopoly outcome, profits are

answer

greater when price discriminating.

question

Once a firm has determined the quantity of output it wishes to sell, the price it can charge is determined by

answer

the firm's demand curve.

question

A firm that emerges as the only seller in an industry with economies of scale is termed a(n)

answer

natural monopoly.

question

Compared to a monopolist charging a single price to everyone, perfect price discrimination makes

answer

the monopolist and some consumers better off.

question

If a firm functions in an oligopoly, it

answer

is one of a few firms that produces a good with close substitutes.

question

Both the perfectly competitive firm and the monopolist find that

answer

it is best to expand production until the benefits and costs of the last unit produced are equal.

question

Suppose there are two small island countries: Avarice, which is populated by people who are completely self-interested and Altruism, which is populated by people who have adopted social norms of generosity and cooperation. Suppose residents of each island often play prisoner's dilemma games, always matched with a person from the same island, but not a person who they know or will play with again. If the same number of games is played, you would expect that

answer

Altruism players will have higher average payoffs than Avarice players.

question

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC stick to the agreement, OPEC will earn profits of $200 million and Mexico will earn profits of $100 million. If both Mexico and OPEC cheat, then OPEC will earn $175 million and Mexico will earn $80 million. If only OPEC cheats, then OPEC earns $185 million and Mexico $60 million. If only Mexico cheats, then Mexico earns $110 million and OPEC $150 million.

answer

not be a prisoner's dilemma; OPEC does not have a dominant strategy

question

Suppose in the U.S., market demand for bottled water is low enough that one firm could supply all of the demand. Two firms enter the market and agree to charge a price above the marginal cost of production. We can expect that

answer

this agreement will collapse.

question

A purely self-interested diner is more likely to tip

answer

only when dining in a restaurant at which he often eats.

question

In the above decision tree, Tracy picks first and Amy picks second. Tracy knows Amy's payoffs to each choice and Amy knows Tracy's payoffs. If before Tracy chose, Amy could make a credible commitment to choose either the top or bottom branch when her turn came, Tracy would get a payoff of _______ and Amy would get a payoff of ______.

answer

300; 200

question

Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The utilities they receive from seeing the films either together or separately are shown in the payoff matrix. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. Suppose a timing element is added to the game, and that Jordan buys a ticket first. While Lee did not see which ticket Jordan bought, Lee does know the values in the payoff matrix and that Jordan has purchased first. Assuming that Jordan and Lee are both self-interested, Lee can infer

answer

that Jordan bought a ticket for the comedy.

question

Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for the product. The profit-maximizing quantity for a monopolist with this demand curve is _____ units, which the monopolist would sell for ______.

answer

2,000; $1.50

question

A decision tree is used when modeling

answer

games in which timing matters.

question

Lee and Cody are competitors. Each is considering whether to take aggressive action against the other or to cooperate. Cody can observe Lee's decision. Their decision tree can be diagrammed as follows: Suppose Cody tells Lee that any aggression on Lee's part will be met with aggression, but that if Lee cooperates, Cody will respond cooperatively. Cody's statement is

answer

a non-credible threat and promise.

question

Refer to the figure above. Player A can infer that Player B will

answer

choose Left when A chooses Up and choose Right when A chooses Down.

question

The dilemma in the Prisoner's Dilemma comes from the fact that

answer

Correct if both players play the dominant strategy they each earn a smaller payoff than had they played the dominated strategy.

question

A monopolistically competitive firm

answer

Correct sometimes distinguishes its output from that of its competitors by locating in a more convenient place.

question

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC stick to the agreement, OPEC will earn profits of $200 million and Mexico will earn profits of $100 million. If both Mexico and OPEC cheat, then OPEC will earn $175 million and Mexico will earn $80 million. If only OPEC cheats, then OPEC earns $185 million and Mexico $60 million. If only Mexico cheats, then Mexico earns $110 million and OPEC $150 million. Suppose Mexico picks its strategy first and OPEC knows what they choose. OPEC told Mexico that in the event Mexico cheats on the agreement, OPEC will cheat as well but if Mexico does not cheat, neither will OPEC. This is an example of a(n) ________ and the outcome is that ________.

answer

credible threat and promise; neither will cheat

question

The tit-for-tat strategy only works for prisoner's dilemma games that

answer

are repeated.

question

Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street, while businesses may locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. If the first store to open in Miniville is located at A, to maximize the number of customers it attracts, the next store to open should locate

answer

just east of A.

question

Emotions like guilt and sympathy

answer

can solve commitment problems, increasing players' payoffs.

question

Which of the following core principles applies to the prisoner's dilemma?

answer

Smart for one, dumb for all

question

Cartels would be more stable if

answer

firms that cheat on the agreement could be legally punished.

question

In the Scarlet Letter, the punishment for adultery was to always wear a large, red letter "A". This was an example of

answer

using public ridicule to solve the commitment problem in marriage.

question

The market for bagels in San Marcos, TX contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table shows the total profits the firms will earn if they abide by the price setting agreement or if they cheat on the agreement. This game has __________ with __________.

answer

a Nash equilibrium; both firms cheating

question

The market for bagels in San Marcos, TX contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table shows the total profits the firms will earn if they abide by the price setting agreement or if they cheat on the agreement. Suppose the firms agree to the following: if one firm cheats today, the other firm will cheat tomorrow, but if one firm abides today, the other will abide tomorrow. The likely effect of this agreement would be

answer

to increase the probability that both firms would abide.

question

In the above decision tree, Tracy picks first and Amy picks second. Tracy knows Amy's payoffs to each choice and Amy knows Tracy's payoffs. The equilibrium to the game results in _______ for Amy and Tracy relative to what they would receive if they could solve their _______.

answer

lower payoffs; commitment problem

question

The use of psychological incentives to solve commitment problems would be least effective in games played

answer

once between strangers.

question

The market for bagels in San Marcos, TX contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table shows the total profits the firms will earn if they abide by the price setting agreement or if they cheat on the agreement. This game is __________ prisoner's dilemma because __________.

answer

a; if both firms played their dominated strategy, profits would be higher than if they play their dominant strategies

question

The market for bagels in San Marcos, TX contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table shows the total profits the firms will earn if they abide by the price setting agreement or if they cheat on the agreement. Suppose a new element was introduced into the agreement: if one firm cheats today, the other firm will cheat tomorrow, but if one firm abides today, the other will abide tomorrow. This strategy pattern is known as

answer

tit-for-tat.

question

Game theory provides tools that are used to model

answer

interdependence

question

Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly arrayed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. At the extreme right end, all 100 voters lie to the left. If Candidate X is running against Candidate Z, by moving to the right Candidate X would

answer

not lose any votes from the left and gain some from Z.

question

Refer to the figure above. In this game, the dominated strategy for Player A

answer

is to play down.

question

Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street, while businesses may locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. Because all residents of Miniville shop at the store located closest to their homes, the optimal location for the first store to open in Miniville is

answer

there is no single optimal location for the first store.

question

The prisoner's dilemma refers to games in which

answer

both players have a dominant strategy which results in a lower payoff than they would earn if they play their dominated strategies.

question

Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The utilities they receive from seeing the films either together or separately are shown in the payoff matrix. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. This game has __________ Nash equilibrium.

answer

2

question

One thousand adults live in Milltown. All of them leave work at 4:30 p.m. everyday and arrive home at exactly 5:00. They all go to bed at 9 p.m. Three fundraisers, Alpha, Beta, and Charlie, have targeted Milltown's population. Because the charities raising the funds are identical, the first to call a willing donor will get the donation. The solution to the firms' problem will involve

answer

differentiation by timing.

question

According to the textbook, owners of restaurants have solved the _______ their wait staff by paying low wages and encouraging tipping by customers.

answer

commitment problem with

question

Refer to the figure above. How many equilibria are there?

answer

1

question

Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The utilities they receive from seeing the films either together or separately are shown in the payoff matrix. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. Jordan has

answer

no dominant strategy.

question

In the above decision tree, Tracy picks first and Amy picks second. Tracy knows Amy's payoffs to each choice and Amy knows Tracy's payoffs. If the payoffs at the end of each branch are as shown, the outcome of this game will be

answer

Tracy gets 75 and Amy gets 150.

question

According to the text, at a party everyone shouts in order to be heard. If instead everyone spoke at a normal volume people would still be heard. The likely reason that people continue to shout is that the

answer

individual incentive to be heard is greater than group incentive for everyone to be heard.

question

Lee and Cody are competitors. Each is considering whether to take aggressive action against the other or to cooperate. Cody can observe Lee's decision. Their decision tree can be diagrammed as follows: The equilibrium for this game is for Lee to choose _______ and for Cody to be _______ in response.

answer

aggression; cooperative

question

Refer to the figure above. Player B can infer that Player A will

answer

always choose the Down strategy.

question

Refer to the figure above. If Row Resorts decides to lower its rates for the summer, Column Cruises would make the most profit if it

answer

also lowered its rates for the summer.

question

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC stick to the agreement, OPEC will earn profits of $200 million and Mexico will earn profits of $100 million. If both Mexico and OPEC cheat, then OPEC will earn $175 million and Mexico will earn $80 million. If only OPEC cheats, then OPEC earns $185 million and Mexico $60 million. If only Mexico cheats, then Mexico earns $110 million and OPEC $150 million. The outcome of this game is

answer

a Nash equilibrium with both Mexico and OPEC cheating.

question

One thousand adults live in Milltown. All of them leave work at 4:30 p.m. everyday and arrive home at exactly 5:00. They all go to bed at 9 p.m. Three fundraisers, Alpha, Beta, and Charlie, have targeted Milltown's population. Because the charities raising the funds are identical, the first to call a willing donor will get the donation. Calls made by fundraisers at each firm will tend to

answer

cluster near 5:00 pm

question

Price discrimination means charging

answer

wrong: higher prices to women and minorities.

question

Products have network economies if they

answer

separate consumers on the basis of their reservation prices.

question

Suppose a monopolist sells one version of its output to consumers and another version to businesses. The marginal cost of the consumer version is $5 per unit while the business version has marginal costs of $5.75. If resale is impossible, one can infer that

answer

the monopolist will charge two different prices and is not practicing price discrimination.

question

Refer to the figure above. As a perfect price-discriminator, this firm would produce approximately _______ units of output.

answer

14

question

A monopolist sets its price at $10 and offers a 10% rebate. For this to be a perfect hurdle, it must be the case that

answer

those with a reservation price of $100 or more purchase and ignore the rebate while those with a reservation price between $99 and $90 purchase and use the rebate.

question

If a natural monopoly decreases the quantity of output it produces,

answer

its average costs will increase.

question

Imperfect price discrimination occurs when

answer

wrong: some buyers pay more than their reservation price.

question

Refer to the figure above. This imperfectly competitive firm's demand function gives information that is used to determine

answer

total revenue at different price and quantity combinations.

question

Pure monopoly exists when

answer

a single firm produces a good with no close substitutes.

question

Refer to the figure above. The profit maximizing quantity and price for this monopolist are

answer

wrong: 2 units and $9.

question

Refer to the figure above. At the socially efficient level of output, the monopolist woul

answer

incur a loss of $100.10.

question

Imagine that you are an entrepreneur, making designer T-shirts in your garage. Your accountant has estimated that your firm's total costs are TC = 300 + 10*Q. If you make 100 T-shirts, your average total cost is _______.

answer

$13

question

When players cannot achieve their goals because they are unable to make credible threats or promises, the situation is called

answer

wrong: a Nash equilibrium.

question

Refer to the figure above. The dominant strategy for Row Resorts is __________ and for Column Cruises is ________.

answer

to reduce rates during the summer; to reduce rates during the summer

question

Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for the product. Suppose Quick Buck cheats on Pushy Sales and reduces its price to $1.00 and Pushy Sales matches the price cut. What will be the economic profit for Quick Buck?

answer

wrong: $3,000

question

The equilibrium in a prisoner's dilemma is an example of

answer

wrong: the comparative advantage principle.

question

Refer to the figure above. If Row Resorts decides to keep its rates high for the summer, Column Cruises would get the highest payoff by

answer

offering reduced summer rates.

question

The numbers in each cell are each firm's profits. The payoffs of this game are such that

answer

both firms would benefit from a law that made publishing coupons illegal.

question

Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The utilities they receive from seeing the films either together or separately are shown in the payoff matrix. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. Suppose Jordan picks first and chooses the comedy and then Lee choose the comedy. The reason Lee selected the comedy is that

answer

Lee must establish a reputation for keeping promises even If it is not in Lee's immediate self-interest to do so.

question

One reason that commitment problems arise is that

answer

wrong: commitments cannot be purchased.

question

Game theory is not useful in understanding perfect competition because

answer

by assumption, the firms are so small as to be unable to influence price and thus are not interdependent.

question

P-TV and QRS-TV are planning their fall line-up. Suppose that sit-coms are more popular than reality shows, and so generate more advertising revenue than do reality shows, but they are more expensive to produce since real actors must be hired. In the following decision tree, QRS-TV announces its decision first and P-TV observes that choice before it decides whether to air a sit-com in the same time slot or a reality show. Both stations know all of the information shown in this diagram when they make their decisions Given the information in this decision tree, if QRS-TV announces that it will air a sit-com, it can expect to

answer

wrong: lose $5 million.

question

Suppose there are two small island countries: Avarice, which is populated by people who are completely self-interested and Altruism, which is populated by people who have adopted social norms of generosity and cooperation. If two residents of Avarice play the Prisoner's Dilemma game, they are likely to

answer

wrong: play their dominated strategies more often than would residents of Altruism.

question

When parents encourage their children to be honest and punish them when they are not, it is an example of

answer

wrong: using material incentives to solve commitment problems.

question

P-TV and QRS-TV are planning their fall line-up. Suppose that sit-coms are more popular than reality shows, and so generate more advertising revenue than do reality shows, but they are more expensive to produce since real actors must be hired. In the following decision tree, QRS-TV announces its decision first and P-TV observes that choice before it decides whether to air a sit-com in the same time slot or a reality show. Both stations know all of the information shown in this diagram when they make their decisions P-TV will air a sit-com

answer

wrong: only if QRS-TV is airing a reality show.

question

Refer to the figure above. In this game, how many dominant strategies does Player A have?

answer

1

question

In the case of either a positive or negative externality, it will always be true that, relative to the social optimum,

answer

the market price will send an inaccurate signal of true cost or benefit.

question

Private incentives in markets with external benefits lead to _____; private incentives in markets with external costs lead to _____.

answer

deadweight loss; deadweight loss

question

A village has five residents, each of whom has accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10% interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in table below. How many goats will villagers send onto the commons?

answer

5

question

Refer to the figure above. The invisible hand ______ allocate resources efficiently in the market because ______.

answer

does not; some costs of production are not included in private marginal costs

question

If the external benefit of an activity is added to the private benefits, then the

answer

demand curve shifts right.

question

The following data show the relationship between the number of drivers who leave for work at 8:00 am, their average commute times, and their marginal benefit associated with the commute times. Suppose a toll is imposed in the following way: leaving between 8 a.m. and 9 a.m. costs $5 per driver, after 9 a.m., the toll is zero. One can predict that __________ drivers would be on the road between 8:00 and 9:00 a.m.

answer

200

question

Your economics professor has announced the following grading policy: For each exam, the highest score in the class will be entered as a 100%; all other scores will be entered as the percent of that top score. For example, if the highest test score is a 50 out of 100, it will be counted as a perfect paper, and exams with a score of 40 out of 100 will be entered as an 80%. The final grade for the course will be determined using these adjusted percentages, with 90% and above an A, 80% and above a B, 70% and above a C and below 70%, not passing. You would expect that, as the semester progressed, students in this class who cared primarily about good grades would

answer

engage in a positional arms race, studying more and more.

question

For most people, baking cinnamon rolls generates _____ externality, and burning tires generates _______ externality.

answer

a positive; a negative

question

Taylor lives in a residential neighborhood that prides itself on well-groomed lawns. Taylor's neighbors find that the collective marginal benefit of someone else's well-groomed lawn is $10. Taylor, however, dislikes yard work and receives zero net benefit from an unkempt lawn and a net benefit of -$1 for a well-groomed lawn - the cost of maintaining the lawn is a dollar more than the benefit of having a well-groomed lawn. If Taylor's lawn is unkempt, the situation is __________ because the total economic surplus is __________.

answer

inefficient; smaller than it could have been

question

According to the textbook, limits on private property rights, e.g., zoning laws, are

answer

an attempt to protect or enlarge the total economic surplus.

question

Brady owns a beachfront lot with a small house. During hurricanes, he refuses to leave. Afterward he applies for federal assistance to rebuild and files insurance claims for damages. By doing so, Brady is

answer

imposing an external cost on rescue workers, taxpayers, and insurance policy holders.

question

If the market equilibrium quantity is less than the socially optimal quantity, one can infer that

answer

the production of this good has a positive externality.

question

Refer to the figure above. The socially optimal quantity in this market is _______.

answer

0V

question

Which of the following investments is an example of a positional arms race?

answer

Studying hard for the economics test if the professor grades on a curve.

question

Refer to the figure above. A ______ equal to _____ would achieve the social optimum in this market.

answer

subsidy; QS

question

A village has five residents, each of whom has accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10% interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in table below. The villagers will buy a year-old goat if that goat can be sold for a price of at least _____ when it is a 2-year-old.

answer

$55

question

Refer to the figure above. The social optimum in the market illustrated could be achieved by imposing a _______.

answer

tax equal to DB

question

A village has five residents, each of whom has accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10% interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in table below. Suppose a village elder decides the total number of goats and bonds with the goal of maximizing total village income. The village income will be _______.

answer

$70

question

The following payoff matrix shows the outcomes for the US and the USSR from relying on conventional weapons or atomic weapons. The percentages refer to the fraction of the population that would die if a war occurred under the two weapons strategies. Assume the payoff matrix is for 1945, shortly after the US had demonstrated the effectiveness of the atomic bomb in World War II, i.e., the example begins in the upper right cell where USA has atomic weapons and the USSR has only conventional weapons. The Nash equilibrium in this situation is for

answer

both countries to have atomic weapons.

question

Taylor lives in a residential neighborhood that prides itself on well-groomed lawns. Taylor's neighbors find that the collective marginal benefit of someone else's well-groomed lawn is $10. Taylor, however, dislikes yard work and receives zero net benefit from an unkempt lawn and a net benefit of -$1 for a well-groomed lawn - the cost of maintaining the lawn is a dollar more than the benefit of having a well-groomed lawn. The Coase Theorem suggests that

answer

Taylor's neighbors could pay Taylor to have a well-groomed lawn, making Taylor and the neighbors better off.

question

Refer to the figure above. When the external cost is included, the efficient equilibrium price is ____ and the socially optimal quantity is ______.

answer

$150; 300

question

The existence of a negative externality will result in

answer

a greater than optimal level of production.

question

A village has five residents, each of whom has accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10% interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in table below. What will be the total village income, if everyone makes the decision that gives him or her the maximum benefit?

answer

$25

question

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar; nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine occupants of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. What is the total economic surplus if the cigar smoker refrains from smoking?

answer

$4.50

question

This graph shows the marginal costs and marginal benefits associated with roadside litter clean up. Assume that the marginal cost and marginal benefit curves slope in the usual directions. Picking up the 20th bag of litter would

answer

create deadweight loss.

question

The reason buffalo were driven to extinction while at the same time cattle were thriving is that

answer

cattle were owned by ranchers whereas buffalo were wild.

question

In order to achieve a socially optimal level of output, activities that generate negative externalities should be

answer

taxed

question

Shel and Fran are neighbors. They work at the same firm and hold the same title. Shel finds that when Fran's consumption rises, Shel feels worse off. Fran feels the same way towards Shel's consumption. Suppose the firm that employs both Fran and Shel begins to offer one hour of overtime. It is likely that

answer

both Fran and Shel will work more.

question

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces the fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains (in thousands of dollars) and losses for the three parties are listed below. The daily cost (in thousands of dollars) of the filter to Erie Textiles is _______, and the daily net benefit (in thousands of dollars) of the filter to the fishermen and bird watchers is _______.

answer

$200; 235

question

The following payoff matrix shows the outcomes for the US and the USSR from relying on conventional weapons or atomic weapons. The percentages refer to the fraction of the population that would die if a war occurred under the two weapons strategies. Assume the payoff matrix is for 1945, shortly after the US had demonstrated the effectiveness of the atomic bomb in World War II, i.e., the example begins in the upper right cell where USA has atomic weapons and the USSR has only conventional weapons. Suppose that a diplomat representing the USSR made the following statement to a diplomat representing the United States: "We will disarm all of our atomic weapons and not develop any new ones." That statement is

answer

a non-credible promise because of the commitment problem.

question

Refer to the figure above. Private incentives in this market generate deadweight loss equal to _______.

answer

½ PR times UV

question

Which of the following would be subject to the tragedy of the commons?

answer

Timber on public lands

question

This graph shows the marginal costs and marginal benefits associated with roadside litter clean up. Assume that the marginal cost and marginal benefit curves slope in the usual directions. The socially optimal number of bags of litter removed from the roadside is

answer

15

question

Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By noon, the buffet is picked over, and by 12:30, there are few popular items left. The garbage bins, though, are full of food. If the cafeteria changed its policy so that students had to pay for each item chosen, students would

answer

make food selections to equalize the marginal utility per dollar for each item.

question

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. A one bedroom, one bath apartment is $500 per month while a two bedroom, one bath apartment is $800. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. Curly would be willing to pay _____ per month to eliminate Moe's snoring.

answer

no more than $100

question

The following data show the relationship between the number of drivers who leave for work at 8:00 am, their average commute times, and their marginal benefit associated with the commute times. The reason drivers would prefer building new roads to a $5 toll to reduce commute times is because

answer

the cost of new roads falls on all taxpayers; the toll only falls on those who use the existing road.

question

Suppose that in most car accidents between cars of unequal size, the smaller car sustains the most damage and its occupants suffer the most injury. In answering the following questions, assume that, on average, smaller cars generate less air pollution and that every person in the economy drives at least one car. Suppose the size of all cars increased by 25%. Car accidents between two cars would cause ______ and air pollution would ______.

answer

neither greater nor less injury; increase

question

According to the textbook, social norms can be viewed as

answer

an informal solution to a positional arms race.

question

In order to achieve a socially optimal level of output, production that generates positive externalities should be

answer

subsidized.

question

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar; nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine occupants of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. Which outcome is consistent with the Coase Theorem?

answer

The cigar smoker will pay each other occupant fifty-five cents, and they will agree to allow smoking.

question

The following data show the relationship between the number of drivers who leave for work at 8:00 am, their average commute times, and their marginal benefit associated with the commute times. If commuters view the highway as having a zero price, one can predict that _________ drivers will leave for downtown at 8:00 am.

answer

500

question

Suppose that the EPA has proposed strict controls on the amount of sulfur diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Suppose that demand for diesel fuel is perfectly inelastic and supply has a positive slope. The effect of the regulation will _______ than if demand were not perfectly inelastic.

answer

increase price by more and reduce quantity by less

question

The following payoff matrix shows the outcomes for the US and the USSR from relying on conventional weapons or atomic weapons. The percentages refer to the fraction of the population that would die if a war occurred under the two weapons strategies. Assume the payoff matrix is for 1945, shortly after the US had demonstrated the effectiveness of the atomic bomb in World War II, i.e., the example begins in the upper right cell where USA has atomic weapons and the USSR has only conventional weapons. As a result of the positional externality in this game

answer

both countries are worse off.

question

The __________ the elasticity of demand for medical care, the __________ the extent of over consumption of medical treatment due to insurance.

answer

larger; greater

question

Protectionism is the view that free trade is ______ and should be _______.

answer

harmful to domestic workers and producers; restricted

question

Refer to the figure above. The welfare loss due to a first-dollar insurance plan for the medical treatment is ________.

answer

$200

question

Two firms can choose from five different technologies to reduce their pollution: A, B, C, D and E. The amount of pollution emitted by each technology and the cost of the technologies are shown in the table. Both firms have adopted technology A and currently emit 4 tons apiece. The government is considering two plans to reduce pollution: a 50% reduction by both firms or selling pollution permits. One permit entitles the owner to emit one ton of pollution. Without a permit, no pollution can be emitted. Industrio would be willing to pay up to ___ for the right to discharge 1 ton of pollution, and Capitalista would be willing to pay up to __ for the right to discharge 1 ton of pollution.

answer

$300; $200

question

Means-tested welfare benefits provide an incentive to

answer

earn unreported or illegal income.

question

When Cody went to the physician with a sore elbow, after hearing Cody's symptoms and examining the elbow manually, Cody's physician had two options: (1) prescribe an anti-inflammatory drug and advise Cody to abstain from vigorous physical activity for a period; or (2) advise Cody to undergo a magnetic resonance imaging (MRI) exam, a costly diagnostic procedure. Which of the following physicians is more likely to go with option (2)?

answer

A physician who is compensated under conventional health insurance.

question

Suppose that there are three power-generating plants, all of which generate emissions. The table summarizes the cost of emission reduction for each firm given five different levels of pollution: It would cost Firm A ____ to reduce emissions by one ton if it currently emits 3 tons, and ___ to reduce an additional ton of emissions if it currently emits 2 tons.

answer

$16; 20

question

Refer to the figure above. If the consumer had to pay the marginal cost for each routine visit, they would choose to go to the doctor _____ times a year.

answer

3

question

Two firms can choose from five different technologies to reduce their pollution: A, B, C, D and E. The amount of pollution emitted by each technology and the cost of the technologies are shown in the table. Both firms have adopted technology A and currently emit 4 tons apiece. The government is considering two plans to reduce pollution: a 50% reduction by both firms or selling pollution permits. One permit entitles the owner to emit one ton of pollution. Without a permit, no pollution can be emitted. If the government decided to use permits instead of regulation, in order to reduce pollution by 50%, it would need to sell _____ permits.

answer

4

question

Two firms can choose from five different technologies to reduce their pollution: A, B, C, D and E. The amount of pollution emitted by each technology and the cost of the technologies are shown in the table. Both firms have adopted technology A and currently emit 4 tons apiece. The government is considering two plans to reduce pollution: a 50% reduction by both firms or selling pollution permits. One permit entitles the owner to emit one ton of pollution. Without a permit, no pollution can be emitted. Suppose the government decides to sell 6 permits allowing a total of 6 tons of pollution. The government starts the bidding with an opening price of $30. What happens next?

answer

A total of seven permits will be demanded, forcing the government to raise the price.

question

Compared to a fixed percentage reduction regulation, a tax on pollution encourages

answer

firms that can most cheaply reduce pollution to make sizable reductions.

question

Suppose that there are three power-generating plants, all of which generate emissions. The table summarizes the cost of emission reduction for each firm given five different levels of pollution: Suppose that the government imposes a tax of $21 per ton of pollution generated. Firm A will emit ____ tons; Firm B will emit ___ tons and Firm C will emit ___ tons.

answer

1; 3; 4

question

Suppose that a government agency is trying to decide between two pollution reduction policy options. Under the permit option, 100 pollution permits would be sold, each allowing emission of one unit of pollution. Firms would be forced to shut down if they produced any units of pollution for which they did not hold a permit. Under the pollution tax option, firms would be taxed $250 for each unit of pollution produced. The regulated firms all currently pollute and face varying costs of pollution reduction, though all face increasing marginal costs of pollution reduction. Because firms face increasing marginal costs to reduce pollution, demand for pollution permits will be

answer

downward sloping.

question

Arguments in favor of programs that tax income to redistribute wealth include:

answer

these programs help to reduce poverty.

question

The major difficulty with using a tax on pollution instead of a fixed percentage reduction regulation is

answer

establishing the optimal size of the tax.

question

Suppose that there are three power-generating plants, all of which generate emissions. The table summarizes the cost of emission reduction for each firm given five different levels of pollution: Suppose the government requires the three firms to reduce pollution to 2 tons of smoke per day, for a total of 6 tons. This will result in a total cost of __________.

answer

$135

question

Suppose that there are three power-generating plants, all of which generate emissions. The table summarizes the cost of emission reduction for each firm given five different levels of pollution: The least costly way of lowering smoke emissions from 12 tons to 9 tons would be for

answer

Firm A to emit 1 ton, and the other firms to emit 4 tons each.

question

Two firms can use five different technologies to produce the same quantity of output: 1,2,3,4 and 5. The first technology is the cheapest, but also the dirtiest. The fifth technology is the most expensive, but results in the lowest levels of pollution. The amount of pollution emitted by each firm and the cost of the technologies are shown in the table. Suppose that the government imposes a tax of $150 per ton of pollution. As a result, pollution emissions are __________ tons for a total cost of ____ .

answer

14; $1,700

question

To the patient, the marginal cost of medical care is zero

answer

under first-dollar insurance coverage.

question

A great deal of medical expenditure inflation, from 4% in 1940 to 14% today, has to do with

answer

the emergence of health insurance.

question

If domestic consumers benefit from free trade of a good, the country must be a(n) ____ of that good.

answer

net importer

question

Suppose that you are an economic researcher, and you have access to detailed information about all of the firms in a given geographic area. You would conclude that the pollution reduction policy in that area is efficient if you observe that

answer

all firms have approximately equal marginal costs of reduction at current emission levels.

question

To say that a given welfare program is means-tested indicates that

answer

the more income one earns, the smaller the size of the benefit.

question

If the marginal cost of treating an illness is zero, the optimal amount of treatment to receive is the amount

answer

for which the marginal benefit is zero.

question

Suppose that a government agency is trying to decide between two pollution reduction policy options. Under the permit option, 100 pollution permits would be sold, each allowing emission of one unit of pollution. Firms would be forced to shut down if they produced any units of pollution for which they did not hold a permit. Under the pollution tax option, firms would be taxed $250 for each unit of pollution produced. The regulated firms all currently pollute and face varying costs of pollution reduction, though all face increasing marginal costs of pollution reduction. Suppose the tax policy is adopted. A firm will be willing to pay the tax if $250 is less than or equal to

answer

the cost of reducing its existing pollution by one unit.

question

Unlike the minimum wage, the Earned Income Tax Credit does not

answer

cause low-wage workers to be laid off.

question

An economic argument in favor of providing medical care through HMOs is that they

answer

reduce incentives for providing unnecessary or excessive care.

question

Prior to World War II, most consumers in the United States

answer

owned medical insurance for catastrophic illness but self insured against routine medical care

question

Refer to the figure above. If all consumers had first-dollar medical insurance for the routine visit, they would choose to go to the doctor _____ times a year.

answer

5

question

According to the textbook, public concern with under treatment by HMO's has led to proposals that would

answer

grant patients the right of appeal when denied treatment.

question

The major characteristic of an HMO is

answer

medical treatment is provided for a fixed annual payment.

question

If the United States is a net importer of bananas, free trade will benefit the

answer

domestic banana consumers.

question

According to the textbook, the best possible solution to the problem of poverty would seem to be

answer

a combination of a negative income tax and public employment.

question

The level of income the federal government uses to define being poor is called the

answer

poverty threshold.

question

Suppose that a government agency is trying to decide between two pollution reduction policy options. Under the permit option, 100 pollution permits would be sold, each allowing emission of one unit of pollution. Firms would be forced to shut down if they produced any units of pollution for which they did not hold a permit. Under the pollution tax option, firms would be taxed $250 for each unit of pollution produced. The regulated firms all currently pollute and face varying costs of pollution reduction, though all face increasing marginal costs of pollution reduction. The two policies being considered will result in the same amount of pollution reduction

answer

only if the equilibrium price in the pollution permit market is $250.

question

A minimum wage law prohibits employers from paying workers less than a specified hourly wage. If the minimum wage is above the equilibrium wage

answer

there will be excess supply of labor.

question

A group of physicians that provide healthcare services to members for a fixed annual fee is termed a

answer

health maintenance organization.

question

In general, if the domestic producers are hurt by a free trade of a good or service, that economy is a(n) ____ of that good or service.

answer

net importer

question

The amount of waste caused by full insurance coverage depends on

answer

the price elasticity of demand for medical service.

question

Refer to the figure above. What is the marginal cost of one extra visit to the doctor's office?

answer

$100

question

Refer to the figure above. If consumers had to pay the marginal cost for the medical treatment, they would choose to stay _____ day(s) in the hospital.

answer

2

question

Two firms can choose from five different technologies to reduce their pollution: A, B, C, D and E. The amount of pollution emitted by each technology and the cost of the technologies are shown in the table. Both firms have adopted technology A and currently emit 4 tons apiece. The government is considering two plans to reduce pollution: a 50% reduction by both firms or selling pollution permits. One permit entitles the owner to emit one ton of pollution. Without a permit, no pollution can be emitted. The ultimate equilibrium price of six permits is __________ with Industrio buying __________ and Capitalista buying __________.

answer

$50; 4; 2

question

From the individual's standpoint, participating in a positional arms race is a __________ from society's point of view, it is __________.

answer

dominant strategy; inefficient

question

Which of the following is an example of a positional arms control agreement?

answer

Campaign spending limits

question

Shel and Fran are neighbors. They work at the same firm and hold the same title. Shel finds that when Fran's consumption rises, Shel feels worse off. Fran feels the same way towards Shel's consumption. An effective mechanism to avoid working all day and all night as their employer offers more and more overtime, Fran and Shel could

answer

lobby for limits on the maximum number of hours in a work week.

question

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar; nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine occupants of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. Declaring the card room a non-smoking area with no opportunity to negotiate would

answer

decrease total economic surplus.

question

In the case of ______, the invisible hand fails to generate the efficient outcome because buyers and sellers only take their self-interests into account.

answer

either an external cost or an external benefit

question

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. If the flu vaccine is provided by private markets, deadweight loss will be _______.

answer

incorrect: $500

question

Assume that the town of Pleasantville has two local TV stations. If one of them invests in the newest weather forecasting technology, one can predict that

answer

to maintain its relative standing, the other station will upgrade its radar technology.

question

A village has five residents, each of whom has accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10% interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in table below. The villagers will buy a year-old goat if that goat can be sold for a price of at least _____ when it is a 2-year-old.

answer

$55

question

This graph shows the marginal costs and marginal benefits associated with roadside litter clean up. Assume that the marginal cost and marginal benefit curves slope in the usual directions. Picking up the 20th bag of litter would

answer

create deadweight loss.

question

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces the fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains (in thousands of dollars) and losses for the three parties are listed below. When Erie Textiles operates with a filter, the total daily gain (in thousand of dollars) by all three parties is _______.

answer

$510

question

The following payoff matrix shows the outcomes for the US and the USSR from relying on conventional weapons or atomic weapons. The percentages refer to the fraction of the population that would die if a war occurred under the two weapons strategies. Assume the payoff matrix is for 1945, shortly after the US had demonstrated the effectiveness of the atomic bomb in World War II, i.e., the example begins in the upper right cell where USA has atomic weapons and the USSR has only conventional weapons. As a result of the positional externality in this game,

answer

both countries are worse off.

question

Early settlers in the town of Dry Gulch drilled wells to pump as much water as they wanted from the single aquifer beneath the town. (An aquifer is an underground body of water.) As more people settled in Dry Gulch, the aquifer level fell and new wells had to be drilled deeper at higher cost. Residents of Dry Gulch have a private incentive to ____ water because _____.

answer

over use; external costs aren't considered

question

Assume that to be labeled a nerd (someone who studies a lot and has high grades) in high school or college is a social negative. According to the textbook,

answer

the negative stereotype serves to discourage some students from studying hard thus increasing the payoff to those who do.

question

Taylor lives in a residential neighborhood that prides itself on well-groomed lawns. Taylor's neighbors find that the collective marginal benefit of someone else's well-groomed lawn is $10. Taylor, however, dislikes yard work and receives zero net benefit from an unkempt lawn and a net benefit of -$1 for a well-groomed lawn - the cost of maintaining the lawn is a dollar more than the benefit of having a well-groomed lawn. Taylor would be willing to keep a well-groomed lawn if the neighbors paid him

answer

no less than $10.

question

The following payoff matrix shows the outcomes for the US and the USSR from relying on conventional weapons or atomic weapons. The percentages refer to the fraction of the population that would die if a war occurred under the two weapons strategies. Assume the payoff matrix is for 1945, shortly after the US had demonstrated the effectiveness of the atomic bomb in World War II, i.e., the example begins in the upper right cell where USA has atomic weapons and the USSR has only conventional weapons. When the United States demonstrated its nuclear capability in the 1950's, the predictable result was

answer

the USSR developed its nuclear capability.

question

When some fraction of the benefit of an activity is received by people not participating in the activity, it is called a(n)

answer

positive externality.

question

Taylor lives in a residential neighborhood that prides itself on well-groomed lawns. Taylor's neighbors find that the collective marginal benefit of someone else's well-groomed lawn is $10. Taylor, however, dislikes yard work and receives zero net benefit from an unkempt lawn and a net benefit of -$1 for a well-groomed lawn - the cost of maintaining the lawn is a dollar more than the benefit of having a well-groomed lawn. Taylor's neighbors would be willing to pay Taylor ______ to keep a well groomed lawn.

answer

no more than $10

question

When Dale visits the doctor, Dale does not pay for either the visit or any tests the doctor may order. Dale must therefore

answer

have first-dollar medical insurance.

question

As fewer families choose to purchase insurance, the cost of premiums will rise, ensuring that fewer, and sicker, families buy insurance. This is an example of

answer

adverse selection.

question

The effect of widespread insurance covering routine medical care is to reduce the

answer

equilibrium amount of routine medical care.

question

First-dollar insurance coverage means that

answer

incorrect: most of the insured's expenses are covered.

question

Two firms can choose from five different technologies to reduce their pollution: A, B, C, D and E. The amount of pollution emitted by each technology and the cost of the technologies are shown in the table. Both firms have adopted technology A and currently emit 4 tons apiece. The government is considering two plans to reduce pollution: a 50% reduction by both firms or selling pollution permits. One permit entitles the owner to emit one ton of pollution. Without a permit, no pollution can be emitted. Suppose a permit system has been adopted and each firm has already purchased one permit. Industrio would be willing to pay up to ___ for the right to discharge a second ton of pollution, and Capitalista would be willing to pay up to __ for the right to discharge a second ton of pollution.

answer

$200; $110

question

Current welfare programs in the United States are

answer

means-tested

question

Refer to the figure above. The welfare loss due to a first-dollar insurance plan for the routine visit is ________.

answer

incorrect: $200

question

A(n) __________ involves giving all citizens a substantial lump sum payment that is reduced at a rate of less than 100% as income is earned.

answer

negative income tax

question

A tariff is a tax imposed on ______ good.

answer

an imported

question

According to the textbook, to completely eliminate the concern about public assistance reducing the poor's incentive to work, the government could

answer

give the assistance as wages in exchange for public sector employment.

question

When Cody went to the physician with a sore elbow, after hearing Cody's symptoms and examining the elbow manually, Cody's physician had two options: (1) prescribe an anti-inflammatory drug and advise Cody to abstain from vigorous physical activity for a period; or (2) advise Cody to undergo a magnetic resonance imaging (MRI) exam, a costly diagnostic procedure. Which of the following physicians is more likely to go with option (1)?

answer

incorrect: A physician under conventional health insurance.

question

Free trade is ______, because it ______ the size of the pie available to the economy.

answer

efficient; increases

question

Suppose that there are three power-generating plants, all of which generate emissions. The table summarizes the cost of emission reduction for each firm given five different levels of pollution: Suppose that the government imposes a tax of $20 per ton of pollution generated. If Firm A produces 2 tons of smoke, its abatement costs plus taxes will total ____, and if Firm A produces 3 tons of smoke, its abatement costs plus taxes will total ____. Firm A will be better off emitting

answer

incorrect: $30; $14; 3 tons than 2 tons

question

Efficiency occurs when

answer

incorrect: a market is in equilibrium

question

The price of output to a firm is $9 and the marginal cost of the last unit produced is $8.50. This means the

answer

extra benefit of the last unit produced is greater than the extra cost.

question

Suppose last year, Pat was a soybean farmer and Chris was a corn farmer. This year, high demand for ethanol, an automobile fuel made from corn, causes the price of corn to increase. Relative to last year, the price of soybeans is likely to be ______ and the price of corn is likely to be ______.

answer

higher; higher

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