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45 Cards in this Set

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1. The incentive of producers to control costs and the incentive of consumers to economize on their purchases will be weakest when the good is produced
a. privately, but paid for by taxpayers and provided to consumers free of charge.
b. by government enterprises, and the cost of production is covered by taxes.
c. privately, and consumers purchase it with their own money.
d. by government enterprises, and consumers purchase it with their own money.
b. by government enterprises, and the cost of production is covered by taxes.
2. In 2002, the American Association of Retired Persons (AARP) spent $70 million on lobbying-related expenses in an attempt to get policies enacted that would benefit retirees. In economics, the term used to describe such activity is
a. logrolling.
b. rent seeking.
c. influence peddling.
d. redistribution searching.
b. rent seeking.
3. Which of the following is implied by the economic concept of opportunity cost?
a. If the National Football League (NFL) allowed college freshmen and sophomores to be drafted and play in the NFL, the most talented football players would drop out of school to play professional football.
b. If the demand for computer programmers in the private sector was to rise, salaries for computer science professors would likely rise as well.
c. The cost of taking time off work to have children is higher for women in high-paying managerial positions than for women in low-paying clerical jobs.
d. All of the above are true.
d. All of the above are true.
4. The number of cattle slaughtered every year for meat far exceeds the number of elephants slaughtered every year for their ivory. Despite this, cows can be found everywhere while elephants are on the verge of extinction in some countries. Which of the following best explains this difference?
a. Cows can be privately owned while in many countries elephants can not.
b. The demand for ivory far exceeds the demand for beef.
c. Animals slaughtered for their meat are generally better conserved by humans than animals slaughtered for nonfood uses.
d. People tend to protest more every year to prevent cow extinction than they do for elephant extinction.
a. Cows can be privately owned while in many countries elephants can not.
5. When collective decision making is utilized to resolve economic questions regarding the allocation of resources,
a. decentralized decision making is inevitable.
b. central planning and political bargaining will replace market forces.
c. individual preferences are of no importance.
d. economic equality will result.
b. central planning and political bargaining will replace market forces.
6. Air travel from New York to Los Angeles costs $600 and takes 5 hours. A bus ticket between the cities costs $100 and takes 105 hours. Other things constant, the minimum value of one’s time that would induce a rational individual to fly rather than drive would be
a. $1 per hour.
b. $5 per hour.
c. $10 per hour.
d. $120 per hour.
b. $5 per hour.
7. Other things constant, if both the benefits and costs of a public-sector activity are widespread among voters, the political process will generally result in the
a. rejection of productive activities and acceptance of unproductive activities.
b. acceptance of both productive and unproductive activities.
c. rejection of both productive and unproductive activities.
d. acceptance of productive activities and rejection of unproductive activities.
d. acceptance of productive activities and rejection of unproductive activities.
8. Which of the following is true regarding private ownership?
a. Relative to common ownership, private ownership generally leads to less conservation of resources.
b. With private ownership, owners are held accountable for using their resources in a manner that harms the resources of others.
c. Private ownership generally gives the owner little incentive to find ways to use the resource wisely.
d. With private ownership, resource owners have little incentive to consider the preferences of others when deciding how to employ a resource.
b. With private ownership, owners are held accountable for using their resources in a manner that harms the resources of others.
9. Bill is willing to cut lawns for a minimum of $200 a week. He is, however, paid $250 for the same service by a lawn maintenance company. This is an example of
a. consumer surplus.
b. employment discrimination.
c. producer surplus.
d. the derivation of accounting profit.
c. producer surplus.
10. As a result of the September 11, 2001 terrorist attacks, new regulations were imposed that required airlines to adopt more costly security measures. Other things constant, how would this increase in the cost of providing air travel security affect the supply of air travel?
a. Higher security cost would result in an increase in the supply of air travel.
b. Higher security cost would result in a reduction in the supply of air travel.
c. Higher security cost would not affect the supply of air travel.
d. Higher security cost would shift the supply curve of air travel to the right.
b. Higher security cost would result in a reduction in the supply of air travel.
11. Which of the following is the most likely effect of higher chicken prices on the price and quantity purchased of beef, a substitute product?
a. The price of beef will increase, and the quantity purchased will fall.
b. The price of beef will fall, and the quantity purchased will increase.
c. The price of beef will increase, and the quantity purchased will increase.
d. The price of beef will fall, and the quantity purchased will fall.
c. The price of beef will increase, and the quantity purchased will increase.
12. Profits and losses play an important role in helping
a. to signal to government which businesses are suffering losses so that they can be subsidized.
b. consumers decide which products they value the most by looking at each firm’s profit.
c. to allocate scarce resources in a manner that maximizes the value created to society.
d. ensure that the total profits in the economy exactly equal the total losses.
c. to allocate scarce resources in a manner that maximizes the value created to society.
13. In Figure 1, suppose D1 and S1 indicate initial conditions in the market for ice cream. Which of the following changes would tend to cause a shift from S1 to S2 in the market for ice cream?
a. an increase in the price of sugar, an ingredient used to produce ice cream
b. a decrease in the price of frozen yogurt, a substitute for ice cream
c. abnormally hot weather that temporarily increases consumer desire for ice cream
d. a decrease in the price of milk, an ingredient used to produce ice cream
d. a decrease in the price of milk, an ingredient used to produce ice cream
14. A progressive tax
a. is one that taxes those with higher incomes at a higher rate than those with lower incomes.
b. takes a similar percentage in the form of taxes from those with higher incomes as it does from those with lower incomes.
c. takes a higher percentage of income in the form of taxes from those with lower incomes than from those with higher incomes.
d. is any tax in which the dollar amount of taxes paid increases with income.
a. is one that taxes those with higher incomes at a higher rate than those with lower incomes.
15. (I) For very low marginal tax rates, an increase in tax rates will likely lead to an increase in tax revenues.
(II) For very high marginal tax rates, a reduction in tax rates will likely lead to an increase in tax revenues.
a. I is true; II is false.
b. I is false; II is true.
c. Both I and II are true.
d. Both I and II are false.
c. Both I and II are true.
16. If Neleh’s income increases from $60,000 to $80,000 and her tax liability increases from $12,000 to $16,000, which of the following is true?
a. Her marginal tax rate is 20 percent in this income range.
b. Her average tax rate is 30 percent at her new income level of $80,000.
c. She faces a regressive tax in this income range.
d. She faces a progressive tax in this income range.
a. Her marginal tax rate is 20 percent in this income range.
17. A regressive tax is defined as a tax for which the
a. average tax rate rises as income increases.
b. average tax rate falls as income increases.
c. average tax rate remains constant at all levels of income.
d. dollar tax liability of those with higher income is less than the dollar tax liability of those with lower income.
b. average tax rate falls as income increases.
18. Which of the following provides an example of an activity that generates an externality?
a. Jim gets a vaccination against measles that prevents him from catching the disease and spreading it to others.
b. An industry emits dangerous chemical pollutants into the local lake without permission.
c. Sally drives her car during rush hour on a crowded roadway.
d. All of the above are examples of activities that generate externalities.
d. All of the above are examples of activities that generate externalities.
Exam 2 Material (Chapters 7-10)

19. If Mr. Smith thinks the last dollar spent on shirts yields more satisfaction than the last dollar spent on cola, and Smith is a utility-maximizing consumer, he should
a. decrease his spending on cola.
b. decrease his spending on cola and increase his spending on shirts.
c. increase his spending on shirts.
d. increase his spending on cola and decrease his spending on shirts.
b. decrease his spending on cola and increase his spending on shirts.
20. Which of the following statements is true?
a. The demand curve for a group of consumers in a market is simply the horizontal summation of each individual’s demand.
b. The single demand curve shows the quantity of a good that people will buy, allowing all factors (price, income, expected future prices, etc.) to vary.
c. An increase in income will cause a person to move down and to the right along her demand curve.
d. The market demand for an item is independent of the number of individuals in the market.
a. The demand curve for a group of consumers in a market is simply the horizontal summation of each individual’s demand.
21. The demand for which one of the following is most likely to be highly elastic?
a. gasoline
b. fresh green spinach
c. tickets to the Super Bowl football game
d. the services of a physician
b. fresh green spinach
22. Which of the following is most likely to be an inferior good?
a. diamond rings
b. intercity air passenger travel
c. new automobiles
d. intercity bus passenger travel
d. intercity bus passenger travel
23. Paul’s Plumbing is a small business that employs 12 people. Which of the following is the best example of an implicit cost incurred by this firm?
a. the tax payments on property owned by the firm
b. the wages paid to the 12 employees
c. the half of the payroll taxes on the wages of the 12 employees paid by the employers, but not the half paid by the employees
d. the accounting services provided free of charge to the firm by Paul’s wife, who is an accountant
b. the wages paid to the 12 employees
24. If you were operating a fast-food restaurant, which of the following would represent a fixed cost of production in the short run?
a. an annual business license fee paid to the local government
b. wages paid to workers
c. the cost of electricity to light the restaurant
d. the cost of paper supplies (napkins, bags, etc.)
a. an annual business license fee paid to the local government
25. Average fixed costs
a. will remain unchanged as output expands.
b. are defined as the change in total costs divided by the change in output.
c. will always increase as output increases.
d. will always decrease as output expands.
d. will always decrease as output expands.
26. If fixed costs are $200,000 and variable costs are $30 per unit over the relevant range of output, when 10,000 units are produced, the average total cost will be
a. $20.
b. $30.
c. $50.
d. $70.
c. $50.
27. Which of the following is an implication of the law of diminishing returns?
a. Total output will decline as more workers are hired.
b. In the long run, average total cost will eventually decline as output is expanded.
c. In the short run, expansion of output will eventually lead to increases in marginal cost and average total cost.
d. A doubling of all inputs will lead to more than a doubling of output.
c. In the short run, expansion of output will eventually lead to increases in marginal cost and average total cost.
28. Which of the following is always true?
a. When marginal costs are less than average total costs, average total costs will be decreasing.
b. When average fixed costs are falling, marginal costs must be less than average fixed costs.
c. When average fixed costs are rising, marginal costs must be greater than average total costs.
d. When marginal costs are greater than average total costs, average total costs will be decreasing.
a. When marginal costs are less than average total costs, average total costs will be decreasing.
29. A large aircraft manufacturer, like Boeing, may have a cost advantage over a new smaller manufacturer because
a. of diseconomies of scale.
b. of economies of scale.
c. of diminishing returns to a fixed factor of production.
d. the principal agent problem is generally less severe for larger firms.
b. of economies of scale.
30. In Figure 2, which output minimizes per-unit cost?
a. 4
b. 6
c. 7
d. 8
d. 8
31. The schedule of total costs for a chair-manufacturing firm is presented in the table below. If the market price of chairs is $100, which of the output levels should this price-taker firm produce in order to maximize profit?
Units of Output Total Cost (dollars)
10 1,000
20 1,900
30 2,850
40 4,000
a. 10
b. 20
c. 30
d. 40
c. 30
32. The price-taker firm should discontinue production immediately if
a. the market price exceeds the firm’s average total costs.
b. the market price is less than the firm’s average variable costs.
c. the market price is less than the firm’s average total costs but greater than its average variable cost.
d. its accounting statement indicates that it is suffering losses.
b. the market price is less than the firm’s average variable costs.
33. There are 1,000 identical firms in a price-taker industry. In the short run, the total revenues of each firm are less than total costs. What will happen in the long run?
a. Nothing, because each firm is already maximizing its profits.
b. Additional firms will enter the market, and price will be driven down to where each firm will be making just enough to stay in business (cover its variable costs).
c. Additional firms will enter the market, but the price will remain the same because the existing firms will not allow it to decrease.
d. Firms will exit the market, and the product price will rise.
d. Firms will exit the market, and the product price will rise.
34. In a price-taker market, profits are
a. the result of consumers being charged arbitrarily high prices.
b. a reward for creating value.
c. the result of barriers to entry into the market.
d. a signal that fewer resources are needed in a market.
b. a reward for creating value.
35. The cost conditions for a profit-maximizing firm operating in a price-taker market are indicated in Figure 3. If the market price was $3, what output should the firm produce, and what would be the firm’s maximum profit?
a. output, 3; maximum profit, $3 loss
b. output, 5; maximum profit, zero
c. output, 5; maximum profit, $5
d. output, 6; maximum profit, $6
b. output, 5; maximum profit, zero
36. If the market price in Figure 3 increases to $4, what output should the firm produce, and what would be the firm’s maximum profit?
a. output, 3; maximum profit, $3 loss
b. output, 5; maximum profit, zero
c. output, 5; maximum profit, slightly less than $5
d. output, 6; maximum profit, slightly less than $6
d. output, 6; maximum profit, slightly less than $6
37. Which of the following is the best example of a firm operating in a competitive price-searcher market?
a. a pizza parlor operating near a college campus
b. Shell Oil Company, a major refiner of gasoline
c. a Texas rancher that raises beef cattle
d. Boeing, the aircraft manufacturer
a. a pizza parlor operating near a college campus
38. Firms that are price searchers
a. will eventually find and charge the highest price at which consumers will purchase any units.
b. face inelastic demand curves for their products.
c. do not confront rival sellers like price takers do.
d. face a downward-sloping demand curve.
d. face a downward-sloping demand curve.
39. Losses are important to a competitive price-searcher market (industry) because they send a message to the market participants that
a. more resources should be devoted to a particular industry.
b. resources can rise in value if diverted away from that particular industry.
c. resources are allocated exactly as they should be.
d. the firms should charge lower prices.
b. resources can rise in value if diverted away from that particular industry
40. To the extent that competitive price searchers fail to expand output to the minimum per-unit cost rate, many economists believe that this high cost is merely a premium that must be paid for.
a. higher entrepreneurial profits
b. product variety and convenience
c. higher worker wages
d. wasteful advertising
b. product variety and convenience
41. Which of the following is a necessary condition for price discrimination to be profitable?
a. All consumers must have identical preferences.
b. It must be easy to distinguish consumer groups with differing responses to higher prices.
c. The seller must face a horizontal demand curve for its product in at least one part of the market.
d. Both b and c are correct.
b. It must be easy to distinguish consumer groups with differing responses to higher prices.
42. (I) In order for effective price discrimination to occur, a seller must be a pure monopolist.
(II) Price discrimination will not be profitable unless there are at least two identifiable groups of consumers with differing price elasticities of demand for the firm’s product.
a. Both I and II are true.
b. I is true; II is false.
c. I is false; II is true.
d. Both I and II are false.
c. I is false; II is true.
43. A monopoly is most likely to emerge in a market when
a. the producers in the market have U-shaped average total cost curves.
b. the price elasticity of demand for the product is high.
c. the cost of entry and exit into the market is low.
d. economies of scale are large relative to market demand.
d. economies of scale are large relative to market demand.
44. Which of the following accurately describes a major difference between a monopolist and firms in competitive price-searcher markets?
a. A monopolist will maximize profit, while firms in competitive price-searcher markets will maximize sales.
b. A monopolist may be able to earn long-run economic profit, but firms in competitive price-searcher markets will not be able to do so.
c. A monopolist will charge a price that is greater than its marginal cost, but competitive price searchers will charge prices that are just equal to their marginal cost.
d. A monopolist will charge a price that is just equal to its marginal cost, but competitive price searchers will charge prices that are greater than their marginal cost.
b. A monopolist may be able to earn long-run economic profit, but firms in competitive price-searcher markets will not be able to do so.
Use the table to answer the following question.
Price Units of Output Total Cost
(dollars) (quantity demanded) (dollars)
10 200 2,000
9 250 2,200
8 330 2,400
7 405 2,600
6 480 2,800
45. The demand and cost schedules of a monopolist are presented in the table above. What price should a profit-maximizing monopolist charge?
a. $10
b. $ 9
c. $ 8
d. $ 7
c. $ 8