Econ

Front 1

Suppose that the firms in the perfectly competitive oat industry are currently receiving a price of $2 per bushel for their product. The minimum possible average total cost of producing oats in the long-run is $1 per bushel. It follows that

Back 1

New firms will enter the oat industry (Since price exceeds minimum long-run average total cost, firms will be making positive economic profits, and this will induce additional firms to enter the market.)

Front 2

Countries gain from trade by producing

Back 2

the goods they can produce at the lowest opportunity cost. (The principle that the lowest cost rules is the basis for the gains from trade because countries that produce a good at the lowest cost have a comparative advantage in the production of that good.)

Front 3

When Americans find that the euro is rising in price, it is getting:

Back 3

more expensive for Americans to buy European products but cheaper for Europeans to buy American products. (The higher price of the euro means Americans must spend more dollars to buy the euros they use to buy European products. It also means that Europeans need fewer euros to buy dollars.)

Front 4

A perfectly competitive firm in the long run:

Back 4

makes zero economic profits. (In a perfectly competitive industry, firms enter or exit an industry in the long-run until economic profits becomes zero.)

Front 5

The demand for a good is inelastic. Which of the following would be an explanation for this?

Back 5

The good is a necessity. (Necessities tend to be price inelastic.)

Front 6

The supply of leather jackets would be expected to increase as a result of:

Back 6

a decrease in the cost of producing leather jackets (A decrease in the cost of producing leather jackets will cause supply to increase or shift rightward. A change in price causes a movement along supply, not a shift. Increased popularity affects the demand for leather jackets. The expectation of a higher future price will motivate suppliers to store some of today's supply in order to sell it later and reap higher profits, to the current supply decreases.)

Front 7

Basic research is more likely to be funded by the federal rather than state and local government because:

Back 7

Basic research is largely a public good; benefits flow to the whole world, not just the state. (Basic research is usually funded by the federal government because it is often a public good. For this research to pass a cost-benefit test for California, the benefits must be much greater than the cost because most of them will flow out of the state. If the research results in a private good, then more of the benefits could be captured by California, but if the prospect of arriving at a private good, that is, something protected by patent, were high enough, private firms would be conducting it.)

Front 8

A natural monopoly:

Back 8

occurs when a single firm can supply the entire market demand for a product at a lower average total cost than would be possible if two or more firms supplied the market. (Natural monopolies exist because economies of scale make it less costly for one firm to supply an entire market than for multiple firms to do so.)

Front 9

Rent control makes apartments:

Back 9

hard to find. (Rent control is a government-imposed price ceiling on rent resulting in a shortage of apartments.)

Front 10

A 2004 Wall Street Journal article reported, "Chinese Are Losing Dollar Faith." It stated, "From black marketeers to anxious grandmothers, Chinese have become disenchanted with the dollar...Many Chinese view the yuan, also called the renminbi, as the safer currency to hold." If dollars and yuan traded freely, this change in attitude would lead to:

Back 10

an appreciation of the yuan and a depreciation of the dollar. (The yuan should gain value, which implies that the dollar should lose value.)

Front 11

Honus Wagner, a major league baseball player from 1897 to 1917 and one of the first five men inducted into the Baseball Hall of fame, had his baseball card pulled from cigarette packs because he wasn't being paid for their distribution. What best describes the effect of his action on the market for his baseball card?

Back 11

Supply shifted to the left, price rose, and quantity demanded fell (The supply of Honus Wagner cards shifted to the left when Honus pulled his card from the cigarette packs. As a result price rose causing a decline in the quantity of cards demanded.)

Front 12

In the early 2000s, analysts were predicting that although many legal music download sites would start up, that because of the technology, only a few, or perhaps even just one, would survive. A forecast that online music will end up with a few or only one seller will prove correct if online music firms:

Back 12

have decreasing long-run average cost curves. (If there are economies of scale in the online music business, the firms will have decreasing long-run average cost curves. The larger the firm, the more profitable it will be relative to rivals. Hence, one large seller will ultimately dominate the market)

Front 13

A perfectly competitive firm's marginal revenue is:

Back 13

equal to the selling price. (Since a perfectly competitive firm faces a horizontal demand curve, the sale of another unit of output increases total revenue by the selling price.)

Front 14

At the socially optimum quantity of production price equals:

Back 14

marginal cost. (If price equals marginal cost, than the social benefit from producing an additional unit of output just equals the social cost, so no improvement in welfare is possible.)

Front 15

Which of the following is not likely to change the supply of personal computers?

Back 15

An increase in consumers' incomes. (An increase in consumers' incomes will shift the demand curve for personal computers, NOT the supply curve. All the other options clearly shift the supply curve for computers.)

Front 16

The profit-maximizing condition for a perfectly competitive firm is:

Back 16

P = MC. (Profits are maximized only when marginal revenue equals marginal cost. For a perfectly competitive firm price always equals marginal revenue and it can sell as much output as it wants at the market price, therefore, MR=P=MC.)

Front 17

If there is an improvement in technology one would expect

Back 17

a shift downward (or to the right) of the supply curve. (Technology is a shift factor of supply.)

Front 18

What do economists mean when they say there is "market failure"?

Back 18

Free markets yield results that economists do not consider socially optimal. (Economists define socially optimal in terms of economic efficiency. Market failure means that there is lost value--it is at least theoretically possible to change something to increase end value.)

Front 19

Oligopoly is characterized by:

Back 19

few sellers. (In an oligopoly, the number of sellers is small.)

Front 20

The exchange rate is the:

Back 20

price of one currency in terms of another. (The exchange rate is the price of foreign currency)

Front 21

The optimal quantity of pollution control occurs at the point where the:

Back 21

marginal social cost equals the marginal social benefit of pollution. (The optimal amount of pollution control is where MC=MB.)

Front 22

If a positive externality is to be taken full advantage of the:

Back 22

consumer of the good should receive a subsidy equal to the marginal external benefit resulting from production (or consumption) of the good. (To internalize a positive externality, MB must be increased by the amount of the externality. That is, consumers must be subsidized.)

Front 23

Suppose a monopolist is at the profit-maximizing output level. If the monopolist sells another unit of output, then:

Back 23

producer surplus falls but consumer surplus rises. (Consumer surplus rises because the increase in output reduces the price. Producer surplus falls because profits are reduced by the reduction in price.)

Front 24

The opportunity cost for a student of attending college for a year is best measured by the:

Back 24

value of the next-best activity forgone by attending college. (Opportunity cost is the benefit forgone by undertaking an activity.)

Front 25

The consumption of an additional unit of a good provides additional satisfaction, which is called:

Back 25

marginal utility. (Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or service.)

Front 26

Along a downward-sloping straight line demand curve beginning at the price where demand intersects the price axis, as price declines revenue:

Back 26

rises then declines. (At each end-point (price and quantity axis intercepts), revenue is zero. At first revenue rises, hits a maximum where elasticity is one and then declines)

Front 27

The best example of a positive externality is:

Back 27

education. (Pollution is an example of a negative externality. Roller coaster rides and alcoholic beverages are private goods.)

Front 28

In general, the greater the elasticity the

Back 28

larger the responsiveness of quantity to changes in price. (When either demand or supply is highly elastic, the quantity is very responsive to a change in price.)

Front 29

The unwillingness of individuals to share in the cost of a public good is called the:

Back 29

free rider problem. (The free rider problem is a market failure that occurs when people take advantage of being able to use a common resource, or collective good, without paying for it)

Front 30

Your opportunity cost of taking this course is:

Back 30

the net benefit of the activity you would have chosen if you had not taken the course. (Opportunity cost is what you must sacrifice when you choose an activity. By taking this course, you are sacrificing the benefit you could have obtained from the activity you would have chosen if you had not taken the course.)

Front 31

If the U.S. dollar appreciates against the Japanese yen, then:

Back 31

Japanese goods will be cheaper in the United States. (An appreciation of the dollar decreases the price of yen in terms of dollars, making Japanese goods priced in yen cheaper in terms of dollars.)

Front 32

To maximize profits, a perfectly competitive firm should produce where marginal:

Back 32

cost equals marginal revenue. (If marginal cost equals marginal revenue, a firm cannot increase its profits by increasing or decreasing output. It is maximizing profit.)

Front 33

The prisoner's dilemma is a well-known game in which:

Back 33

independent action is not necessarily the best joint action, but is the best independent action. (In the prisoner's dilemma game, cooperation is beneficial for both prisoners, but difficult to achieve. There are gains to both cooperative and independent action. Individuals don't always act in their best joint interest.)

Front 34

If a positive externality exists in the provision of education when education is provided in a perfectly competitive market without government intervention, then at the market equilibrium level of education:

Back 34

additional net gains to society are possible by raising the level of education. (Since there is a positive externality, marginal social benefit exceeds marginal private benefit. The market equilibrium occurs where marginal private benefit equals marginal private cost, but the socially optimal level is where marginal social benefit equals marginal private cost.)

Front 35

Along a straight-line demand curve elasticity:

Back 35

rises as price rises (Elasticity is infinite at the price axis intercept and declines to zero at the quantity axis intercept.)

Front 36

The law of diminishing marginal productivity implies that the marginal product of a variable input:

Back 36

eventually declines. (Diminishing marginal productivity occurs when the marginal product of a variable input declines. This decline need not occur immediately, however, so that the marginal product of a variable input may rise at first before it begins to decline.)

Front 37

An industry that has many sellers offering slightly differentiated products is called:

Back 37

monopolistically competitive (Although there are many sellers in a perfectly competitive industry, the products are not differentiated. Neither oligopoly nor monopoly can be characterized as having many sellers.)

Front 38

Which policy is likely to be the most efficient in dealing with automobile emission pollution?

Back 38

An emission tax (Taxes are more likely to equate marginal benefit and marginal cost)

Front 39

If a negative externality is to be internalized to the decision maker the

Back 39

producers' marginal costs should be increased by an amount equal to the marginal external cost resulting from production of the good. (To internalize a negative externality, MC must be increased by the amount of the externality.)

Front 40

The total satisfaction one gets from one's consumption of a product is called:

Back 40

total utility (Total utility is the total satisfaction received from consuming a given total quantity of a good or service)

Front 41

An individual with a highly elastic demand for gasoline will:

Back 41

cut consumption more than an individual with a highly inelastic demand when price goes up (Since that person finds it easy to conserve gasoline, he/she will reduce consumption of gasoline by a lot.)

Front 42

New York City has been experiencing a housing emergency for quite some time. Apartments are difficult to come by. In fact, the vacancy rate has been below 5 percent since World War II. The most likely cause of the housing emergency is:

Back 42

a price ceiling on rent lower than equilibrium price. (In New York City, many apartments have government-imposed rents below market price. As a result, the quantity of apartments demanded exceeds quantity supplied. The price ceiling (rent control) has perpetuated the housing emergency.)

Front 43

The demand for a good is elastic. Which of the following would be the most likely explanation for this?

Back 43

The good is a large portion of one's total income. (Demand for goods that are a large portion of one's total income tend to be price elastic.)

Front 44

In 2004, the Wall Street Journal reported that Starbucks was set to raise some of its prices. The article stated that "mass-market grocery brands such as Kraft Foods Inc.'s Folgers and Maxwell House coffees tend to be much more price-elastic" than Starbucks' coffees. This information about elasticities is telling us that:

Back 44

Starbucks' customers are not as responsive to price changes as are the customers of the grocery brands (

Front 45

A perfectly competitive firm will be profitable if price at the profit-maximizing quantity is above:

Back 45

ATC (If price exceeds average total cost or cost per unit, than a firm is making positive economic profits.)

Front 46

In the mid 1990s, caviar sales soared as did its price. The Petrossian boutique in New York which serves the upscale fare says it has raised its price in reaction to a renewed interest in the food coupled with a shrinking supply of Russian caviar following the collapse of Soviet Communism. Given these facts, what most likely led to the higher quantity sold and higher price of caviar?

Back 46

A large shift in demand to the right and a small shift in supply to the left. (The recent interest in caviar is represented by a shift to the right in demand. The shrinking supply of Russian caviar shifts the supply curve to the left. The shift in supply, however, must be small relative to the shift in demand so that quantity sold remains higher than before.)

Front 47

Economies of scale

Back 47

1. Indivisible setup costs

2. Learning by doing

3. Labor specialization

Front 48

Diseconomies of scale

Back 48

1. Loss of team spirit

2. Coordination failures

3. Own demand inputs