EC 201 FS17 Amsler

Question 1

Economics is best defined as the study of

Answer 1

how society manages its scarce resources

Question 2

Your opportunity cost of going to a movie is

Answer 2

the total cash expenditure needed to go to the movie plus the value of your time

Question 3

A marginal change is one that

Answer 3

incrementally alters an existing plan

Question 4

Adam Smith’s phrase “invisible hand” refers to

Answer 4

the ability of free markets to reach desirable outcomes, despite the self-interest of market participants

Question 5

Governments may intervene in a market economy in order to

Answer 5

protect property rights, correct a market failure due to externalities, and achieve a more equal distribution of income.

Question 6

If a nation has high and persistent inflation, the most likely explanation is

Answer 6

the central bank creating excessive amounts of money

Question 7

An economic model is

Answer 7

a simplified representation of some aspect of the economy.

Question 8

The circular-flow diagram illustrates that, in markets for the factors of production,

Answer 8

households are sellers, and firms are buyers

Question 9

A point inside the production possibilities frontier is

Answer 9

feasible, but not efficient

Question 10

An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers’ preferences, it would

Answer 10

move the economy along the production possibilities frontier

Question 11

All of the following topics fall within the study of microeconomics EXCEPT

Answer 11

the influence of the government budget deficit on economic growth

Question 12

Which of the following is a positive, rather than a normative, statement?

Answer 12

Law X will reduce national income

Question 13

In an hour, Mateo can wash 2 cars or mow 1 lawn, and Tyler can wash 3 cars or mow 1 lawn. Who has the absolute advantage in car washing, and who has the absolute advantage in lawn mowing?

Answer 13

Tyler in washing, neither in mowing

Question 14

Once again, in an hour, Mateo can wash 2 cars or mow 1 lawn, and Tyler can wash 3 cars or mow 1 lawn. Who has the comparative advantage in car washing, and who has the comparative advantage in lawn mowing?

Answer 14

Tyler in washing, Mateo in mowing

Question 15

When two individuals produce efficiently and then make a mutually beneficial trade based on comparative advantage,

Answer 15

they both obtain consumption outside their production possibilities frontier

Question 16

Which goods will a nation typically import?

Answer 16

those goods in which other nations have a comparative advantage

Question 17

Suppose that in the United States, producing an aircraft takes 10,000 hours of labor and producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor, while producing a shirt takes 4 hours of labor. What will these nations trade?

Answer 17

China will export shirts, while the United States will export aircraft.

Question 18

Kayla can cook dinner in 30 minutes and wash the laundry in 20 minutes. Her roommate takes half as long to do each task. How should the roommates allocate the work?

Answer 18

There are no gains from trade in this situation.

Question 19

Emilio buys pizza for $10 and soda for $2. He has income of $100.

Answer 19

The price of pizza rises to $20, the price of soda rises to $4, and his income rises to $400.

Question 20

At any point on an indifference curve, the slope of the curve measures the consumer’s

Answer 20

willingness to trade one good for the other.

Question 21

Matthew and Susan are both optimizing consumers in the markets for shirts and hats, where they pay $100 for a shirt and $50 for a hat. Matthew buys 4 shirts and 16 hats, while Susan buys 6 shirts and 12 hats. From this information, we can infer that Matthew’s marginal rate of substitution is _____ hats per shirt, while Susan’s is _____.

Answer 21

2, 2

Question 22

Darius buys only lobster and chicken. Lobster is a normal good, while chicken is an inferior good. When the price of lobster rises, Darius buys

Answer 22

less lobster and more chicken.

Question 23

If the price of pasta increases and a consumer buys more pasta, we can infer that

Answer 23

pasta is an inferior good, and the income effect is greater than the substitution effect.

Question 24

The labor supply curve slopes upward if

Answer 24

the substitution effect on leisure is greater than the income effect.

Question 25

Xavier opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor’s lawn for $40. Xavier has an accounting profit of _____ and an economic profit of ____.

Answer 25

$50, $10

Question 26

Diminishing marginal product explains why, as a firm’s output increases,

Answer 26

the production function gets flatter, while the total cost curve gets steeper.

Question 27

A firm is producing 1,000 units at a total cost of $5,000. If it were to increase production to 1,001 units, its total cost would rise to $5,008. What does this information tell you about the firm?

Answer 27

Marginal cost is $8, and average total cost is $5.

Question 28

A firm is producing 20 units with an average total cost of $25 and marginal cost of $15. If the firm were to increase production to 21 units, which of the following must occur?

Answer 28

Average total cost would decrease.

Question 29

The government imposes a $1,000 per year license fee on all pizza restaurants. Which cost curves shift as a result?

Answer 29

Average total cost and average fixed cost.

Question 30

If a higher level of production allows workers to specialize in particular tasks, a firm will likely exhibit ________ of scale and ________ average total cost.

Answer 30

economies, falling

Question 31

A perfectly competitive firm

Answer 31

takes its price as given by market conditions.

Question 32

A competitive firm maximizes profit by choosing the quantity at which

Answer 32

marginal cost equals the price.

Question 33

A competitive firm’s short-run supply curve is its ________ cost curve above its ________ cost curve.

Answer 33

marginal, average variable

Question 34

If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will

Answer 34

keep producing in the short run but exit the market in the long run.

Question 35

In the long-run equilibrium of a competitive market with identical firms, what is the relationship between price marginal cost and average total cost?

Answer 35

P=MC and P=ATC

Question 36

Pretzel stands in New York City are a perfectly competitive industry in long-run equilibrium. One day, the city starts imposing a $100 per month tax on each stand. How does this policy affect the number of pretzels consumed in the short run and the long run?

Answer 36

no change in the short run, down in the long run

Question 37

A change in which of the following will not shift the demand curve for hamburgers?

Answer 37

The price of hamburgers

Question 38

An increase in ________ will cause a movement along a given demand curve, which is called a change in ________.

Answer 38

supply, quantity demanded

Question 39

Movie tickets and film streaming services are substitutes. If the price of film streaming increases, what happens in the market for movie tickets?

Answer 39

The demand curve shifts to the right.

Question 40

The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline, leading to a ________ equilibrium price.

Answer 40

supply, lower

Question 41

If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods?

Answer 41

Prices and quantities both rise.

Question 42

Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold?

Answer 42

An increase in the price of grapes, an input to jelly

Question 43

A life-saving medicine without any close substitutes will tend to have:

Answer 43

A small elasticity of demand

Question 44

The price of a good rises from $8 to $12, and the quantity demanded falls from 110 to 90 units. Calculated with the midpoint method, the elasticity is:

Answer 44

1/2

Question 45

A linear, downward-sloping demand curve is

Answer 45

inelastic at some points and elastic at others.

Question 46

The ability of firms to enter and exit a market over time means that, in the long run,

Answer 46

the supply curve is more elastic.

Question 47

An increase in the supply of a good will decrease the total revenue producers receive if

Answer 47

the demand curve is inelastic.

Question 48

Over time, technological advance increases consumers’ incomes and reduces the price of smartphones. Each of these forces increases the amount consumers spend on smartphones if the income elasticity of demand is greater than _____ and if the price elasticity of demand is greater than _____.

Answer 48

zero, one

Question 49

When the government imposes a binding price floor, it causes

Answer 49

a surplus of the good to develop

Question 50

In a market with a binding price ceiling, an increase in the ceiling will ________ the quantity supplied, ________ the quantity demanded, and reduce the ________.

Answer 50

increase, decrease, shortage

Question 51

A $1 per unit tax levied on consumers of a good is equivalent to

Answer 51

a $1 per unit tax levied on producers of the good.

Question 52

Which of the following would increase quantity supplied, decrease quantity demanded, and increase the price that consumers pay?

Answer 52

The imposition of a binding price floor

Question 53

Which of the following would increase quantity supplied, increase quantity demanded, and decrease the price that consumers pay?

Answer 53

The repeal of a tax levied on producers

Question 54

When a good is taxed, the burden of the tax falls mainly on consumers if

Answer 54

supply is elastic, and demand is inelastic.

Question 55

Jen values her time at $60 an hour. She spends 2 hours giving Colleen a massage. Colleen was willing to pay as much as $300 for the massage, but they negotiate a price of $200.

Answer 55

consumer surplus is $20 larger than producer surplus.

Question 56

The demand curve for cookies is downward sloping. When the price of cookies is $2, the quantity demanded is 100. If the price rises to $3, what happens to consumer surplus?

Answer 56

It falls by less than $100.

Question 57

John has been working as a tutor for $300 a semester. When the university raises the price it pays tutors to $400, Jasmine enters the market and begins tutoring as well. How much does producer surplus rise as a result of this price increase?

Answer 57

between $100 and $200

Question 58

An efficient allocation of resources maximizes

Answer 58

consumer surplus plus producer surplus.

Question 59

When a market is in equilibrium, the buyers are those with the ________ willingness to pay, and the sellers are those with the ________ costs.

Answer 59

highest, lowest

Question 60

Producing a quantity larger than the equilibrium of supply and demand is inefficient because the marginal buyer’s willingness to pay is

Answer 60

positive but less than the marginal seller’s cost.

Question 61

A tax on a good has a deadweight loss if

Answer 61

the reduction in consumer and producer surplus is greater than the tax revenue.

Question 62

Sofia pays Sam $50 to mow her lawn every week. When the government levies a mowing tax of $10 on Sam, he raises his price to $60. Sofia continues to hire him at the higher price.
What is the change in producer surplus, change in consumer surplus, and deadweight loss?

Answer 62

$0, –$10, $0

Question 63

Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward-sloping.
If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax

Answer 63

increases by more than 50 percent.

Question 64

Peanut butter has an upward-sloping supply curve and a downward-sloping demand curve.
If a 10 cent per pound tax is increased to 15 cents, the government’s tax revenue

Answer 64

increases by less than 50 percent and may even decline.

Question 65

The Laffer curve illustrates that, in some circumstances, the government can reduce a tax on a good and increase the

Answer 65

government’s tax revenue.

Question 66

If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, he should look for goods with ________ elasticities of demand and ________ elasticities of supply.

Answer 66

small, small

Question 67

Which of the following is an example of a positive externality?

Answer 67

Hillary’s newly cut lawn makes her neighborhood more attractive.

Question 68

If the production of a good yields a negative externality, then the social-cost curve lies ________ the supply curve, and the socially optimal quantity is ________ than the equilibrium quantity.

Answer 68

above, less

Question 69

When the government levies a tax on a good equal to the external cost associated with the good’s production, it ________ the price paid by consumers and makes the market outcome ________ efficient.

Answer 69

increases, more

Question 70

Which of the following statements about corrective taxes is generally not true?

Answer 70

They cause deadweight losses.

Question 71

The government auctions off 500 units of pollution rights. They sell for $50 per unit, raising total revenue of $25,000.
This policy is equivalent to a corrective tax of _____ per unit of pollution

Answer 71

$50

Question 72

The Coase theorem does not apply if

Answer 72

transaction costs make negotiating difficult.

Question 73

If a nation that does not allow international trade in steel has a domestic price of steel lower than the world price, then

Answer 73

the nation has a comparative advantage in producing steel and would become a steel exporter if it opened up trade.

Question 74

When the nation of Ectenia opens itself to world trade in coffee beans, the domestic price of coffee beans falls.
Which of the following describes the situation?

Answer 74

Domestic production of coffee falls, and Ectenia becomes a coffee importer.

Question 75

When a nation opens itself to trade in a good and becomes an importer,

Answer 75

producer surplus decreases, but consumer surplus and total surplus both increase.

Question 76

If a nation that imports a good imposes a tariff, it will increase

Answer 76

the domestic quantity supplied.

Question 77

Which of the following trade policies would benefit producers, hurt consumers, and increase the amount of trade?

Answer 77

Starting to allow trade when the world price is greater than the domestic price

Question 78

The main difference between imposing a tariff and handing out licenses under an import quota is that a tariff increases

Answer 78

government revenue.

Question 79

Approximately what percentage of U.S. national income is paid to workers, as opposed to owners of capital and land?

Answer 79

65%

Question 80

If firms are competitive and profit maximizing, the demand curve for labor is determined by

Answer 80

the value of the marginal product of labor.

Question 81

A bakery operating in competitive markets sells its output for $20 per cake and hires labor at $10 per hour. To maximize profits, it should hire labor until the marginal product of labor is

Answer 81

1/2 cake per hour.

Question 82

A technological advance that increases the marginal product of labor shifts the labor ________ curve to the ________.

Answer 82

demand, right

Question 83

Around 1973, the U.S. economy experienced a significant ________ in productivity growth, coupled with a(n) ________ in the growth of real wages.

Answer 83

slowdown, slowdown

Question 84

A storm destroys several factories, thereby reducing the stock of capital. What effect does this event have on factor markets?

Answer 84

Wages fall, and the rental price of capital rises.

Question 85

A firm is a natural monopoly if it exhibits the following as its output increases:

Answer 85

decreasing average total cost.

Question 86

For a profit-maximizing monopoly that charges the same price to all consumers, what is the relationship between price marginal revenue and marginal cost ?

Answer 86

P>MR and MR=MC

Question 87

If a monopoly’s fixed costs increase, its price will _____, and its profit will _____.

Answer 87

stay the same, decrease

Question 88

Compared to the social optimum, a monopoly firm chooses

Answer 88

a quantity that is too low and a price that is too high.

Question 89

The deadweight loss from monopoly arises because

Answer 89

some potential consumers who forgo buying the good value it more than its marginal cost.

Question 90

When a monopolist switches from charging a single price to perfect price discrimination, it reduces

Answer 90

consumer surplus.

Question 91

Which of the following conditions does NOT describe a firm in a monopolistically competitive market?

Answer 91

It takes its price as given by market conditions.

Question 92

Which of the following markets best fits the definition of monopolistic competition?

Answer 92

The market for haircuts

Question 93

A monopolistically competitive firm will increase its production if

Answer 93

marginal revenue is greater than marginal cost.

Question 94

New firms will enter a monopolistically competitive market if

Answer 94

price is greater than average total cost.

Question 95

What is true of a monopolistically competitive market in long-run equilibrium?

Answer 95

Price is greater than marginal cost.

Question 96

If advertising makes consumers more loyal to particular brands, it could ________ the elasticity of demand and ________ the markup of price over marginal cost.

Answer 96

decrease, increase

Question 97

The key feature of an oligopolistic market is that

Answer 97

a small number of firms are acting strategically.

Question 98

If an oligopolistic industry organizes itself as a cooperative cartel, it will produce a quantity of output that is ________ the competitive level and ________ the monopoly level.

Answer 98

less than, equal to

Question 99

If an oligopoly does not cooperate and each firm chooses its own quantity, the industry will produce a quantity of output that is ________ the competitive level and ________ the monopoly level.

Answer 99

less than, more than

Question 100

As the number of firms in an oligopoly grows large, the industry approaches a level of output that is ________ the competitive level and ________ the monopoly level.

Answer 100

equal to, more than

Question 101

The Prisoners’ Dilemma is a two-person game illustrating that

Answer 101

even if cooperation is better than the Nash equilibrium, each person might have an incentive not to cooperate.

Question 102

The anti-trust laws aim to

Answer 102

prevent firms from acting in ways that reduce competition.

Question 103

Which categories of goods are excludable?

Answer 103

Private goods and club goods

Question 104

Which categories of goods are rival in consumption?

Answer 104

Private goods and common resources

Question 105

Which of the following is an example of a public good?

Answer 105

National defense

Question 106

Which of the following is an example of a common resource?

Answer 106

Fish in the ocean

Question 107

Public goods are

Answer 107

underprovided in the absence of government.

Question 108

Common resources are

Answer 108

overused in the absence of government.

Question 109

Because Elaine has a family history of significant medical problems, she buys health insurance, while her friend Jerry, who has a healthier family, goes without.

Answer 109

adverse selection.

Question 110

George has a life insurance policy that pays his family $1 million if he dies. As a result, he does not hesitate to enjoy his favorite hobby of bungee jumping.

Answer 110

moral hazard.

Question 111

Before selling anyone a health insurance policy, the Kramer Insurance Company requires that applicants undergo a medical examination. Those with significant preexisting medical problems are charged more.

Answer 111

screening.

Question 112

The Condorcet Paradox illustrates Arrow’s Impossibility theorem by showing that pairwise majority voting

Answer 112

leads to social preferences that are not transitive.

Question 113

Two political candidates are vying for town mayor, and the key issue is how much to spend on the annual Fourth of July fireworks. Among the 100 voters, 40 voters want to spend $30,000, 30 voters want to spend $10,000, and 30 voters want to spend nothing at all.
What is the winning position on this issue?

Answer 113

$10,000

Question 114

The experiment called the ultimatum game illustrates that people

Answer 114

care about fairness, even to their own detriment.

Question 115

The two largest sources of tax revenue for the U.S. federal government are

Answer 115

personal income taxes and payroll taxes for social insurance.

Question 116

Aiden gives piano lessons. He has an opportunity cost of $50 per lesson and charges $60. He has two students: Brandon, who has a willingness to pay of $70, and Chloe, who has a willingness to pay of $90.
When the government puts a $20 tax on piano lessons and Aiden raises his price to $80, the deadweight loss is _____ and the tax revenue is _____.

Answer 116

$20, $20

Question 117

If the tax code exempts the first $20,000 of income from taxation and then taxes 25 percent of all income above that level, then a person who earns $50,000 has an average tax rate of _____ percent and a marginal tax rate of _____ percent.

Answer 117

15, 25

Question 118

A toll is a tax on those citizens who use toll roads. This policy can be viewed as an application of

Answer 118

the benefits principle.

Question 119

In the United States, taxpayers in the top one percent of the income distribution pay about _____ percent of their income in federal taxes

Answer 119

30

Question 120

If the corporate income tax induces businesses to reduce their capital investment, then

Answer 120

workers bear some of the burden of the tax.

Question 121

In the United States, the poorest fifth of the population earns about _____ percent of all income, while the richest fifth earns about _____ percent.

Answer 121

4, 50

Question 122

When income inequality is compared across nations, one finds that the United States is

Answer 122

less equal than most nations but not the least equal.

Question 123

A utilitarian believes that the redistribution of income from the rich to the poor is worthwhile as long as

Answer 123

the distortionary effect on work incentives is not too large.

Question 124

Rawls’s thought experiment of the “original position” behind the “veil of ignorance” is meant to draw attention to the fact that

Answer 124

the station of life each of us was born into is largely a matter of luck.

Question 125

A negative income tax is a policy under which

Answer 125

individuals with low income get transfers from the government.

Question 126

If the benefits from an antipoverty program are phased out as an individual’s income increases, then the program will

Answer 126

increase the effective marginal tax rate that the poor face.

Question 127

Ted leaves his job as a high school math teacher and returns to school to study the latest developments in computer programming, after which he takes a higher-paying job at a software firm.

Answer 127

human capital.

Question 128

Marshall and Lily work at a local department store. Marshall, who greets customers as they arrive, is paid less than Lily, who cleans the bathrooms.

Answer 128

a compensating differential.

Question 129

Barney runs a small manufacturing company. He pays his employees about twice as much as other firms in the area, even though he could pay less and still recruit all the workers he wants. He believes that higher wages make his workers more loyal and hard-working.

Answer 129

efficiency wages.

Question 130

A business consulting firm hires Robin because she was a math major in college. Her new job does not require any of the mathematics she learned, but the firm believes that anyone who can graduate with a math degree must be very smart.

Answer 130

signaling.

Question 131

Measuring how much discrimination affects labor market outcomes is difficult because

Answer 131

workers differ in their attributes and the types of jobs they have.

Question 132

The forces of competition in markets with free entry and exit tend to eliminate wage differentials that arise from discrimination by

Answer 132

employers