FINAL Flashcards
1
Q
Which of the following statements is true?
A. An order given in a firm is a request for a job that can be rejected by the employee.
B. In a market, prices motivate and constrain people’s actions, and are determined as a result of the actions of a large number of participants.
C. Contracts for products sold in markets temporarily transfer authority over the product from the seller to the buyer.
D. Asymmetric information in a firm is the details about the asymmetry of authority within the firm.
A
B. In a market, prices motivate and constrain people’s actions, and are determined as a result of the actions of a large number of participants.
2
Q
Which of the following statements is true?
A. The managers are residual claimants of the firm’s profits.
B. The owners of a firm are the only individuals who hold the firm?s shares.
C. With the separation of ownership and control, decisions are made by managers while the benefits of the decisions accrue to the owners.
D. The separation of ownership and control has costs that almost always outweigh the benefits.
A
C. With the separation of ownership and control, decisions are made by managers while the benefits of the decisions accrue to the owners.
3
Q
Which of the following statements regarding employment contracts are correct?
A. The firm is required to state exactly what it needs the employee to do in an employment contract.
B. The firm needs to specify exactly how much effort employees are expected to put into their job.
C. Employees effort levels cannot be the basis of an enforceable contract.
D. Employment contracts are incomplete as they can only specify things that both the employees and the business owner care about.
A
C. Employees effort levels cannot be the basis of an enforceable contract.
4
Q
The figure depicts an employee’s best response to wage when the expected unemployment duration is 44 weeks. Which of the following statements is correct?
A. In order to induce an extra effort of 0.1 per hour at any particular wage level, the employer needs to increase the hourly wage by $3.
B. The slope of the best response curve is the employer’s marginal rate of transformation of higher wages into worker effort.
C. A fall in the unemployment rate would reduce the reservation wage to below $6.
D. The employer would still have to pay $24 per hour to have the effort level of 0.8 even if there is an increase in the unemployment benefit.
A
B. The slope of the best response curve is the employer’s marginal rate of transformation of higher wages into worker effort.
5
Q
Consider isocost lines drawn on a graph with hourly wage on the horizontal axis and effort per hour on the vertical axis. Which of the following statements is correct?
A. Isocost lines intersect the horizontal axis at the reservation wage.
B. The slope of the isocost line is the employer’s marginal rate of transformation of higher wages into worker effort.
C. Steeper isocost lines represent higher cost per unit of effort.
D. For an isocost lines with a slope of 0.07, the cost of unit of effort is $14.3.
A
D. For an isocost lines with a slope of 0.07, the cost of unit of effort is $14.3.
6
Q
The figure depicts the efficiency wage equilibrium of a worker and a firm. According to this figure:
A. At C, the marginal rate of substitution (MRS) between higher wage cost and higher effort exceeds the marginal rate of transformation (MRT).
B. At B, the MRS is higher than the MRT.
C. The firm would maximize its profits by paying an hourly wage that is $6 above the worker’s reservation wage.
D. The firm is able to increase its profits from those attained at A by inducing the worker to exert higher effort in return for a higher wage.
A
C. The firm would maximize its profits by paying an hourly wage that is $6 above the worker’s reservation wage.
7
Q
The figure depicts the efficiency wage equilibrium of a worker and a firm. Based on this information, which of the following statements is correct?
A. There can be more than one Nash equilibrium outcome.
B. If the worker was naturally hard-working and puts in full effort regardless of the wage rate, then she would receive no employment rent.
C. If the law changed and the firm is prohibited from firing the worker, then the worker will be paid the reservation wage and the firm will earn higher profits.
D. At the efficient wage equilibrium, the worker claims the entire surplus of production.
A
B. If the worker was naturally hard-working and puts in full effort regardless of the wage rate, then she would receive no employment rent.
8
Q
Consider a worker’s best response curve in the labour discipline model. Currently the firm chooses to pay $12 per hour to minimize the cost of effort, which induces an effort level of 0.6 from the worker. Now consider a rise in the unemployment benefit. Then:
A. At the wage rate of $12 per hour the worker will now exert more than 0.6 of effort.
B. The firm can lower the wage rate to below $12 to maintain the effort level of 0.6.
C. The firm’s new wage offer that minimizes the cost of effort will be higher than $12.
D. The firm’s maximum units of effort per dollar of wage cost will be higher than before the rise in the unemployment benefit.
A
C. The firm’s new wage offer that minimizes the cost of effort will be higher than $12.
9
Q
The figure below depicts the effect of an increase in the unemployment benefit on the worker’s best response curve, when the unemployment rate is 12%. Which of the following statements is correct following a rise in the unemployment benefit, ceteris paribus?
A. The firm’s profit level falls.
B. The worker’s reservation wage falls.
C. The efficiency wage at any given level of employment falls.
D. The firm sets a lower efficiency wage.
A
A. The firm’s profit level falls.
10
Q
The figure shows a demand curve for Cheerios. Based on this figure, which of the following statements is correct?
A. If the price was $2 then the total demand would be 40,000 pounds.
B. If the firms want to sell at least 24,000 pounds then they need to charge at least $3.
C. The demand curve suggests that to double the amount sold, the price needs to be halved.
D. There is no demand if the price is set above $7.20.
A
D. There is no demand if the price is set above $7.20.
11
Q
Consider the demand curve shown in the figure. Suppose that the unit cost (the cost of producing each pound of Cheerios) is C = $2. Based on the demand curve, which of the following statements is correct?
A. The total revenue when Q = 24,000 is $48,000.
B. The total cost when P = 4 is $64,000.
C. The profit when P = 3 is $24,000.
D. The profit when Q = 16,000 is $64,000.
A
C. The profit when P = 3 is $24,000.
12
Q
The figure depicts isoprofits of firms selling Cheerios. Which of the following statements is correct?
A. The unit cost of production is $2.
B. The profit level associated with isoprofit curve A is $96,000.
C. Firms prefer isoprofit curve B to A.
D. Isoprofit curve C goes through the point (Q, P) = (2,000, 9).
A
D. Isoprofit curve C goes through the point (Q, P) = (2,000, 9).
13
Q
Which of the following statements regarding the marginal rate of substitution (MRS) and the marginal rate of transformation (MRT) of a profit-maximising firm is correct?
A. The MRS is how much in price you are willing to give up for an incremental increase in the quantity, holding profits constant.
B. The MRT is how much in price the consumers are willing to give up for an incremental increase in the quantity consumed, keeping their utility constant.
C. If MRT > MRS then firms can increase their profit by increasing output.
D. The MRT is the slope of the isoprofit curves.
A
A. The MRS is how much in price you are willing to give up for an incremental increase in the quantity, holding profits constant.
14
Q
Which of the following statements regarding average cost and marginal cost of a firm is correct?
A. Average cost is the slope of the total cost curve.
B. Marginal cost is the slope of the average cost curve.
C. Marginal cost is always higher than average cost.
D. When marginal cost equals average cost, the slope of the average cost curve is zero.
A
D. When marginal cost equals average cost, the slope of the average cost curve is zero.
15
Q
The figure depicts the demand curve of a firm producing cars, together with its marginal cost, average cost, and isoprofit curves. Which of the following statements is correct?
A. The firm’s marginal revenue curve is steeper than the demand curve.
B. The marginal revenue and marginal cost curves intersect at D.
C. Marginal profit (MR - MC) is maximized at quantity Q*.
D. Revenue is maximized at quantity Q*.
A
A. The firm’s marginal revenue curve is steeper than the demand curve.
16
Q
Which of the following statements regarding the cost structure of the film (movie) industry is correct?
A. The marginal cost of producing additional copies of a film is high.
B. The price is above marginal cost due to lack of substitutes.
C. Industry regulators should cap the price of a DVD at its marginal cost.
D. The quantity sold in the film industry is inefficient.
A
D. The quantity sold in the film industry is inefficient.
17
Q
The following is a table of the total cost (TC) of producing output Q for a particular firm. Based on this information, which of the following statements is correct?
A. The average cost at Q = 40 is $7.
B. The marginal cost at Q = 80 is $9.50.
C. The marginal cost is higher than the average cost at Q = 50.
D. The marginal cost curve intersects the average cost curve at Q = 60.
A
D. The marginal cost curve intersects the average cost curve at Q = 60.
18
Q
Suppose that the marginal cost of producing a pound of cereal is $2, irrespective of the level of output, but there are also some fixed costs of production. Which of the following statements is correct?
A. The total cost curve is an upward-sloping straight line through the origin.
B. The average cost curve is U-shaped.
C. The marginal cost curve is a horizontal straight line.
D. The marginal cost curve intersects the average cost curve at its minimum point.
A
C. The marginal cost curve is a horizontal straight line.
19
Q
A firm with a higher price elasticity of demand will have a ___________ markup than a firm with a lower elasticity of demand. ____________ is one way to increase the price elasticity of demand in an industry.
A. higher; Regulation
B. lower; Regulation
C. higher; Competition
D. lower; Competition
A
D. lower; Competition
20
Q
In figure 7-5, the firm will produce at point E because it is the point that _________________.
A. maximizes profit
B. maximizes revenue
C. minimizes cost
D. maximizes consumer utility
A
A. maximizes profit
21
Q
Firms with market power face a downward sloping demand curve and are generally are assumed to choose the quantity and price that will:
A. maximize economic efficiency
B. minimize negative externalities
C. maximize workers’ salaries
D. maximize profit
A
D. maximize profit
22
Q
Firms with more market power will have a higher ________, or the difference between the price and the marginal cost.
A. fixed cost
B. profit margin
C. average cost
D. price
A
B. profit margin
23
Q
Even firms with a lot of market power cannot set prices as high as they want because as price _______, quantity _________, eventually leading to lower profits.
A. increases; increases
B. decreases; stays the same
C. decreases; decreases
D. increases; decreases
A
D. increases; decreases
24
Q
There are five students who are looking to buy one second-hand textbook each. Their willingness-to-pay are$5, $6, $8, $12, and $15, respectively. Based on this information, which of the following statements is correct?
A. The student with a willingness-to-pay of $15 is the richest.
B. Their willingness-to-pay indicates an upward-sloping demand curve.
C. To sell three books, the maximum price that can be charged is $8.
D. If a seller is one of many identical sellers and his reservation price is $8, then he is guaranteed to sell his textbook.
A
C. To sell three books, the maximum price that can be charged is $8.
25
The diagram shows the demand and the supply curves for textbooks. Based on this figure, which of the following statements is correct?
A. At a price of $12, all 40 books will be sold.
B. At a price of $6, there is an excess demand of 4 books.
C. There are sellers willing to give away their textbooks for free.
D. The Nash equilibrium price is $8.
D. The Nash equilibrium price is $8.
26
A bakery is one of many that operate in the bread industry. The market demand curve for bread is downward-sloping. The bakery incurs fixed costs and has an upward-sloping marginal cost curve. Which of the following statements is correct?
A. The bakery faces a flat demand curve.
B. The bakery's supply curve is horizontal.
C. The bakery always makes a positive economic rent.
D. The bakery can ensure that the price is above its average cost.
A. The bakery faces a flat demand curve.
27
The figure shows a bakery's marginal and average cost curves, and its isoprofit curves. The bakery is a price-taker in a large bread market. Based on this figure, which of the following statements is correct?
A. At a price of P3, the bakery will choose to operate at C.
B. At B, the bakery makes zero profits.
C. At A, the bakery would be making a loss.
D. If the market price is P2, then the bakery can undercut this price to capture a higher market share.
C. At A, the bakery would be making a loss.
28
Consider the case where a government introduces a specific (per-unit) tax on cigarettes. As a result, the government succeeds in reducing the consumption level. Which of the following statements is correct?
A. This is a bad policy as it creates a deadweight loss.
B. The cost of collecting taxes must be considered when assessing the success of this policy.
C. The more elastic the demand for cigarettes, the larger the tax revenue.
D. The tax rate should be determined so as to maximize tax revenue.
B. The cost of collecting taxes must be considered when assessing the success of this policy.
29
The market demand curve of a particular good is downward-sloping. Based on this information, which of the following statements is correct regarding a price-taking firm producing that good?
A. The demand curve faced by the firm is downward-sloping.
B. The firm chooses the price that equals its marginal cost.
C. The firm chooses its output such that the marginal cost equals the price.
D. A price-taking firm cannot be profit-maximizing.
C. The firm chooses its output such that the marginal cost equals the price.
30
The following diagram shows the consumer and producer surplus in the market for bread. Consider changes in the elasticities of the demand and supply curves. Assuming that the market equilibrium output and price are unchanged, which of the following statements is correct?
A. A less elastic supply curve will lead to a larger producer surplus.
B. A more elastic demand curve will lead to a smaller producer surplus.
C. A less elastic demand curve will lead to a smaller consumer surplus.
D. Consumer and producer surplus do not depend on the elasticities of the demand and supply curves.
A. A less elastic supply curve will lead to a larger producer surplus.
31
If a competitive market is in equilibrium and there is an increase in supply due to an improvement in technology, then price will ________ and quantity will _________.
A. decrease; increase
B. decrease; decrease
C. increase; decrease
D. increase; increase
A. decrease; increase
32
If demand for a brand decreases because consumers' tastes change, then we would expect price to _______ and quantity to _________.
A. decrease; decrease
B. increase; decrease
C. increase; increase
D. decrease; increase
A. decrease; decrease
33
If people start drinking more concentrated frozen orange juice (demand increases) but there is a frost in Florida killing many orange trees (supply decrease), what do we know for certain about the new price and quantity in the market?
A. price decreases
B. quantity decreases
C. price increases
D. quantity increases
C. price increases
34
1. The reservation price of a potential seller, who will be willing to sell a unit only for a price at least this high.
2. An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of the good.
3. The lowest price at which someone is willing to sell a good (keeping the good is the potential seller’s reservation option).
willingness to pay (WTP)
willingness to accept (WTA)
reservation price
2. willingness to pay (WTP)
1. willingness to accept (WTA)
3. reservation price
35
1. At this price there is no excess supply or excess demand.
2. A model outcome that is self-perpetuating. In this case, something of interest does not change unless an outside or external force is introduced that alters the model’s description of the situation.
3. A market outcome in which all buyers and sellers are price-takers, and at the prevailing market price, the quantity supplied is equal to the quantity demanded.
4. Characteristic of producers and consumers who cannot benefit by offering or asking any price other than the market price in the equilibrium of a competitive market. They have no power to influence the market price.
price-taker
competitive equilibrium
equilibrium
market-clearing price
4. price-taker
3. competitive equilibrium
2. equilibrium
1. market-clearing price
36
The figure shows the hat market before and after a demand shift. Based on the figure, which of the following statements is correct regarding the initial disequilibrium when the demand shifts?
A. The firms become price-makers and maximize their profits.
B. The existence of excess demand means that firms would sell more hats at $8.
C. All firms are able to sell all their supply at $13.
D. All firms will immediately adjust their hat price to $10.
A. The firms become price-makers and maximize their profits.
37
Consider a market in which bakeries supply bread to the restaurant trade. A new technology becomes available to the bakeries, shifting the supply curve down as shown in the figure. Which of the following statements is correct?
A. Initially there is an excess demand for bread.
B. Bakeries initially earn disequilibrium economic rents by selling more loaves at $2
C. Bakeries initially earn disequilibrium economic rents even if they keep the price and the output unchanged.
D. Outcome A is Pareto efficient before and after the supply curve shift.
C. Bakeries initially earn disequilibrium economic rents even if they keep the price and the output unchanged.
38
The figures show the market for bread in the short-run and in the long-run. The horizontal axis is the number of loaves and the vertical axis is the price and cost in Euros. All bakeries are identical. Which of the following statements is correct?
A. The number of bakeries in the long-run equilibrium is given exogenously.
B. Each bakery's output is higher in the long-run equilibrium than in the short-run equilibrium.
C. The long-run equilibrium is reached when the marginal cost equals the average cost.
D. The transition from the short-run to the long-run equilibrium is immediate.
C. The long-run equilibrium is reached when the marginal cost equals the average cost.
39
The figures show the market for bread in the short-run and in the long-run. The horizontal axis is the number of loaves and the vertical axis is the price and cost in Euros. All bakeries are identical. Which of the following statements regarding the short-run equilibrium is correct?
A. Each bakery's supply curve becomes flatter in the long-run, resulting in a flatter market supply curve.
B. The demand curve is more inelastic in the long-run.
C. The supply curve is more elastic in the long-run.
D. The long-run equilibrium is reached when the supply curve is totally elastic.
C. The supply curve is more elastic in the long-run.
40
Consider a government bond and a corporate bond with exactly the same stream of payments. Assume that the corporate bond has a higher risk of default. Which of the following statements is correct?
A. When the interest rate rises, the price of the bonds also rise.
B. The corporate bond has a lower price than the government bond.
C. Investors will always earn a higher return from buying the corporate bond than buying the government bond.
D. An investor should always choose the less risky government bond.
B. The corporate bond has a lower price than the government bond.
41
Which of the following statements regarding trading strategies is correct?
A. A momentum trader would not buy a share when its price is higher than its fundamental value.
B. Buying and selling assets based on an assessment of their fundamental values is a form of speculation.
C. Momentum trading is not an example of speculation.
D. The fundamental value of a security should reflect its recent price movements.
B. Buying and selling assets based on an assessment of their fundamental values is a form of speculation.
42
The graph plots the daily closing values of Nasdaq Composite Index between 1995 and 2004. The index began at less than 750, rose in five years to more than 5,000, then lost two-thirds of its value in less than a year, eventually bottoming out at around 1,100. Which of the following statements is correct?
A. The fundamental value of the index was 1,100 during the bubble years.
B. Investors should have known to exit the market at 5,000.
C. The bubble lasted for over a year between 1999 and 2000.
D. Some economists do not agree that bubbles exist.
D. Some economists do not agree that bubbles exist.
43
The figure illustrates the rental housing market, where there is an outward shift in the demand curve. In response, the city authority imposes a rent ceiling of $500. Which of the following statements is correct?
A. The market clears at $500 with 12,000 houses.
B. Banning sub-letting makes the outcome Pareto efficient.
C. Removing the rent ceiling leads to an inefficient outcome.
D. In the long run, building more houses would remove the need for the rent ceiling.
D. In the long run, building more houses would remove the need for the rent ceiling.
44
Which of the following statements is correct? According to Friedrich Hayek:
A. In a centrally planned economy, prices convey the scarcity of a good.
B. Perfect competition can be attained without activities such as advertising, undercutting, and improving ('differentiating') the goods or services produced.
C. The advantage of capitalism is that it provides the right information to the right people.
D. A single central authority can collate and make use of the information available in the economy better than the market.
C. The advantage of capitalism is that it provides the right information to the right people.
45
The UK introduced a national minimum wage in 1998. Which of the following statements regarding minimum wages is correct?
A. A minimum wage is a form of price ceiling.
B. The introduction of a minimum wage would always lead to a fall in the demand for labour by firms.
C. A minimum wage would not always lead to increased unemployment.
D. Instead of a minimum wage, the government can promote increased labour participation to encourage higher wages.
C. A minimum wage would not always lead to increased unemployment.
46
In the long-run of a profitable market, both demand and supply elasticities tend to be ____________ as firms enter and exit the market and substitutes become available.
A. more elastic
B. less elastic
C. the same
D. more inelastic
A. more elastic
47
1. The economic rent that arises when a market is not in equilibrium, for example when there is excess demand or excess supply in a market for some good or service.
2. Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organizational form, or marketing strategy.
3. Coming from outside the model rather than being produced by the workings of the model itself.
4. Produced by the workings of a model rather than coming from outside the model.
innovation rents
endogenous
disequilibrium rent
exogenous
2. innovation rents
4. endogenous
1. disequilibrium rent
3. exogenous
48
1. Anything of value that is owned.
2. A financial instrument issued by governments that promises to pay flows of money at specific intervals.
3. A type of financial asset for which the issuer promises to pay a given amount over time to the holder.
4. A part of the assets of a firm that may be traded. It gives the holder a right to receive a proportion of a firm’s profit and to benefit when the firm’s assets become more valuable.
asset
government bond
bond
stock or share
1. asset
2. government bond
3. bond
4. stock or share
49
1. A risk that affects all assets in the market, so that it is not possible for investors to reduce their exposure to the risk by holding a combination of different assets.
2. A risk that only affects a small number of assets at one time. Traders can almost eliminate their exposure to such risks by holding a diverse portfolio of assets affected by different risks.
3. A risk that threatens the financial system itself.
4. Buying and selling assets in order to profit from an anticipated change in their price.
speculation
idiosyncratic risk
systemic risk
systematic risk
4. speculation
2. idiosyncratic risk
3. systemic risk
1. systematic risk
50
1. A process whereby some initial change sets in motion a process that magnifies the initial change.
2. A process whereby some initial change sets in motion a process that dampens the initial change.
3. An equilibrium in which there is a tendency for the equilibrium to be restored after it is disturbed by a small shock.
4. An equilibrium such that, if a shock disturbs the equilibrium, there is a subsequent tendency to move even further away from the equilibrium.
positive feedback
negative feedback
unstable equilibrium
stable equilibrium
1. positive feedback
2. negative feedback
4. unstable equilibrium
3. stable equilibrium
51
Which of the following statements regarding the use of antibiotics is correct?
A. If each doctor acts in the best interest of his or her patients, the outcome will be Pareto efficient.
B. If each doctor acts in the best interest of his or her patients, the result will be an overuse of antibiotics.
C. The use of antibiotics does not bring benefits to mankind.
D. The allocation of antibiotics should be left to the market.
B. If each doctor acts in the best interest of his or her patients, the result will be an overuse of antibiotics.
52
The figure shows the marginal private cost and marginal social cost of producing bananas while using pesticides. The per-tonne price of bananas is constant at $400. Based on the figure, which of the following statements regarding point A is correct?
A. The marginal external cost at A is $670.
B. A is the banana producer's profit-maximizing outcome.
C. Producing 1 tonne less at A leads to a fall of $400 in the producer's profit.
D. A is the Pareto optimal outcome.
B. A is the banana producer's profit-maximizing outcome.
53
Which of the following statements is correct?
A. Merit goods are those that are allocated according to consumers' willingness-to-pay.
B. All goods with a positive externality on society are merit goods.
C. To ensure a socially-optimal level of provision, merit goods should be provided by the private sector.
D. Emergency healthcare is a merit good.
D. Emergency healthcare is a merit good.
54
1. When markets allocate resources in a Pareto-inefficient way.
2. A positive or negative effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit or liability in a contract. It is called an external effect because the effect in question is outside the contract.
3. A negative external effect: that is, the negative effect of production, consumption, or other economic decisions on another person or party, which is not specified as a liability in a contract.
4. The cost of producing an additional unit of a good, taking into account both the cost for the producer and the costs incurred by others affected by the good’s production. Marginal social cost is the sum of the marginal private cost and the marginal external cost.
market failure
external effect or externality
marginal social cost (MSC)
external cost
1. market failure
2. external effect or externality
4. marginal social cost (MSC)
3. external cost
55
1. Costs that impede the bargaining process or the agreement of a contract. They include costs of acquiring information about the good to be traded, and costs of enforcing a contract.
2. A person’s next best alternative among all options in a particular transaction.
3. In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. Generally applied in bargaining situations to mean the least favorable offer that would be accepted.
transaction costs
minimum acceptable offer
reservation option
1. transaction costs
3. minimum acceptable offer
2. reservation option
56
1. A good for which use by one person does not reduce its availability to others.
2. A public good that it is possible to exclude some people from enjoying.
3. A good that is both rival, and from which others can be excluded.
4. A rival good that one cannot prevent others from enjoying.
artificially scarce good
common-pool resource
public good
private good
2. artificially scarce good
4. common-pool resource
1. public good
3. private good
57
1. This occurs when some action taken by one party to an exchange is not known or cannot be verified by the other. For example, the employer cannot know (or cannot verify) how hard the worker she has employed is actually working.
2. This term originated in the insurance industry to express the problem that insurers face, namely, the person with home insurance may take less care to avoid fires or other damages to his home, thereby increasing the risk above what it would be in absence of insurance. This term now refers to any situation in which one party to an interaction is deciding on an action that affects the profits or wellbeing of the other but which the affected party cannot control by means of a contract, often because the affected party does not have adequate information on the action.
3. This occurs when some attribute of the person engaging in an exchange (or the product or service being provided) is not known to the other parties. An example is that the individual purchasing health insurance knows her own health status, but the insurance company does not.
4. The problem faced by parties to an exchange in which the terms offered by one party will cause some exchange partners to drop out. An example is the problem of asymmetric information in insurance: if the price is sufficiently high, the only people who will seek to purchase medical insurance are people who know they are ill (but the insurer does not). This will lead to further price increases to cover costs.
hidden attributes
adverse selection
hidden actions
hidden actions
3. hidden attributes
4. adverse selection
1. hidden actions
2. hidden actions
58
Wealth, earnings, and disposable income are just three of several ways of looking at inequality. Imagine a household that earns $80,000 per year from labour. In that year, it also receives an income of $3,000 from investments, pays $12,000 in tax, and receives $7,000 in assorted benefits from the state. Which of the following is an accurate statement of its market income and its disposable income?
A. $80,000; $68,000.
B. $83,000; $71,000.
C. $83,000; $78,000.
D. $80,000; $75,000.
C. $83,000; $78,000.
59
Which of the following is not likely to be an effect of labour-saving automation?
A. In the short run, it reduces the reservation option of all workers, lowering the wage that firms have to set to get the desired level of work effort.
B. Automation reduces demand for certain types of labour and causes unemployment in the short run.
C. The increase in productivity increases profits in the short run.
D. In the long run, the increase in the capital stock increases productivity and causes unemployment.
D. In the long run, the increase in the capital stock increases productivity and causes unemployment.
60
Which of the following is an example of a predistribution policy aimed at changing the endowments of workers?
A. Income tax.
B. Minimum wage legislation.
C. Inheritance tax.
D. Child benefits.
C. Inheritance tax.
61
Which of the following statements is correct regarding policies on inequality?
A. Japan has a more equal society compared to the US due to its large equalizing effect of taxes and transfers.
B. Providing high-quality education to citizens is a way of raising the endowments of less well off people.
C. An increase in the minimum wage increases unemployment, leading to higher inequality unambiguously.
D. Non-compete contracts mean that workers can demand higher wages, leading to reduced inequality.
B. Providing high-quality education to citizens is a way of raising the endowments of less well off people.
62
Which type of inequality is generally the highest?
A. Disposable income inequality
B. Inequality after taxes and transfers
C. Wealth inequality
D. Market income inequality
C. Wealth inequality
63
Global inequality, both between country averages and between all of the world's people, is very _________ but has been ___________ in recent decades.
A. low; falling
B. high; rising
C. low; rising
D. high; falling
D. high; falling
64
What is the term used to describe inequality between groups, such as by gender or race?
A. categorical inequality
B. gini coefficient
C. Income earned by top 1%
D. 90/10 income ratio
A. categorical inequality
65
1. In-kind transfers
2. Welfare state
3. Social insurance
4. Progressive policy
___ Public expenditure in the form of free or subsidized services for households rather than in the form of cash transfers.
___ A set of government policies designed to provide improvements in the welfare of citizens by assisting with income smoothing (for example, unemployment benefits and pensions).
___ Expenditure by the government, financed by taxation, which provides protection against various economic risks (for example, loss of income due to sickness, or unemployment) and enables people to smooth incomes throughout their lifetime.
___ An expenditure or transfer that increases the incomes of poorer households by more than richer households, in percentage terms.
1. Public expenditure in the form of free or subsidized services for households rather than in the form of cash transfers.
2. A set of government policies designed to provide improvements in the welfare of citizens by assisting with income smoothing (for example, unemployment benefits and pensions).
3. Expenditure by the government, financed by taxation, which provides protection against various economic risks (for example, loss of income due to sickness, or unemployment) and enables people to smooth incomes throughout their lifetime.
4. An expenditure or transfer that increases the incomes of poorer households by more than richer households, in percentage terms.
66
Consider an employee with a reservation wage of $6 an hour. The employee chooses an effort level between zero and one. Which of the following statements regarding her best response curve is correct?
A. The best response curve describes the effort that the employee would choose for each level of the hourly wage.
B. The best response curve is upward-sloping and convex.
C. The curve crosses the horizontal axis at the origin.
D. The MRT is increasing as the wage increases.
A. The best response curve describes the effort that the employee would choose for each level of the hourly wage.
67
In Figure 6-5 the profit at point A is __________ than the profit at point B because the firm has to pay _____________ for the same level of effort from its employees.
A. lower; more
B. higher; less
C. higher; more
D. lower; less
A. lower; more
68
Employers may be against the government providing higher unemployment benefits because it will shift the workers' best response curve to the ________ and ________ the firms' profits.
A. left; increase
B. left; reduce
C. right; increase
D. right; reduce
D. right; reduce
69
Which of the following statements is correct regarding involuntary unemployment?
A. When there is no involuntary unemployment firms must be employing workers without ever dismissing them.
B. When a firm sacks (fires) a worker against her wishes but she can get another identical job immediately, there is involuntary unemployment.
C. There must be involuntary unemployment in an efficiency wage equilibrium because workers would be worse off if they lose their current job.
D. When there is involuntary unemployment the employment rent is zero.
C. There must be involuntary unemployment in an efficiency wage equilibrium because workers would be worse off if they lose their current job.
70
In the labor market, firms pay workers a wage _________ than their reservation wage in order to give them an incentive to provide more _____________.
A. equal to; effort
B. lower; effort
C. higher; effort
D. equal to; time
C. higher; effort
71
Which of the following statements regarding employment rents are correct?
A. They are the costs you have to pay for your employment.
B. It equals the wage you receive in your employment.
C. Higher employment rents make workers more likely to quit their job.
D. Employers can use high employment rents to exert power over employees.
D. Employers can use high employment rents to exert power over employees.
72
The figure depicts an employee's best response to wage when the expected unemployment duration is 44 weeks. Which of the following statements is correct?
A. In order to induce an extra effort of 0.1 per hour at any particular wage level, the employer needs to increase the hourly wage by $3.
B. The slope of the best response curve is the employer's marginal rate of transformation of higher wages into worker effort.
C. A fall in the unemployment rate would reduce the reservation wage to below $6.
D. The employer would still have to pay $24 per hour to have the effort level of 0.8 even if there is an increase in the unemployment benefit.
B. The slope of the best response curve is the employer's marginal rate of transformation of higher wages into worker effort.
73
Consider a worker's best response curve in the labour discipline model. Currently the firm chooses to pay $12 per hour to minimize the cost of effort, which induces an effort level of 0.6 from the worker. Now consider a rise in the unemployment benefit. Then:
A. At the wage rate of $12 per hour the worker will now exert more than 0.6 of effort.
B. The firm can lower the wage rate to below $12 to maintain the effort level of 0.6.
C. The firm's new wage offer that minimizes the cost of effort will be higher than $12.
D. The firm's maximum units of effort per dollar of wage cost will be higher than before the rise in the unemployment benefit.
C. The firm's new wage offer that minimizes the cost of effort will be higher than $12.
74
The major difference between firms and markets is that firms are an entity in which there is a _____________ of power while markets are characterized by a _____________ of power.
A. decentralization; concentration
B. concentration; decentralization
C. lack of; increase
D. dispersal; focus
B. concentration; decentralization
75
The cost of job loss, or ______________, is the benefit to a worker of having his or her specific job compared to his or her next best alternative.
A. wage
B. unemployment benefits
C. employment rent
D. salary
C. employment rent
76
The following table shows the total cost (TC), average cost (AC), and marginal cost (MC) of a firm for different outputs Q. Which of the following numbers correctly fills in the corresponding letter in the table?
A. 156
B. 43
C. 130
D. 79
D. 79
77
The figure depicts the demand curve of a firm producing cars, together with its marginal cost, average cost, and isoprofit curves. Now consider a case where the demand for cars becomes less elastic. Assume that the new demand curve intersects the marginal cost curve at B. Based on this information, which of the following statements is correct?
A. The demand curve becomes flatter.
B. The markup increases.
C. The quantity produced increases to above 34 units.
D. The deadweight loss decreases.
B. The markup increases.
78
A firm's cost of production is £12 per unit of output. If P is the price of the output good and Q is the number of units produced, which of the following statements is correct?
A. Point (Q, P) = (2,000, 20) is on a lower isoprofit curve than point (Q, P) = (1,200, 24).
B. Points (Q, P) = (2,000, 20) and (4,000, 16) are on the same isoprofit curve.
C. Point (Q, P) = (2,000, 20) is on the isoprofit curve representing the profit level £20,000.
D. Point (Q, P) = (5,000, 12) is not on any isoprofit curve.
B. Points (Q, P) = (2,000, 20) and (4,000, 16) are on the same isoprofit curve.
79
he firm's unit cost of production is £60. Based on this information, which of the following is correct?
A. The maximum profit that can be attained is £50,000.
B. The profit-maximizing output is Q = 400.
C. At Q = 100, the firm's profit is £20,000.
D. The firm will make a loss at all outputs of 800 and above.
B. The profit-maximizing output is Q = 400.
80
Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. The quantity-price combination at point E is (Q*, P*) = (32, 5,440). The average cost of producing 50 cars is the same as the average cost of producing 32. Suppose that the firm keeps the price at P = $5,440 but now produces 50 cars instead of 32. Which of the following is correct?
A. The firm's profit will increase.
B. The firm's profit remains the same.
C. The firm's profit is now reduced.
D. The firm will now sell all 50 cars at $5,440.
C. The firm's profit is now reduced.
81
Which of the following are factors that contribute to a firm's diseconomies of scale?
A. Difficulty of monitoring workers' effort as the number of employees increases.
B. The firm needing to double the capacity of a pipe that transports its fuel when the production level is doubled.
C. Fixed costs such as lobbying.
D. Network effects of its output goods.
A. Difficulty of monitoring workers' effort as the number of employees increases.
82
This figure shows the marginal cost and marginal revenue curves for Beautiful Cars. Which of the following statements is correct, based on the information shown?
A. Profit is greater when Q = 20 than when Q = 10.
B. Revenue is greater when Q = 10 than if Q = 20.
C. The firm would not choose to produce at point E because marginal profit is zero.
D. When Q = 40, the marginal cost is greater than the marginal revenue so the firm's profit must be negative.
A. Profit is greater when Q = 20 than when Q = 10.
83
A firm can earn positive profits so long as:
A. Price is greater than marginal cost
B. Price is greater than average cost
C. Price is greater than total cost
D. Marginal revenue = marginal cost
B. Price is greater than average cost
84
The figure shows the market demand curve for bread, together with original and new supply curves, where the curve has shifted due to an introduction of a new technology. Assume that the number of bakeries remains constant. Which of the following statements is correct?
A. The bakeries marginal cost of production has fallen.
B. Excess demand at the original price has led to the fall in the equilibrium price.
C. The more elastic the demand curve, the larger the fall in price.
D. There has been an increase in demand.
A. The bakeries marginal cost of production has fallen.
85
Consider a stock exchange where shares in News Corp are traded. Initially, 6,000 shares are traded per hour at a price of $16.50, as shown in the figure. If some good news about the future profitability of News Corp is revealed to the market, which of the following statements is correct?
A. The demand curve shifts to the left as more shares are demanded for given price.
B. The supply curve shifts to the left as fewer shares are offered for a given price.
C. In the new equilibrium, more than 6,000 shares will be traded per hour.
D. The share price will remain at $16.50.
B. The supply curve shifts to the left as fewer shares are offered for a given price.
86
The following diagram depicts the competitive market for hats before and after a demand shift. Based on this information, which of the following statements is correct?
A. After the demand shift, the market initially moves from A to E, before settling to the new equilibrium at F.
B. At E, the sellers are on the short side of the market.
C. At E, lowering the price to $7 results in a Nash equilibrium for the buyers and sellers.
D. In the adjustment process from E to the new market equilibrium F, the sellers behave as price-makers while the buyers remain price-takers.
A. After the demand shift, the market initially moves from A to E, before settling to the new equilibrium at F.
87
The figure shows the hat market before and after a demand shift. Based on the figure, which of the following statements is correct?
A. Firms initially earn disequilibrium rents by remaining at A.
B. Firms will initially drop their price while keeping the output fixed.
C. At C, both buyers and sellers are price-takers.
D. The fall in the price from $8 to $6 is an exogenous shift in price.
C. At C, both buyers and sellers are price-takers.
88
In Guadeloupe and Martinique, the use of pesticide chlordecone on banana plantations led to devastation of fishing communities downstream. Which of the following statements is correct?
A. Clean water is a right for the fishing community.
B. The use of pesticide is a right for the banana producers.
C. The problem arises when actors take into account the costs their decisions impose on others.
D. This is an example of a social dilemma.
D. This is an example of a social dilemma.
89
The figure shows the marginal private cost and marginal social cost of producing bananas while using pesticides. The per-tonne price of bananas is constant at $400. Based on the figure, which of the following statements regarding point B is correct?
A. The banana producers make positive profits.
B. The fishermen incur a cost of $400 from the 38,000th tonne of bananas.
C. Producing 1 tonne less is Pareto improving.
D. Producing 1 tonne more is Pareto improving.
A. The banana producers make positive profits.
90
Bridgman is a candy maker who uses machines that generate noise and vibration. Sturges is a doctor next door whose consulting room is on the boundary of Bridgman's property and so is affected by the noise and vibration. The court has granted the doctor an injunction that prevents Bridgman from using his machinery. Assume that the transaction costs required for Bridgman and Sturges to get together and bargain are negligible. Based on this information, which of the following statements is correct?
A. Bridgman will produce at his profit-maximizing level.
B. Had the court instead given Bridgman the right to produce, the Pareto-efficient production level would be different, ceteris paribus.
C. Bridgman's and Sturges profits in the Pareto-efficient outcome are independent of the court's decision.
D. If transaction costs exist then the Pareto-efficient outcome may not be achieved.
D. If transaction costs exist then the Pareto-efficient outcome may not be achieved.
91
The figure shows the marginal private cost and marginal social cost of producing bananas while using pesticides. The price of bananas is constant at $400. The government has different options in order to reduce the output level down to the Pareto-efficient level of 38,000. At this point, the difference between the MSC and the MPC curves is $105. In which of the following options do the banana producers make the highest profit?
A. Government regulation to produce 38,000 tonnes of bananas a day.
B. Pigouvian tax of $105 per tonne of bananas.
C. Coasean bargaining when the producers have the right to produce.
D. Coasean bargaining when the fishermen have the right to clean water.
C. Coasean bargaining when the producers have the right to produce.
92
A factory is situated next to a dormitory for nurses who work night shifts. The factory produces 120 units of humanoid robots a day. The production process is rather noisy, and the nurses often complain that their sleep is disturbed. The following graph depicts the MPC and MSC of the robot factory production. The robot market is competitive and the market price is £340. Based on this information, which of the following statements is correct?
A. At Q = 80, both the factory and the nurses would benefit from the factory paying a fee less than 80 to the nurses to increase output.
B. At Q = 120, both the factory and the nurses would benefit from the nurses paying a fee less than 120 to the factory to reduce output.
C. The efficient level of output is 0, where there is zero marginal external cost to the nurses.
D. The efficient level of output is the factory's profit-maximizing quantity, which is 120.
B. At Q = 120, both the factory and the nurses would benefit from the nurses paying a fee less than 120 to the factory to reduce output.
93
In Guadeloupe and Martinique, the use of pesticide chlordecone on banana plantations led to devastation of fishing communities downstream. Which of the following statements regarding marginal costs is correct?
A. Marginal private cost (MPC) is the cost imposed on fishermen by the plantations using the pesticide.
B. Marginal external cost (MEC) is the cost of the pesticide for the plantations.
C. Marginal social cost (MSC) is the difference between the MPC and the MEC.
D. MSC is the marginal cost to society of banana production.
D. MSC is the marginal cost to society of banana production.
94
Bridgman is a candy maker who uses machines that generate noise and vibration. Sturges is a doctor next door whose consulting room is on the boundary of Bridgman's property and so is affected by the noise and vibration. The court has granted the doctor an injunction that prevents Bridgman from using his machinery. Assume that the transaction costs required for Bridgman and Sturges to get together and bargain are negligible. Based on this information, which of the following statements is correct?
A. Bridgman will have to close down his firm.
B. The court's role was to establish the initial property rights of the two parties.
C. If the court ruled that Bridgman had the right to produce candies, then Sturges would have had to close his surgery.
D. Sturges will pay Bridgman to reduce the production level of candies.
B. The court's role was to establish the initial property rights of the two parties.
95
Consider a beekeeper who produces honey and sells it at a constant price per kilogram. Assume that the marginal private cost of producing honey increases with output, and that there is a neighboring farmer whose crops the bees can help pollinate. Which of the following statements is correct?
A. The beekeeper's marginal private benefit (MPB) curve is upward sloping.
B. There is a marginal external cost of producing honey.
C. The marginal social benefit (MSB) curve will be above the MPB curve.
D. The beekeeper's profit-maximizing output level is higher than the Pareto-efficient level.
C. The marginal social benefit (MSB) curve will be above the MPB curve.
96
One solution to a market failure is for the government to impose _______________ so that a firm's marginal private cost is equal to the marginal social cost.
A. a quota
B. clear property rights
C. a Pigouvian tax
D. a production ban
C. a Pigouvian tax
97
According to the figure below, __________ of people born in the bottom 20% of the income distribution make it to the top 20% of the income distribution in the United States while __________ make the jump up in Denmark.
A. 36%; 33.7%
B. 9.8%; 16.1%
C. 7.4%; 16.7%
D. 16.7%; 7.4%
C. 7.4%; 16.7%
98
In Thomas Piketty’s ‘Economist in action’ video, which of the following were NOT among the reasons that Piketty gave for the fall in the incomes of the very rich during the twentieth century?
A. the First World War
B. the Russian Revolution
C. the Great Depression
D. the Second World War
B. the Russian Revolution
99
Which of the following statements regarding segmented labor markets are correct?
A. The ‘gig economy’ is not part of the primary labor market.
B. Trade unions have attempted to reduce hours of work by introducing zero hours contracts.
C. Workers in the secondary labor market are better paid than those in the primary labor market.
D. Primary labor market jobs are concentrated in agriculture.
A. The ‘gig economy’ is not part of the primary labor market.
100
According to our ‘Economist in action’ video of Arin Dube, which of the following was a finding of his study of the minimum wage increase?
A. There was a minimal negative effect on employment.
B. A 10% increase in minimum wage resulted in a 4% decrease in employment.
C. Increasing the minimum wage increased worker turnover.
D. A 10% increase in minimum wage resulted in a 4% increase in earnings.
A. There was a minimal negative effect on employment.
101
Wealth is usually more unequally distributed than earnings, which in turn are more unequally distributed than disposable income. This is mainly because:
A. The value of assets increases more rapidly than income over time.
B. Planning restrictions keep house values high.
C. Wealth is accumulated savings. Some of this is accumulated by several generations and then passed from parents to children. Earnings are more equally distributed because there is no cumulative effect. Disposable income is more equally distributed still since many governments operate a progressive tax system.
D. Public policy is to encourage the accumulation of wealth.
C. Wealth is accumulated savings. Some of this is accumulated by several generations and then passed from parents to children. Earnings are more equally distributed because there is no cumulative effect. Disposable income is more equally distributed still since many governments operate a progressive tax system.
102
For countries with a progressive tax system, when making the adjustment from market income to disposable income we would usually expect the Gini coefficient to ?, and in making the adjustment to final income we would expect it to ?.
A. Fall; fall.
B. Rise; rise.
C. Rise; fall.
D. Fall; rise.
A. Fall; fall.
103
Which of the following would not be considered part of a person's personal endowment?
A. The capital the person uses at his or her job provided by the firm
B. The person's gender or race
C. The person's parents and family situation
D. The person's education
A. The capital the person uses at his or her job provided by the firm
104
Which of the following is likely to increase the Gini coefficient and income inequality?
A. Higher unemployment benefits
B. A higher minimum wage
C. A "right to work" law that makes it harder to form unions.
D. Increased membership in labor unions
C. A "right to work" law that makes it harder to form unions.
105
Which of the following is the most unequally distributed (and so has the highest Gini coefficient)?
A. Height
B. Wealth
C. Disposable income
D. Market income
B. Wealth
106
Which of the following statements is true?
A. A labour contract transfers ownership of the employee from the employee to the employer.
B. The office where the employee works is a relation-specific asset, because the employee cannot use it after leaving the firm.
C. In a labour contract, one side of the contract has the power to issue orders to the other side, but this power is absent from a sale contract.
D. A firm is a structure that involves decentralization of power to the employees
C. In a labour contract, one side of the contract has the power to issue orders to the other side, but this power is absent from a sale contract.
107
Which of the following statements about the separation of ownership and control is true?
A. When the ownership and control of a firm is separated, the managers become the residual claimants.
B. Managers always work to maximize the firm’s profit.
C. One way to address the problem associated with the separation of ownership and control is to pay the managers a salary that depends on the performance of the firm’s share price.
D. It is effective for shareholders to monitor the performance of the management, in a firm owned by a large number of shareholders.
C. One way to address the problem associated with the separation of ownership and control is to pay the managers a salary that depends on the performance of the firm’s share price.
108
Which of the following are reasons why employment contracts are incomplete?
A. The firm cannot contract an employee not to leave.
B. The firm cannot specify every eventuality in a contract.
C. The firm is unable to observe exactly how an employee is fulfilling the contract.
D. The contract is unfinished.
A. The firm cannot contract an employee not to leave.
B. The firm cannot specify every eventuality in a contract.
C. The firm is unable to observe exactly how an employee is fulfilling the contract.
109
In which of the following employment situations would the employment rent be high, ceteris paribus?
A. In a job that provides many benefits, such as housing and medical insurance.
B. In an economic boom, when the ratio of job-seekers to vacancies is low.
C. When the worker is paid a high salary because she is a qualified accountant and there is a shortage of accountancy skills.
D. When the worker is paid a high salary because the firm’s customers know and trust her.
A. In a job that provides many benefits, such as housing and medical insurance.
D. When the worker is paid a high salary because the firm’s customers know and trust her.
110
Maria earns $12 per hour in her current job and works 35 hours a week. Her disutility of effort is equivalent to a cost of $2 per hour of work. If she loses her job, she will receive unemployment benefit equivalent to $6 per hour. Additionally, being unemployed has psychological and social costs equivalent to $1 per hour. Then:
A. The employment rent per hour is $3.
B. Maria’s reservation wage is $6 per hour.
C. Maria’s employment rent if she can get another job with the same wage rate after 44 weeks of being unemployed is $6,160.
D. Maria’s employment rent if she can only get a job at a lower wage rate after 44 weeks of being unemployed is more than $7,700.
D. Maria’s employment rent if she can only get a job at a lower wage rate after 44 weeks of being unemployed is more than $7,700.
111
Figure 6.4 depicted Maria’s best response curve when the expected duration of unemployment was 44 weeks. Which of the following statements is correct?
A. If the expected unemployment duration increased to 50 weeks, Maria’s best response to a wage of $12 would be an effort level above 0.5.
B. If the unemployment benefit was reduced, then Maria’s reservation wage would be higher than $6.
C. Over the range of wages shown in the figure, Maria would never exert the maximum possible effort per hour.
D. Increasing effort from 0.5 to 0.6 requires a bigger wage increase than increasing effort from 0.8 to 0.9.
A. If the expected unemployment duration increased to 50 weeks, Maria’s best response to a wage of $12 would be an effort level above 0.5.
C. Over the range of wages shown in the figure, Maria would never exert the maximum possible effort per hour.
112
Figure 6.6 depicts the efficiency wage equilibrium of a worker and a firm. According to this figure:
A. Along the isocost line tangent to the best response curve, doubling of the per-hour effort from 0.45 to 0.90 would lead to an increased profit for the firm.
B. The slope of each isocost line is the number of units of effort per dollar.
C. At the equilibrium point, the marginal rate of transformation on the isocost line equals the marginal rate of substitution on the worker’s best response curve.
D. Points C and A both represent Nash equilibria because they are on the best response curve.
B. The slope of each isocost line is the number of units of effort per dollar.
113
Which of the following statements are true?
A. If unemployment benefits are increased, the minimum cost of a unit of effort for the employer will rise.
B. If the wage doesn’t change, employees will work harder in periods of high unemployment.
C. If workers continue to receive benefits however long they remained unemployed, an increase in the level of unemployment will have no effect on the best response curve.
D. If an employee’s disutility of effort increases, the reservation wage will rise.
A. If unemployment benefits are increased, the minimum cost of a unit of effort for the employer will rise.
B. If the wage doesn’t change, employees will work harder in periods of high unemployment.
114
Which of the following statements is correct?
A. If a firm’s technology exhibits constant returns to scale, doubling the inputs leads to doubling of the output level.
B. If a firm’s technology exhibits decreasing returns to scale, doubling the inputs more than doubles the output level.
C. If a firm’s technology exhibits economies of scale, costs per unit will fall as the firm expands its production.
D. If a firm’s technology exhibits diseconomies of scale, doubling the inputs leads to less than doubling of the output level
A. If a firm’s technology exhibits constant returns to scale, doubling the inputs leads to doubling of the output level.
B. If a firm’s technology exhibits decreasing returns to scale, doubling the inputs more than doubles the output level.
D. If a firm’s technology exhibits diseconomies of scale, doubling the inputs leads to less than doubling of the output level
115
Consider a firm with fixed costs of production. Which of the following statements about its average cost (AC) and marginal cost (MC) is correct?
A. When AC = MC, the AC curve has a zero slope.
B. When AC > MC, the MC curve is downward-sloping.
C. When AC < MC, the AC curve is downward-sloping.
D.The MC curve cannot be horizontal.
A. When AC = MC, the AC curve has a zero slope.
116
Suppose that the unit cost of producing a pound of cereal is $2, irrespective of the level of output. (This means there are no fixed costs, that is, costs that are present for any level of output, including zero.) Which of the following statements is correct?
A. The total cost curve is a horizontal straight line.
B.The average cost curve is downward-sloping.
C. The marginal cost curve is upward-sloping.
D. The average cost and the marginal cost curves coincide.
D. The average cost and the marginal cost curves coincide.
117
The diagram depicts two alternative demand curves, D and D′, for a product. Based on this graph, which of the following are correct?
A. On demand curve D, when the price is £5,000, the firm can sell 15 units of the product.
B. On demand curve D′, the firm can sell 70 units at a price of £3,000.
C. At price £1,000, the firm can sell 40 more units of the product on D′ than on D.
D. With an output of 30 units, the firm can charge £2,000 more on D′ than on D.
B. On demand curve D′, the firm can sell 70 units at a price of £3,000.
C. At price £1,000, the firm can sell 40 more units of the product on D′ than on D.
118
The diagram depicts the marginal cost curve (MC), the average cost curve (AC), and the isoprofit curves of a firm. What can we deduce from the information in the diagram?
A. The profit level at A is 500.
B. The profit level at B is 150.
C. The price at C is 50.
D. The price at B is 36.
C. The price at C is 50.
119
Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. At point E, the quantity-price combination is (Q*, P*) = (32, 5,440) and the profit is $63,360.
Suppose that the firm chooses instead to produce Q = 32 cars and sets the price at P = $5,400. Which of the following statements is correct?
A. The profit remains the same at $63,360.
B. The profit is reduced to $62,080.
C. The average cost of production is $3,400.
D. The firm is unable to sell all the cars.
B. The profit is reduced to $62,080.
120
Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves.
Suppose that the firm decides to switch from P* = $5,440 and Q* = 32 to a higher price, and chooses the profit-maximizing level of output at the new price. Which of the following statements is correct?
A. The quantity of cars produced is reduced.
B. The marginal cost of producing an extra car is higher.
C. The total cost of production is higher.
D. The profit is increased due to the new higher price.
A. The quantity of cars produced is reduced.
121
Which of the following statements is correct?
A. Consumer surplus is the difference between the consumers’ willingness to pay and what they actually pay.
B. Producer surplus equals the firm’s profit.
C. Deadweight loss is the loss incurred by the producer for not selling more cars.
D. All possible gains from trade are achieved when the firm chooses its profit-maximizing output and price.
A. Consumer surplus is the difference between the consumers’ willingness to pay and what they actually pay.
122
A shop sells 20 hats per week at $10 each. When it increases the price to $12, the number of hats sold falls to 15 per week. Which of the following statements are correct?
A. When the price increases from $10 to $12, demand increases by 25%.
B. A 20% increase in the price causes a 25% fall in demand.
C. The demand for hats is inelastic.
D. The elasticity of demand is approximately 1.25.
B. A 20% increase in the price causes a 25% fall in demand.
D. The elasticity of demand is approximately 1.25.
123
The figure depicts two demand curves, D1 and D2.
Based on this figure, which of the following statements are correct?
A. At E, demand curve D1 is less elastic than D2.
B.The elasticity is the same at A and C.
C. At E, both demand curves have the same elasticity.
D. The elasticity is higher at E than at B.
A. At E, demand curve D1 is less elastic than D2.
D. The elasticity is higher at E than at B.
124
Suppose that in a small town a multinational retailer is planning to build a new superstore. Which of the following arguments could be correct?
A. The local protestors argue that the close substitutability of some of the goods sold between the new retailer and existing ones means that the new retailer faces inelastic demand for those goods, giving it excessive market power.
B. The new retailer argues that the close substitutability of some of the goods implies a high elasticity of demand, leading to healthy competition and lower prices for consumers.
C. The local protestors argue that once the local retailers are driven out, there will be no competition, giving the multinational retailer more market power and driving up prices.
D. The new retailer argues that most of the goods sold by local retailers are sufficiently differentiated from its own goods that their elasticity of demand will be high enough to protect the local retailers’ profits.
B. The new retailer argues that the close substitutability of some of the goods implies a high elasticity of demand, leading to healthy competition and lower prices for consumers.
C. The local protestors argue that once the local retailers are driven out, there will be no competition, giving the multinational retailer more market power and driving up prices.
125
As a student representative, one of your roles is to organize a second-hand textbook market between the current and former first-year students. After a survey, you estimate the demand and supply curves to be the ones shown in Figures 8.1 and 8.2. For example, you estimate that pricing the book at $7 would lead to a supply of 20 books and a demand of 26 books. Which of the following statements is correct?
A. A rumour that the textbook may be required again in Year 2 would change the supply curve, shifting it upwards.
B. Doubling the price to $14 would double the supply.
C. A rumour that the textbook may no longer be on the reading list for the first-year students would change the demand curve, shifting it upwards.
D. Demand would double if the price were reduced sufficiently.
A. A rumour that the textbook may be required again in Year 2 would change the supply curve, shifting it upwards.
126
The diagram shows the demand and the supply curves for a textbook. The curves intersect at (Q, P) = (24, 8). Which of the following is correct?
A. At price $10, there is an excess demand for the textbook.
B. At $8, some of the sellers have an incentive to increase their selling price to $9.
C. At $8, the market clears.
D. 40 books will be sold in total.
C. At $8, the market clears.
127
Figure 8.5 shows a price-taking bakery’s marginal and average cost curves, and its isoprofit curves. The market price for bread is P*= €2.35. Which of the following statements is correct?
A. The firm’s supply curve is horizontal.
B. At the market price of €2.35, the firm will supply 62 loaves, at the point where the firm makes zero profit.
C. At any market price, the firm’s supply is given by the corresponding point on the average cost curve.
D. The marginal cost curve is the firm’s supply curve.
D. The marginal cost curve is the firm’s supply curve.
128
There are two different types of producers of a good in an industry where firms are price-takers. The marginal cost curves of the two types are given below:
Type A is more efficient than Type B: for example, as shown, at the output of 20 units, the Type A firms have a marginal cost of $2, as opposed to a marginal cost of $3 for the Type B firms. There are 10 Type A firms and 8 Type B firms in the market. Which of the following statements is correct?
A. At price $2, the market supply is 450 units.
B. The market will supply 510 units at price $3.
C. At price $2, the market’s marginal cost of supplying one extra unit of the good will depend on the type of the firm that produces it.
D. With different types of firms, we cannot determine the marginal cost curve for the market.
B. The market will supply 510 units at price $3.
129
In Figure 8.9a, the market equilibrium output and price of the bread market is shown to be at (Q*, P*) = (5,000, €2). Suppose that the mayor decrees that bakeries must sell as much bread as consumers want, at a price of €1.50. Which of the following statements are correct?
A. The consumer and producer surpluses both increase.
B. The producer surplus increases but the consumer surplus decreases.
C. The consumer surplus increases but the producer surplus decreases.
D. The total surplus is lower than at the market equilibrium.
C. The consumer surplus increases but the producer surplus decreases.
D. The total surplus is lower than at the market equilibrium.
130
Which of the following statements about a competitive equilibrium allocation are correct?
A. It is the best possible allocation.
B. No buyer’s or seller’s surplus can be increased without reducing someone else’s surplus.
C. The allocation must be Pareto efficient.
D. The total surplus from trade is maximized
B. No buyer’s or seller’s surplus can be increased without reducing someone else’s surplus.
D. The total surplus from trade is maximized
131
Figure 8.8 shows the equilibrium of the bread market to be 5,000 loaves per day at price €2. A year later, we find that the market equilibrium price has fallen to €1.50. What can we conclude?
A. The fall in the price must have been caused by a downward shift in the demand curve.
B. The fall in the price must have been caused by a downward shift in the supply curve.
C. The fall in price could have been caused by a shift in either curve.
D. At a price of €1.50, there will be an excess demand for bread.
C. The fall in price could have been caused by a shift in either curve.
132
Which of the following statements are correct?
A. A fall in the mortgage interest rate would shift up the demand curve for new houses.
B. The launch of a new Sony smartphone would shift up the demand curve for existing iPhones.
C. A fall in the oil price would shift up the demand curve for oil.
D. A fall in the oil price would shift down the supply curve for plastics.
A. A fall in the mortgage interest rate would shift up the demand curve for new houses.
D. A fall in the oil price would shift down the supply curve for plastics.
133
Figure 8.17 shows the effect of a tax intended to reduce the consumption of butter. The before-tax equilibrium is at A = (2.0 kg, 45 kr) and the after-tax equilibrium is at B = (1.6 kg, 54 kr). The tax imposed is 10 kr per kg of butter. Which of the following statements is correct?
A. The producers receive 45 kr per kg of butter.
B. The tax policy would be more effective if the supply curve were less elastic.
C. The very elastic supply curve implies that the incidence of the tax falls mainly on consumers.
D. The loss of consumer surplus due to tax is (1/2) × 10 × (2.0 – 1.6) = 2.0.
C. The very elastic supply curve implies that the incidence of the tax falls mainly on consumers.
134
Look again at Figure 8.18, which shows the market for Choccos and for all chocolate bars. Based on the two diagrams, which of the following statements is correct?
A. The firm that makes Choccos chooses to produce at the bottom of the U-shaped isoprofit curve.
B. All chocolate bars will be sold at the same price P*.
C. The existence of many competitors means that the firm is a price-taker.
D. The market marginal cost (MC) curve is approximately the sum of the MC curves of all the producers of the chocolate bars.
D. The market marginal cost (MC) curve is approximately the sum of the MC curves of all the producers of the chocolate bars.
135
Figure 11.6 shows the market for bread in the short run, with 50 bakeries, and in the long run when more bakeries can enter. All bakeries are identical. Which of the following statements is correct?
A. The supply curve of each bakery shifts as more bakeries enter the market.
B. A and B cannot be long-run equilibria, as the bakeries are making a positive economic rent.
C. More bakeries will want to enter the market when C is reached.
D. Bakeries will want to leave the market when C is reached, because they don’t make any profit.
B. A and B cannot be long-run equilibria, as the bakeries are making a positive economic rent.
136
Which of the following statements is correct?
A. The fundamental value of the shares in a firm is determined by expected future profits and systematic risk.
B. If there is no new information regarding the future profitability or systematic risk of a firm, but its share price keeps rising, the fundamental value must be increasing.
C. Buying a share at a price above its fundamental value in the hope that someone else would buy it from you at an even higher price is guaranteed to lose money.
D. All investors always agree on the fundamental value of the shares in a firm.
A. The fundamental value of the shares in a firm is determined by expected future profits and systematic risk.
137
The figure shows an order book for News Corp shares. Which of the following statements about this order book is correct?
A. A buyer wants 500 shares at $16.59.
B. A limit buy order at $16.56 means that the buyer would pay at least $16.56 per share.
C. A limit sell order for 100 shares at $16.58 will be unfilled.
D. A limit buy order for 600 shares at $16.59 will be filled with 500 shares bought at $16.59 and the remaining 100 shares at $16.60.
C. A limit sell order for 100 shares at $16.58 will be unfilled.
138
Which of the following statements about bubbles is correct?
A. A bubble occurs when the fundamental value of a share rises too quickly.
B. A bubble is less likely to occur in a market where people can easily switch from buying to selling.
C. Momentum trading strategies make bubbles more likely to occur.
D. Bubbles can only occur in financial markets.
C. Momentum trading strategies make bubbles more likely to occur.
139
Which of the following statements about short selling (shorting) is correct?
A. Shorting is used to benefit from a price fall.
B. Shorting involves selling shares that you currently own.
C. The maximum loss a trader can incur by shorting is the price he receives from the sale of the shares.
D. Shorting is a sure way of profiting from a suspected bubble.
A. Shorting is used to benefit from a price fall.
140
Figure 11.21 is a stylized representation of the market for an event at the 2012 London Olympic Games. 40,000 tickets were allocated by lottery, at £100 each.
Assume that buyers could resell their tickets in the secondary market. Which of the following statements is correct?
A. The market cleared at £100.
B. The probability of obtaining a ticket was 4/7.
C. The economic rent earned by those selling in the secondary market was £100.
D. The lottery organizers should have chosen a price of £225.
B. The probability of obtaining a ticket was 4/7.
141
A factory is situated next to a dormitory for nurses who work night shifts. The factory produces 120 humanoid robots a day. The production process is rather noisy, and the nurses often complain that their sleep is disturbed. Based on this information, which of the following statements is correct?
A. The marginal private cost is the factory’s total cost of producing 120 robots a day.
B. The marginal social cost is the noise cost incurred by the nurses from production of an additional robot.
C. The marginal external cost is the cost to the factory, plus the noise cost incurred by the nurses, when an additional robot is produced.
D. The total external cost is the total costs per day imposed on the nurses by the factory’s production.
D. The total external cost is the total costs per day imposed on the nurses by the factory’s production.
142
The robot market is competitive and the market price is $340. Currently the factory is producing an output of 120, but 80 would be Pareto efficient. Which of the following statements is correct?
A. To reduce output to 80, the factory’s minimum acceptable payment would be $1,600.
B. The maximum that the nurses are willing to pay to induce the factory to reduce the output to 80 is $2,400.
C. The factory would not reduce its output to 80 unless it received at least $4,000.
D. The net social gain from the output reduction to 80 depends on the amount paid by the nurses to the factory.
A. To reduce output to 80, the factory’s minimum acceptable payment would be $1,600.
143
Consider the situation where the noise of a factory’s production affects nurses in the dormitory next door. If there are no transaction costs to impede Coasean bargaining, which of the following statements is correct?
A. Whether the final output level will be Pareto efficient depends on who has the initial property rights.
B. The nurses would be better off in the bargained allocation if they initially had a right to undisturbed sleep than they would if the factory has the right to make noise.
C. If the factory has the right to make noise, it will prefer not to bargain with the nurses.
D. If the nurses have the initial rights, they will obtain all of the net social gain from robot production.
B. The nurses would be better off in the bargained allocation if they initially had a right to undisturbed sleep than they would if the factory has the right to make noise.
144
The market for robots is competitive and the market price is $340. The initial output is 120 but the government uses a Pigouvian tax to reduce this to the efficient level of 80. Which of the following statements is correct?
A. Under the Pigouvian tax, the factory’s surplus will be $6,400.
B. The required Pigouvian tax is $120 per robot.
C. The nurses are at least as well off as they would be under Coasean bargaining.
D. The nurses obtain no benefit from the imposition of the Pigouvian tax.
A. Under the Pigouvian tax, the factory’s surplus will be $6,400.
145
Which of the following statements is correct?
A. Some public goods are rival.
B. A public good must be non-excludable.
C. A good cannot be rival and non-excludable.
D. If a good is non-rival, then the cost of an additional person consuming it is zero.
D. If a good is non-rival, then the cost of an additional person consuming it is zero.
146
There are 10 cars on the market, of which six are good quality cars worth $9,000 to buyers, and the others are lemons, worth zero. There are many potential buyers who do not know the quality of each car, but they know the proportion of good quality cars, and are willing to pay the average value. All sellers are happy to accept a price at least half the value of their car. Based on this information, which of the following statements is correct?
A. The buyers are willing to pay at most $4,500.
B. Only the lemons will be sold in this market.
C. All cars will be sold at a price of $5,400.
D. All cars will be sold at a price of $4,500.
C. All cars will be sold at a price of $5,400.
147
Which of the following statements is correct?
A. The problem with the credit market is that rich people will always get a loan irrespective of the quality of their project.
B. It is easier for rich people to get loans because they are able to provide equity or collateral.
C. Banks are described as ‘too big to fail’ when their large size makes them safe institutions.
D. Banks that are ‘too big to fail’ are careful not to make risky loans.
B. It is easier for rich people to get loans because they are able to provide equity or collateral.
148
Figure 19.6 is a scatterplot of occupations for the US economy, with the 2015 mean hourly wages on the vertical axis and the 2014–24 projected job growth on the horizontal axis:
Based on this information, which of the following statements is correct?
A. Occupations with the biggest projected growth are those that benefit from innovations that increase automation.
B. Occupations with substantial projected job losses are those with the highest wages, which would encourage employers to invest in automation.
C. The high wage occupations with projected job growth are either in human services or occupations in which digital information processing has greatly increased the productivity of high skill workers.
D. There is no particular pattern between the mean average wage and the projected job growth.
C. The high wage occupations with projected job growth are either in human services or occupations in which digital information processing has greatly increased the productivity of high skill workers.
149
Figure 19.10 shows the proportion of children in earnings quantile conditional on their father’s earnings quantile in the US and Denmark, respectively.
Based on this information, which of the following statements is correct?
A. The data provides support for the ‘American Dream’, a term coined in 1931 by James Truslow Adams that refers to ‘a dream of social order in which each man and woman shall be able to attain to the fullest stature of which they are innately capable … regardless of the fortuitous circumstances of birth or position’ (in The Epic of America, 1931).
B. In the US, 7.4% of those from the poorest 20% of families managed to move up to become part of the richest 20%.
C. In Denmark, it is far more difficult for the richest families to preserve their status for the next generation than in the US.
D. The figure suggests that there is very little governments can do to reduce intergenerational transmission of economic status.
B. In the US, 7.4% of those from the poorest 20% of families managed to move up to become part of the richest 20%.
150
Figure 19.15 shows the feasible frontier of the incomes of the rich and the poor.
Which of the following statements is correct?
A. E, the point of maximum equality, is Pareto efficient.
B. For the inequality-averse citizen shown, any point between R and F on the frontier is preferable to any point inside the frontier.
C. If you had a 50-50 chance of being rich or poor, then your expected income is maximized at point B.
D. Between D and F, lower income for the poor leads also to lower income for the rich.
D. Between D and F, lower income for the poor leads also to lower income for the rich.
151
Which of the following statements are correct?
A. Endowments are facts about an individual that may affect his or her income.
B. Having or not having a degree does not constitute a difference in endowments if it is a matter of individual choice.
C. All individuals have the same reservation option irrespective of their endowments.
D. A visa (permission to work for a non-citizen) is not an element of an individual’s endowment because it cannot be sold.
A. Endowments are facts about an individual that may affect his or her income.
152
Watch our ‘Economist in action’ video of James Heckman. According to Heckman, which of the following individual attributes are NOT among the reasons for persistent poverty in a family from generation to generation?
A. inherited IQ
B. limited schooling
C. race
D. social behaviour
A. inherited IQ
