ECO 501 ECONOMICS 501 Final Exam

ECONOMICS 501 ECO Final Questions Chapter 2 Question 1: What do economists mean by scarcity? a. Economists mean that unlimited wants exceed limited resources. b. Economists mean that trade is not possible. c. Econ ...

ECONOMICS 501 ECO Final Questions Chapter 2 Question 1: What do economists mean by scarcity? a. Economists mean that unlimited wants exceed limited resources. b. Economists mean that trade is not possible. c. Economists mean that people are not employed. d. Economists mean that production is inefficient. e. Economists mean that economy is unable to produce increasing quantities of goods and services What of the following is not scarce according to the economic definition? a. Coal b. Time c. Food d. Capital e. None of the above Chapter 2 Question 2: A production possibilities frontier: a. Shows the market for a good or service b. Shows how unlimited wants exceed the limited resources available to fulfill those wants c. Shows how participants in the market are linked d. Shows the maximum attainable combinations of two goods that may be produced with available resources. We can show economic efficiency: a. With points inside the production possibilities frontier b. With points on the production possibilities frontier c. With points inside and on the production possibilities frontier d. With points on and outside the production possibilities frontier e. With points outside the production possibilities frontier We can show economic inefficiency: a. With points inside the production possibilities frontier b. With points on the production possibilities frontier c. With points inside and on the production possibilities frontier d. With points on and outside the production possibilities frontier e. With points outside the production possibilities frontier The production possibilities frontier will shirt outward: a. If technological advances occur. Chapter 2 Question 3: What does increasing marginal opportunity costs mean? a. The economy is unable to produce increasing quantities of good and services. b. Increasing the production of a good requires decreases in the production of another good c. Production is not occurring on the production possibilities frontier d. Increasing the production of a good requires smaller and smaller decreases in the production of another good e. Increasing the production of a good requires larger and larger decreases in the production of another good What are the implications of this idea for the shape of the production possibilities frontier? a. The production possibilities frontier will be bowed inward b. The production possibilities frontier will have a negative slope c. The production possibilities frontier will be a straight line d. The production possibilities frontier will have a positive slope. e. The production possibilities frontier will be bowed outward. Chapter 2 Question 4: GRAPH Consider the production possibilities frontier (PPF) that shows the trade-off between the production of cotton and the production of soybeans depicted in the figure to the right. Use the three-point curved line drawing tool to show the effect that improved fertilizers/prolonged drought would have on the initial production possibilities frontier by drawing a new production possibilities frontier. Properly label this curve. Chapter 2 Question 5: GRAPH Consider the production possibilities frontier (PPF) that shows the trade-off between the production of cotton and the production of soybeans depicted in the figure to the right. Suppose that genetic modifications make soybeans resistant to insects, allowing yields to increase. Use the three-point curved line drawing tool to show the effect of this technological change by drawing a new production possibilities frontier. Properly label this curve. Chapter 2 Question 6: GRAPH One of the trade-offs BMW faces is between safety and gas mileage. For example, adding steel to a car makes it safer but also heavier, which results in lower gas mileage. Use the three-point curved line drawing tool to draw a hypothetical production possibilities frontier that BMW engineers face that shows this trade-off. Assume that this trade-off is consistent with increasing costs of added safety. Properly label this curve. Chapter 2 Question 7: Suppose you win free tickets to a movie plus all you can eat at the snack bar for free. Would there be a cost to you to attend this movie? a. No because the movie ticket and snacks at the bar are free. b. No because the movies are not scarce c. No because the movie ticket is free d. Yes because attending movies is not on the production possibilities frontier e. Yes because the movie’s opportunity cost is equal to the highest-valued alternative that must be given up to attend the movie. Chapter 2 Question 8: Suppose we can divide all the goods produced by an economy into two types: consumption goods and capital goods. Capital goods, such as machinery, equipment, and computers, are goods used to produce other goods. Is it likely that the production possibilities frontier in this situation would be a straight line: or bowed out? a. The production possibilities frontier would likely be bowed out because not all resources are equally well suited to produce both consumption and capital goods. Chapter 2 Question 9: GRAPH Suppose we can divide all the goods produced by an economy into two types: consumption goods and capital goods. Capital goods, such as machinery, equipment, and computers, are goods used to produce other goods. Suppose a technological advance occurs that affects the production of capital goods but not consumption goods. Use the three-point curved drawing tool to show the effect of this technological change by drawing a new production possibilities frontier. Properly label this curve. Chapter 2 Question 10: GRAPH Suppose we can divide all the goods produced by an economy into two types: consumption goods and capital goods. Capital goods, such as machinery, equipment, and computers, are goods used to produce other goods. Suppose that country A and country B currently have identical production possibilities frontiers but that country A devotes only 5 percent of its resources to producing capital goods over each of the next 10 years, whereas country B devotes 30 percent. Which country is likely to experience more rapid economic growth in the future? a. Country B Use the three-point curved drawing tool to illustrate this by drawing two production possibilities frontiers. Specifically, your graph should include production possibilities frontiers for country A in 10 years (the future) and production possibilities frontiers for country B in 10 years (the future). Properly label the curves. Chapter 2 Question 11: What is absolute advantage? What is comparative advantage? Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country without an absolute advantage in producing a good: Chapter 2 Question 12: What is the basis for trade? How can a country gain from specialization and trade? a. Chapter 2 Question 13: GRAPH The graph to the right shows how many pounds of apples and pounds of cherries you and your neighbor can each pick in one week. For example, if you devote all of your time to picking apples and none of your time to picking cherries, you can pick 12 pounds of apples. If you devote all of your time to picking cherries, you can pick 72 pounds. At the same time, if your neighbor devotes all of her time to picking apples, she can pick 32 pounds of apples. If she devotes all of her time to picking cherries, she can pick 32 pounds. Suppose initially that you (Y) are consuming 8 pounds of apples and 24 pounds of cherries and that your neighbor (N) is consuming 4 pounds of apples and 28 pounds of cherries, as indicated in the graph. Then, suppose you and your neighbor specialize by each only picking the good for which you have a comparative advantage and trade. In particular, suppose you trade your neighbor half of your production for half of what your neighbor produces. In the table below, first fill in production when specializing. Next fill in consumption with trade. Recall that you trade your neighbor half of what you pick for half of what your neighbor picks. Finally, fill in gains from trade. Chapter 2 Question 14: GRAPH Using the same amount of resources, the United States and Canada can both produce lumberjack shirts and lumberjack boots, as shown in the production possibilities frontiers in the figure to the right. The United States has a comparative advantage in producing lumberjack boots. Canada has a comparative advantage in producing lumberjack boots. Does either country have an absolute advantage in producing both goods? Suppose initially that the United States is consuming 18 boots and 2 shirts and Canada is consuming 4 boots and 8 shirts, as indicated in the figure. Then, suppose the United States and Canada specialize by each only producing the good for which they have a comparative advantage and then trade. In particular, suppose the United States trades Canada half of its production for half of what Canada produces. The United States will have 10 additional shirt(s) after the trade and 0 additional boot(s). At the same time, Canada will be able to consume 4 additional shirt(s) as a result of the trade and 14 additional boot(s). Chapter 2 Question 15: In the 1950’s, the economist Bela Balassa compared 28 manufacturing industries in the United States and Britain. In every one of the 28 industries, Balassa found that the United States had an absolute advantage. In these circumstances, would there have been any gain to the United States from importing any of these products from Britain? Explain. Chapter 2 Question 16: CHART Suppose Iran and Iraq both produce oil and olive oil. The following table shows combinations of both goods that each country can produce in a day, measured in thousands of barrels. Who has the comparative advantage in producing oil? Can these two countries gain from trading oil and olive oil? Chapter 2 Question 17: CHART Suppose that France and Germany both produce wine and schnitzel. The table below shows combinations of the goods that each country can produce in a day. Who has the comparative advantage in producing wine and who has the comparative advantage in producing schnitzel? Suppose that France is currently producing 1 bottle of wine and 12 pounds of schnitzel and Germany is currently producing 3 bottles of wine and 10 pounds of schnitzel. Then, assume instead that France and Germany specialize by producing only the good for which they have a comparative advantage and then trade 3 bottles of wine for 13 pounds of schnitzel. After specialization and trade, France gains by consuming the same amount of wine and 1 additional pound(s) of schnitzel and Germany gains by consuming the same amount of wine and 2 additional pound(s) of schnitzel. Chapter 2 Question 18: What is the circular-flow diagram and what does it illustrate? a. . Chapter 2 Question 19: What are the two main categories of participants in markets? Which participants are of greatest importance in determining what goods and services are produced? Chapter 2 Question 20: What is a free market? In what ways does a free market economy differ from a centrally planned economy? Unlike a free market economy, Chapter 2 Question 21: What is an entrepreneur? Why do entrepreneurs play a key role in a market system? Chapter 2 Question 22: Firms are likely to produce more of a good or service when its price rises and less of a good or service when its price falls. Chapter 2 Question 23: What are private property rights? Private property rights are: What role do they play in the working of a market system? Private property rights: Why are independent courts important for a well-functioning economy? Independence is necessary for courts: Chapter 2 Question 24: Identify whether each of the following transactions will take place in the factor market or in the production market and whether households or firms are supplying the good or service or demanding the good or service. George buys a BMW X5 SUV. This takes place in the product market. The household demands the good the firm supplies the good. BMW increases employment at its Spartanburg plant. This takes place in the factor market. The households supply the labor and the firm demands the labor. George works 20 hours per week at McDonald’s. This takes place in the factor market. The household supplies the labor and the firm demands the labor. George sells land he owns to McDonald’s so it can build a new restaurant. This takes place in the factor market. The household supplies the factor of production and the firm demands the factor of production. Chapter 2 Question 25: In The Wealth of Nations, Adam Smith wrote the following: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” What did Smith mean by this? Chapter 3 Question 1: GRAPH Below are both a demand schedule and a demand curve. Which one is best suited to find the quantity demanded at a price of $4.00? The demand schedule. Chapter 3 Question 2: What do economists mean when they use the Latin expression ceteris paribus? a. All else equal Chapter 3 Question 3: GRAPH Use the point drawing tool to show a change in demand given the combinations of price and quantity-demanded shown at point A. Chapter 3 Question 4: The law of demand is the assertion that An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More specifically, Chapter 3 Question 5: GRAPH A grilled cheese sandwich is considered to be a normal good. Use the line drawing tool to show how a decrease in consumer income affects the demand for grilled cheese sandwiches. Label this new line ‘D2’. Chapter 3 Question 6: GRAPH Jiffy peanut butter and Smucker’s Strawberry jam are considered to be complementary goods. Use the line drawing tool to show how an increase in the price of Jiffy peanut butter affects the demand for Smucker’s Strawberry jam. Label this new line ‘D2’. Chapter 3 Question 7: GRAPH Below are both a supply schedule and a supply curve. Which one is best suited to find the quantity supplied at a price of $4.50? The supply curve. Chapter 3 Question 8: The difference between a change in supply and a change in the quantity supplied is that the latter is Chapter 3 Question 9: From the list below, select the variable that will cause the supply curve to shift: Chapter 3 Question 10: Identify whether each of the following statements describes a change in supply or a change in the quantity supplied. a. To take advantage of high prices for snow shovels during a very snowy winter, Alexander Shovels, Inc., decides to increase output. A change in quantity supplied. b. The success of Apple’s iPod leads more firms to begin producing digital music players. A change in supply. c. In the six months following Hurricane Katrina, production of oil in the Gulf of Mexico declined by 25 percent. A change in supply. Chapter 3 Question 11: GRAPH On the diagram to the right, a movement from A to B represents a Chapter 3 Question 12: GRAPH According to the law of supply, Chapter 3 Question 13: Consider the supply of crude oil on the world market. In August 2011, the price of oil was roughly $80 per barrel. Which of the following changes would increase the supply of oil? The oil supply curve would shift to the right if Chapter 3 Question 14: When economists speak of a shortage, they mean a situation in which Chapter 3 Question 15: Complete the following statement: “When there is a shortage of a good Chapter 3 Question 16: GRAPH An article discusses the market for autographs by Mickey Mantle, the superstar centerfielder for the New York Yankees during the 1950s and the 1960s: “At card shows, gold outings, charity dinners, Mr. Mantle signed his name over and over.” One expert on sport autographs is quoted as saying: blah blah blah. Show how the price of baseballs signed by Mantle could be higher than the price of baseballs signed by Ford. 1) Use the line drawing tool to draw the supply curve (SFord) and the demand curve (DFord) for baseballs autographed by Whitey Ford. Properly label the lines. 2) Use the line drawing tool to draw the supply curve (SMantle) and the demand curve (DMantle) for baseballs autographed by Mickey Mantle. Properly label the lines. 3) Use the point drawing tool to indicate the equilibrium price and quantity of autographed baseballs by Ford and the equilibrium price and quantity of autographed baseballs by Matle. Properly label the lines. Chapter 3 Question 17: During the summer of 2011, General Motors (GM) had trouble selling pickup trucks. According to an article in USA Today: “General Motors dealers had a 122-day supply of Chevrolet Silverado and GMC Sierra pickups in June, more than 50% above what’s considered optimum … Behind the glut: The year started strong and makes pumped up production. Then the economy slowed faster than they cut back.” The term glut implies that relative to the quantity supplied of GM pickup trucks, the quantity demanded was smaller. Given the situation in the market for GM pickup trucks in the summer of 2011, their prices would be expected to fall. A slowing economy helped cause the glut of pickup trucks because Chapter 3 Question 18: GRAPH Assume the figure to the right illustrates the market for houses for sale in a small city. Suppose the market price of houses is $250,000. How large will the resulting surplus be? At a price of $250,000, there will be 800 surplus houses. What is the equilibrium price is $150,000. Chapter 3 Question 19: GRAPH In the diagram to the right, when the price is $71 per player, the amount of the surplus is 56 million players per month. Chapter 3 Question 20: The market for corn in country A is highly competitive. At the current market price of $5/bushel there is a shortage of 100,000 bushels of corn in this country. Media reports claim that the price of corn will rise drastically in the near future. According to these reports, the neighboring country B had witnessed a similar situation recently. At the same price, the shortage in country B was also 100,000 bushels and eventually the equilibrium price in B went up to $10/bushel. Both countries are known to have equal number of corn producers and the market supply of corn is identical at all prices. This, combined with the fact that consumers in the two countries also have similar tastes and preferences, let the media to conclude that the price of corn in country A would soon be as high as $10/bushel. Which of the following is being assumed by the media while concluding that the price in country A will also rise to $10/bushel? Chapter 3 Question 21: The market for corn in country A is highly competitive. At the current market price of $5/bushel there is a shortage of 100,000 bushels of corn in this country. Media reports claim that the price of corn will rise drastically in the near future. According to these reports, the neighboring country B had witnessed a similar situation recently. At the same price, the shortage in country B was also 100,000 bushels and eventually the equilibrium price in B went up to $10/bushel. Both countries are known to have equal number of corn producers and the market supply of corn is identical at all prices. This, combined with the fact that consumers in the two countries also have similar tastes and preferences, let the media to conclude that the price of corn in country A would soon be as high as $10/bushel. This reasoning is flawed because it assumes that: Chapter 3 Question 22: The market for corn in country A is highly competitive. At the current market price of $5/bushel there is a shortage of 100,000 bushels of corn in this country. Media reports claim that the price of corn will rise drastically in the near future. According to these reports, the neighboring country B had witnessed a similar situation recently. At the same price, the shortage in country B was also 100,000 bushels and eventually the equilibrium price in B went up to $10/bushel. Both countries are known to have equal number of corn producers and the market supply of corn is identical at all prices. This, combined with the fact that consumers in the two countries also have similar tastes and preferences, let the media to conclude that the price of corn in country A would soon be as high as $10/bushel. If the new equilibrium price turns out to be below $10/bushel, which of the following inferences can be drawn? Chapter 4 Question 1: GRAPH Dissolvable tobacco products contain less nicotine than cigarettes and can help people quit smoking. Suppose that figure to the right illustrates five consumers’ willingness to pay for tobacco lozenges. If the price of a pack of tobacco lozenges is $5.50, what is the consumer surplus for these consumers? Consumer surplus is $5.50 Chapter 4 Question 2: Firm A is a new producer in the market for good X, which is characterized by linear demand and supply curves. Initially, to attract customers, the firm prices its product low at $8 per unit. While the firm sells 1,000 units of the product at this price, there is a shortage in the market. This shortage can be cleared if price is increased to $10 per unit. The quantity demanded and supplied at this higher price will be 1,500 units. Which of the following is most strongly supported by this information? a. Producer surplus will increase if the price rises from $8 per unit to $10 Chapter 4 Question 3: Firm A is a new producer in the market for good X, which is characterized by linear demand and supply curves. Initially, to attract customers, the firm prices its product low at $8 per unit. While the firm sells 1,000 units of the product at this price, there is a shortage in the market. This shortage can be cleared if price is increased to $10 per unit. The quantity demanded and supplied at this higher price will be 1,500 units. Rajiv Bose, a market analyst with firm A, claims that an increase in producer surplus would necessarily increase average profit for the firm. Which of the following, if true, would weaken Rajiv’s claim? Chapter 4 Question 4: Briefly explain whether you agree with the following statement: “If consumer surplus in a market increases, producer surplus must decrease.” Chapter 4 Question 5: Does an increase in economic surplus in a market always mean that economic efficiency in the market has increased? Briefly explain. Chapter 4 Question 6: Country Talmar produces 100,000 cars during a particular year. The market price of cars in Talmar is $5,000. In a recent meeting of the Economic Council, an economist, Carl Anderson claimed the nation’s production of cars was inefficiently high because the industry seemed to have positive inventory every year. Another economist, Tara Henderson, felt that the production was inefficiently low because there is a huge segment of the population that does not own cars. Which of the following statements are Tara and Carl likely to agree with? Chapter 4 Question 7: Country Talmar produces 100,000 cars during a particular year. The market price of cars in Talmar is $5,000. In a recent meeting of the Economic Council, an economist, Carl Anderson claimed the nation’s production of cars was inefficiently high because the industry seemed to have positive inventory every year. Another economist, Tara Henderson, felt that the production was inefficiently low because there is a huge segment of the population that does not own cars. Which of the following if true, would support Carl’s view? Chapter 4 Question 8: Country Talmar produces 100,000 cars during a particular year. The market price of cars in Talmar is $5,000. In a recent meeting of the Economic Council, an economist, Carl Anderson claimed the nation’s production of cars was inefficiently high because the industry seemed to have positive inventory every year. Another economist, Tara Henderson, felt that the production was inefficiently low because there is a huge segment of the population that does not own cars. Which of the following, if true, would support Tara’s view? Chapter 4 Question 9: GRAPH Use the information on the kumquat market in the following table to answer the questions. The equilibrium price is $15 and the equilibrium quantity is 100 million crates. Suppose the federal government imposes a price floor of $25 per crate and purchases any surplus kumquats from producers. Now how much revenue will kumquat producers receive? Kumquat producers will receive $4.5 billion in revenue. 1) Use the rectangular drawing tool to shade in the revenue received by kumquat producers before the price floor. Properly label the shaded area. 2) Use the rectangular drawing tool to shade in the revenue received by kumquat producers after the price floor. Properly label the shaded area. 3) Use the rectangular drawing tool to shade in the area representing the amount the government spends to purchase surplus kumquats. Properly label the shaded area. Chapter 4 Question 10: GRAPH Suppose the figure to the right represents a local cattle market. What would be the effect on this market of the local government regulating a price ceiling of $1.00 per pound? The market would have a shortage of 20 thousand pounds. Chapter 4 Question 11: The carpet industry in a developing country, A was going through difficult times. While this industry was once a major foreign exchange earner, there was a steady fall in production levels for the past three to four years. Workers, who had the requisite abilities to weave carpets, were finding it difficult to sustain themselves in this industry and began looking for opportunities elsewhere. Since the carpet industry was one of country A’s oldest industries, many people lobbied the government to take some action. Widespread support from various groups induced the government to invest heavily in the carpet industry last year. This was expected to boost the industry’s production level considerably. However, the increase in carpet production was much lower than expected. Which of the following, if true, could explain this outcome? Chapter 4 Question 12: A deadly hurricane caused substantial damage to corn produced in the eastern region of a small country, which is its main corn-producing belt. This resulted in acute shortage of corn in this country and the price increased. The government decided to introduce a price ceiling for corn in an attempt to prevent an abnormal price hike. Kyra, a student of economics, believed that this was not a good idea as it was likely to increase the shortage and create a huge deadweight loss. Her friend, Dona, however felt that the resultant deadweight loss may not be too high. Which of the following, if true, would support Kyra’s claim. Chapter 4 Question 13: GRAPH Consider the market illustrated in the figure to the right. Supply curve S1 represents the private cost of production and demand curve D1 represents the private benefit from consumption. Suppose the consumption of this good creates a negative externality. In turn, the social benefit from consumption is represented by demand curve D2. Show how the externality affects market efficiency. Use the triangle drawing tool to share in the new economic surplus (new surplus) or the deadweight loss (deadweight loss) created by the negative externality. Properly label this shaded area. Chapter 4 Question 14: Which of the following is not an example of an externality? An externality is not created by a. Chapter 4 Question 15: How do externalities affect markets? If a negative externality in production is present in a market, then Chapter 4 Question 16: How do externalities in the production of college educations result in market failure? Because of externalities, the market for college educations will Chapter 4 Question 17: A coal-fired electric utility has a capacity of producing 500MW of electricity every month. To maximize its profit, the firm produces 400MW of electricity in a month. Kevin Peters, the president of an environmental advocacy group, claims that the production at this utility is inefficient and should be reduced by 200MW. The Environmental Protection Agency (EPA), however, has a different opinion. Although the EPA agrees that production needs to be reduced, it claims that the electric utility need not reduce production by as much as 200 MW. Which of the following, if true, would support Kevin’s claim? Chapter 4 Question 18: A coal-fired electric utility has a capacity of producing 500MW of electricity every month. To maximize its profit, the firm produces 400MW of electricity in a month. Kevin Peters, the president of an environmental advocacy group, claims that the production at this utility is inefficient and should be reduced by 200MW. The Environmental Protection Agency (EPA), however, has a different opinion. Although the EPA agrees that production needs to be reduced, it claims that the electric utility need not reduce production by as much as 200 MW. Which of the following, if true, would support the EPA’s view? Chapter 4 Question 19: The gross annual production of petrochemical plants situated in Jamnagar district of the Indian state of Gujarat is around 130 million tons. Each plant follows the profit-maximization principle and supplies petrochemicals up to the point where price equals the price marginal cost of production. Industry experts claim that the aggregate production of this industry is socially efficient because at this output level the supply of petrochemicals is equal to its demand. Which of the following, if true, would strengthen the claim of the industry experts that production is socially efficient? Chapter 4 Question 20: In a paper written for the Harvard Project on International Climate Agreements, the authors state that while a majority of developed nations are enacting significant regulations to mitigate climate change, “developing countries typically place greater priority on economic development than on environment protection, despite being vulnerable to the potential adverse effects of continued warming.” Recall the definition of normal goods. Is environmental protection a normal good? If so, is there any connection between this fact and the observation of the authors of the above statement? Briefly explain. How do the marginal cost and marginal benefit of environmental protection change with economic development? Environmental protection is The authors’ statement Since developed countries have enacted more significant regulations to mitigate climate change than developing countries, it must be the case that for a given level of environmental protection, Chapter 4 Question 21: GRAPH Suppose the figure to the right represents the production of a manufactured good. Production of this good generates volatile organic compounds, which are a type of air pollution. As a result, the cost of production to society is greater than the private cost of production is represented by MC1 and the marginal social cost is represented by MC2. Suppose the government decides to impose a Pigovian tax to bring about an efficient level of output. What size should the tax be? The government should levy a tax of $225 per ton produced. Chapter 4 Question 22: Suppose the United States has two utilities, Commonwealth Utilities and Consolidated Electric. Both produce 20 million tons of sulfur dioxide pollution per year. However, the marginal cost of reducing a ton of pollution for Consolidated Electric is $200 per ton and the marginal cost of reducing a ton of pollution for Commonwealth Utilities is $250 per ton. The government’s goal is to cut sulfur dioxide pollution in half (by 20 million tons per year). If the government issues 10 million tradable pollution permits to each utility, what will be the cost of eliminating half of the pollution to society? Using a cap-and-trade system of tradable emission allowances will eliminate half of the sulfur dioxide pollution at a cost of $4,000 million per year. If the permits are not tradable, what will be the cost of eliminating half of the pollution? If permits cannot be traded, then the cost of the pollution reduction will be $4500 million per year. Chapter 4 Question 23: The advanced machinery used for limestone quarrying in a particular region leads to noise pollution and affects the hearing ability of people residing in the neighborhood. The quarrying activity also results in soil erosion. Blah blah blah. Which of the following, if true, would support the taxation policy proposed by the research group? Chapter 4 Question 24: The advanced machinery used for limestone quarrying in a particular region leads to noise pollution and affects the hearing ability of people residing in the neighborhood. The quarrying activity also results in soil erosion. Blah blah blah. Suppose the government responds by imposing a tax on the production of limestone. After the tax is imposed, total production of limestone declines by the amount the environmental research group had estimated. This convinces them that limestone production is now socially efficient. Which of the following conclusions can most reasonably be drawn from the given information? Chapter 4 Question 25: The government of Country X follows a cap-and-trade system of tradable emissions allowances. Each steel manufacturing firm in this country is permitted to release a maximum of 30 million pounds of pollutants annually, but the firms can freely trade their emission allowances with each other. Clemington Inc., an iron and steel manufacturer in this country, releases 1.2 million pounds of airborne pollutants into the atmosphere every year and had been asked by the pollution control department to reduce pollution. Stella Morris, a director at Clemington Inc., strongly recommends that the board buy the allowances from other steel plants instead of curbing production. Which of the following, if true, would strengthen Stella’s view? Chapter 7 Question 1: What is the definition of marginal utility? The law of diminishing utility suggests that: Marginal utility is more useful than total utility in consumer decision making because: Chapter 7 Question 2: TABLE The table below shows the relationship between the number of movies seen per month and the total utility received. Fill in marginal utility in the table below. In this example, consuming additional movies illustrates the law of diminishing marginal utility. Chapter 7 Question 3: Consider the demand for Ramen noodles. Suppose the price of Ramen noodles decreases. If Ramen noodles are a normal good, this will produce a positive substitution effect and a positive income effect. Chapter 7 Question 4: Explain how a downward-sloping demand curve results from consumers adjusting their consumption choices to changes in price. Chapter 7 Question 5: GRAPH The demand for lemonade for Luci (DL) and Kyle (DK) is illustrated in the figure to the right. Derive the market demand curve for lemonade if the market is comprised of only these two consumers. Use the line drawing tool, draw the market demand curve for lemonade in the figure to the right. Attach the provided label. Chapter 7 Question 6: GRAPH The table below shows the demand for tickets to professional basketball games for you, Gina, and Chad. Use the line drawing tool to draw the market demand curve for basketball tickets (assuming the market consists of you, Gina, and Chad). Label this line ‘Market Demand’. Chapter 7 Question 7: Suppose that Lady Gaga can sell out a concert at Madison Square Garden with tickets priced at $80 each. Lady Gaga’s manager estimates that the singer could still sell out the Garden at $130 per ticket. Why might Lady Gaga and her manager want to keep ticket prices at $80? Chapter 7 Question 8: Suppose that the Amazing Spider-man comes out, and hundreds of people arrive at a theater and discover that the movie is already sold out. Meanwhile, the theater is also showing a boring movie in its third week of release in a mostly empty theater. Why would this firm charge the same $8.00 for a ticket to either movie, when the quantity of tickets demanded is much greater than the quantity supplied for one movie, and the quantity of tickets demanded is much less than the quantity supplied for the other? Chapter 7 Question 9: What effect does a network externality have on the market for a product? If a network externality is present for a product, then Chapter 7 Question 10: Consider a form of public consumption such as wearing clothes. An individual’s demand for clothes depends on: Chapter 7 Question 11: Consider the ultimatum game, where an “allocator” is given, say, $50.00 to decide how to divide with a “recipient,” who then decides whether to accept or reject the allocation, ultimately determining whether the pair receives the allocation or nothing. What is the optimal play in the ultimatum game? The optimal play in the ultimatum game is for the allocator to propose a division of the money such that the recipient receives $.01 and the recipient then accepts the division. When the ultimatum game experiment is carried out, both allocators and recipients act as if fairness is important. Chapter 7 Question 12: Richard Thaler, an economist at the University of Chicago, is the person who first used the term endowment effect to describe placing a higher value on something already owned than would be placed on the object if not currently owned. According to an article in the Economist: Dr. Thaler, who recently had some expensive bottles of wine stolen, observed that he is “now confronted with precisely one of my own experiments: these are bottles I wasn’t planning to sell and now I’m going to get a cheque from an insurance company and most of these bottles I will not buy. I’m a good enough economist to know there’s a bit of an inconsistency there.” Based on Thaler’s statement, how do his stolen bottles of wine illustrate the endowment effect, and why does he make the statement: “I’m a good enough economist to know there’s a bit of an inconsistency there.” Thaler’s stolen bottles of wine illustrate the endowment effect because Thaler’s behavior is inconsistent because: a. . Chapter 7 Question 13: After owning a used car for two years, you start having problems with it. You take it into the shop and are told it will cost $4,000 to repair it. In considering whether to repair it or not, you should take what into consideration? Chapter 7 Question 14: In recent years, some economists have begun studying situations in which people does not appear to be making choices that are economically rational. This new area of economics is called behavioral economics. Why might consumers not act rationally? Consumers might: The most obvious reason why consumers might not act rationally would be that they do not realize that their actions are inconsistent with their goals. For example, consumers commonly commit the following three mistakes when making decisions: they take into account monetary cost but ignore nonmonetary opportunity costs. They fail to ignore sunk costs. They are overly optimistic about their future behavior. Chapter 7 Question 15: According to behavioral economists, why might consumers or businesses not act rationally? People might not act rationally because they Chapter 7 Question 16: The construction of a nuclear power plant near a town was heavily opposed by the residents once they became aware of the health risks that the plant could pose if it became operational. The opposition to the construction was on various grounds. Blah blah blah. The residents and the lobbyists most likely disagree on which of the following issues related to the power plant’s construction? Chapter 7 Question 17: What is the formula of the price elasticity of demand? The formula for the price elasticity of demand is: Why isn’t elasticity just measured by the slope of the demand curve? Chapter 7 Question 18: GRAPH Consider the market for a new DVD movie, where the price is initially $12 and 36 copies are sold per day at a superstore, as indicated in the figure to the right. The superstore is considering lowering the price to $10. What is the price elasticity of demand between these two prices (use the Midpoint Formula)? The price elasticity of demand is -.61. Chapter 7 Question 19: GRAPH Consider the polar case where the price elasticity of demand is perfectly elastic. Use the line drawing tool to draw a perfectly elastic demand curve, Label this line ‘D’. Chapter 7 Question 20: When XYZ firm entered the market for good A two years back, it kept the price of its price of the product low to attract customers’ away from its leading competitor. The firm has now established itself and has a market share of 20 percent. The management of XYZ is planning to increase price of A from the current $6 per unit to $7 per unit. Blah blah blah. Which of the following is most strongly supported by the information above? Chapter 7 Question 21: Compare the price elasticity of demand for pepper with the price elasticity of demand for clothes. The price elasticity of demand for pepper is likely: Chapter 7 Question 22: Suppose Wendy’s hamburgers have many close substitutes available. If so, then an increase in the price of Wendy’s hamburgers will likely Chapter 7 Question 23: Suppose the price elasticity of demand for a Czech novel translated into English is perfectly inelastic. Assume the initial price of the translated novel is $23.00 and the quantity demanded is 509 copies per year. If the price is of the translated novel increases by $3.00 then the quantity demanded will be 509 copies per year. Next, suppose the price elastic of demand for a mystery novel by Stephen King is infinitely elastic. In this example, assume the initial price of the novel is $29.00 and the quantity demanded is 92 thousand copies per year. If the price of the mystery novel increases by $2.00, then the quantity demanded will be 0 copies per year. Chapter 7 Question 24: The price elasticity of demand for McDonald’s hamburgers should be more elastic than the price elastic of demand for all hamburgers. Chapter 7 Question 25: The Commerce Ministry of a conducts regular surveys on good and services sold within the country. Researchers at the Ministry study consumer behavior through the choices the consumers make while deciding what to buy. Their report on the industry for beverages last year indicated that the price elasticity of demand for fruit juices in the country was -0.8, while the price elasticity of demand for a particular brand called Fruit Drops was -1.2. blah blah blah. Which of the following conclusions can most reasonably be drawn from the information given in the question? Chapter 7 Question 26: The price of organic apples falls and apple growers find that their revenue increases. Is the demand for organic apples elastic or inelastic? The demand for organic apples is elastic. Chapter 7 Question 27: Two managers have the following conversation. Manager 1: “The only way we can increase the revenue we receive from selling our frozen pizzas is by cutting the price.” Manager 2: “Cutting the price of a product never increases the amount of revenue you receive. If we want to increase revenue, we have to increase price.” Do you agree with the reasoning of Manager 2? Chapter 7 Question 28: GRAPH Consider the demand curve illustrated in the figure to the right. Is demand elastic or inelastic? At what price is total revenue maximized? Total revenue is maximized when price equals $8. Chapter 7 Question 29: A firm sells 3,000 headphones at a price of $3 per unit. Even through this price is slightly higher than competing brands, the management is considering a further increase in price by 25 cents. The firm plans to focus advertising efforts on superior sound clarity. Rachel, the firm’s marketing head, feels confident that a price increase by 25 cents will increase revenue. Blah blah blah. Which of the following are both the management and the industry analysts likely to agree with? Chapter 7 Question 30: A firm sells 3,000 headphones at a price of $3 per unit. Even through this price is slightly higher than competing brands, the management is considering a further increase in price by 25 cents. The firm plans to focus advertising efforts on superior sound clarity. Rachel, the firm’s marketing head, feels confident that a price increase by 25 cents will increase revenue. Blah blah blah. Which of the following, if true, would indicate that any increase in price from $3 would reduce the firm’s total revenue? (Assume the demand curve is linear.) Chapter 9 Question 1: What are the three conditions for a market to be perfectly competitive? For a market to be perfectly competitive there must be Chapter 9 Question 2: What is a price taker? A price taker is: When are firms likely to be price takers? A firm is likely to be a price taker when: Chapter 9 Question 3: GRAPH Consider the graph below showing the market demand and supply for corn. Use the line drawing tool to graph the demand for the corn produced by one corn farmer. Properly label this line. Chapter 9 Question 4: GRAPH Suppose Farmer Smith grows apples. The entire market for apples is show in the figure below. Assume the market for apples is perfectly competitive. Use the line drawing tool to draw the demand curve for farmer Smith’s apples. Label this line ‘Demand for Smith apples’. Chapter 9 Question 5: How are prices determined in perfectly competitive markets? In perfectly competitive markets, prices are determined by: Chapter 9 Question 6: What characterizes perfectly competitive markets? a. . Chapter 9 Question 7: Explain why it is true that for a firm in a perfectly competitive market that P=MR=AR. In a perfectly competitive market, P=MR=AR because: Chapter 9 Question 8: How should firms in perfectly competitive markets decide how much to produce? Perfectly competitive firms should produce the quantity where: Chapter 9 Question 9: CHART Farmer Jones grows oranges in Florida. Suppose the market for oranges is perfectly competitive and that the market price for a crate of oranges is $18 per crate. Fill in total revenue, average revenue, and marginal revenue in the table below. Chapter 9 Question 10: GRAPH The graph to the right shows a firm in a perfectly competitive market operating at a loss. The graph includes the firm’s marginal cost curve, average total cost curve, and average variable cost curve. Use the line drawing tool to graph the firm’s demand curve. Label this line ‘Demand’. Use the point drawing tool to plot the firm’s profit-maximizing price and quantity. Label this point ‘Point A’. Use the rectangle drawing tool to shade in the firm’s profit (Profit/Loss). Properly label this shaded area. Chapter 9 Question 11: GRAPH The figure to the right illustrates the average total cost (ATC) and marginal cost (MC) curves for an orange farmer in California. Assume the market for oranges is perfectly competitive. Suppose the market price of oranges is $28.00 per crate. Characterize the farmer’s profit. At $28.00 price, the farmer will make a profit. The orange farmer will make a profit if the price of oranges is above $20 per crate. Chapter 9 Question 12: Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as: Chapter 9 Question 13: GRAPH The figure to the right illustrates the average total cost (ATC) and marginal cost (MC) curves for an apple farmer. Assume the market for apples is perfectly competitive. IF the market price for apples is $42.00 per crate, then what will be this apple farmer’s profit? Use the rectangle drawing tool to shade in the apple farmer’s profit. Label this shaded area ‘Profit’. Chapter 9 Question 14: GRAPH Lauren grows grapes. Her average variable cost (AVC), average total cost (ATC), and marginal cost (MC) of production are illustrated in the figure to the right. Assume the market for grapes is perfectly competitive and that the market price is $2.00 per crate. Characterize Lauren’s economic profits. Assume she produces such that she maximizes profits in the short run. Using the rectangle drawing tool, shade in Lauren’s economic profits. Attach the correct label to indicate whether she is earning a profit (Profit) or incurring a loss (Loss). Chapter 9 Question 15: What is the difference between a firm’s shutdown point in the short run and its exit point in the long run? In the short run, a firm’s shutdown point is the minimum point on the: Why are firms willing to accept losses in the short run but not in the long run? Chapter 9 Question 16: GRAPH The market for corn is perfectly competitive with 1,000 farmers. Suppose the farmers have identical short-run cost curves, which are illustrated in the figure below. Describe the market’s supply curve. Use the line drawing tool to draw the short-run market supply curve for the corn. Label this line ‘Supply’. Chapter 9 Question 17: GRAPH The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost (ATC) curve, average variable (AVC) curve, and marginal cost (MC) curve. Fixed costs are $50.00. Suppose the market price is $18.00 per unit. Characterize the firm’s profit. If the firm produces output, then it will experience losses. Should the firm instead shut down in the short run? In the short run, the firm should Chapter 9 Question 18: Bob is a general contractor in the construction industry. Suppose the construction industry is perfectly competitive. In the short run, assume the marginal cost of building new homes equals the market price of a new home when Bob builds 10 new homes. At this level of output, bob’s average fixed cost of building a new home is $200,000 and his average variable cost is $160,000 per home. (so his average total cost is $360000 per home). If new homes are selling for $170,000, should he continue to produce 10 new homes in the short run or shut down? In the short run, Bob should produce and lose $1,900,000. Chapter 9 Question 19: What is the supply curve for a perfectly competitive firm in the short run? The supply curve for a firm in a perfectly competitive market in the short run is: Chapter 9 Question 20: Would a firm earing zero economic profit continue to produce, even in the long run? In the long-run competitive equilibrium, a firm earning zero economic profit: a. Will continue to produce because such profit is as high a return as could be earned elsewhere. Chapter 9 Question 21: GRAPH Discuss the shape of the long-run supply curve in a perfectly competitive market. The long-run supply curve is: Suppose that the perfectly competitive market illustrated in the graph to the right is initially in long-run equilibrium (at P1) and then there is a permanent decrease in the demand for the product (to D2). Show how the market adjusts in the long run. Use the line drawing tool to add either a new demand curve or a new supply curve showing the market in the long-run equilibrium. Properly label this line. Use the point drawing tool to identify the new long-run market equilibrium price and quantity. Properly label this point. Chapter 9 Question 22: TABLE Xavier is an accountant who provides tax services through his own firm. To provide these services he must rent an office for $14,000 per year, hire a secretary for $30,000, and spend $6,000 per year in advertising. Xavier’s total revenue from his tax services is $82,000 per year. Suppose Xavier’s firm is in a perfectly competitive industry and that he could otherwise earn $32,000 per year working as an accountant in another firm. Assuming Xavier’s profits are representative of the industry, describe what will likely happen to Xavier’s profits in the long run. Chapter 9 Question 23: GRAPH The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost (ATC) curve, average variable (AVC) curve, and marginal cost(MC) Curve. Suppose the market price is $14.00 per unit. Will firms enter or exit the industry in the long run? If market price is $14.00, then firms will enter the market in the long run. What effect will firms entering have on the market? When firms enter, Chapter 9 Question 24: Suppose the market for cotton is perfectly competitive and that input prices increase as the industry expands. Characterize the industry’s long-run supply curve. The cotton industry’s long-run supply curve will be: Chapter 9 Question 25: GRAPH the figure to the right represents the market for peaches. Assume the market for peaches is perfectly competitive and a constant-cost industry. Also assume the industry is initially in long-run equilibrium. Then, the demand for peaches decreases, as shown, from D1 to D2. Use the line drawing tool to draw the new market supply curve (S2) and the long-run industry supply curve (SLR). Properly label this line. Chapter 9 Question 26: Suppose you read the following item in a newspaper article, under the headline “Price Gouging Alleged in Pencil Market”: Consumer advocacy groups changed at a press conference yesterday that there is widespread price gouging in the sale of pencils. They released a study showing that whereas the average retail price of pencils was $1.00, the average cost of producing pencils was only $0.50. blah blah blah. Which of the following is not likely to happen in the pencil market? Chapter 9 Question 27: GRAPH In 2011, Sony announced that it had lost money selling televisions for the seventh straight year. Given the strong consumer demand for plasma, LCD, and LED television sets, shouldn’t Sony have been able to raise prices to earn a profit? Illustrate on the graph to the right how an increase in demand could result in a lower market price. Use the line drawing tool to draw the new demand curve. Properly label this line. Use the line drawing tool to draw the new supply curve. Properly label this line. Use the point drawing tool to indicate the new equilibrium price and quantity. Label this point ‘E2’. Chapter 9 Question 28: Assume the market for oranges is perfectly competitive. If the demand for oranges increases, will the market supply additional oranges? IF the demand for oranges increases, then the market: