Final Exam Flashcards
1
Q
Which of the following is TRUE?
- social cost = private cost + external cost
- private cost + social cost = external cost
- external cost = private cost
- private cost + average cost = social cost
A
Social cost = private cost + external cost
2
Q
Which of the following illustrates the concept of external cost?
- A small business owner frequently buys raw materials by using her bank’s line of credit
- Margaret purchases all her food and clothing in the big city outside her residence
- Raymond cannot open his windows at times because he lives downwind from a mushroom farm
- Felicia, an economics major, asks the most insightful questions in class.
A
Raymond cannot open his windows at times because he lives downwind from a mushroom farm.
3
Q
Antibiotics may be ________, since people consider only the ________.
- underused; private and not the social costs of consumption
- overused; private and not the social costs of consumption
- underused; external and not the private costs of consumption
- overused; external and not the private costs of consumption
A
overused; private and not the social costs of consumption
4
Q
An external cost:
- affects producers but not consumers.
- is a cost paid by people other than the producer or consumer trading in the market.
- causes markets to allocate resources efficiently.
- leads to economic efficiency only when private costs are greater than external costs.
A
is a cost paid by people other than the producer or consumer trading in the market.
5
Q
What is a social cost?
A
the total cost of
production, including both the private cost and any external cost
6
Q
What is a private cost?
A
a cost borne by the producer of a good or service
7
Q
What is a private good?
A
a good that is both rival and excludable
8
Q
What is a public good?
A
a good that is both
nonrivalrous and nonexcludable
9
Q
Describe rivalry.
A
occurs when consumption of one unit of a good prevents its consumption by someone else
10
Q
What is an externality?
A
a benefit or cost that affects someone not directly involved in the production or
consumption of a good or service
11
Q
An external cost can be calculated as the difference between?
A
the social cost of production and the private cost of production
12
Q
If a steel manufacturer does NOT bear the entire cost of the sulfur dioxide it emits, it will
- emit an acceptable level of sulfur dioxide
- emit a lower level of sulfur dioxide than is socially efficient.
- emit a higher level of sulfur dioxide than is socially efficient.
- not emit any sulfur dioxide in an attempt to avoid paying the entire cost.
A
emit a higher level of sulfur dioxide than is socially efficient.
13
Q
Ideally, a market should maximize:
- consumer surplus plus producer surplus.
- consumer surplus.
- social surplus.
- producer surplus.
A
social surplus.
14
Q
If the government wanted to maximize the number of people receiving a flu vaccination, it should:
- impose a mandatory vaccination program.
- give a subsidy to people who are vaccinated.
- provide research grants to those firms engaging in increasing the supply of vaccine
- impose a tax on people who are unwilling to be vaccinated.
A
give a subsidy to people who are vaccinated.
15
Q
Government solutions to externality problems include:
- taxing the consumption of goods that cause externalities.
- All of the answers are correct.
- allowing firms to trade the rights to create pollutants.
- subsidies.
A
All of the answers are correct.
16
Q
The problem with using command-and-control policies to eliminate external costs is that there are typically many methods to achieve a goal and:
- consumers may be reluctant to follow.
- the goal itself may not necessarily be the socially optimal outcome.
- the situation may be difficult for the government to control.
- the government may not have enough information to choose the least costly methods.
A
the government may not have enough information to choose the least costly methods.
17
Q
If a market for tradeable allowances exists, a company that has used up its own allowances can:
- buy allowances from another firm that will not reach its limit of pollution.
- buy allowances from another firm that has surpassed its limit of pollution.
- purchase additional allowances from the EPA on a temporary basis.
- pay a fine to the EPA and purchase additional allowances from other firms.
A
buy allowances from another firm that will not reach its limit of pollution.
18
Q
Which of the following is an example of an external cost?
- the cost you pay your plumber to install a new hot water heater
- increased gas prices for drivers of SUVs
- secondhand smoke
- your high electric bill that results from leaving your lights on all night
A
secondhand smoke
19
Q
The social cost of driving an SUV is equal to
- only the cost of the pollution emitted by the vehicle
- both the cost of producing and driving the vehicle
- both the cost of the vehicle’s pollution and its operation (gas, etc).
- the cost of producing the vehicle.
A
both the cost of the vehicle’s pollution and its operation (gas, etc).
20
Q
A private cost is
- the cost to everyone trading in all markets.
- the cost of reaching an agreement.
- a cost paid by the consumer or the producer trading in the market.
- a cost paid by people other than the consumer or the producer trading in the market.
A
a cost paid by the consumer or the producer trading in the market.
21
Q
An external cost is
- the cost to everyone.
- a cost paid by the consumer or the producer
- a cost paid by people other than the consumer or the producer trading in the market.
- the cost of reaching an agreement.
A
a cost paid by people other than the consumer or the producer trading in the market.
22
Q
The social cost is
- a cost paid by the consumer or the producer.
- the cost of reaching an agreement
- a cost paid by people other than the consumer or the producer trading in the market.
- the cost to everyone.
A
the cost to everyone.
23
Q
The price of antibiotics sends the wrong signal because
- it includes the social cost but not the private cost.
- it includes the external cost but not the private cost
- it includes the external cost but not the social cost
- it includes the private cost but not the external cost.
A
it includes the private cost but not the external cost.
24
Q
When external costs are present in a market,
- social surplus is maximized.
- consumer surplus is not maximized.
- market prices send incorrect signals.
- market prices are still able to send the correct signals.
A
market prices send incorrect signals.
25
A Pigouvian tax
* is levied on a good that creates a positive externality and should be set equal to the external benefit to eliminate the deadweight loss.
* is levied on a good that creates a positive externality and should be set equal to the social benefit to eliminate the deadweight loss.
* is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss
* subsidizes a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss.
is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss
26
Which of the following policies does the economics of externalities suggest would encourage an efficient quantity in the corresponding market?
* subsidizing beautiful flower beds in public spaces.
* subsidizing polluting factories.
* taxing healthy food.
* taxing convenient benches set up in public spaces.
subsidizing beautiful flower beds in public spaces.
27
The Coase Theorem suggests that private bargains will ensure the efficiency of markets even when externalities exist
* but only in the presence of government regulation.
* if consumers have more information regarding the externality than suppliers.
* if the cost of the negotiations are less than the price of the good.
* if transactions costs are low and property rights are well defined.
if transactions costs are low and property rights are well defined.
28
The command and control method is a ______ solution to the externality problem.
* lottery-based
* private
* regulatory
* democratic
regulatory
29
Tradable allowances for pollution
* allow firms to reduce pollution levels at lower costs.
* typically decrease firms' profits.
* seem good in theory, but have never been successfully enacted in market economies.
* decrease the availability of resources able to be utilized in other areas of production.
allow firms to reduce pollution levels at lower costs.
30
Absolute advantage is the ability to produce a:
* good with fewer inputs than others.
* variety of goods.
* good when demand is high.
* good at a lower opportunity cost than others.
good with fewer inputs than others.
31
As trade becomes more widespread, specialization \_\_\_\_\_\_, which in turn ______ productivity.
## Footnote
increases; increases
32
Toilet paper is a rival good because:
* there is a lot of competition in the toilet paper market
* it is made from natural resources.
* one person's use of toilet paper reduces the ability of another person to use the same sheets.
* it is a substitute good for a bidet.
one person's use of toilet paper reduces the ability of another person to use the same sheets.
33
A public good is:
* rival and nonexcludable.
* rival and excludable.
* nonrival and excludable.
* nonrival and nonexcludable.
nonrival and nonexcludable.
34
An excludable good is:
* one that is excluded from the common basket of goods consumed by households.
* one where people can be prevented from using the good.
* not necessary to consume, a luxury.
* one that producers will exclude from production.
one where people can be prevented from using the good.
35
A rival good is one where:
* the good is simultaneously nonexcludable and public.
* one person's use does not impinge on another person's ability to enjoy the same good.
* one person's use prevents another person's ability to use that good at the same time.
* two people can use the same good at the same time.
one person's use prevents another person's ability to use that good at the same time.
36
Which of the following is a private good?
* soft drinks
* the environment
* cable TV
* national defense
soft drinks
37
A free rider is a person who:
* produces goods at no cost.
* receives the benefits of a good but avoids paying for it.
* avoids paying taxes by using tax code loophole
* will purchase products only when on sale.
receives the benefits of a good but avoids paying for it
38
People have little incentive to produce a public good because:
* of the free rider problem.
* production is impossible.
* fixed costs are usually too high.
* social benefits are typically less than total costs
of the free rider problem.
39
The city government taxes its residents to pay for mosquito control. Betty is not happy about paying the tax, for mosquitoes never bite her. Betty is a:
* lonesome rider
* free rider
* taxed rider
* forced rider
forced rider
40
A common resource is:
* All of the answers are correct.
* likely to be overutilized.
* a good that, when used by one person, leaves less for everyone else.
* rival but nonexcludable
All of the answers are correct.
41
An example of a common resource would be:
* cable TV.
* clothing.
* a street light
* the environment.
the environment.
42
Which of the following is the explanation for why wild animals are often hunted to the point of extinction?
* cost-benefit analysis
* public goods
* tragedy of the commons
* There is no known explanation
tragedy of the commons
43
Which of the following goods is nonexcludable?
* a concert at Radio City Music Hall
* an apartment building
* national defense
* a can of Coke
national defense
44
Which of the following goods best exemplifies a nonrival good?
* a bottle of water
* the Internet
* your apartment
* an automobile
the Internet
45
Cellular phone service is an example of a good that is generally
* nonexcludable and rival
* nonexcludable and nonrival
* excludable and nonrival
* excludable and rival
excludable and nonrival
46
Street lights are an example of a good that is
* nonexcludable and nonrival
* excludable and nonrival
* nonexcludable and rival
* excludable and rival
nonexcludable and nonrival
47
Private goods are
* nonexcludable and nonrival
* nonexcludable and rival.
* excludable and rival.
* excludable and nonrival.
excludable and rival.
48
Common resources are
* nonexcludable and nonrival.
* excludable and nonrival.
* excludable and rival.
* nonexcludable and rival.
nonexcludable and rival.
49
Ocean tuna is an example of a
* private good.
* common resource
* nonrival private good
* public good
common resource
50
Markets tend to be inefficient when it comes to public goods because
* consumers tend to value these goods less than private goods.
* the government tends to overproduce the good.
* free riders lead to an underproduction of the good.
* the rival nature of the good makes it hard to collect payment from consumers.
free riders lead to an underproduction of the good.
51
Which of the following is an example of a forced rider?
* A city resident who pays a city tax for a weekly trash removal service.
* Someone who dislikes the noise coming from a privately owned park and pays taxes to maintain public parks
* Someone without children who recently had to start paying a community fee for the maintenance of a new playground.
* A Canadian-American who pays taxes that help maintain the U.S. army in case of a Canadian invasion.
Someone without children who recently had to start paying a community fee for the maintenance of a new playground.
52
If you're camping with a few friends, which of the following is a public good?
* the campfire
* the tents
* the toilet paper
* the food
the campfire
53
When it comes to national defense, antiwar protesters are
* reserved funders.
* latent payers
* free riders.
* forced riders
forced riders
54
The tragedy of the commons refers to the
* overuse of a rival but nonexcludable good.
* underproduction of public goods in economic markets
* underproduction of a common good.
* overuse of a nonrival and nonexcludable good.
overuse of a rival but nonexcludable good.
55
What is the prisoners dillema game?
Group incentive leads to cooperation but individual incentive leads to cheating
56
Relationship between positive and negative externalities and production
Positive: Underproduced
Negative: Overproduced
57
What is the situation called in which the market fails to produce the efficient level of output?
a. An externality
b. Market failure
c. External disequilibrium
d. The Coase Theorem
b. Market failure
58
14. What type of solution to externalities is the Coase Theorem?
a. A private solution to externalities
b. A public solution to externalities
c. The only solution to externalities
d. The least preferred solution
a. A private solution to externalities
59
An externality is
A) a cost paid for by the producer of a good or service.
B) a benefit realized by the purchaser of a good or service.
C) a benefit or cost experienced by someone who is not a producer or consumer of a good or service.
D) anything that is external or not relevant to the production of a good or service.
C) a benefit or cost experienced by someone who is not a producer or consumer of a good or service
60
What is a market failure?
A) It refers to a breakdown in a market economy because of widespread corruption in government.
B) It refers to a situation where an entire sector of the economy (for example, the airline industry) collapses
because of some unforeseen event.
C) It refers the inability of the market to allocate resources efficiently up to the point where marginal social
benefit equals marginal social cost.
D) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social
benefit equals marginal private cost
C) It refers the inability of the market to allocate resources efficiently up to the point where marginal social
benefit equals marginal social cost.
61
A negative externality exists if
A) there are price controls in a market.
B) the marginal social cost of producing a good or service exceeds the private cost.
C) there are quantity controls in a market.
D) the marginal private cost of producing a good or service exceeds the social cost
B) the marginal social cost of producing a good or service exceeds the private cost.
62
Private costs
A) are borne by producers of a good while social costs are borne by those who cannot afford to purchase the
good.
B) are borne by consumers of a good while social costs are borne by government.
C) are borne by producers of a good while social costs are borne by government.
D) are borne by producers of a good while social costs are borne by society at large.
D) are borne by producers of a good while social costs are borne by society at large.
63
An external cost can be calculated as the difference between
A) the social cost of production and the social benefit of production.
B) the private cost of production and the social benefit of production.
C) the social cost of production and the private cost of production.
D) a producer's cost of production and the price at which the good is sold.
C) the social cost of production and the private cost of production
64
When there is a negative externality in a free market,
A) too little of the good is produced and consumed.
B) an economically efficient level of the good is produced and consumed.
C) a productively efficient level of the good is produced and consumed.
D) too much of the good is produced and consumed.
D) too much of the good is produced and consumed
65
A product is considered to be nonexcludable if
A) you cannot keep those who did not pay for the item from enjoying its benefits.
B) your consumption of the product reduces the quantity available for others to consume.
C) you can keep those who did not pay for the item from enjoying its benefits.
D) it is jointly owned by all members of a community
A) you cannot keep those who did not pay for the item from enjoying its benefits.
66
Which of the following displays these two characteristics: rivalry and nonexcludability?
A) a private good.
B) a common resource.
C) a quasi-public good.
D) a public good
B) a common resource
67
The "tragedy of the commons" refers to the phenomenon where
A) individuals are free riders.
B) there is rivalry in consumption.
C) people do not internalize an externality.
D) people overuse a common resource
D) people overuse a common resource.
68
Competitive firms want to enter industries in which
* P \< MC
* P \< AC.
* P \> AC
* P = MC.
P \> AC
69
In a perfectly competitive market, each firm produces
* a potentially different quantity
* as much quantity as possible
* as little quantity as possible
* the same quantity
## Footnote
a potentially different quantity
70
Normal profits in a perfectly competitive industry refer to ______ run profits
* negative long
* zero long
* positive long
* positive short
zero long
71
In competitive markets
* firms will earn zero economic profits in the long run.
* firms with the lowest marginal costs will earn above normal profits even in the long run
* firms will earn positive economic profits in the long run.
* free markets may not always minimize total industry costs
firms will earn zero economic profits in the long run.
72
Graphically, a firm's marginal revenue curve is
* downward sloping, but with twice the slope of the market demand curve
* perfectly elastic and equal to their marginal cost curve.
* downward sloping and equal to the market demand curve.
* perfectly elastic but lies underneath the market demand curve.
downward sloping, but with twice the slope of the market demand curve
73
A firm can sell 1 unit at $9, or 2 units at $8, or 3 units at $7, and so on. What is the marginal revenue from the sale of the fifth unit?
* 0
* 4
* 5
* 1
1
74
In which of the following product markets should we see a higher price markup?
* one with a very elastic demand
* one for a luxury good
* one with lots of substitutes
* one with few substitutes
one with few substitutes
75
Since the popular video game Grand Theft Auto IV cost more than $100 million to develop,
* marginal cost pricing of $1 per game will most likely generate an unsuitable return on investment.
* marginal revenue will be negative on the first 100 million games sold.
* pricing above marginal costs is not necessary to earn above normal profits.
* pricing above marginal cost will not create deadweight losses because of the large development costs.
marginal cost pricing of $1 per game will most likely generate an unsuitable return on investment.
76
The rising demand for electricity in California during the year 2000
* prevented electricity generators from benefiting from economies of scale, lead to reduced supply, and intermittent blackouts.
* made it difficult for electricity companies to use their market power to bargain down prices of key inputs, increasing the cost of electricity generation, which led to subsequent blackouts.
* increased the elasticity of demand for electricity generators, causing some power companies to go out of business.
* decreased the elasticity of demand curve for electricity generators, giving the generating companies an incentive to close down plants and send electricity prices soaring.
decreased the elasticity of demand curve for electricity generators, giving the generating companies an incentive to close down plants and send electricity prices soaring.
77
Haircuts for men are often cheaper than haircuts for women, even when they are offered by the same stylist. Why might this be price discrimination?
* The marginal cost of supplying a haircut may be lower for male than for female customers, and haircutting is a competitive industry with few fixed costs
* Everyone has the same demand for haircuts.
* Demand for haircuts for women might be more inelastic than demand for haircuts for men, and haircuts are impossible to arbitrage.
* Stylists are misogynists
Demand for haircuts for women might be more inelastic than demand for haircuts for men, and haircuts are impossible to arbitrage.
78
In the case of a perfectly price-discriminating monopolist, the price of last unit sold
* is equal to marginal cost
* and marginal cost cannot be compared.
* is less than marginal cost.
* is greater than marginal cost.
is equal to marginal cost
79
Which of the following would be most difficult to arbitrage?
* tax preparation services
* automobiles
* pharmaceutical drugs
* aluminum
tax preparation services
80
Why are the prices of hardcover books more expensive than paperback?
* Unlike paperback books, hardcover books are generally exempt from state sales taxes
* Consumers who can't wait for the paperback version have a greater willingness to pay and buy the hardback upon its release.
* Hardcover books are of higher quality, and the difference in price reflects this.
* Higher production costs accounted for the entire price difference.
Consumers who can't wait for the paperback version have a greater willingness to pay and buy the hardback upon its release.
81
In which of the following industries may price discrimination be good?
* industries with high fixed costs of production
* industries with poor consumers
* Price discrimination is never good, as it lowers total surplus in society.
* industries with low marginal costs of production
industries with high fixed costs of production
82
Bundling is most likely to be beneficial when fixed costs are ______ and marginal costs are \_\_\_\_\_\_.
* low; low
* high; high
* high; low
* low; high
high; low
83
OPEC is a
* monopoly that try to behave oligopolistically.
* group of monopolistically competitive producers that try to behave in a perfectly competitive manner
* group of oligopolistic producers that try to behave like a monopoly.
* group of perfectly competitive producers that try to behave in a monopolistically competitive manner.
group of oligopolistic producers that try to behave like a monopoly.
84
The NBA and NCAA are examples of
* a buyer's cartel, keeping the salaries of players lower than they would be in a competitive market.
* natural resource monopolies
* markets with low barriers to entry
* monopolistically competitive markets.
a buyer's cartel, keeping the salaries of players lower than they would be in a competitive market
85
Cartels in the United States were outlawed with the passage of the
* Sherman Antitrust Act of 1890
* ACA Act of 1957.
* Wagner Act of 1935.
* Fair Labor Standards Act of 1938.
Sherman Antitrust Act of 1890
86
Monopolistically competitive firms earn zero profits on average because
* new firms cannot enter the market.
* they price above marginal cost
* positive profits cause competitors to enter the market, decreasing demand
* they price at marginal cost.
positive profits cause competitors to enter the market, decreasing demand
87
If a monopolistically competitive firm raises price, it will
* go out of business.
* sell no output
* sell less output.
* continue to sell the same amount of output.
sell less output.
