Principles of Economics 2000 (Abrahams LSU)

A firm that shuts down temporarily has to pay?

a. its variable costs but not its fixed costs.

b. neither its variable costs nor its fixed costs.

c. its fixed costs but not its variable costs.

d. both its variable costs and its fixed costs.

c. its fixed costs but not its variable costs.

Explicit Cost

costs for which actual payments are made. These are out of pocket costs and do not involve opportunity costs

An example of an explicit cost of production would be the?

a. lost opportunity to invest in capital markets when the money is invested in one's business.

b. lease payments for the land on which a firm's factory stands.

c. cost of forgone labor earnings for an entrepreneur.

d. value of the time the business could've spent producing something else.

b. lease payments for the land on which a firm's factory stands.

Equilibrium Price

a point at which the supply and demand curves intersect.

Elastic Demand

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

Price Elasticity of Demand

percentage change in quantity demanded / percentage change in price

An increase in the price causes an increase in total revenue, the demand is?

Inelastic

An increase in the price causes a decrease in total revenue, the demand is?

Elastic

Fixed Cost

do not vary with the quantity of output produced

Which of the following costs of publishing a book is a fixed cost?

a. Shipping and postage expenses

b. Composition, typesetting, and jacket design for the book

c. The costs of paper and binding

d. Author royalties of 5 percent per book

b. Composition, typesetting, and jacket design for the book

When income increases and demand increases, therefore consumer surplus increases.

Normal Good

When income increases, demand decreases and thus consumer surplus decreases.

Inferior Good

Midpoint Method

[Q2-Q1/(Q2+Q1/2)] / [P2-P1/(P2+P1/2)]

Quantity Supplied > Quantity Demanded

Surplus (QS - QD)

Quantity Supplied < Quantity Demanded

Shortage (QD-QS)

Price = Marginal Cost

Monopolist

Price x Quantity =

Total Revenue

Oligopoly

A market structure in which only a few sellers offer similar or identical products

Collusion

An agreement among firms in a market about quantities to produce or prices to charge

Cartel

A group of firms acting in unison

Prisoner's Dilemma

A particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

Dominant Strategy

A strategy that is best for a player in a game regardless of the strategies chosen by the other players

Price Ceiling

A legal maximum on the price at which a good can be sold

A price ceiling is binding is?

When it lies below the equilibrium price.

Price Floor

A legal minimum on the price at which a good can be sold

A price floor is binding...

When it lies above the equilibrium.

Cross-Price Elasticity

is a positive or negative number depends on whether the two goods are substitutes or complements

If a price floor is not binding, then

a. the equilibrium price is above the price floor.

b. there will be a surplus in the market.

c. the equilibrium price is below the price floor.

d. there will be a shortage in the market.

a. the equilibrium price is above the price floor.

Change in Quantity Demanded =

Price Elasticity x Change in Price

Absolute Advantage

the ability to produce a good using fewer inputs than another producer

Comparative Advantage

the ability to produce a good at a lower opportunity cost

Law of Supply

the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

The law of demand states that, other things equal, when the price of a good

a. rises, the quantity demanded of the good rises.

b. falls, the demand for the good rises.

c. falls, the quantity demanded of the good rises.

d. rises, the demand for the good falls.

c. falls, the quantity demanded of the good rises.

What can cause us to move (slide) to a new point on the same supply curve?

A change in price

What factors can cause a shift to a new supply curve?

Input prices

Technology

Expectations

Number of sellers

What can cause us to move (slide) to a new point on the same demand curve?

A change in price

What factors can cause a shift to a new demand curve?

Income

Prices of related goods, Tastes

Expectations

Number of buyers

Budget Constraint

the limit on the consumption bundles that a consumer can afford

What does the slope of the budget constraint represent?

The slope of the budget constraint measures the rate at which the consumer can trade one good for the other

Consumer Surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Producer Surplus

the amount a seller is paid for a good minus the seller's cost of providing it

In which of the following market structures can firms earn economic profits in the long run?

a. Perfect competition only

b. Monopolistic competition only

c. Monopolistic competition and monopoly

d. Monopoly only

d. Monopoly only

In some cases, tradable pollution permits may be better than a corrective tax because

a.pollution permits generate more revenue for the government than a corrective tax.

b.pollution permits allow for a market solution while a corrective tax does not.

c.pollution permits are never preferred over a corrective tax.

d. the government can set a maximum level of pollution using permits.

d. the government can set a maximum level of pollution using permits.

If the government removes a binding price ceiling from a market, then the price paid by buyers will

a. decrease, and the quantity sold in the market will increase.

b. increase, and the quantity sold in the market will increase.

c. decrease, and the quantity sold in the market will decrease.

d. increase, and the quantity sold in the market will decrease.

b. increase, and the quantity sold in the market will increase.

If government regulation sets the maximum price for a natural monopoly equal to its marginal cost, then the natural monopolist will

a. earn zero economic profits.

b. produce a lower quantity of output than is socially optimal.

c. earn economic losses.

d. earn economic profits.

c. earn economic losses.

If a sawmill creates too much noise for local residents,

a. noise restrictions will force residents to move out of the area.

b. the government should avoid intervening because the market will always allocate resources efficiently.

c. the government can raise economic well-being through noise-control regulations.

d. a sense of social responsibility will cause owners of the mill to reduce noise levels.

c. the government can raise economic well-being through noise-control regulations.

Equilibrium price must decrease when demand

a. increases and supply does not change, when demand does not change and supply decreases, and when demand increases and supply decreases simultaneously.

b. decreases and supply does not change, when demand does not change and supply increases, and when demand increases and supply decreases simultaneously.

c. decreases and supply does not change, when demand does not change and supply increases, and when demand decreases and supply increases simultaneously.

d. increases and supply does not change, when demand does not change and supply decreases, and when demand decreases and supply increases simultaneously.

c. decreases and supply does not change, when demand does not change and supply increases, and when demand decreases and supply increases simultaneously.

Efficiency means that

a. society is conserving resources in order to save them for the future.

b. society's goods and services are distributed fairly, though not necessarily equally, among society's members.

c. society is getting the most it can from its scarce resources.

d. society's goods and services are distributed equally among society's members.

c. society is getting the most it can from its scarce resources.

If a seller in a competitive market chooses to charge more than the going price, then

Select one:

a. buyers will make purchases from other sellers.

b. the owners of the raw materials used in production would raise the prices for the raw materials.

c. other sellers would also raise their prices.

d. the sellers' profits must increase.

a. buyers will make purchases from other sellers.

The producer that requires a smaller quantity of inputs to produce a certain amount of a good, relative to the quantities of inputs required by other producers to produce the same amount of that good,

a. has a low opportunity cost of producing that good, relative to the opportunity costs of other producers.

b. has a comparative advantage in the production of that good.

c. should be the only producer of that good.

d. has an absolute advantage in the production of that good.

d. has an absolute advantage in the production of that good.

Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is

a.positive, and the good is an inferior good.

b.negative, and the good is an inferior good.

c.negative, and the good is a normal good.

d.positive, and the good is a normal good.

d.positive, and the good is a normal good.

A difference between explicit and implicit costs is that

a.explicit costs must be greater than implicit costs.

b.implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.

c.implicit costs must be greater than explicit costs.

d.explicit costs do not require a direct monetary outlay by the firm, whereas implicit costs do.

b.implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.

Total Cost =

fixed cost + variable cost

If long-run average total cost decreases as the quantity of output increases, the firm is experiencing

a.coordination problems arising from the large size of the firm.

b.fixed costs greatly exceeding variable costs.

c.diseconomies of scale.

d.economies of scale.

d.economies of scale.

Economic profit =

total revenue minus total cost, including both explicit and implicit costs

Accounting profit =

total revenue minus total explicit cost

Both public goods and common resources are

a.nonrival in consumption.

b.excludable.

c.nonexcludable.

d.rival in consumption.

c.nonexcludable.

According to the Coase theorem, private parties can solve the problem of externalities if

a.property rights aren't clearly defined.

b.the number of parties involved is sufficiently large.

c.the initial distribution of legal rights favors the person being adversely affected by the externality.

d.the cost of bargaining is small.

d.the cost of bargaining is small.

Which of the following is not an advantage of corrective taxes?

a.They raise revenues for the government.

b.They enhance economic efficiency.

c.They move the allocation of resources closer to the social optimum.

d.They subsidize the production of goods with positive externalities.

d.They subsidize the production of goods with positive externalities.

Goods that are rival in consumption include both

a.public goods and common resources.

b.club goods and public goods.

c.private goods and club goods.

d.common resources and private goods.

d.common resources and private goods.

The Tragedy of the Commons will be evident when a growing number of sheep grazing on the town commons leads to a destruction of the grazing resource. To correct for this problem, the town could

a.wait until the market corrects the problem.

b.auction off a limited number of sheep-grazing permits.

c.allow individual shepherds to choose their own flock sizes.

d.internalize the externality by subsidizing the production of sheep's wool.

b.auction off a limited number of sheep-grazing permits.