ECO 2023 Final Exam

Which of the following statements is normative?

Taxes should be avoided because they create deadweight loss

Ethan washes and irons his own shirts. Sophia, his boss, sends her clothes to a laundry. Which is the most plausible economic explanation for this difference?

Sophia has a higher opportunity cost of laundering her clothes than Ethan does.

When economists say that equilibrium is efficient, they mean that...

The marginal benefit of the last unit produced equals the marginal cost.
Every unit of output up to equilibrium has a marginal benefit greater than its marginal cost.
The sum of consumer surplus and producer surplus is maximized.

Which of the following is an example of a positive economic statement?

If a monopoly is currently charging a price in the inelastic region of demand, raising the price will increase revenue.

If Theodora is paid $25,000 to sell her valuable jewelry, even though she would have been willing to sell it for $20,000, this indicates that...

Theodora received $5,000 of producer surplus from the transaction.

When economists say that equilibrium is efficient, they mean that...

each unit produced and consumed has a marginal benefit greater than or equal to marginal cost.

Which of the following activities describes the opportunity cost of attending an economics class?

the value of the highest valued alternative that must be forgone because of attending the class

Jimbo can catch 3 possums per night, or tip over 6 cows per night. Bubba can catch 8 possums per night, or tip over 32 cows per night. Those are their maximums for each, but points in between are possible. For example, Jimbo could also catch, say, 1 possum per night, and tip over 4 cows. Which of the following is correct?

The opportunity cost for Jimbo to catch 1 possum is 2 tipped-over cows. The opportunity cost for Bubba to catch 1 possum is 4 tipped-over cows.

The opportunity cost for Vietnam to produce 1 unit of broadcasting equipment is 3 units of integrated circuits. The opportunity cost for South Korea to produce 1 unit of broadcasting equipment is 1 unit of integrated circuits. Which of the following terms of trade would benefit both sides?

1 unit of broadcasting equipment for 2 units of integrated circuits.

The market for dry-erase markers is in equilibrium, but then the cost of dry-erase ink (which is used to produce the markers) rises. What happens in the market for dry-erase markers?

price rises, quantity falls

It is the year 49 A.D. and Emperor Claudius of Rome has conquered part of Britannia, taking control of its silver mines, which soon begin to produce silver. The silver is shipped to Rome (instead of going to local chieftains as it did before). What effect should this have on the market for silver in Rome?

Supply rises, driving prices down and quantities up.

When a conflict arises in a major oil-exporting area of the world, such as the Middle East, the price of gasoline already in the storage tanks at gas stations near you usually increases immediately. Which of the following best explains this occurrence?

Gas station owners anticipate higher replacement costs for their supply of gasoline and, therefore, raise their prices in response to this increased expected cost.

A new hormone will increase the amount of milk each cow produces. If this hormone is adopted by many dairies, what will be the effect on the milk market?

An increase in supply, lower equilibrium price, and higher equilibrium quantity.

Students have used printed textbooks for years, but then e-books are invented. Many students prefer e-books, and stop buying printed textbooks. What happens in the market for printed textbooks?

Demand falls, driving prices down and quantities down.

Suppose the market for onions is in equilibrium. Bad weather damages the onion crop. Which of the following is likely to happen?

The price of onions rises and the quantity falls.

Board games and video games are substitutes. If the price of board games falls, ceteris paribus, which of the following will happen in the market for video games?

The Supply of video games will fall, price will rise, and quantity will fall.

It's the late 1970s, and the market for movies is in equilibrium. Two things happen at the same time: Improvements in technology lead to a much better movie experience, due to better special effects and audio, resulting in more crowd-pleasing movies and improvements in technology reduces the costs of making and distributing movies.

Price is indeterminate, quantity rises.

For most people, ramen noodles are an inferior good. Suppose the market for ramen noodles is in equilibrium, and then two things happen at the same time. First, the incomes of consumers rise. Second, a technological improvement at noodle factories allows them to produce more noodles at a lower cost. What happens to the price and quantity of noodles?

price falls, quantity is indeterminate

Suppose demand decreases and supply increases at the same time. Which of the following will happen?

Equilibrium quantity will be indeterminate, while equilibrium price will decrease.

The arc own-price elasticity of demand for veggie burger patties is 0.9. The arc price elasticity of supply for veggie burger patties is 0.6. If a tax on veggie burger patties is imposed on producers, which of the following will occur?

The price will rise and the burden of the tax will fall mostly on producers.

The price of the popular Galaga R8 smartphone goes from $600 to $800, and the quantity of Galaga R8 smartphones purchased falls from 12 million to 2 million phones per year. What is the Arc Own-Price Elasticity of Demand?

5

You work part time while going to college, earning $5,000 per year. Due to your low income, you only eat at restaurants 6 times per year. After graduating and getting a good job earning $60,000 per year, you eat at restaurants 94 times per year. Which of the following is correct?

The arc income elasticity of demand is 1.04, and meals at restaurants are a normal good.

The imposition of price ceilings on a market often results in

lower prices being offered on the black market.

In a market economy, which of the following would most likely cause a prolonged grain surplus?

imposition of a price floor above the equilibrium price of grain

The equilibrium price of crude oil is currently $70 per gallon. If the U.S. government imposes a price floor of $40 per gallon, the immediate result will be...

nothing

Suppose the government imposed a $200 price ceiling on mobile phones. Which of the following would probably not occur?

The quality of smartphones available for sale would increase, resulting in faster phones with bigger, better screens.

Suppose that a tax is placed on a particular good. If the sellers end up bearing most of the tax burden, this indicates that the

supply is more inelastic than demand.

Pes Laul Inc. is a company that makes electric guitars. Due to concerns about excessive cutting of old growth trees to make guitars, a heavy tax is placed on the sorts of lumber that Pes Laul Inc. uses to make its guitars. Which of the following describes the effect of this tax?

The tax raises the firm's costs, causing it to charge a higher price and produce less output.

Suppose the own-price elasticity of demand for oranges is 1.5, and the price elasticity of supply for oranges is 0.8.
A $0.20 per orange tax on oranges is legally assigned to consumers. Who will suffer the largest loss due to tax revenue and deadweight loss?

producers

Big Boats Inc. is a company that makes yachts for very wealthy people. A heavy tax on yachts, legally paid by producers, was recently repealed. What is the effect of the removal of this tax on Big Boats Inc.?

The removal of the tax reduces the firms' costs, causing it to charge a lower price and produce more output.

A new hormone will increase the amount of milk each cow produces. If this hormone is adopted by many dairies, what will be the effect on the milk market?

An increase in supply, lower equilibrium price, and higher equilibrium quantity.

The market for dry-erase markers is in equilibrium, but then the cost of dry-erase ink (which is used to produce the markers) rises. What happens in the market for dry-erase markers?

price rises, quantity falls.

Which of the following is the best description of the effects of an increase in the supply of bread?

Bread prices will fall, and bread sales will rise.

When Apple announces the details of their new iPhone, and it is even better than the last model than everyone expected, the price of a used iPhone goes down, even though the new one is not out yet. This is probably because...

Consumer demand for the used iPhone falls due to changes in expectations about the future.

The market for wooden pencils is in equilibrium, and wood pencils are an inferior good. Mechanical pencils are a normal good. Everyone's income rises. What happens?

The demand for wooden pencils falls, and the demand for mechanical pencils rises.

Suppose the market for low-skilled labor is in equilibrium, and then two things happen at the same time. First, a large number of low-skill immigrants enters the country, competing with domestic low-skill workers. Second, these immigrants all want to buy more goods and services, and they typically buy goods produced by low-skill workers. Which of the following will occur in the market for low-skill workers?

The number of workers employed will rise, but we cannot tell what will happen to the wage rate.

The market for mangoes is in equilibrium, and then two things happen at the same time. First, the FDA releases a new study showing that eating mangoes will reduce your chances of getting heart disease significantly. Second, a new fertilizer makes it possible to grow mangoes in cooler climates than was previously possible. Which of the following will occur in the market for mangoes?

Quantity rises, price is indeterminate

Suppose demand decreases and (at the same time) supply increases. Which of the following will happen?

Equilibrium quantity will rise, fall, or stay the same while equilibrium price will decrease.

Which of the following would shift the supply of milk to the left?

A disease kills many dairy cows.

If Leon County has a comparative advantage in producing education, and Key West has a comparative advantage in producing relaxing vacations, which of the following is correct?

If Leon County specializes in education, and Key West specializes in relaxing vacations, they can trade and each have more of both goods.

Which of the following would shift the demand for peanuts to the right?

The price of cashews, a substitute for peanuts, rises.

Suppose the market for coffee is in equilibrium. The price of tea rises. What happens in the market for coffee?

Price rises, quantity rises

If the price of bananas rises by 10%, and the quantity of bananas falls by 20%, which of the following is correct?

The own-price elasticity of demand is 2, and demand is elastic.

The market for letter envelopes is in equilibrium, but then two things happen at the same time. First, the invention of email and other electronic communication causes people to write fewer paper letters. Second, new regulations on paper production makes production of envelopes more costly. What happens to the price and quantity of paper envelopes?

price is indeterminate, quantity falls

A lawn-maintenance company tends to 50 lawns each week. It has Average Variable Cost of $40, and Average Fixed Cost of $60. Total Cost (note that I didn't say average Total Cost) is...

$5,000

Your bakery produces 100 additional loaves of bread. Your fixed costs are $10,000. Total costs rise from $15,000 to $15,500. What is the marginal cost of producing an additional loaf of bread?

$5

A doctor's office sees 100 patients each week. It has Average Variable Cost of $100, and Average Fixed Cost of $50. Total Cost (note that I didn't say average Total Cost) is...

$15,000

Suppose the market for potatoes is a constant cost industry, and is in equilibrium with zero profit. The demand for potatoes rises. What happens?

The price of potatoes rises, causing profits to become positive. This lures new firms into the industry, shifting supply to the right. This pushes the price back down until zero profit is restored.

Bart operates a lemonade stand in front of his house. His father works at the Springfield Nuclear Power Plant. Which of the following is likely to be true?

The long run is longer for the power plant than it is for the lemonade stand.

In the perfectly competitive model, market supply is...

The horizontal sum of individual firms' supply curves.

If profit-seeking entrepreneurs are going to be successful, they must

produce a product that the consumers value more than the resources required for its production.

The supply curve of a price-taker firm in the short run is the

portion of the firm's marginal cost curve that lies above average variable cost curve.

Which of the following is a primary difference between price takers and price searchers that operate in markets with low barriers to entry?

The price searchers will have to search for the price, while price takers will have to take the price determined in the market.

When new firms have an incentive to enter a competitive price-taker market, their entry will

drive down profits of existing firms in the market.

A firm is producing a good using fixed inputs and variable inputs. As the firm adds more of a variable input, the additional output created by more units of that input must eventually fall. This is known as...

the Law of Diminishing Returns

Diminishing returns occur because...

Some inputs are fixed in the short run. As a firm adds more variable inputs, production rises, but at some point there are not enough fixed inputs available for the additional workers to use as productively as prior workers did. As a result, marginal product must eventually fall.

Your new startup produces mobile phones for dogs (your dog can press a big red button on it, and the phone calls you so that your dog can hear your voice when the dog misses you). Your current revenue is $3 million, and your total accounting cost is $2.7 million. After doing some research, you determine that you could probably make an accounting profit of $1 million if you were to make mobile phones for humans instead. Which of the following is correct?

Your accounting profit is $300,000, and your economic profit is -$700,000, so you should switch to making mobile phones for humans

The rule for profit maximization is known as...

The Equimarginal Principle.

Which of the following industry structures contains firms that are price takers?

Perfect Competition

Which of the following most closely approximates the conditions of a monopolistic competition?

the restaurant industry, which is characterized by firms producing a differentiated product in a market with low entry barriers

Which of the following is a characteristic of Monopolistic Competition?

Monopolistically Competitive firms earn zero profit in the long run.

A monopoly cable television company sells access to cable television channels. It lowers the price of a subscription from $100 to $80, and finds that the number of subscriptions sold rises from 1 million per month to 2 million per month. The monopoly's marginal revenue is...

$60

Several countries that primarily export oil get together and agree to reduce production, causing prices to go up. This is an example of...

collusive oligopoly

Which of the following is an example of third degree price discrimination?

Amazon.com looks at your past purchase history and decides that you are the sort of person who really likes books about Chinese history. When you shop for books on Chinese history, Amazon.com shows you higher prices than it shows other consumers.

Which of the following statements about price discrimination and efficiency is correct?

Price discrimination is generally efficient because it allows more consumers to buy the product than would be possible if everyone paid the same price.

If a competitive price-taker firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

a one-unit decrease in output would increase the firm's profit.

The FSU Tutors company is a new startup business, headed by two enterprising FSU undergraduates. As their tutoring business grows, and they move into larger offices, they've found that the average total cost of a tutoring lesson has been falling. Their business is experiencing...

Economies of Scale.

Which of the following is an example of variable inputs?

Joe's Pizza Parlor orders more cheese due to an increase in orders.

A price-searching firm's own-price elasticity of demand is 1.5. If this firm lowers its price, which of the following will happen?

total revenue will rise

Total Revenue (TR)

Price x Quantity

Marginal Revenue (MR)

Change in Total Revenue / Change in Quantity

Profit

TR-TC

Average Fixed Cost (AFC)

FC/Q

ATC

AVC+AFC

Average Variable Cost

VC/Q

Marginal Product

Change in q / Change in L

Total Cost

variable cost + fixed cost

Tragedy of the Anticommons

when there are too many people with the ability to stop the use of resources

Four Biases

Anti-Foreign, Anti-Market, Make-Work, Pessimistic

Voting

More likely to result in an efficient outcome if benefits are tied to amount the voter pays

Wicksell's Unanimity rule

guarantees efficient policies pass, but bargaining costs are too high

Problems with Government action

Shortsightedness, Rent seeking, Inefficiency