Econ CH 10, 11, 13

When patients or farmers choose whether to use more antibiotics, they compare:

their private benefits with the market price.

An external cost is built into the market price of a good and thus paid by the consumers.

False

An external cost is:

a cost paid by people other than the consumer or the producer trading in the market.

When external benefits are present in a market:

the market outcome is inefficient.

An external benefit is a benefit received by:

people other than the consumers or producers trading in the market.

All of the following would be government solutions to externality problems EXCEPT:

public sector charities

Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use.

False

When significant externalities exist: \n I. the market equilibrium is no longer efficient. \n II. the market equilibrium is only efficient if the externality is an external benefit. \n III. social surplus is not maximized. \n IV. the government may increase efficiency by imposing a tax on the market.

I and III only

(Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The market's outcome generates a(n):

deadweight loss of approximately $750.

Refer to the figure. Which price and quantity combination represents the efficient equilibrium?

*P*2 and *Q*2

An external benefit in a market will cause the market to produce:

less than is socially desirable.

Antibiotics may be ________ since people consider only the ________.

overused; private and not the social costs of consumption

An efficient equilibrium occurs when:

social costs equals social benefits.

Transaction costs:

can keep private parties from solving externality problems.

(Figure: Palm Oil) Refer to the figure. Indonesian palm oil producers deforest tropical rainforests to grow the plants that excrete the oil. With this externality, what is the deadweight loss (if any) of producing palm oil?

$100,000,000

According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome when externalities are present.

False

When externalities are present in a market, social surplus is maximized.

False

(Figure: Efficient Market Outcome) Refer to the figure. The efficient price and quantity are, respectively:

*P*2 and *Q*1.

A Pigouvian tax:

is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss

Tradable allowances for pollution:

allow firms to reduce pollution levels at lower costs.

When external benefits are significant:

market output is too low.

An external cost is a cost paid by:

people other than the consumer and the producer trading in the market.

When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

too high; too low

(Figure: Efficient Market Outcome) Refer to the figure. Which point represents the efficient equilibrium?

C

A free market void of externalities ______ social surplus.

sometimes maximizes

A(n) ______ is a tax on a good with external costs

Pigouvian tax

An external cost:

is a cost paid by people other than the producer or consumer trading in the market.

When the government intervenes in markets with external costs, it does so in order to:

protect the interests of bystanders.

An example of a transaction cost for a shirt is the price you pay for a shirt

False

A free market with an external benefit is ______, and one with an external cost is ______.

inefficient; inefficient

(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. In this figure, what is the external cost of using dishwashing detergent?

$6

(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. In this figure, SC represents the:

social cost of production: the private cost plus the external cost.

An externality is either an external cost or external benefit that spills over to bystanders.

True

When external costs are present in a market:

market prices send incorrect signals.

A free market with externalities ______ social surplus.

does not maximize

According to the Coase theorem, which situation would MOST likely result in a private bargaining solution and yield an efficient market?

Your neighbor's dog routinely gets out of his yard and does his “business” in your yard.

An efficient equilibrium occurs whenever:

social surplus is maximized.

A Pigouvian subsidy should be set equal to the amount of the external benefit.

 True

Tradable pollution permits:

have helped reduce sulfur dioxide and carbon emissions.

Firms are profitable when price is:

greater than average cost.

A firm's short-run supply curve is its marginal cost curve.

True

Firms in competitive industries: \n I. can only charge a price equal to the market price. \n II. cannot charge any more than the market price. \n III. will earn less profit if they charge less than the market price.

I, II, and III

Decreasing cost industries have supply curves that slope downward forever.

False

Firms earn negative profit when price is:

less than average cost.

(Figure: Two-Firm Industry) Refer to the figures. At a market price of $25, the total quantity supplied in the industry is:

45 units.

Use the figure. The profit-maximizing output for this firm is:

6

A market is considered perfectly competitive if: \n I. there is a lot of product differentiation among sellers. \n II. there are many sellers, each small relative to the total market. \n III. the product sold is similar across sellers. \n IV. there are only a few buyers.

II and III only

Firms should exit the market if:

price falls below the average cost.

A firm should exit an industry if:

*P*– *AC* < 0.

A firm should always shut down if it is earning negative profits.

False

Firms have less pricing power if their firm-level product is more unique.

False

(Figure: Industry Firms) Refer to the figures. The market is characterized by demand curve *D*2 and supply curve *S*1. The firms in the industry are earning ________, which will cause the______________.

profit; supply curve to shift to *S*2

(Figure: Two-Firm Industry) Refer to the figures. At a market price of $20, the total quantity supplied in the industry is:

15 units.

If *P* = $20, *AC* = $16, and *Q* = 100, then profit = $3,600.

False

(Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which panel shows a competitive firm making positive economic profits?

Panel C

Explicit costs incurred by firms include the firm's opportunity costs.

False

(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:

$75.

Refer to the figure. If you are one of literally thousands of maple syrup producers and you wanted to increase your maple syrup production from 100 gallons to 110 gallons, what price would you charge?

$96

Refer to the figure. In the long run, what do you expect this firm's economic profit or loss to be?

$0

(Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which panel shows a competitive firm making an economic loss?

Panel A

Firms in a perfectly competitive industry maximize profits by:

 setting a price equal to the market price.

A firm's total profit is equal to the marginal cost of production multiplied by the quantity produced.

False

Economists study decreasing cost industries in order to explain:

the existence of industry clusters.

Average total cost is equal to total cost divided by profit.

False

Refer to the set of four panels in the figure. Which panel shows the typical shape of the average cost curve in a competitive market?

Panel A

Firm profit is defined as:

total revenue minus total cost.

A competitive firm maximizes profits when price equals marginal cost.

True

Economic profit is equal to total revenue minus explicit costs.

False

Average cost is equal to total cost divided by quantity.

True

(Figure: Costs of Oil Production) Refer to the figure. Assuming that price equals marginal cost, the profit of producing eight barrels of oil is:

$160

(Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which panel shows a competitive firm making zero economic profits?

Panel B

Economic profit differs from accounting profits because of its inclusion of:

implicit costs.

A firm will continue to produce additional output, as long as marginal revenue is greater than marginal cost.

True

Economists call the time after all exit or entry has occurred:

the long run.

A firm should exit an industry if price is less than average cost.

True

How much profit is the firm making at the profit-maximizing quantity?

a profit of $300

For a small firm in an extremely competitive industry, marginal revenue is always equal to price because:

the firm has no ability to influence the market price.

(Figure: Monopolist 3) In this figure, the monopolist's maximum profit is:

$45.

A monopoly is a firm with market power, and market power may arise from economies of scale, patent protection, and innovation.

True

A firm will attain more monopoly power as demand for its product becomes more elastic.

False

(Figure: Monopoly 8) If the government set price equal to average cost, the natural monopolist in this figure would produce:

14 units of output.

Refer to the figure. Which of the following answers correctly indicates the profit earned by this monopolist at the profit-maximizing quantity?

area *A*

If this figure represents the demand and cost curves for a firm with market power, what price should the firm charge to maximize profits?

$60

For a linear demand curve, the marginal revenue curve has:

twice the slope.

(Figure: Paint Market 2) If the fixed costs were halved, deadweight loss would:

not change.

A natural monopoly occurs when:

there are economies of scale over the relevant range of output

(Figure: Monopoly Markup) Refer to the figure. The deadweight loss attributable to monopoly is:

triangle *cef*

\n A firm with no competition faces a perfectly inelastic demand curve.

False

(Figure: Maximize Monopoly Profits) Refer to the figure. The monopolist will maximize its profit by charging a price equal to:

*P*2.

For a monopolist, *MR* is always less than *P* because:

when a monopolist lowers the price to sell more units, it must lower the prices of all units sold.

What is the profit or loss for this monopoly?

$100,000

(Figure: Maximize Monopoly Profits) Refer to the figure. The monopolist will maximize its profit by producing at output equal to:

*Q*2

(Figure: Monopolist 3) In this figure, the profit-maximizing monopolist sells:

9 units of output at $11 per unit.

For a monopoly, the entire consumer surplus is transferred to the monopolist as profit.

False

(Figure: Monopoly Markup) Refer to the figure. Consumer surplus under competition is represented by:

triangle *adf*.

(Figure: Monopoly 6) If the market in this figure is a monopoly, the consumer surplus is area ______, and the deadweight loss is area ______.

*A*; *C*

(Figure: Paint Market 2) What is the deadweight loss (if any) from the monopoly in this diagram relative to its optimum quantity?

$125,000

A government can maximize efficiency in monopoly markets by setting prices equal to the monopolist's average cost of production albeit at the cost of reduced long term innovation.

True

A monopoly maximizes profit by finding the output level where the difference between marginal revenue and marginal costs is as large as possible.

False

\n Refer to the figure. The competitive industry level of output is:

80