ECON 101 Exam 2

What will be the effect of a nonbinding price ceiling?

There will be no effect

In the event of a binding price ceiling what is one function that an illegal market serves?

It reduces the shortage caused by the price ceiling 

Supply and demand generally become more elastic in the long run. This means that the shortages caused by price ceilings _____ in the long run. 

Become larger

What is one unintended consequence of rent control?

Landlords may not maintain rental units.

A binding price ceiling will have which of the following consequences?

The quantity demanded will always exceed the quantity supplied 

Do all buyers benefit from a binding price ceiling?

No. A binding price ceiling benefits only some buyers because not all are able to obtain the good in the legal market at the government-set price.

Setting a price ceiling below the equilibrium price can result in:

A shortage, where the quantity demanded exceeds the quantity supplied.

If a city passes a temporary anti-gouging law limiting generator prices to $700, what will happen?

Quantity demanded of electric generators will exceed quantity supplied. 

Which is a correct statement about a rent control law?

A rent control law is a price ceiling law that makes apartments cheaper to rent but discourages property owners from renting out apartments.

Which of the following is the most likely cause of the government's implementing a price floor for the market for soybeans?

Producers of soybeans knew a price floor would protect their profits, and they lobbied Congress for such legislation.

If the government were to place a price ceiling, P1, on gasoline, predict the resulting surplus or shortage

There would be a shortage of 75,000 units. 

If the government were to place a price floor, P3, on gasoline, what would be the resulting surplus or shortage?

There would be a surplus of 75,000 units.

A consequence of a price floor is:

An increase in the amount of resources devoted to the production of this good or service.

A binding price ceiling is a government-set price that:

Is set below the equilibrium price. 

Which of the following is a correct statement about a minimum wage law?

It can cause prices to rise as producers pay more for labor. 

The maximum legal price that can be charged for a good or service is a(n):

Price ceiling.

What is the long-run consequence of a price floor law?

A surplus will continue to exist and will grow larger over time.

The rent control is:

A price ceiling that applies to the market for apartment rentals.

What will happen in a market where a binding price floor is removed?

There will be downward pressure on the price.

Price gouging is:

Temporary ceilings on the prices that sellers can charge during times of emergency. 

If a price floor is imposed at $15 per unit when the equilibrium market price is $12, there will be:

A surplus.

What are some of the unintended effects of rent control?

Rent control decreases landlords' profits and subsequently lowers their incentive to invest in property.

The price control:

An attempt to set prices through government regulations in the market.

Why does a surplus exist under a binding price floor?

A price floor makes the price so high that the quantity supplied exceeds the quantity demanded in the legal market.

Which of the following is a correct statement?

Rent control is an illustration of a price ceiling, and the minimum wage is an illustration of a price floor. 

Which of the following is an example of a public good?

A free outdoor Christmas light display

The costs or benefit of a market activity that affect a third party are called

Externalities

Consider a market with a negative externality. The market will tend to ___ the good because the market participants tend to ignore the ___ of their decision.

Overproduce; external cost

Which area represents the deadweight loss associated with producing at the market equilibrium instead of the social optimum?

A

The third party problem

Occurs when a market activity leads to a negative or a positive externality

At the market equilibrium, price is equal to ____, and ____ units of the good are produced. 

$14; 70

The socially optimal price and quantity would be____. 

$18 and 50

The graph best illustrates what type of market?

The good produced creates a negative externality 

To achieve the social optimum, the government could set a tax equal to ____ per unit sold. 

$6

If government regulation forces firms in an industry to internalize the externality, then the 

Supply curve shifts to the right

A positive externality exists whenever

Production of a good creates an external benefit

Which of the following is true?

Social benefits = internal benefits + external benefits 

The government identifies a situation where production of a good is generating a negative externality. A reasonable option for the government to consider is to

Impose a tax on the sale of this good

A positive externality exists, and the government does not intervene. Which point best represents the market equilibrium

A

 A good that is rival and excludable is defined as a ___ good.

Private

Which of the following characteristics best defines a public good?

Nonrival and nonexcludable

Club goods are

Nonrival, like public goods, and excludable, like private goods.

Which of the following characteristics best defines a common-resource good?

Rival and nonexcludable

 To maximize social welfare, the optimal quantity of a public good to provide should be determined through the use of

Cost-benefit analysis 

Global warming is an example of 

The tragedy of the commons

If the government provides subsidies to consumers of an external benefit product, then, in the market, the

Demand curve shifts to the right

Which of the following is an example of an implicit cost?

The opportunity cost of the owner’s time

Which of the following statements is true?

An implicit cost is an opportunity cost

An explicit cost for a business that manufactures bicycles would be the

Wages paid by the business to its employees

If a firm has total costs of $635,000 and its implicit costs are $240,000, how much are its explicit costs?

$395,000

Raul owns and manages a men’s barbershop. He himself does not give haircuts. His total revenue last year was $400,000. Of that, his barbers for $210,000, and his rent was $6,000 per month. His other expenses totaled $1,000 per month. Raul could earn $55,000 per year cutting hair as a barber in someone else’s shop. His implicit costs last year were

$55,000

Donna owns a small custom drapes business. Her total revenue last year was $270,000, and her rent was $9,000 per month. She pays her one employee $3,000 per month, and the cost of materials and overhead averages $800 per month. Donna could earn $85,00 per year as the manager of a competing business nearby. Her economic profit last year was

$31,400

A firm’s accounting profit is always greater than its economic profit because

Economic profit considers implicit costs, which accounting profit does not.

Karolina owns a small diner, where she works full time in the kitchen. Her total revenue last year was $100,000, and her rent was $3,000 per month. She pays her one employee $2,000 per month, and the cost of ingredients averages $1,000 per month. Karolina could earn $50,000 per year as the manager of a competing diner neavry. Her economic profit last year was

-22,000

Accounting profit is equal to

Total revenue minus explicit costs

Economic profit is equal to

Total revenue minus implicit costs and explicit costs

Total output with seven workers is Q=70. Total output with eight workers is Q=82. What is the marginal product of the eighth worker?

12

At what output does diminishing marginal product begin?

8