question
Normative statement
answer
expresses a value judgment about the desirability of a situation
question
Positive statement
answer
it's a claim about how the world works
question
Cooperation
answer
trade, a voluntary exchange; "Give me that which I want, and you shall have this which you want"
question
Coercion
answer
the practice of persuading someone to do something by using force or threats
question
"three big questions" we mentioned at the start of section 1b: what goods to produce? how to produce them? and for whom to produce them? How are these questions answered in a market system?
answer
In a market system, prices signal firms what goods are valued highly by members of society and give them an incentive to produce more goods that are more highly valued
question
Two people or nations can both become better off through trade:
answer
as long as each of them can produce some good using fewer inputs
question
A rational or purposive decision maker is one who:
answer
chooses actions they believe will help them achieve their goals
question
Because a potato has a price expressed in dollars, its value is objective
answer
No, that's wrong. There's no such thing as "the value of a potato", only "the value of a potato to me"
question
What is held constant along a given demand curve
answer
The consumers' income.
question
When quantity demanded decreases at every possible price, the demand curve has
answer
shifted to the left
question
Pizza is a normal good if the demand
answer
for pizza increases when income rises.
question
The law of demand states that, other things equal, when the price of a good
answer
falls, the quantity demanded of the good rises.
question
Adam Smith suggested that an invisible had guides market economies. In this analogy, what is the baton that the invisible hand uses to conduct the economic orchestra?
answer
prices
question
Economic thinkers associated with the "Marginal Revolution" of the late 19th century.
answer
Carl Menger, William Stanley Jevons, and Leon Walras
question
Suppose consumers in Lawrence demand 100 pounds of potatoes per week when the price is $5 per pound, but they would demand only 80 pounds of potatoes at a price of $6 per pound.
answer
This situation corresponds to a movement along the potato demand curve.
question
perfectly competitive market model
answer
- firms are able to enter or exit the market freely in the long run
- firms in the market produce identical goods
- firms have perfect knowledge of market conditions
- firms are NOT able to set price higher than marginal cost
- firms in the market produce identical goods
- firms have perfect knowledge of market conditions
- firms are NOT able to set price higher than marginal cost
question
a short-run situation where a company is operating at a loss
answer
covering its variable cost but NOT covering all of its fixed costs from its land lease, factory construction, etc.
question
True or False? Seeing the market as a "process" is a feature of both the Austrian school of economics and the classical economics of writers like Adam Smith.
answer
True
question
technological innovation
answer
A change that would increase the supply of widgets?
question
Scotch whisky is matured in oak casks for three or more years. This suggests that, other things equal, an increase in interest rates will:
answer
increase the cost of producing Scotch
If the interest rate is 5%, then the cost of the finished product (at time 3) will be £10*(1.05)^3=£11.58. If the interest rate increases to 10%, the cost of the finished product increases to £13.31.
If the interest rate is 5%, then the cost of the finished product (at time 3) will be £10*(1.05)^3=£11.58. If the interest rate increases to 10%, the cost of the finished product increases to £13.31.
question
Suppose, thanks to technological advances in the oil drilling industry, gasoline prices fall to $1.00 per gallon. How will this affect the market for automobiles?
answer
gas and autos are complements, so car prices will increase but more cars will be sold
question
equilibrium
answer
The term that means "equal balance"
question
Suppose one change leads to an increase in the demand for widgets while at the same time another increase leads to a decrease in the supply of widgets.
answer
The increase in demand will increase price and increase quantity. The decrease in supply will increase price and decrease quantity. the price of widgets will increase, but the effect on quantity is indeterminate
question
example of a triangular intervention
answer
the government requires employers to provide health insurance to employees, the government is prohibiting a transaction between the employer and employee on terms that don't include provision of health insurance
question
Autistic intervention
answer
The intervener restricts the freedom of the entity concerned to dispose of its person or property, but there is no exchange between them: Taxation and the draft
question
Binary intervention
answer
occurs when the intervener forces an exchange between him and the entity against which he intervenes or demands a 'gift' from that entity: the prohibition against smoking
question
Suppose the equilibrium wholesale price of milk is $1/gal., but the government prohibits sales at less than $2/gal. Which of the following is not a likely consequence of this price floor?
answer
dairy farmers sell more milk
question
Recall that rationing refers to the way a limited supply of a good is allocated to different buyers/uses. In a free market, what is the mechanism by which the available units of a good are rationed?
answer
Prices; Only buyers who value another unit of the good more than whatever else they could buy with the price for one unit will purchase it
question
In a competitive market, the actions of any single buyer or seller will
answer
have a negligible impact on the market price.
question
Wheat is the main input in the production of flour. If the price of wheat decreases, then we would expect the
answer
supply of flour to increase.
question
Which of the following events must cause equilibrium price to fall?
answer
demand decreases and supply increases
question
Years ago, thousands of country music fans risked their lives by rushing to buy tickets for a Willie Nelson concert at Carnegie Hall. This behavior indicates
answer
the ticket price was below the equilibrium price.
question
The supply curve of a perfectly-competitive firm in the short-run is:
answer
the marginal cost curve above the minimum of average variable cost.
question
Consider two goods, X and Y. If the price of Y increases and, as a consequence, the demand curve for X shifts to the left, then:
answer
X and Y are complements.
question
Alice would pay up to $10,000 for a signed first-edition copy of Human Action by Ludwig von Mises, but no more. Bob has one, and he would sell it for as little as $100, but no less. If Bob sells Alice his copy for $5,000, what is Alice's consumer surplus from the transaction
answer
$5,000
question
Alice paid Bob $5,000 to acquire a signed first-edition copy of Human Action. Suppose Bob has a second copy that Alice also buys for $5,000. Would you expect Alice's consumer surplus from purchasing a second copy to be the same (on the margin) as the $5,000 consumer surplus she obtained by buying the first copy?
answer
It will be less: This is because the principle of diminishing marginal utility tells us that she is likely to value the addition of a second copy less than the addition of the first copy.
question
Kaldor-Hicks improvement
answer
The law that "improves economic efficiency": eliminate $2000/year of damage at a cost of only $1000 per year
question
As before, Alice, the only rancher in Dobbstown, lives next door to Bob, the only farmer in Dobbstown. Once per year, Alice's cattle wander into Bob's unfenced field, causing $2000 worth of damage to his crop. Under current law, Alice is legally liable for the damage to Bob's crops, and must pay him $2000 in compensation for the damage. Bob could prevent the damage completely by building a fence that costs $1000 per year to maintain, but he has no incentive to do so. Fencing in Alice's range would be prohibitively expensive.
Suppose Bob is the first selectman of Dobbstown, and he keeps Alice's proposed ordinance from passing at the town meeting. How else could this problem be solved?
Suppose Bob is the first selectman of Dobbstown, and he keeps Alice's proposed ordinance from passing at the town meeting. How else could this problem be solved?
answer
- Pareto improvement; Alice could pay Bob $1500/year to maintain a fence around his field. If Alice pays Bob $1500 to maintain the fence, Alice ends up $500 better off ($2000 less in compensation payments minus $1500 to Bob) and Bob also ends up $500 better off ($1500 from Alice minus the $1000 cost of the fence).
question
Normative statements are
answer
prescriptive, whereas positive statements are descriptive.
question
A price ceiling is
answer
a legal maximum on the price at which a good can be sold.
question
The imposition of a binding price floor on a market
answer
causes quantity demanded to be less than quantity supplied.
question
A binding price ceiling
answer
- causes a shortage.
- is set at a price below the equilibrium price.
- is set at a price below the equilibrium price.
question
In a market economy,
answer
- firms decide whom to hire and what to make
- households decide which firms to work for and what to buy with their incomes.
- households decide which firms to work for and what to buy with their incomes.
question
In a free, competitive market, what is the rationing mechanism?
answer
price
question
Most likely explanation for the imposition of a price ceiling on the market for milk
answer
Buyers of milk, recognizing that the price ceiling is good for them, have pressured policymakers into imposing the price ceiling.
question
Suppose the government has imposed a price ceiling on laptop computers. What could transform the price ceiling from one that is not binding into one that is binding?
answer
The number of firms selling laptop computers decreases
question
When government imposes a price ceiling or a price floor on a market
answer
price no longer serves as a rationing device
question
If the government imposes (and enforces) a binding price ceiling on the market for apples, but doesn't provide a formal rationing mechanism:
answer
Resources will be wasted as buyers jockey (compete with one another) to obtain the good
question
Suppose a city facing a shortage of rental apartments eliminates rent controls, what is likely to occur?
answer
an increase in rents and an increase in the number of apartment units supplied
question
Tom quit his $65,000 a year corporate lawyer job to open up his own law practice. In Tom's first year in business, during which he didn't draw a paycheck, his total revenues were $150,000 and his explicit costs totaled $85,000. What is Tom's economic profit for his first year in business?
answer
Zero; The pecuniary income he gave up ($65,000) in order to work in his own practice is a good first approximation of the implicit cost of his labor, so we conclude that his economic profit is approximately zero.
question
Sebastian decides to open a tree farm. When deciding to open his own business, he turned down two separate job offers of $25,000 and $30,000 and withdrew $20,000 from his savings. Sebastian's savings account paid 3 percent interest. He also borrowed $20,000 from his brother, whom he pays 2 percent interest per year. He spent $15,000 to purchase supplies and earned $50,000 in revenue during his first year. Which of the following statements is correct?
answer
Sebastian paid $15,000 to purchase supplies and $400 in interest to his brother, so his explicit costs total $15,400.
question
Let L represent the number of workers hired by a firm, and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 5, Q = 125) and (L = 6, Q = 152). Then the marginal product of the 6th worker is
answer
27 units of output; The marginal product of labor is the increase in output divided by the increase in the labor input. Between these two points, output increases by 27 units while labor input increases by one 1 unit. So the MPL here is 27/1=27.
question
Which of the following costs of publishing a book is a fixed cost?
answer
composition, typesetting, and jacket design for the book; the design costs are incurred only once, up front, and they're the same whether 1 book or 1000 books are produced.
question
The Wacky Widget company has total fixed costs of $100,000 per year. The firm's average variable cost is $5 for 10,000 widgets. At that level of output, the firm's average total costs equal
answer
$15; TC=FC+VC=FC+QAVC. So, TC=100,000+(10,0005)=150,000. Since ATC=TC/Q=150,000/10,000=15.
question
economies of scope
answer
increasing the amount of a second good being produced by the firm, through a different production process; a firm can produce two products more cheaply together
question
Joint production
answer
two goods being produced as part of the same production process.
question
economies of scale
answer
producing the first good at a higher rate; decrease in cost per unit of output enables an increase in scale; reduction in costs accompanying higher cumulative volume of production
question
Learning by doing can be achieved by;
answer
The capabilities of flexible manufacturing systems, describe the potential to produce multiple products and change the sequence of operations, and routing flexibility; a firm's long-run average costs get lower when it produces higher quantities: It results from a firm's cumulative output experience.
question
True or False? In the long run, firms in a perfectly-competitive industry make zero economic profit.
answer
True. Perfect competition is defined, in part, as an industry structure where firms are free to enter and exit the industry. All of a firm's costs are variable.
question
Suppose a plague of locusts destroys a large portion of this year's wheat crop, causing 20% less wheat to be sold this year at a price that is 40% higher. From this we can conclude that:
answer
Overall, wheat farmers' revenues will be up this year, because demand was inelastic, If p and q are the original equilibrium price and quantity, revenue was pq before and will be (1.4p)(.8q)=1.12pq after. Revenues increased by 12%.
question
Tony is the owner of Tony's Taqueria. Tony is a profit-maximizing owner whose firm operates in a competitive market. Hiring one more worker costs Tony $200 and has a marginal product of 40 tacos. Assuming Tony has no other variable costs, and fixed costs of $120, what is the marginal cost of a taco?
answer
$5
question
Acme Widget Company is producing 100 widgets per month and selling them for $10 each. Acme's CEO observes that it could produce 1 more widget for only $7 more, without affecting the price, and suggests that it increase its output. The CFO objects, because the average total cost of producing 101 widgets is $12, which is more than the selling price. Who is right?
answer
The CEO is correct, because producing one more widget will increase the firm's profit.
question
Monopolies use their market power to:
answer
charge a price that is higher than marginal cost
question
The marginal revenue curve of a monopolist lies below the demand curve because:
answer
the monopolist must lower price on all units sold in order to sell additional units.
question
If price remains above the average total cost for firms in a competitive industry:
answer
new firms will enter that industry.
question
A perfectly competitive firm faces a horizontal demand curve, which implies that:
answer
the firm cannot affect price by any action it takes.
question
What is a condition for long-run equilibrium in a competitive industry?
answer
Each firm in the industry is earning zero economic profit.
question
The supply curve of a perfectly-competitive firm in the short-run is:
answer
the marginal cost curve above the minimum of average variable cost.
question
If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then
answer
a small increase in output will increase the firm's profit
question
The CEO of Acme Widgets is considering shutting down this month to avoid large losses, but the CFO points out that as a large employer Acme is required to give its workers 60 days notice of a plant closing or layoff. If they close the plant, Acme will still have to pay its workers this month. The CEO should:
answer
Close the plant anyway, if there's no way to earn at least enough revenue to cover variable costs.
question
According to the mainstream approach to economics (as explicated in, e.g., Milton Friedman's essay "The Methodology of Positive Economics"), a good model is:
answer
falsifiable
question
True or False? Specializing and trading according to comparative advantage can allow two people (or countries) to both consume outside (further from the origin) their respective production possibilities frontiers?
answer
False
question
If the demand for peanut butter decreases as consumer incomes fall, then peanut butter is what type of good?
answer
normal
question
When the price of plane flights decreases, Bob rents more nights in hotel rooms. For Bob, plane flights and hotel rooms are:
answer
complements
question
News of an imminent war between Russia and Canada (the world's third- and fourth-largest oil producers, respectively) would:
answer
decrease the supply of oil today
question
True or False? Because of diminishing marginal returns, the long-run market supply curve always slopes upward.
answer
False
question
True or False? If new firms enter an industry, the short-run supply curve shifts out and to the right.
answer
True
question
Which of the following events must cause equilibrium price to fall?
answer
demand decreases and supply increases
question
The term derived demand refers to:
answer
the way producers' demand for inputs is a consequence of consumers' demand for finished products.
question
In a free market for strawberries, which of the following would be a likely response to a shortage?
answer
Labor, land, and capital would be drawn into strawberry production from other sectors.
question
True or False? Producer surplus is equal to profits.
answer
False
question
Economists typically assume that the goal of the firm is to maximize total:
answer
profit
question
True or False? When the long-run average cost curve for a firm is horizontal, the firm is experiencing constant returns to scale.
answer
True
question
agglomeration economies
answer
a reduction in costs when firms in one industry locate close to one another
question
True or False? In the long run, the market supply curve always slopes up.
answer
False
question
If demand increases in a perfectly-competitive market, then in the short run:
answer
profits will increase
question
Free entry means that:
answer
there are no legal barriers to entering the industry.
question
If the income elasticity of demand for widgets is negative, then widgets are:
answer
an inferior good.
question
In the Cournot model of oligopoly, why is more output produced when there are two firms than when there is one?
answer
Synergy between the firms lowers costs for both.
question
In the period before World War II, Alcoa was likely a natural monopoly because
answer
the domestic market for aluminum was not yet large enough for two companies to produce at the minimum efficient scale.
question
According to the paper by Martin Perry referenced in the text, what problem did forward integration into fabrication solve for Alcoa?
answer
With forward integration, Alcoa was able to avoid increasing the supply of secondary aluminum.
question
A firm that disrupts a highly-concentrated industry, putting pressure on its rivals to lower prices and innovate (and thereby benefitting consumers), is known as a:
answer
Maverick
question
Which of the follow commodities have had their supply artificially restricted and/or their price artificially raised by the US government?
answer
coffee
tobacco
cheese
sugar
tobacco
cheese
sugar
question
According to Yale Brozen, which of the following was NOT true of monopolies in the 17th and 18th centuries
answer
Monopolists were held to higher quality standards by the crown.
question
The popular understanding of government regulation is that it keeps companies from raising prices too high. Yet, as Brozen relates, the US government's _________ often refused requests by regulated companies to lower their rates.
answer
Interstate Commerce Commission
question
If a regulator allows different prices to be set for different services even when there is no difference in the cost of providing the service, this enables which monopolistic practice?
answer
Price discrimination
question
In the 1950s, New England textile manufacturers supported __________ because it reduced competition from other firms in their industry.
answer
a minimum wage increase
question
Strategies used by the Schweizer Käseunion (Swiss Cheese Union) during the cartelization that lasted for most of the 20th century?
answer
subsidies, marketing fondue as a delicious traditional Swiss dish, restrictions on production
question
The Carter era policy that led to the accumulation of caves full of cheese in the Kansas City area was price supports for dairy farmers equivalent to a ____ price ____.
answer
binding, floor
question
Suppose two firms in a duopolistic industry are attempting to collude by restricting production and maintaining high prices. Which of the following government regulations will make it harder for them to successfully collude?
answer
A requirement to publish all their prices in advance.
question
True or False? The Cournot oligopoly model predicts that total output of an industry will be higher with two oligopolists than under a monopoly.
answer
True
question
Which of the following is NOT a likely explanation for Alcoa's dominance in the early twentieth century?
answer
Government subsidies
question
Which of the following is a key input into the production of aluminum?
answer
electricity
question
H | T
H 1 0 | 0 1
---------|-------
T 1 0 | 1 0
1. Are there any Nash equilibria for this game?
2. Suppose player 2 proposes changing the game above so that player 1 moves first, and then player 2 moves after observing player 1's move. Should player 1 accept this proposal?
H 1 0 | 0 1
---------|-------
T 1 0 | 1 0
1. Are there any Nash equilibria for this game?
2. Suppose player 2 proposes changing the game above so that player 1 moves first, and then player 2 moves after observing player 1's move. Should player 1 accept this proposal?
answer
1. A Nash equilibrium exists only in mixed strategies.
2. No, player 1 would do worse if forced to move first.
2. No, player 1 would do worse if forced to move first.
question
In the game depicted above, are there any dominant strategies for player 2?
answer
...
question
In the game depicted above, which of the following are Nash equilibria?
answer
(T,L) is Nash.
question
In the game depicted above, which of the following are Nash equilibria?
answer
None of these are Nash equilibria.
question
Player 1 and Player 2 are ending a partnership whose assets are worth $100,000. As the senior partner, Player 1 gets to make an offer, which Player 2 can Accept or Reject. If Player 2 rejects, the case goes to court, where each partner will spend $20,000 in legal fees, with the outcomes depicted in the game below:
Assuming all each player cares about is the money they receive, what is the subgame-perfect Nash equilibrium of this game?
Assuming all each player cares about is the money they receive, what is the subgame-perfect Nash equilibrium of this game?
answer
(Offer 70-30; Accept, Accept)
question
True or False? In the game depicted above, (Offer 70-30; Accept, Reject) is a Nash equilibrium.
answer
False
question
In the question above, if Acme Circuits is reluctant to invest in a new plant because they are afraid that Apple will exploit the situation, what is one possible solution?
answer
Apple can backward integrate into chip manufacture.
question
Suppose Acme Circuits builds a new chip fabrication plant that is specifically designed to manufacture chips for Apple's iPhone; retooling the plant to produce chips for a different purpose will incur additional expense. If, after this, Apple pressures Acme to lower its prices, this situation illustrates which concept from this module?
answer
hold-up
question
According to Brozen, for which of the following industries were tariffs a significant source of reduced competition in the US during the mid-twentieth century?
answer
Sugar
question
In the US DOJ's recent suit against Penguin and Simon & Schuster, their primary complaint is the potential for which of the following?
answer
monopsony power
question
The US accumulated a cave full of cheese in Kansas City as a direct result of:
answer
price supports
question
A ship's crew authorized by a government to capture vessels of a certain nationality was known as a:
answer
Privateer
question
True or False? Pirate crews were racially diverse, with 25-30% of members being of African descent?
answer
True
question
In a modern corporation, who is the residual claimant?
answer
shareholders
question
According to efficiency-wage theory, one reason that workers may be paid more than the market-clearing wage is:
answer
to solve the principal-agent problem.
question
What, according to Hayek, is the economic problem society faces?
answer
"the utilization of knowledge not given to anyone in its totality"
"what is the best way of utilizing knowledge initially dispersed among all the people"
"what is the best way of utilizing knowledge initially dispersed among all the people"
question
comparative advantage
answer
term refers to the principle that people can mutually-benefit through trade whenever their cost of producing two goods differs
question
True or False? The Consumer Price Index typically understates price inflation in the United States?
answer
False
question
Which of the following changes does not shift the demand curve for peanut butter?
answer
an increase in the price of peanut butter
question
When the price of a subway ride increases, Alice buys more taxi rides. For Alice, subway rides and taxi rides are:
answer
substitutes
question
Which of the following changes would increase the supply of beef?
answer
a sustained decline in corn prices
question
In the perfect competition model, the horizontal summation of each firm's marginal cost curve for producing the product is:
answer
the market supply curve.
question
If an increase in minimum wages forces restaurant owners to pay workers more, we would expect:
answer
restaurant prices to rise & fewer meals to be served
question
If the demand for mobile phones increases at the same time that supply-chain disruptions make mobile phone components more expensive:
answer
There is not enough information to answer this question.
question
If the minimum wage is increased, which of the following are possible consequences instead of, or in addition to, lower employment of low-skilled workers?
answer
- In the long run, capital may be substituted for labor.
- Employers may reduce health insurance or other benefits provided to workers.
- Commute times may increase for workers.
- Employers may reduce health insurance or other benefits provided to workers.
- Commute times may increase for workers.
question
Which of the following results is consistent with the imposition of a binding price ceiling?
answer
Sellers have short-side power that allows them to discriminate costlessly.
question
True or False? Consumer surplus is the difference between a consumer's valuation of a good and the price they pay to obtain it.
answer
True
question
In the short run, the size of a widget factory is fixed. As more workers are hired, output increases, but each additional worker adds less to output. The term that describes this situation is:
answer
diminishing marginal returns to labor
question
Average total cost equals
answer
(fixed costs + variable costs) divided by quantity produced.
question
Marginal Cost
answer
The amount by which total cost rises when the firm produces one additional unit of output
question
sunk costs
answer
Costs that are ignored because they are irrelevant to a business's production decision
question
When a firm is experiencing diseconomies of scale:
answer
long-run average total cost is increasing.
question
Which of the following statements are true about perfect competition?
answer
In the long run, firms will produce the quantity where average total cost is minimized.
question
If demand increases in a perfectly-competitive market, then in the short run:
answer
profits will increase
question
When existing firms in a perfectly-competitive market are earning profit of $0, we can expect:
answer
prices to fall or remain the same.
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