EC 2123 Microeconomics Final Study Guide

A firm that charges a very low price would be practicing predatory pricing if:

A. the price allowed only a small profit.
B. the price is below marginal cost and would only be profitable if it succeeded in driving a rival out of the market.
C. the price allowed profits that were positive but below those earned by other firms.
D. it only offered the low price to its rivals' customers.

The Justice Department and the Federal Trade Commission are likely to oppose mergers:

A. that seem likely to increase efficiency.
B. that create a larger firm with economies of scale in a market.
C. which will help one of the merging firms out of financial difficulties.
D. which threaten to reduce competition.

Economies of scale imply: (i) a continuously falling AC curve; (ii) a larger output is more efficient than a smaller input.

A. i and ii
B. i but not ii
C. ii but not i
D. neither i nor ii

Setting price equal to marginal cost in a natural monopoly will lead to:

A. excess profits for the firm.
B. losses for the firm.
C. zero profits for the firm.
D. One cannot tell without further information.

One of the clear effects of deregulation was:

A. lower prices of many services.
B. decreased entry of new firms into regulated industries.
C. higher income to unions working in regulated industries.
D. all of the above.

Which of the following holds true in a market when it functions properly?

A. MC = MU = P
B. P = MRS
C. P = MC but not P = MU
D. P = MU but not P = MC

If the marginal utility of product exceeds its MC, we would want, on efficiency grounds, to:

A. increase production.
B. decrease production.
C. leave production constant.
D. One cannot tell without knowing the price.

A firm is generating detrimental externalities when:

A. MSC is less than MPC.
B. MSC is the same as MPC.
C. MSC is greater than MPC.
D. MPC includes some incidental costs.

An appropriate government policy toward negative externalities is to:

A. subsidize the activity that creates the negative externality.
B. impose a tax or fine on the activity that creates the negative externality.
C. pay money to the party that creates the negative externality.
D. impose a tax on recipients of the negative externality.

Government often finds it difficult to cope with externalities because:

A. costs and benefits are difficult to assess in monetary terms.
B. taxes and subsidies are ineffective in equating MSC and MSB.
C. government has no authority to impose fines for air and water pollution.
D. marginal private cost curves cannot be shifted.

Public goods are:

A. valuable socially.
B. not depletable and often not excludable
C. subject to the "free rider" problem.
D. All of the above are correct.

Without government intervention, public goods would:

A. be much less expensive.
B. not be provided.
C. be produced in much larger quantity.
D. be priced within the income ability of all individuals to purchase them.

A process through which a firm seeks to obtain earnings without contributing to production, thus wasting valuable resources, is known as:

A. moral hazard.
B. rent seeking.
C. detrimental externality.
D. a defective telescopic faculty.

Moral hazard is best described as:

A. an action by an individual that endangers others.
B. an action that puts one's salvation at risk.
C. the presence of insurance changing the behavior of those insured.
D. vigilance by individuals to keep total insurance claims at a minimum to keep rates low.

A tax system under which an individual pays a higher fraction of his income in taxes at higher levels of income is formally described as:

A. digressive.
B. progressive.
C. proportional.
D. regressive.

The average tax rate is:

A. the ratio of taxes to additional dollar of income.
B. the ratio of taxes to income.
C. the ratio of taxes to GDP.
D. the ratio of income to direct taxes.

Social Security payroll taxes are examples of:

A. progressive taxation.
B. regressive taxation.
C. proportional taxation.
D. marginal taxes.

An efficient tax is one that raises the desired tax revenue but creates the least possible:

A. total burden.
B. excess burden.
C. tax incidence.
D. tax shifting.

When a tax is imposed on an item, it can generally be said that the incidence of the tax is:

A. entirely on the buyer.
B. entirely on the seller.
C. on both the buyer and the seller.
D. not determined in this manner.

On necessities, more of the incidence of tax is:

A. borne by the producer.
B. borne by the consumer.
C. shared equally between the producer and the consumer.
D. None of the above is correct.

According to the graph in Figure 18-1, tax collections will be which of the following?
(1,000*1,000)

A. 14 million
B. 1.4 million
C. 12 million
D. 1 million

Income / Share of
Group / National Income
Lowest fifth / 6
Second fifth / 9
Third fifth / 17
Fourth fifth / 19
Highest fifth / 49

Consider the economy described by the income distribution in Table 21-1. From this table, we can conclude that the poorest 60 percent of the population earns:

A. 15 percent of the income.
B. 17 percent of the income.
C. 32 percent of the income.
D. 68 percent of the income.

Policies that redistribute income:

A. reduce the rewards of high-income earners.
B. raise the rewards of low-income earners.
C. reduce the incentive to earn high income.
D. All of the above are correct.

Tax loopholes serve to:

A. improve the incomes of the poor.
B. erode the progressivity of the income tax.
C. increase the progressivity of the income tax.
D. decrease work incentives for the poor.

The interest rate is determined by:

A. the supply and demand of financial capital (loanable funds).
B. the supply and demand of land.
C. the supply and demand of marginal land.
D. None of the above is correct.

Firms will borrow to finance capital expansion until the MRP of the investment equals the:

A. MRP of labor.
B. marginal cost of the finished good.
C. marginal physical product of capital.
D. interest payment charged for borrowing.

The market level of rent:

A. is entirely determined by the demand side.
B. is determined by its elastic supply.
C. is difficult to determine because of shifts on the supply side.
D. generally settles at levels below any rent controls favored politically.

Marginal land is land:

A. that is unprofitable under any circumstances.
B. that is the most productive in the area.
C. that is on the borderline of being used or not.
D. of average productivity.

The demand for labor is derived from the:

A. demand for leisure.
B. supply of labor.
C. demand for final-output goods.
D. supply of final-output goods.

The demand for labor is a derived demand. Employers hire workers until the:

A. wage rate equals the average product of labor.
B. wage rate equals the marginal revenue product of labor.
C. last worker hired adds nothing to total output.
D. average product of labor is zero.

A decision to supply labor or not to supply it is also a decision to:

A. earn the highest possible wage.
B. demand or forgo a certain amount of leisure.
C. be as productive as possible.
D. join the union.

The income effect of a wage increase is expected to increase:

A. supply of labor.
B. supply of goods and services.
C. demand for leisure.
D. demand for labor.

The price of leisure is the:

A. wage rate.
B. interest rate.
C. discount rate.
D. rate of return on investment.

The substitution effect of an increase in the wage rate would lead most people to:

A. supply less labor and demand less leisure.
B. supply less labor and demand more leisure.
C. supply more labor and demand less leisure.
D. supply more labor and demand more leisure.

If the interest rate "r" (expressed as a decimal number), the present value today of $1 to be received "n" years from today equals:

A. $1r^n
B. $1(1 + r)^n
C. $1/(1 + r)^n
D. $1/(1 + n)^r

One reason why nations trade is because:

A. trading provides opportunities to earn losses.
B. the rate of interest is not the same in all countries.
C. resources are not equally distributed to all nations.
D. some nations like to build one thing while others like to build another.

A country has a comparative advantage over another in the production of widgets if it can produce:

A. widgets using smaller quantities of resources than can the other country.
B. more widgets than can the other country.
C. widgets less efficiently than can the other country.
D. widgets at lower opportunity cost than can the other country.

ALTERNATE OUTPUTS FROM ONE DAY'S LABOR INPUT

United States
(One person's/day's labor)
12 bushels of wheat OR 3 yards of textiles

Great Britain
(One person's/day's labor)
3 bushels of wheat OR 12 yards of textiles

From Table 17-1, the United States:

A. has an absolute advantage over Great Britain in the production of textiles.
B. has an absolute advantage over Great Britain in the production of wheat.
C. has a comparative advantage in the production of textiles.
D. should export textiles to Great Britain.

If the United States imposed a 25 percent tariff on imports of minivans, the effect would be to:

A. raise the price and reduce the quantity of imports.
B. raise the price and quantity of imports.
C. lower the price and the quantity of imports.
D. raise the quantity and reduce the price of imports.