Exam 3 Microeconomics WVU Olsen

Goods that are rival in consumption but not excludable would be considered

If a road is congested, then use of that road by an additional person would lead to a

Which of the following goods is rival and excludable?
a. an uncongested toll road
b. an uncongested nontoll road
c. a congested nontoll road
d. a congested toll road

The Whitefish Bay Public Library has a large number of books that anyone with a library card may borrow.
Anyone can obtain a card for free. Because the number of copies of each book is limited, not everyone can
have the same book at the same time. What type of good would the library books be classified as in this
case?

A free-rider problem exists for any good that is not

It is commonly argued that national defense is a public good. Nevertheless, the weapons used by the U.S.
military are produced by private firms. We can conclude that

The privately-owned school system in Smalltown has a virtually unlimited capacity. It accepts all applicants
and operates on both tuition and private donations. Although every resident places value on having an
educated community, the school's revenues have suffered lately due to a large decline in private donations
from the elderly population. Since the benefit that each citizen receives from having an educated community
is a public good, which of the following would not be correct?
a. The free-rider problem causes the private market to undersupply education to the
community.
b. The government can potentially help the market reach a socially optimal level of
education.
c. A tax increase to pay for education could potentially make the community better off.
d. The private market is the best way to supply education.

Which of the following is not an advantage of road tolls as a way to reduce traffic?
a. They charge people based on consumption.
b. They can help bring usage closer to its optimal level.
c. Rates can differ according to the time of day.
d. The administrative costs of collecting the tolls are almost zero, especially for local roads.

Four roommates share an off-campus house and equally share the cost of rent. Everyone says that she values a
clean house, yet the house is usually dirty. To an economist, a clean house in this case represents
a. a common resource problem.
b. a public good.
c. a natural monopoly.
d. All of the above are correct.

From the time of Benjamin Franklin to the present, the percentage of the average American's income that
goes to pay taxes

A budget deficit

a. occurs when government receipts are less than spending.
b. occurs when government spending is less than receipts.
c. occurs when government receipts are equal to spending.
d. is the accumulation of years of government overspending.

Table 12-1

Deadweight losses occur in markets in which
a. firms decide to downsize.
b. the government imposes a tax.
c. profits fall because of low consumer demand.
d. equilibrium prices fall.

In the absence of taxes, Janet would prefer to purchase a large sport utility vehicle (SUV). The government
has recently decided to place a $10,000 nuisance tax on SUVs. If Janet decides to purchase a small economy
car as a result of the tax, which of the following statements is correct?

a. Other people who choose to purchase SUVs will incur the cost of the deadweight loss of
the tax.

b. There are no deadweight losses as long as some people still choose to purchase SUVs.

c. In order to determine the magnitude of the deadweight loss, we must add the revenues
from the tax to the loss in Janet's consumer surplus.

d. Janet is worse off, and her loss of welfare is part of the deadweight loss of the tax.

Scenario 12-1
Suppose Jim and Joan receive great satisfaction from their consumption of cheesecake. Joan would be willing
to purchase only one slice and would pay up to $6 for it. Jim would be willing to pay $9 for his first slice, $7
for his second slice, and $3 for his third slice. The current market price is $3 per slice.

15. Refer to Scenario 12-1. Assume that the government places a $4 tax on each slice of cheesecake and that the
new equilibrium price is $7. Which of the following statements is correct?

a. Jim will bear the full burden of the deadweight loss.
b. Joan will bear the full burden of the deadweight loss.
c. Both Joan and Jim will share the burden of the deadweight loss.
d. There will be no deadweight loss.

Suppose that the government taxes income in the following fashion: 30 percent of the first $20,000, 50
percent of the next $30,000, and 60 percent of all income over $50,000. George earns $40,000, and Elaine
earns $60,000. Which of the following statements is correct?

a. George's marginal tax rate is 60 percent, and his average tax rate is 50 percent.
b. George's marginal tax rate is 50 percent, and his average tax rate is 40 percent.
c. Elaine's marginal tax rate is 50 percent, and her average tax rate is 45 percent.
d. Elaine's marginal tax rate is 60 percent, and her average tax rate is 40 percent.

Suppose that the government taxes income in the following fashion: 20 percent of the first $50,000, 40
percent of the next $50,000, and 60 percent of all income over $100,000. John earns $200,000, and Theresa
earns $600,000. Which of the following statements is correct?

a. John's marginal tax rate is higher than Theresa's marginal tax rate.
b. John's average tax rate is higher than his marginal tax rate.
c. Theresa's average tax rate is higher than her marginal tax rate.
d. Theresa's average tax rate is higher than John's average tax rate.

The U.S. tax code gives preferential treatment to investors in municipal bonds. This is an example of
a. a tax loophole.
b. tax evasion.
c. an administrative burden.
d. tax enforcement.

Table 12-12

Profit is defined as total revenue
a. plus total cost.
b. times total cost.
c. minus total cost.
d. divided by total cost.

Lois is a self-employed pet sitter. She can make 20 "housecalls" per day. She is considering hiring her
sister Dora to work for her. Both she and Dora can visit 35 houses per day. What is Dora's marginal
product?
a. 55
b. 35
c. 22.5
d. 15

Table 13-5

Table 13-9

Table 13-11

Which of the following statements is correct?

a. If marginal cost is rising, then average total cost is rising.
b. If marginal cost is rising, then average variable cost is rising.
c. If average variable cost is rising, then marginal cost is minimized.
d. If average total cost is rising, then marginal cost is greater than average total cost.

The average fixed cost curve

a. always declines with increased levels of output.
b. always rises with increased levels of output.
c. declines as long as it is above marginal cost.
d. declines as long as it is below marginal cost.

13-7

The fundamental reason that marginal cost eventually rises as output increases is because of

a. economies of scale.
b. diseconomies of scale.
c. diminishing marginal product.
d. rising average fixed cost.

One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing
firm is that in the short run,

a. output is not variable.
b. the number of workers used to produce the firm's product is fixed.
c. the size of the factory is fixed.
d. there are no fixed costs.

Economies of scale occur when

a. long-run average total costs rise as output increases.
b. long-run average total costs fall as output increases.
c. average fixed costs are falling.
d. average fixed costs are constant.

If long-run average total cost decreases as the quantity of output increases, the firm is experiencing

a. economies of scale.
b. diseconomies of scale.
c. coordination problems arising from the large size of the firm.
d. fixed costs greatly exceeding variable costs.

When a firm experiences diseconomies of scale,

a. short-run average total cost is minimized.
b. long-run average total cost is minimized.
c. long-run average total cost increases as output increases.
d. long-run average total cost decreases as output increases.

Because the goods offered for sale in a competitive market are largely the same,

a. there will be few sellers in the market.
b. there will be few buyers in the market.
c. only a few buyers will have market power.
d. sellers will have little reason to charge less than the going market price.

Which of the following firms is the closest to being a perfectly competitive firm?

a. a hot dog vendor in New York
b. Microsoft Corporation
c. Ford Motor Company
d. the campus bookstore

14-2

14-5

When fixed costs are ignored because they are irrelevant to a business's production decision, they are called

a. explicit costs.
b. implicit costs.
c. sunk costs.
d. opportunity costs.

Tommy's Tires operates in a perfectly competitive market. If tires sell for $50 each and average total cost per tire is $40 at the profit-maximizing output level, then in the long run

a. more firms will enter the market.
b. some firms will exit from the market.
c. the equilibrium price per tire will rise.
d. average total costs will fall.

When market conditions in a competitive industry are such that firms cannot cover their total production
costs, then

a. the firms will suffer long-run economic losses.
b. the firms will suffer short-run economic losses that will be exactly offset by long-run
economic profits.
c. some firms will exit the market, causing prices to rise until the remaining firms can cover
their total production costs.
d. all firms will go out of business, since consumers will not pay prices that enable firms to
cover their total production costs.

14-9

The simplest way for a monopoly to arise is for a single firm to

a. decrease its price below its competitors' prices.
b. decrease production to increase demand for its product.
c. make pricing decisions jointly with other firms.
d. own a key resource.

Which of the following statements is true?

(i) When a competitive firm sells an additional unit of output, its revenue increases by
an amount less than the price.

(ii) When a monopoly firm sells an additional unit of output, its revenue increases by an
amount less than the price.

(iii) Average revenue is the same as price for both competitive and monopoly firms.

15-4

A monopoly chooses to supply the market with a quantity of a product that is determined by the intersection
of the

a. marginal cost and demand curves.
b. average total cost and demand curves.
c. marginal revenue and average total cost curves.
d. marginal revenue and marginal cost curves.

"Monopolists do not worry about efficient production and minimizing costs since they can just pass along any
increase in costs to their consumers." This statement is

a. false; price increases will mean fewer sales, which may lower profits.
b. true; this is the primary reason why economists believe that monopolies result in economic
inefficiency.
c. false; the monopolist is a price taker.
d. true; consumers in a monopoly market have no substitutes to turn to when the monopolist
raises prices.

15-10

15-5

If the government regulates the price that a natural monopolist can charge to be equal to the firm's marginal cost, the firm will

a. earn zero profits.
b. earn positive profits, causing other firms to enter the industry.
c. earn negative profits, causing the firm to exit the industry.
d. minimize costs in order to lower the price that it charges.

Perfect price discrimination

a. eliminates deadweight loss.
b. reduces profits to the monopolist.
c. decreases the total quantity sold by the monopolist.
d. requires arbitrage in order for the monopolist to maximize profits

15-6