question
Derived demand for labor means that when a firm hires labor, it has to derive its demand
answer
from the demand for the product that the labor produces.
question
For a firm in perfect competition, the value of the marginal product is
answer
the price of the product multiplied by the additional output resulting from an additional unit employed.
question
A firm that is perfectly competitive will hire labor as long as which of the following is true?
answer
VMP > W.
question
The VMP curve slopes downward at some point because
answer
congestion in the work place lowers marginal product.
question
Marginal revenue product is the name applied to value of the marginal product when a firm is in a perfectly competitive market.
answer
false
question
A firm produces 8 TVs with 1 unit of labor, 15 TVs with 2 units of labor, and 21 TVs with 3 units of labor. Its marginal revenue on each TV is $300. This would indicate that the firm
answer
is a price taker (perfectly competitive firm).
question
A firm produces 8 TVs with 1 unit of labor, 15 TVs with 2 units of labor, and 21 TVs with 3 units of labor. Its marginal revenue on each TV is $300. The value of the marginal product of the third unit of labor is
answer
$1800.
question
Examine the graph below. If the wage rate is $15 per hour, the firm will hire
answer
3 units of labor.
question
Suppose a firm employs both labor and capital. If the ratio of marginal product to price of labor is 50/$10 and the ratio of marginal product of capital to price of capital is 60/$12, the firm should
answer
maintain the current combination capital and labor.
question
If the marginal product of labor divided by the price of labor is greater than the marginal product of capital divided by the price of capital, a firm could minimize costs by
answer
buying more labor and less capital.
question
If a firm uses both labor and capital in producing TVs, which of the following events will likely increase the firm's demand for labor?
answer
an increase in the marginal product of labor.
question
In the long run, a firm cannot minimize costs between two inputs because only one of the inputs is variable.
answer
false
question
On a labor market graph, a firm's demand for labor is
answer
the marginal revenue product curve.
question
Which of the following does not cause the labor demand curve to shift?
answer
Changes in the wage rate
question
A high elasticity of demand for labor means that
answer
A small change in the wage rate causes a larger percentage change in the quantity of labor demanded.
question
Why may a household's labor supply curve bend backwards at some wage rate?
answer
The household substitutes leisure for labor.
question
In the labor market, the substitution effect predicts that, as wage rates increase, households will
answer
substitute labor for leisure.
question
The substitution effect is usually stronger than the income effect, thus creating an upward sloping labor supply curve.
answer
true
question
The labor demand curve slopes downward because it is the firm's marginal revenue product curve and the firm experiences diminishing marginal product.
answer
true
question
The marginal factor cost for a monopsonist is
answer
greater than the wage rate because the monopsonist has to raise the wage rate for all employees if it wants to hire another employee.
question
If a firm is a monopsony, then it
answer
will have to pay a higher wage to hire additional employees.
question
Which of the following employment situations would most closely approximate a monopsony?
answer
a large factory in a small town.
question
If a monopsonist hires labor, it will choose to hire that quantity at which ___________ and pay a wage rate that is _______________.
answer
MRP = MFC; less than MRP
question
The supply curve for labor that a monopsonist faces is the supply curve for the industry.
answer
true
question
Which of the following would not be considered capital in a business?
answer
The employees
question
The increase in the value of a firm's capital as it increases in age and use is depreciation.
answer
false
question
Present value is
answer
the current value of a future income stream using the market rate of interest to discount it.
question
The significance of the internal rate of return is that it tells the firm whether it should invest in a capital project by comparing the IRR to the market rate of interest.
answer
true
question
A firm's demand for capital is a function of
answer
the market rate of interest.
question
Which of the following kinds of monopoly represent a market failure?
answer
All the above are market failures.
question
Market failures are caused by all of the following except
answer
inferior products
question
A market failure exists
answer
if an economic outcome fails to maximize economic value.
question
Which of the following could not cause market failure?
answer
An uneducated person who does not value an education.
question
Which of the following economic systems could prevent market failure?
answer
none of the above.
question
A market failure is any economic outcome in which
answer
the market does not provide the optimal outcome for a particular good.
question
If an economic outcome results in a social cost,
answer
negative externalites are probably involved in the production of the good.
question
In some coastal areas of the country, oceans are being over-fished resulting in rapid depletion of the fish population and a scarcity of certain varieties of fish. The reason for over-fishing is that
answer
the fishing areas are unowned and unregulated.
question
If the consumption of a good by one person reduces the amount of the good that can be consumed by others, economists say that the good is
answer
a rival good.
question
A good is non-exclusive if
answer
it is not possible to prevent people from obtaining the benefits of the good once it has been provided.
question
To obtain a market demand curve for a public good, one has to horizontally sum the demand of individual consumers.
answer
false
question
A free rider is a a consumer who consumes
answer
a public good and may be unwilling to pay anything for it.
question
The main feature of a progressive tax system is that the higher one's income, the _______________ one pays.
answer
higher the tax rate one pays.
question
A taxpayer pays _____________tax rate on additional income if the tax system is progressive, ___________ tax rate on additional income if the tax system is proportional, and ______________ tax rate on additional income if the tax structure is regressive.
answer
a higher; the same; a lower
question
Suppose a person has income of $100,000. If this person has a marginal tax rate of 20% on income over $20,000 and a zero tax rate on the first $20,000 of income, what is the person's average tax rate?
answer
16%
question
A sales tax on all retail sales is a progressive tax system because higher income taxpayers spend more money.
answer
false
question
Public choice theory is concerned with
answer
government policy decisions.
question
In a majority voting system, a public project
answer
may be approved even if the total benefits are less than the total costs.
question
The impossibility theorem states that we can always achieve consistent results in societal preference ordering if we properly aggregate individual preferences.
answer
false
question
Public choice theory assumes that those involved in the public sector are generally motivated by
answer
the same factors that motivate them in the private sector.
question
Three voters will use a simple majority vote to determine whether a public service will be funded. Each persons share of the tax is $25. Person 1 receives $30 worth of benefits, person 2 receives $26 worth of benefits, and person 3 receives $5 worth of benefits. Therefore ______ person (s)will vote in favor, _____ person(s) will vote against, and the outcome will be ____________.
answer
two; one; inefficient
question
You are considering buying a raffle ticket. If you win, you will receive $500. If you lose, you will receive nothing. There is a 1% chance that you will win. If raffle tickets cost $5, which individuals would buy the tickets?
answer
risk neutral individuals and risk lovers
question
A risk averse person would not be expected to
answer
buy a lottery ticket.
question
Which of the following examples describe both risk-averse and risk-loving behavior?
answer
insuring your car and betting on horses
question
You are considering buying a raffle ticket. If you win, you will receive $500. If you lose, you will receive nothing. There is a 1% chance that you will win. If you are risk neutral, which of the following prices would you be willing to pay?
answer
$5
question
If you are willing to pay more than the expected value of an opportunity, you are considered
answer
a risk lover.
question
You are considering buying a raffle ticket. If you win, you will receive $500. If you lose, you will receive nothing. There is a 1% chance that you will win. If you are risk inclined, how much would you be willing to pay for a ticket?
answer
$6
question
Good information is of value to
answer
sellers and buyers.
question
Producers would be willing to pay for perfect information.
answer
true
question
If perfect information were a reality,
answer
transactions would be risk free.
question
Asymmetric information refers to a situation in which both parties in a transaction have equal information and can calculate the expected value of the outcome of the transaction.
answer
false
question
Because of asymmetric information,
answer
buyers offer low prices to guard against the potential risks.
question
Assymetric information exists in any transaction when
answer
each party to a trade differ in the amount of knowledge they have of the good being traded.
question
It appears that cigarette companies may have had an advantage in information over consumers until recent years. If consumers had had the same information
answer
both a and b.
question
"Lemon laws" are a possible solution to
answer
adverse selection.
question
Which of the following would not be an example of a problem associated with moral hazard?
answer
All of the above are examples of moral hazard.
question
The auto insurance industry relies on people to
answer
be risk averse.
question
Methods used by life insurance companies to avoid the problem of moral hazard include all but
answer
premium discounts for certain age groups.
question
In the automobile insurance industry, deductibles are meant to increase the moral hazard associated with a claim.
answer
false
question
One of the main potential problems caused by moral hazards in insurance markets is that
answer
insurance markets may break down.
question
What type of economy would we expect to have the highest incidence of moral hazard?
answer
A planned economy
question
An externality refers to
answer
the actions of one person affecting another person.
question
An example of a positive externality (external benefit) is
answer
vaccinating your dog for rabies.
question
When externalities are present, the market will not maximize economic value.
answer
true
question
Which of the following is least likely to generate an external cost?
answer
Reading a book.
question
An unintended effect of a action that adversely affects others is called a
answer
a negative externality (external cost).
question
Negative externalities (external costs)that arise from the production of a good
answer
impose unfair costs on parties outside the production.
question
The effects of an action that increases the well-being of third parties is called a
answer
positive externality (external benefit).
question
All of the following could be reasons that pollution exists except
answer
all of the above could be reasons that pollution exists.
question
In a market experiencing a negative externality, quantity should __________ and price should __________.
answer
fall, rise.
question
Negative externalities lead to
answer
inefficiency.
question
The true social cost of any transaction is the private cost and the external cost, minus the true social benefits.
answer
false
question
If the production of a good results in negative externalities, then
answer
production will be greater than the socially optimal output.
question
If the producer of a negative externality considers the cost to third parties when the producer makes cost-benefit analyses involving the production, the externality is said to be
answer
internalized.
question
Which of the following statements is not true?
answer
Internalizing an externality is not the same as inducing the producer of an externality to consider both private and social costs in production decisions.
question
All the following are possible methods of correcting a negative externality except
answer
taxing the recipients of the externality and using the revenue to correct the problem.
question
The "principle of second best" is the idea that the best way to internalize a negative externality is to force the producer to correct the effects of the externality after it has occurred.
answer
false
question
A positive externality can be
answer
all of the above
question
An external benefit created by a transaction is any benefit that accrues to a party outside that transaction.
answer
true
question
Which of the following would create an external benefit?
answer
planting a flower garden
question
Government subsidies of day care can be explained by government's attempt to internalize a _________________ associated with ______________________.
answer
benefit, well-adjusted children.
question
When positive externalities are in a market, the market
answer
fails, because it underproduces the good that creates the positive externality.
question
A method that could be used to internalize an external benefit would be to subsidize the producer of the benefit.
answer
true
question
School lunch programs in which the government pays part of the cost of some students' lunches is an example of how the government attempts to
answer
internalize a benefit.
question
The internalization of a negative externality from a particular production process will cause
answer
the market demand curve to stay the same.
question
The main problem about negative externalities is that
answer
they understate the cost of production.
question
Years after the invention of Tang, the space program began using the drink in its heavily advertised space flights. This is an example of a
answer
positive externality
question
Internalizing a negative externality refers to
answer
the producer bearing the cost of correcting a problem.
question
Which of the following would be considered a solution to automobile air pollution by applying the principle of the second best?
answer
The government sells tradable pollution permits.
question
A method of correcting air pollution that most closely corrects the original problem is
answer
to tax each firm a per-unit tax for the right to pollute.
question
If property rights for the right to pollute the air were established, there would probably be
answer
less air pollution.
question
When a per-unit tax is imposed on a polluter, the marginal social cost curve shifts to the right.
answer
false
question
The Coase Theorem suggests that
answer
people working in their own best interest can privately negotiate to solve an externality.
question
If your neighbor's barking dog annoys you, a possible Coase solution would be to
answer
offer to train the dog not to bark.
question
Assume your neighbor throws trash in his yard. He gets $50 worth of benefit from littering, which imposes a $90 cost to you. According to Coase, you should
answer
offer him between $51 and $90 if he will keep his yard clean.
question
Usually the cost of preventing an external cost is less than the cost of correcting it after it has occurred.
answer
true
question
The Coase theorem is important because
answer
it indicates that market externalities can be corrected without resorting to government solutions.
question
The Coase theorem suggests that finding an efficient solution to a negative externality
answer
is not dependent upon the ownership of property rights to the resource.
question
Coase believes all of the following except
answer
government intervention never effectively deals with externalities.
question
If third parties are involved in an externality,
answer
it may be less expensive to have the government determine a solution.
question
The Coase theorem suggests that government policy is the most effective way of solving externality problems.
answer
false
question
If third parties bear part of the cost of an externality, the Coase theorem corollary says that
answer
the government may have to impose a solution.
question
If an externality affects only a few people,
answer
then it is likely that a private solution could occur.
question
If transaction costs in finding a solution are high, a government-imposed solution to an externality may be the most efficient solution.
answer
true
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