# Econ Exam 2

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The concept of price elasticity of demand measures the
sensitivity of consumer purchases to price changes.
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The concept of price elasticity of supply measures the
sensitivity of the firms production (or sales) to price changes.
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The price elasticity of demand for widgets is 0.80. Assuming no change in the demand curve for widgets, a 16% increase in sales implies a
20% reduction in price.
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When the price of candy bars increased from \$0.545 to \$0.55, the quantity demanded changed from 21,000 per day to 19,000 per day. In this price range, the price-elasticity coefficient (based on the midpoint formula) for candy bars is
0.5.
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Along a linear downward-sloping demand curve, the price elasticity of demand will be
different across each price range.
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In which instances will total revenues decline?
price rises and Ed equals -2.47
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Which of the following factors will make the demand for a product relatively elastic?
The time interval considered is long.
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The price elasticity of demand increases with the length of the period considered because
consumers will be better able to find substitutes.
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We would expect the cross elasticity of demand between Pepsi and Coke to be
positive, indicating substitute goods.
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The cross elasticity of demand between Quaker State motor oil and Texaco motor oil is likely to be
a positive number.
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The supply of product X is elastic if the price of X rises by
5% and quantity supplied rises by 7%.
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It takes a considerable amount of time to increase the production of pork. This implies that
the short-run supply curve for pork is less elastic than the long-run supply curve for pork.
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In a situation where an externality occurs, the "third party" refers to those who
are not directly involved in the transaction or activity.
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External benefits in consumption refer to benefits accruing to those
other than the ones who consumed the product.
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Use the following information to answer the question below. It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. In the situation described above, we would expect an
overproduction of paper in the mills.
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In a free-market economy, a product that entails a positive externality (additional social benefit) will be
underproduced.
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Which of the following is an example of a positive externality (additional social benefit)?
an increase in the value of land you own when a nearby development is completed
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If some activity creates external benefits as well as private benefits, then economic theory suggests that the activity ought to be
subsidized.
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If the consumption of a product or service involves external benefits, then the government can improve efficiency in the market by
providing a subsidy to correct for an underallocation of resources.
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If a good that generates negative externalities were priced to take these negative externalities into account, its
price would increase and its output would decrease
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Use the following information to answer the question below. It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. Based on the preceding information, which of the following policies would be most appropriate for dealing with this problem?
Levy a tax on the producers of paper products and use the tax revenues to clean up the river.
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Among the following examples, the one that best illustrates a public good is a(n)
bike path around a city or town.
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Assume there is no way to prevent someone from using an interstate highway, regardless of whether or not he or she helps pay for it. This characteristic is called
nonexcludability.
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The two main characteristics of a public good are
nonrivalry and nonexcludability.
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Unlike a private good, a public good
has benefits available to all, including nonpayers.
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A public good
is available to all and cannot be denied to anyone.
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The satisfaction or happiness one gets from consuming a good or service is called
utility.
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The utility from a specific product is
a measure of one's preference or taste for it.
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The utility of a good or service -is synonymous with usefulness. -is the satisfaction or happiness one receives from consuming it. -is easy to quantify. -rarely varies from person to person.
is the satisfaction or happiness one receives from consuming it.
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Marginal utility is equal to -total utility multiplied by quantity consumed. -total utility divided by quantity consumed. -change in total utility multiplied by change in quantity consumed. -change in total utility divided by change in quantity consumed.
change in total utility divided by change in quantity consumed.
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Children who dislike Brussels sprouts exemplify the notion that the marginal utility of Brussels sprouts is -zero. -negative. -positive, but decreasing. -less than the total utility.
negative
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After eating four slices of pizza, you are offered a fifth slice for free. You turn down the fifth slice. Your refusal indicates that the -marginal utility for four pizza slices is negative. -total utility for five pizza slices is negative. -marginal utility is positive for the fourth slice and negative for the fifth slice. -marginal utility for the fourth slice is the largest among all slices.
marginal utility is positive for the fourth slice and negative for the fifth slice.
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When diminishing marginal utility starts happening as a person consumes more and more of a given good -total utility will decrease at a diminishing rate. -total utility will increase at a diminishing rate. -marginal utility will increase at a diminishing rate. -total utility will become negative.
total utility will increase at a diminishing rate.
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Which situation is consistent with the law of diminishing marginal utility? -The more pizza Joe eats, the more he enjoys an additional slice. -The more pizza Joe eats, the less he enjoys an additional slice. -Joe's marginal utility from eating pizza becomes positive after eating three slices. -Joe's marginal utility from eating pizza reaches a maximum when total utility is zero.
The more pizza Joe eats, the less he enjoys an additional slice.
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Which of the following is an assumption of the decision-making process followed by consumers to maximize utility? -The consumer's income increases as prices of goods increase. -The consumer considers the prices of the products. -The consumer oftentimes is not sure about her preferences. -Marginal utility always increases as more units of a good are consumed.
The consumer considers the prices of the products.
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If the price of product X increases, then the resulting decline in the amount purchased will -necessarily increase the consumer's total utility from his total purchases. -increase the marginal utility of the last unit consumed of this good. -increase the total utility from purchases of this good. -reduce the marginal utility of the last unit consumed of this good.
increase the marginal utility of the last unit consumed of this good.
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The decision-making process followed by consumers to maximize utility assumes that -consumers behave rationally, attempting to maximize their satisfaction. -consumers have unlimited incomes. -consumers do not know how much marginal utility they obtain from consuming additional units of various products. -consumers are unable to rank their preferences.
consumers behave rationally, attempting to maximize their satisfaction.
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Oscar makes purchases of an existing product (X) such that the marginal utility of the last unit he consumes is 10 utils and the price is \$5. He also tries a new product (Y) and the marginal utility of the last unit he consumes is 8 utils and the price is \$1. The equal marginal principle suggests that Oscar should -increase his consumption of product X and decrease his consumption of product Y. -increase his consumption of product X and increase his consumption of product Y. -increase his consumption of product Y and decrease his consumption of product X. -decrease his consumption of product Y and decrease his consumption of product X.
increase his consumption of product Y and decrease his consumption of product X.
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Assume that Alex would like to purchase a combination of product A and product B such that, after he is done spending his limited income, the MUa / Pa = 8 and MUb / Pb = 4. To maximize utility without spending more money, Alex should -purchase less of product A and more of product B. -purchase more of product A and less of product B. -purchase more of both product A and product B. -make no change in purchases of products A and B.
purchase more of product A and less of product B.
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Suppose that you could either prepare your own tax return in 15 hours or hire a tax specialist to prepare it for you in 2 hours. You value your time at \$11 an hour; the tax specialist will charge you \$55 an hour. The opportunity cost of preparing your own tax return is -\$40. -\$55. -\$110. -\$165.
\$165
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Cash expenditures a firm makes to pay for resources are called -implicit costs. -explicit costs. -normal profit. -opportunity costs.
explicit costs.
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Harvey quit his job at State University where he earned \$45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be \$5,000 a year. To start the business, he cashed in \$100,000 in bonds that earned 10% interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at \$75 each. Of the \$75, \$55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The implicit costs of Harvey's firm in the first year were -\$50,000. -\$60,000. -\$100,000. -\$150,000.
\$60,000.
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Which of the following constitutes an implicit cost to the Johnston Manufacturing Company? -payments of wages to its office workers -rent paid for the use of equipment owned by the Schultz Machinery Company -use of savings to pay operating expenses instead of generating interest income -economic profits resulting from current production
use of savings to pay operating expenses instead of generating interest income
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Which of the following is most likely to be an implicit cost for Company X? -forgone rent from the building owned and used by Company X -rental payments on IBM equipment -payments for raw materials purchased from Company Y -transportation costs paid to a nearby trucking firm
forgone rent from the building owned and used by Company X
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If economic profits in an industry are zero and implicit costs are greater than zero, then -resources will move out of the industry. -there will be no production in the short run. -accounting profits are greater than zero. -new firms will enter the industry.
accounting profits are greater than zero.
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Accounting profits equal total revenue minus -total explicit costs. -total implicit costs. -total economic costs. -economic profits.
total explicit costs.
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Marginal product of labor refers to the -last unit of output produced by labor at the end of each period. -increase in output resulting from employing one more unit of labor. -total output divided by the number of labor employed. -smallest unit of the output produced by labor.
increase in output resulting from employing one more unit of labor.
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Variable costs are -sunk costs. -costs that change every day. -costs that change with the level of production. -the change in total cost due to the production of an additional unit of output.
costs that change with the level of production.
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Fixed costs of production in the short run -cannot be reduced by producing less output. -are a function of the level of variable costs. -are low in proportion to variable costs in the short run. -increase as the firm produces more output.
cannot be reduced by producing less output.
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If you know that total fixed cost is \$200, total variable cost is \$600, and total product is 4 units, then average total cost must be -\$200. -\$250. -\$800. -\$3,200.
\$200.
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If you know that when a firm produces 10 units of output, total costs are \$1,030 and average fixed costs are \$10, then total variable costs are -\$104. -\$930. -\$1,040. -\$1,130.
\$930.
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Which statement is correct? -Marginal cost is the change in average cost when there is a change in output of one unit. -The marginal cost curve cuts the average variable cost curve at its lowest point. -The marginal cost curve cuts the average variable cost curve at an output greater than where the marginal cost curve cuts the average cost curve. -If average variable cost is increasing, then average total cost must be increasing too.
The marginal cost curve cuts the average variable cost curve at its lowest point.
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Round Things, Inc.'s production process exhibits economies of scale. Currently their long-run average cost is \$1/unit. If Round Things doubles its use of all inputs, its new long-run average total cost will be -\$1/unit. -less than \$1/unit. -greater than \$2/unit. -greater than \$1/unit but less than \$2/unit.