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Detailed Explanation to Microeconomics

Study questions for a final.

1. Which of the following is true?
a. 0 When price increases in the elastic range of the demand curve, total revenues will increase.
b. 0 When price decreases in the elastic range of the demand curve, total revenues will decrease.
c. 0 When price increases and demand is unit elastic, total revenue will increase.
d. 0 When price decreases in the inelastic range of the demand curve, total revenue will decrease.
e. 0 None of the above.

2. The three central coordination problems any economic system must solve are:
a. 0 what to produce, why to produce, how to produce.
b. 0 what to produce, why to produce, for whom to produce.
c. 0 what to produce, how to produce, for whom to produce.
d. 0 what to produce, where to produce, how to produce.

3. Positive economics:
a. 0 deals with subjective value judgments about "what ought to be."
b. 0 will make the economy positively better off.
c. 0 is the exact opposite of negative economics.
d. 0 deals with how the economy does in fact work.

4. The law of demand states that:
a. 0 there is an inverse relationship between the price and quantity demanded.
b. 0 there is a direct relationship between the price and quantity demanded.
c. 0 as income rises, quantity demanded also rises.
d. 0 a decrease in price will increase demand.

5. If at some price the quantity supplied exceeds the quantity demanded, then:
a. 0 a surplus exists and the price will fall over time as sellers competitively bid down the price.
b. 0 a shortage exists and the price will rise over time as buyers competitively bid up the price.
c. 0 the price is below equilibrium.
d. 0 equilibrium will be reestablished as the demand curve shifts to the left.

6. If demand and supply both increase, this will cause:
a. 0 an increase in the equilibrium quantity, but an uncertain effect on the equilibrium price.
b. 0 an increase in the equilibrium price, but an uncertain effect on the equilibrium quantity.
c. 0 an increase in equilibrium price and quantity.
d. 0 a decrease in the equilibrium price and quantity.

7. A price ceiling:
a. 0 is a government-imposed limit on how low a price can be charged.
b. 0 creates a surplus.
c. 0 causes the quantity demanded to exceed the quantity supplied.
d. 0 increases demand and decreases supply.

8. The most likely example of an inferior good is:
a. 0 steak.
b. 0 powdered milk.
c. 0 jewelry.
d. 0 BMWs.

9. Regarding elasticities:
a. 0 the more substitutes, the more elastic the demand and the more elastic the supply.
b. 0 the shorter the time period considered, the more elastic the supply.
c. 0 with elastic demand, a rise in price increases total revenue.
d. 0 firms have a strong incentive to separate out people with more elastic demand and charge them a higher price.

10. Regarding utility:
a. 0 the total satisfaction one gets from one's consumption is called marginal utility.
b. 0 if you buy one Big Mac that gives you marginal utility of 400 and a second one that gives you marginal utility of 250, total utility of eating two Big Macs is 650.
c. 0 according to the law of diminishing marginal utility the more we consume of something, the smaller the total satisfaction received from that good.
d. 0 total utility received from the consumption of a good will be maximized when marginal utility is at a maximum.

11. Regarding accounting profit and economic profit:
a. 0 economic profit = total revenue - total cost.
b. 0 a calculation for economic profit is required when filling out an income tax return.
c. 0 accounting profit includes owners'opportunity costs while economic profit does not.
d. 0 economic profit = explicit and implicit revenue - explicit and implicit cost.

12. The long run:
a. 0 refers to a production planning period of longer than one year.
b. 0 typically refers to the period of time in which the firm has sufficient time to change the amounts of any of its inputs.
c. 0 means all inputs are variable.
d. 0 means all costs are fixed.

13. ___________________ is the increase (decrease) in total cost from increasing (or decreasing) the level of output by one unit.
a. 0 Average variable cost.
b. 0 Average fixed cost.
c. 0 Average cost.
d. 0 Marginal cost.

14. Economies of scale:
a. 0 mean per-unit costs increase as output increases in the long run.
b. 0 are caused by loss of team spirit as a firm expands in size.
c. 0 is the result of mismeasurement of opportunity costs.
d. 0 occur when per unit costs increase as one input is added to production.

15. The relationship between long-run and short-run average total costs is known as:
a. 0 the envelope relationship.
b. 0 economies of scale.
c. 0 diseconomies of scale.
d. 0 technical efficiency.

16. An increase in the demand for labor could be caused by:
a. 0 a decrease in the productivity of workers.
b. 0 a decrease in the price of the product.
c. 0 a decrease in the demand for the product produced by workers.
d. 0 an increase in the price of a substitute input like capital (machines).

17. Regarding the labor market:
a. 0 a monopsony employer will hire more workers and pay a higher wage than if it were hiring workers under perfectly competitive labor market conditions.
b. 0 an increase in the demand for a product will likely lead to a decrease in the demand for the workers employed in producing the product.
c. 0 the demand for an input is called derived demand because it arises from the demand for the output that the input is used to produce.
d. 0 downsizing has been a result of outsourcing and an increase in X-inefficiency.

18. A Lorenz curve:
a. 0 with a more unequal distribution of income bows out more from the diagonal line.
b. 0 which lies on a diagonal would indicate perfect income inequality.
c. 0 shows the percentage of the population living in poverty.
d. 0 for the U.S., when compared to other nations, indicates that the U.S. has more inequality than most developing nations but less inequality than many developed nations.

19. A means-tested social program targeted to the poor and providing financial, nutritional, medical, and housing assistance is known as:
a. 0 Social Security.
b. 0 Medicare
c. 0 a public assistance program.
d. 0 Supplemental Security Income (SSI).

20. A federal program that pays benefits, based on need, to the elderly, blind, and disabled is:
a. 0 Social Security.
b. 0 Medicare
c. 0 A public assistance program.
d. 0 Supplemental Security Income (SSI).

21. In a capitalist system
a. 0 goods are distributeed based on people's needs.
b. 0 the factors of production are owned by the state.
c. 0 political, social, and historical forces play no role in the coordination of economic activity.
d. 0 businesspeople decide how to produce efficiently, guided by their desire to make a profit.

22. Consumer sovereignty means:
a. 0 that business people have virtually total control over what gets produced.
b. 0 consumers have voting rights which can be exercised to control the regulatory environment
of business.
c. 0 consumers do not really care what businesses produce.
d. 0 consumers' wishes ultimately control what gets produced.

23. The major advantage of the corporations is:
a. 0 limited liability.
b. 0 relatively easy to form.
c. 0 direct control by owners, that is, the stockholders.
d. 0 monitoring problems.

24. For a perfectly competitive firm:
a. 0 the demand curve is perfectly inelastic at the market price and is one and the same with its marginal-revenue curve.
b. 0 economic profits can be earned in the long run but not in the short run.
c. 0 the profit-maximizing quantity to produce occurs at that output level in which price equals marginal cost.
d. 0 its total-revenue function is linear (a straight line), with a slope equal to the quantity demanded.

25. In order to maximize profits (or minimize losses) a firm should produce at the output level which:
a. 0 maximizes per-unit profit.
b. 0 maximizes total revenue.
c. 0 minimizes total cost.
d. 0 causes marginal revenue to equal marginal cost.

26. If economic profits are currently being earned by firms in a perfectly competitive market, in the long run we can expect:
a. 0 new firms to enter the business.
b. 0 the market supply curve to shift to the left.
c. 0 the market price to rise.
d. 0 a substantial economic profit to be earned by firms.

27. Zero profits mean that:
a. 0 the entrepreneur gets nothing for his or her efforts.
b. 0 if a firm has super-efficient machinery, zero profit can be avoided.
c. 0 if a firm has super-efficient workers, zero profit can be avoided.
d. 0 only at this point does market entry and exit stop.

28. A profit-maximizing monopolist will:
a. 0 produce an output level at which marginal revenue exceeds marginal cost.
b. 0 produce an output level at which the price exceeds marginal cost.
c. 0 always earn an economic profit in the short run.
d. 0 increase production for all output levels in which MR < MC.

29. Price discrimination:
a. 0 means that everyone should be charged the same price.
b. 0 means that different prices can be charged to different individuals or groups of individuals.
c. 0 is illegal.
d. 0 allows the monopolist to charge customers with less elastic demand a lower price.

30. Kellogg's, the breakfast-food people, comprises one of four corporations that control about 92 percent of its market for breakfast food. Kellogg's would be considered:
a. 0 a perfect competitor.
b. 0 a monopolist.
c. 0 an oligopolist.
d. 0 to be engaged in monopolistic competition.

31. Adam Smith, author of The Wealth of Nations, was a strong believer in:
a. 0 government intervention in the market.
b. 0 efforts to keep foreign goods out of one's country.
c. 0 the benefits that come from the propensity humans have to trade.
d. 0 efforts to keep competition from happening.

32. Regarding comparative advantage,
a. 0 it can change over time.
b. 0 it is less efficient than having the government make all the decisions in trade.
c. 0 it is supported by few economists.
d. 0 it does not lead to free trade.

33. A good example of a tax based on the ability to pay is the ___________ tax.
a. 0 sales
b. 0 income
c. 0 airport
d. 0 Social Security

34. "Rent seeking:"
a. 0 means the same thing to renters and landlords.
b. 0 diverts useful resources into activities to redistribute surplus.
c. 0 is of no concern to public choice economists.
d. 0 aids the public in dramatic ways.

35. A merger in which one company buys another that does not want to be taken over is called:
a. 0 an illegal takeover.
b. 0 a vertical merger.
c. 0 a hostile takeover.
d. 0 a conglomerate merger.

36. A price-support program:
a. 0 that is set above the long-term average price level will likely accumulate surpluses over time.
b. 0 is an example of government intervention in a market to set prices below equilibrium.
c. 0 creates shortages and lower prices for consumers.
d. 0 benefits taxpayers and consumers but hurts farmers.

37. Regarding real-world markets:
a. 0 the threat of a corporate takeover puts competitive pressures on a firm and may cause it to become more efficient.
b. 0 monopolies always charge the highest price market demand allows.
c. 0 most real-world production is undertaken by owner-operated businesses, not corporations.
d. 0 the net effect of restricting entry into markets is to decrease supplier's income.

38. In real-world markets:
a. 0 a firm's laziness is limited by the degree of competition.
b. 0 perfect competition is not as rare as pure monopoly.
c. 0 potential profits encourage new firms to try to figure out new ways to break down barriers to entry.
d. 0 legal monopolies from patents are of unlimited value because a competitor is unable to offer a similar version of the patented good.

39. In real-world markets:
a. 0 the degree to which real-world firms maximize profits depends upon the goals of the firm and the incentive structure embodied in the firm's organization.
b. 0 monitoring problems and costs are not that significant.
c. 0 there are few self-interested individuals who try to change institutions for their own benefit.
d. 0 competition is on the basis of price only.

40. X-inefficient firms:
b. 0 try to maximize profits.
b. 0 operate far less efficiently than they could technically.
c. 0 operate in perfectly competitive markets.
d. 0 are more profitable than monopolies.

41. One way in which firms try to protect their monopoly power is to:
a. 0 avoid lobbying government.
b. 0 raise their taxes.
c. 0 maximize short-run profits.
d. 0 differentiate their product in either real or imaginary terms.

42. Regulated natural monopolies:
a. 0 have a great incentive to hold down costs.
b. 0 seldom have large bureaucracies managing the business.
c. 0 cannot raise prices without the consent of regulatory authorities.
d. 0 are favored by most economists because of their efficiency.

43. The most important failure of market outcomes is:
a. 0 failures due to distributional issues.
b. 0 failures due to psychological problems of individuals.
c. 0 failures due to inalienable rights.
d. 0 none of the above are more important than the other.

44. An example of a sin tax is a tax on:
a. 0 incomes.
b. 0 real estate.
c. 0 alcohol.
d. 0 capital gains.

45. If the goal of government is to raise revenue, it is most effective when:
a. 0 demand is elastic.
b. 0 supply is elastic.
c. 0 supply is inelastic.
d. 0 demand is unit elastic.

46. If the goal of government is to change behavior, it is most effective when:
a. 0 demand is elastic.
b. 0 supply is inelastic.
c. 0 demand is inelastic.
d. 0 demand is unit elastic.

47. Regarding international trade:
a. 0 the benefits and costs of free trade tend to be widely scattered among many people.
b. 0 a nation imposing trade barriers can benefit if another nation also imposes trade barriers.
c. 0 embargoes are usually established for economic reasons rather than for political reasons.
d. 0 a nation should engage in international trade when the nation can give up fewer goods for the imported item than is implied by the item's domestic opportunity cost of production.

48. Regarding trade barriers:
a. 0 a voluntary restraint agreement will reduce the price of imported goods the same as a quota.
b. 0 if trade restrictions on imports are imposed, domestic firms tend to become more efficient.
c. 0 small groups of producers have more political influence than large numbers of consumers.
d. 0 consumers are most likely to lobby government for a trade restriction.

49. The national security argument for trade restrictions is supported by economists if:
a. 0 export restrictions on goods are directly war related.
b. 0 export restrictions on goods are indirectly war related.
c. 0 transshipments of goods are possible.
d. 0 international cooperation is ignored.

50. Regarding international trade:
a. 0 most economists favor free trade.
b. 0 most economists think the infant-industry argument is theoretically justified.
c. 0 trade-adjustment assistance is a difficult policy to use since claims of injury from international trade are hard to make.
d. 0 the WTO has functions virtually the same as NAFTA.

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