2013 CH sample questions - 200

Transcription

1 Class: Date: 2013 CH sample questions Multiple Choice Identify the choice that best completes the statement or answers the question. 1. When studying pollution and the environment, economists a. have no role to play. b. concentrate on the physical aspects of the environment. c. emphasize costs and benefits. d. attempt to reduce pollution at all costs. e. think pollution is good if it occurs when production takes place. 2. The cost of producing an additional unit of a good or service is defined as the a. external cost. b. private cost. c. marginal cost. d. marginal external benefit. e. None of the above answers is correct. 3. The cost of producing an additional unit of a good or service that is borne by the producer of that good or service is the marginal a. external cost. b. private cost. c. social cost. d. public cost. e. None of the above answers is correct. 4. For a product with an external cost, the supply curve a. represents the various quantities people can buy. b. is the same as the marginal private cost curve. c. is the same as the marginal social cost curve. d. is the same as the marginal external cost curve. e. is undefined. 5. The cost of producing an additional unit of a good or service that falls on people other than the producer is the marginal a. external cost. b. private cost. c. social cost. d. social benefit. e. None of the above answers is correct. 6. A firm dumps dioxin in a river, thereby severely polluting the river. The cost of the water pollution is i. zero for the firm. ii. an external cost. iii. part of the marginal social cost a. i only. b. ii only. c. iii only. d. ii and iii. e. i, ii, and iii. 38

2 7. Suppose two neighborhoods with 10 homes each in Buffalo, New York are identical except one of them is near a toxic waste dump. If homes near the dump sell for an average of $40,000 and the other homes sell for $90,000, the external cost of the dump is a. $400,000. b. $1,300,000. c. $900,000. d. $500,000. e. $90, The marginal social cost, MSC, of producing a good or service equals a. MC + MB. b. MB + marginal external cost. c. MB + marginal external benefit. d. MC + marginal external cost. e. MC + marginal external cost - marginal external benefit. 9. The marginal cost incurred by the entire society to produce a good or service is the marginal a. external cost. b. private cost. c. social cost. d. social benefit. e. private benefit. 10. The marginal social cost of producing a good or service is the a. cost of producing an additional unit borne by the producer. b. cost of producing an additional unit borne by people other than the producer. c. sum of the marginal private cost and the marginal external cost. d. same as marginal external cost. e. sum of the marginal private cost and the marginal external cost minus the marginal social benefit. 11. If a good has an external cost, then the marginal private cost curve a. lies below then the marginal social cost curve. b. lies above the marginal social cost curve. c. lies below the horizontal axis. d. is the same as the marginal external cost curve. e. is undefined because the firms' costs are not equal to the social costs. 12. The marginal external cost and marginal private cost a. are all borne by the seller. b. are opportunity costs. c. when added, equal the sum of the marginal private benefit plus the marginal social benefit at equilibrium. d. are regulated by the government. e. must always be equal in equilibrium. 13. If the marginal social cost of producing a ton of cement is $4,000 and the marginal private cost is $3,500, then the a. marginal benefit of a ton of cement will equal $4,000. b. total cost of producing a ton of cement is $7,500. c. marginal external cost of producing a ton of cement is $500. d. marginal external cost of producing a ton of cement is $7,500. e. marginal external cost of producing a ton of cement is $4,000. 2

3 14. If the production of a good causes an external cost, then the efficient quantity is a. the quantity at which the marginal benefit equals marginal cost. b. less than the quantity at which the marginal benefit equals the marginal cost. c. more than the quantity at which the marginal benefit equals the marginal cost. d. the quantity at which the marginal private benefit is greater than the marginal social benefit. e. None of the above answers is correct. 15. If a good has an external cost, the a. competitive market outcome is efficient. b. marginal private cost reflects the external cost. c. competitive market outcome is inefficient. d. marginal social benefit is equal to the marginal social cost when the market is in equilibrium. e. external benefit must equal the external cost. 16. If producing a good or a service by an unregulated competitive industry creates pollution, then a. the market produces an efficient output. b. the industry's supply curve includes the extra cost of pollution. c. marginal social benefit equals the equilibrium price but marginal social cost is greater than the equilibrium price. d. marginal social benefit and marginal social cost are equal at the equilibrium quantity. e. marginal social cost equals the equilibrium price but marginal social benefit is less than the equilibrium price. 17. The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. Suppose the marginal private cost of the 5th concert is $10,000. Then, for the 5th concert, the marginal a. external cost equals $30,000. b. social cost equals $30,000. c. external cost equals the marginal private cost. d. external cost equals $40,000. e. external cost equals $10,000. 3

4 18. The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. At 10 concerts, the marginal a. private cost equals the marginal external cost. b. social cost equals $60,000. c. private cost is more than $40,000. d. external cost equals $60,000. e. external cost equals $80, The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. It also illustrates the marginal private benefit. There is no external benefit. The efficient number of concerts in Seattle is a. 0. b. 5. c. 10. d. 20. e Legally established titles to ownership, use, and disposal of factors of production and goods and services, are called rights. a. government b. pollution c. property d. inefficient e. private 21. Legally established titles to the ownership, use, and disposal of factors of production are referred to as a. property rights. b. Coase rights. c. pollution rights. d. emission rights. e. price-setting rights. 4

5 22. One reason why property rights help achieve an efficient level of pollution is because property rights a. force the marginal private cost to equal the marginal social cost. b. force the marginal social cost to zero. c. force the marginal external cost to a lower level than marginal private cost. d. eliminate marginal private costs. e. change the marginal external cost so that they are equal to the marginal social benefit. 23. When transactions costs are low and the problem of external costs is resolved through private negations, the theorem that applies is known as the a. property rights theorem. b. emission rights theorem. c. pollution rights theorem. d. Coase theorem. e. private-market efficient theorem. 24. The Coase theorem deals with the problem of pollution by a. giving the government regulatory power over polluters. b. making all polluters stop polluting. c. establishing and enforcing private property rights. d. having the government take over ownership of all polluting processes. e. allowing the government to set the proper emission charge. 25. Transactions costs are the a. costs of using the Coase theorem. b. opportunity costs of conducting a transaction. c. external marginal costs of the externality. d. reason why taxes cannot alter the inefficiency resulting from an external cost. e. external costs when a firm pollutes. 26. Which of the following is the best example of a transactions cost? a. the time spent shopping for a bathing suit. b. the price of a new set of tires c. the cost associated with producing a golf club d. the price of labor and materials used to produce a house e. the price of food 27. Three methods the government can use to cope with external costs are a. taxes, subsidies, and outright bans. b. taxes, regulations, and subsidies. c. marketable permits, subsidies, and taxes. d. emission charges, marketable permits, and taxes. e. vouchers, subsidies, and taxes. 5

6 28. Producing leather creates external costs in the form of water pollution. The figure above illustrates the market for leather. In the absence of any government regulation, how many tons of leather will be produced? a. 0 tons b. 200 tons c. 300 tons d. more than 300 tons e. None of the above answers is correct. 29. In order to make emission charges effective, the regulator must determine the marginal external cost of pollution at different levels of output and levy a charge on polluters that a. is greater than that cost. b. is less than that cost. c. is equal to that cost. d. eliminates pollution. e. None of the above answers is correct. 30. The government can aid in reducing pollution by using marketable permits, which means that a. polluters are taxed on the amount of pollution they discharge. b. emission charges are established by the EPA. c. each polluter is assigned a pollution limit and is given tradable permits that allow this amount of pollution. d. only some producers pollute and the others go out of business. e. each polluter is assigned the property right to its pollution. 31. Firm A and Firm B emit 300 tons of pollution each and each have marketable permits that allow each to emit 100 tons of pollution. If it costs $5,000 for Firm A to eliminate 100 tons of pollution and it costs Firm B $6,000 to eliminate 100 tons of pollution, then a. Firm B sells its permits to Firm A for a price above $6,000. b. Firm A sells its permits to Firm B for a price below $6,000. c. Firm A sells its permits to Firm B for a price above $6,000. d. Firm B sells its permits to Firm A for a price below $6,000. e. neither Firm A nor Firm B sell permits because neither have extra permits. 6

7 32. In order for taxes to be effective in eliminating the deadweight loss resulting from pollution, the tax must be set equal to the a. marginal private cost. b. marginal external cost. c. marginal social cost. d. marginal benefit of polluting. e. price of the good. 33. To eliminate the inefficiency resulting from an external cost, the government can impose a tax on producers that is equal to the a. MSB. b. MC. c. marginal external cost. d. MSC. e. price. 34. The figure above illustrates the gasoline market. There is no external benefit from gasoline. If a tax on gasoline is imposed as shown in the figure, then the quantity of gasoline produced and consumed equals a. 0 gallons. b. 5 million gallons. c. 10 million gallons. d. 20 million gallons. e. None of the above answers is correct. 35. The figure above illustrates the gasoline market. There is no external benefit from gasoline. If a tax on gasoline is imposed as shown in the figure, then the total tax revenue earned by the government equals a. $24 million. b. $16 million. c. $8 million. d. more than $24 million. e. less than $8 million. 7

8 36. The figure above shows the market for the chemical hydrogen sulfide, the production of which creates an external cost. If the government assesses the marginal external cost correctly, what is the amount of the tax that eliminates the inefficiency? a. $2 per pound b. $3 per pound c. $4 per pound d. $1 per pound. e. None of the above answers is correct. 37. The figure above shows the market for the chemical hydrogen sulfide, the production of which creates an external cost. The government imposes the tax shown in the above figure. What quantity is produced after the tax is imposed? a. zero pounds b. 80 million pounds c. 160 million pounds d. more than 160 million pounds e. more than 80 million pounds and less than 160 million pounds. 38. The figure above shows the market for the chemical hydrogen sulfide, the production of which creates an external cost. The government imposes the tax shown in the figure. How much tax revenue does the government collect? a. $640 million b. $320 million c. $240 million d. More than $640 million e. Zero because the government has taxed the firms out of business. 8

9 39. The figure above shows a tax imposed on a good with an external cost. The area of the rectangle abcd equals a. the MSB. b. the total tax revenue collected by the government. c. the amount of pollution tax per ton. d. the MC. e. the deadweight loss. 40. If the marginal private benefit of attending college for Shelly is $40,000 and the marginal external benefit is $15,000, she will attend college if the cost of attendance is no more than a. $55,000. b. $45,000. c. $40,000. d. $25,000. e. $15, A example of a good with external benefits is a. a pizza. b. a dose of flu vaccine. c. a sewing machine. d. an imported good. e. a pair of running shoes 42. Which of the following is true? a. MSB = MB + Marginal external benefit. b. MB = Marginal external benefit MSB. c. MB = Marginal external benefit + MSC. d. MSB = Marginal external cost marginal external benefit. e. MSB = MB + Marginal external benefit Marginal external cost. 9

10 43. MSB equals a. MC + the marginal external cost. b. MC + the marginal external benefit. c. MB + the marginal external cost. d. MB + the marginal external benefit. e. MB + MC 44. If a marginal external benefit is present in the consumption of a good or service, then a. pollution is not paid for. b. the marginal social benefit is greater than the marginal private benefit. c. the marginal social benefit is equal to the marginal private benefit. d. the marginal private benefit is equal to the marginal social benefit plus the marginal external benefit. e. the marginal external benefit is equal to the marginal private benefit minus the marginal social benefit. 45. The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the government does not intervene in this market, the equilibrium price of private education is a. $12,000. b. $16,000. c. $20,000. d. $4,000. e. $6,

11 46. The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the government does not intervene in this market, the equilibrium number of students being privately educated is a. 0 students. b. 200 students. c. 400 students. d. 600 students. e. None of the above answers is correct. 47. The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the government does not intervene in this market, the equilibrium number of students being privately educated is and the efficient quantity is. a. 0 students; 400 students b. 400 students; 400 students c. 400 students; 600 students d. 600 students; 400 students e. 600 students; 600 students 48. The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the government does not intervene in this market, the deadweight loss equals a. 0. b. $800,000. c. $1,600,000. d. more than $1,600,000. e. more than $800,000 and less than $1,600, Which of the following are devices that the government uses to achieve a more efficient allocation of resources in the presence of external benefits? a. taxes, subsidies, and regulation b. patents, taxes, and subsidies c. regulations, copyrights, and vouchers d. vouchers, patents, and subsidies e. patents, taxes, and vouchers 50. The government can overcome the inefficiency created by a good with an external benefit by using a. public provision. b. marketable permits. c. taxes. d. emission charges. e. None of the above answers is correct. 51. Public provision a. is the production of a good by the government by giving funds to private producers. b. lowers the marginal cost of producing the good. c. means the good is produced by a public authority that receives the most of its revenue from the government. d. Both answers A and B are correct. e. Both answers B and C are correct. 11

12 52. The production of a good or service by an authority that receives the most of its revenue from the government is referred to as a. public provision. b. private subsidies. c. vouchers. d. patents and copyrights. e. Coasian production. 53. A subsidy is a. the revenue received from the government to produce a good or service by a public authority. b. a voucher received by the government from producers of goods and services. c. a payment that the government makes to private producers of goods and services. d. a tax imposed on the producers of certain goods or services. e. a tax imposed on the consumers of certain goods or services. 54. A payment made by the government to private producers of roads and libraries would be an example of a. a subsidy. b. a copyright. c. a voucher. d. public provision. e. a Coase payment. 55. A government subsidy a. is a policy that can be used to help eliminate the deadweight loss from an external cost. b. can help achieve an efficient amount of output when the good has an external benefit. c. increases consumers' marginal benefit from the good. d. Both answers A and C are correct. e. Both answers B and C are correct. 56. A government subsidy paid to a firm i. increases the demand for the good. ii. has no effect on the supply of the good. iii. leads to an increase in the equilibrium quantity. a. i only. b. i and ii. c. ii only. d. iii only. e. i and iii. 57. President Bush has proposed giving parents of children in poorly performing schools tax dollars to help send their children to private schools. This proposal is an example of a. vouchers. b. public provision. c. external costs. d. taxes. e. correcting an externality using a Coase good. 58. Food stamps provided by the government to households are an example of a. vouchers. b. marginal benefits from producing a good or service. c. marginal cost from producing a good or service. d. marginal external cost. e. a Coase good. 12

13 59. Education has an external benefit. So to achieve the efficient level of education, an education voucher must equal the difference between the a. marginal (private) cost and the marginal social benefit. b. marginal (private) benefit and the marginal social benefit. c. marginal social benefit and the marginal (private) cost. d. dollar price and marginal (private) cost. e. marginal (private) cost and the marginal social cost. 60. If a situation in which a previously ignored external benefit is overcome by the use of vouchers given to consumers, then the supply curve and the demand curve. a. shifts leftward; shifts leftward b. shifts leftward; shifts rightward c. shifts rightward; shifts rightward d. does not shift; shifts rightward e. shifts rightward; does not shift 61. The figure above shows an education market in which the government is providing households with vouchers. What is the dollar value of a voucher in this market? a. $4,000 b. $8,000 c. $12,000 d. $16,000 e. None of the above answers is correct. 62. The figure above shows an education market in which the government is providing households with vouchers. In total, how much do the schools receive for a student? a. $4,000 b. $8,000 c. $12,000 d. $16,000 e. $20,000 13

14 63. The figure above shows an education market in which the government is providing households with vouchers. Excluding the voucher, what do the students pay the schools? a. $4,000 b. $8,000 c. $12,000 d. $16,000 e. $0 64. The figure shows the market for college education. If the market for education is competitive and with no government intervention, the equilibrium quantity of college students is million and the efficient quantity of college students is million. a. 2; 4 b. 8; 2 c. 8; 4 d. 4; 8 e. 0; The figure shows the market for college education. The efficient number of students is a. less than 4 million. b. more than 4 million and less than 8 million. c. 4 million. d. 8 million. e. more than 8 million. 66. The figure shows the market for college education. In order for the efficient amount of education to occur, the government could provide a subsidy of per student. a. $4,000 b. $8,000 c. $12,000 d. $20,000 e. $16,000 14

15 67. The figure shows the market for college education. In order for the efficient amount of education to occur, the government could provide a voucher of per student. a. $4,000 b. $8,000 c. $12,000 d. $20,000 e. $16, A patent is defined as a a. token from the government that allows consumption of a good or service. b. provision of a good or service by a public entity. c. payment made by the government to a private producer. d. government-sanctioned right to produce a good or service. e. voucher given to a producer. 69. Which theorem is the government applying when it grants patents and copyrights to creators for their intellectual property? a. the Coase theorem b. the public subsidy theorem c. the voucher theorem d. the public provision theorem e. the patent theorem 70. A noisy party that keeps neighbors awake is an example of a a. negative production externality. b. positive production externality. c. negative consumption externality. d. positive consumption externality. e. Both answers B and C are correct. 71. An externality can be a cost or benefit arising from the production of a good that falls upon a. consumers but not producers. b. producers but not consumers. c. both the consumer and the producer. d. someone other than the consumer or producer. e. no one so it goes unpaid. 72. Externalities a. are important in the areas of environment and education. b. only have a negative impact on people. c. deal with issues that are not our internal issues. d. affect the people who are responsible for production. e. are nonexistent in unregulated, competitive markets. 73. In a market with an external cost, government action a. cannot decrease the amount of the deadweight loss from the external cost. b. can sometimes help to achieve an efficient outcome. c. cannot alter firms' cost curves. d. Both answers A and C are correct. e. Both answers B and C are correct. 15

16 74. A competitive, unregulated market would a. produce too much pollution because pollution is an external cost. b. produce too little education because education has an external benefit. c. fail to achieve equilibrium if there are externalities present. d. Both answers A and B are correct. e. Both answers B and C are correct. 75. When property rights are assigned and transactions costs are low a. all costs and benefits are taken into account by the transacting parties so the transaction is efficient. b. externalities will result in market failure. c. the marginal social benefit curve shifts leftward and the marginal social cost curve does not shift. d. the marginal social cost curve shifts rightward and the marginal social benefit curve does not shift. e. the marginal social cost curve shifts rightward and the marginal social benefit curve shifts rightward. 76. When people decide whether or not to get a flu vaccination, they ignore the and as a result. a. marginal private benefit; too few vaccinations are given b. external benefit; too few vaccinations are given c. private cost; too many vaccinations are given d. marginal external cost; vouchers must be provided e. social cost; too many vaccinations are given 77. Regulation consists of rules administered by to influence economic activity by determining prices, product standards and types, and the conditions in which firms may enter an industry. a. the Supreme Court b. the Senate c. the President d. government agencies e. the states 78. When a government agency establishes rules to influence economic activity, this process is referred to as a. regulation. b. public interest theory. c. capture theory. d. deregulation. e. a natural monopoly. 79. Deregulation is defined as the a. use of government rules to regulate business activity. b. implementation of industry-wide restrictions on prices. c. theory of businesses maximizing profits with government assistance. d. removal of restrictions on business activities. e. change from public interest to the capture theory of regulation. 80. The first national regulatory agency to be set up in the United States was the a. Environmental Protection Agency. b. Interstate Commerce Commission. c. Food and Drug Administration. d. Federal Aviation Administration. e. Federal Reserve System. 16

17 81. The purpose of the first federal regulatory agency in the United States was to a. assure food safety. b. assure airplane safety. c. control prices and routes of railroads. d. measure the efficacy of new drugs. e. assure the safety of atomic energy plants. 82. By the 1970s approximately what percentage of the economy was subject to some form of regulation? a. 10 percent b. 25 percent c. 3 percent d. 17 percent e. 67 percent 83. Regulation of businesses in the United States can best be described as beginning in the a. late 1960s and growing steadily over the next 40 years. b. early 1900s and growing steadily over the next 80 years. c. 1930s and growing in spurts over the next 70 years. d. late 1800s and growing in spurts until the 1970s after which it has begun to move toward more deregulation. e. 1930s and growing in spurts until the 1970s after which it has grown more steadily. 84. Which of the following is NOT a common part of the regulatory process? i. appointments of people who run the regulatory agencies by the Administration, Congress, and state and local governments ii. price controls set by regulatory agencies iii. regulatory determination of the production technology iv. the establishment of operating rules for business firms a. i only. b. ii and iv. c. iii only. d. i, ii, and iii. e. ii, iii, and iv. 85. The public interest theory of regulation is that a. regulators help producers maximize economic profit. b. regulation seeks to increase the government's revenue. c. regulation causes producers to produce at a point where they are earning normal profits. d. regulation seeks an efficient use of resources. e. regulation focuses on the consumers' interests and ignores producers' interests. 86. Efforts by the government to regulate a firm and bring the price down to competitive levels a. reduces the consumer surplus. b. creates more deadweight loss. c. is what the public interest theory of regulation predicts regulators will do. d. is what the capture theory of regulation predicts regulators will do. e. is why rate of return regulation is considered the most efficient type of regulation. 17

18 87. The public interest theory of regulation asserts that the purpose of regulating a natural monopoly is to i. minimize the deadweight loss created by a monopoly. ii. maximize economic profit. iii. minimize consumer surplus. a. i only. b. ii and iii. c. iii only. d. i and ii. e. ii only. 88. The capture theory of regulation is that regulations a. help producers to maximize economic profits. b. mean producers suffer losses. c. result in diseconomies of scale. d. benefit society, not producers. e. benefit the regulators, not the producers or the consumers. 89. If the capture theory of regulation is correct, then a. a marginal cost pricing rule is used to ensure maximum profits. b. an average cost pricing rule is used to ensure an efficient output. c. the regulators let the firm produce where marginal cost equals marginal revenue to ensure maximum profits. d. subsidies are used to allow marginal cost pricing without an economic loss. e. regulation seeks an efficient use of resources. 90. A natural monopoly exists when a. diseconomies of scale exist in an industry. b. one firm can supply an entire market at a lower average total cost than can two or more firms. c. a firm can engage in price discrimination. d. the producers in an industry have formed a cartel. e. a monopoly firm faces a horizontal demand curve. 91. A natural monopoly is one that arises from a. patent law. b. economies of scale. c. copyright law. d. any government-imposed barrier to entry. e. mergers. 92. With a natural monopoly a. no regulation is necessary because it is a natural monopoly. b. regulation takes the form of forcing competition from new firms. c. regulation takes the form of forcing the company out of business. d. regulation can take the form of average cost pricing to allow coverage of costs. e. regulation takes the form of breaking the company into several competing firms. 18

19 93. A natural monopoly's average cost curve i. intersects the demand curve while the average cost curve slopes downward. ii. reaches its minimum before it intersects the demand curve. iii. intersects the demand curve below the intersection of the marginal cost curve and the demand curve. a. i only. b. ii only. c. iii only. d. i and iii. e. i, ii, and iii. 94. A firm that is a natural monopoly a. can supply the entire market at a lower cost than two or more firms. b. has very small fixed costs and very large marginal costs. c. is infrequently regulated because having one firm serve the market is economically sound. d. cannot make an economic profit if it is not regulated because it must serve a very large customer base. e. produces the efficient quantity of output when it is not regulated. 95. For a regulated natural monopoly, the marginal cost pricing rule is a rule that sets price marginal cost and achieves an amount of output. a. equal to; efficient b. above; inefficient c. below; efficient d. equal to; inefficient e. above; efficient 96. A marginal cost pricing rule sets marginal cost equal to a. minimum average variable cost. b. price. c. average cost. d. marginal revenue. e. the smaller of price or marginal revenue. 97. If a natural monopoly is regulated using a. a marginal cost pricing rule, the firm maximizes its profit. b. an average cost pricing rule, the firm incurs an economic loss. c. a total cost pricing rule, the firm will exit the industry. d. a marginal cost pricing rule, the firm incurs an economic loss. e. an average cost pricing rule, the firm maximizes its profit. 98. Under a marginal cost pricing rule, a natural monopoly a. earns a reasonable profit. b. earns large economic profits. c. earns accounting profits, but breaks even in economic terms. d. incurs an economic loss. e. earns a normal profit but it cannot be determined whether or not it earns an accounting profit. 19

20 99. To achieve efficiency in a market served by a natural monopoly, the regulatory agency must i. use an average cost pricing rule ii. require the firm to charge a price equal to marginal cost. iii. allow the firm to maximize its profit. a. i only. b. ii only. c. iii only. d. i and ii. e. ii and iii If a regulatory agency sets the price equal to marginal cost for a natural monopoly, the a. government might have to provide a subsidy to the firm to keep it in business. b. price is the same as the unregulated monopoly price. c. firm earns an economic profit, though not the maximum economic profit. d. firm earns the maximum economic profit. e. firm earns a normal profit If we compare regulating a natural monopoly using marginal cost pricing to that using average cost pricing, we see that output is a. greater with marginal cost pricing but average cost pricing allows for costs to be covered. b. the same under both cases but the profit is greater with average cost pricing. c. greater under average cost pricing but profits are greater with marginal cost pricing. d. the same but profits are greater with marginal cost pricing. e. greater with marginal cost pricing and the firm's profit is larger with marginal cost pricing The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC is left unregulated, what is the price of cable television in Oakland? a. $40 b. $30 c. $20 d. $10 e. $50 20

21 103. The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under a marginal cost pricing rule, how many households in Oakland are served? a. 20,000 b. 30,000 c. 40,000 d. 50,000 e. 10, The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under an average cost pricing rule, what is the price of cable television in Oakland? a. $40 b. $30 c. $20 d. $10 e. $ The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. Compared to a marginal cost pricing rule, under an average cost pricing rule, TWC output by households. a. increases; 20,000 b. decreases; 10,000 c. increases; 30,000 d. decreases; 50,000 e. decreases; 40, A regulation that sets the price at a level that enables a regulated firm to earn a specified target percent return on its capital is called a. consumer surplus regulation. b. producer surplus regulation. c. capital regulation. d. rate of return regulation. e. rate of profit regulation One of the tendencies that is common among firms regulated using rate of return regulation is to a. increase production to an inefficient level. b. exaggerate the costs of production. c. incur losses. d. understate the costs of production. e. overstate their total revenue If a natural monopoly exaggerates its costs, then a. it earns a normal profit. b. its average cost curve shifts downward. c. with rate of return regulation, the price it is allowed to charge rises. d. with price cap regulation, the price it is allowed to charge rises. e. the firm definitely incurs an economic loss. 21

22 109. Regulation that motivates firms to reduce costs so that they can make and keep all or part of an economic profit is called a. price cap regulation. b. exaggerated cost regulation. c. capturing the regulator. d. rate of return regulation. e. marginal profit regulation Price cap regulation is defined as regulation that a. motivates the firm to operate efficiently and keep costs under control. b. encourages firms to exaggerate costs to increase profits. c. uses marginal cost pricing to ensure efficient output. d. uses average cost pricing to ensure costs are covered. e. is essentially the same as rate of return regulation Price cap regulation a. does not provide incentives to firms to minimize their costs because firms cannot change prices. b. sets the maximum price these firms can charge. c. gives firms the incentive to exaggerate their costs. d. Both answers A and C are correct. e. Both answers A and B are correct Under earnings-sharing regulation, if a firm's profits above a certain level, they must be shared with the firm's. a. rise; customers b. fall; customers c. rise; suppliers d. fall; suppliers e. rise; competitors 113. If public interest regulation is used to regulate an oligopoly, a. it is done so in order to insure that the oligopoly is able to maximize profits. b. the output is equal to the monopoly output. c. the output is equal to the perfectly competitive output. d. producer's interests will be met. e. the output is the same as if the industry was not regulated. 22

23 114. Suppose the government decides to re-regulate the airline market. The above figure represents a possible situation at the Ronald Reagan International Airport in Washington, D.C. Under producer interest regulation, how many flights leave this airport each day? a. 0 b. 400 c. 600 d. 1,000 e Suppose the government decides to re-regulate the airline market. The above figure represents a possible situation at the Ronald Reagan International Airport in Washington, D.C. Under public interest regulation, how many flights leave this airport each day? a. 0 b. 400 c. 600 d. 1,000 e Suppose the government decides to re-regulate the airline market. The above figure represents a possible situation at the Ronald Reagan International Airport in Washington, D.C. Under public interest regulation, what is the average price per flight? a. $1,000 b. $600 c. $400 d. $200 e. $0 23

24 117. The focus of antitrust legislation is to a. encourage cartels to form because they are easier to regulate. b. maintain competition. c. force society to act in the best interest of producers. d. limit the power of regulatory bodies. e. ensure that producers earn enough profit to stay in business so that consumers are not harmed by too many businesses closing Section 1 of the Sherman Antitrust Act declares what to be illegal? a. every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations b. mergers of a horizontal nature c. any attempt to monopolize an industry d. sharing of technology among competing firms or mergers where the effect is to lessen competition e. exiting an industry if the remaining firm or firms have a market share that is too large According to Section 2 of the Sherman Act, which of the following is a felony? a. mergers of a vertical nature b. horizontal mergers c. attempts to monopolize an industry d. price increases among competing firms that occur simultaneously e. using the HHI to justify a merger 120. Under what conditions would it be legal for two bakeries in Minneapolis to explicitly agree to raise their prices by 5 percent? a. if the price rise was not predatory b. if the price rise did not measurably increase producer surplus c. never d. if the price rise did not harm consumers in the long run by reducing competition e. if the price rise was necessary to keep one or both bakeries from closing The government believes that which entry barrier has allowed Microsoft to gain monopoly power? a. ownership of the entire supply of a resource b. patents c. trademarks d. economies of scale and network economies e. territorial confinement 122. When an oligopoly reduces its price with the intent of driving away its competitors, it is said to be engaging in a. pricing differential. b. predatory pricing. c. price fixing. d. a price-tying agreement. e. price discrimination Which of the following indices does the Department of Justice use to determine whether or not to examine a merger? a. the Clayton Index of market concentration b. the producer concentration index c. the Herfindahl-Hirschman index d. the Sherman antitrust index e. the index of prices 24

25 124. If the Herfindahl-Hirschman Index (HHI) for a market is between 1,000 and 1,800, the Department of Justice will examine a. all mergers. b. no mergers. c. mergers that raise the HHI by 100 or more points. d. mergers that raise the HHI by 100 or fewer point. e. mergers that lower the HHI by 100 or more points Suppose there are 6 firms in an industry with the following market shares. If the two smallest firms want to merge, how will the Department of Justice reply? Firm 1: 30 Firm 2: 25 Firm 3: 25 Firm 4: 10 Firm 5: 7 Firm 6: 3 a. The firms will be allowed to merge and compete with the larger firms. b. The firms will be challenged because the merger will raise the HHI by more than 50 points. c. The firms will not be allowed to merge. d. The firms will be challenged because the merger will raise the HHI by more than 100 points. e. The firms will be challenged because the merger will raise the HHI by more than 250 points regulation of a natural monopoly results in an efficient level of output. a. Efficient resale price maintenance b. Marginal cost pricing c. Average cost pricing d. Predatory pricing e. Tying 127. If a natural monopoly is regulated so it uses a marginal cost pricing rule, the firm a. must have violated the Sherman Act. b. earns zero economic profit. c. might be able to use a two-part tariff to avoid incurring an economic loss. d. also faces earnings share regulation. e. finds that its HHI must fall If a firm has become a natural monopoly, a. it has violated the Clayton Act. b. the Department of Justice approved its merger. c. regulators will require that it produce the efficient level of output. d. it might be regulated using price cap regulation. e. it cannot be charged with any violation of the antitrust laws. 25

26 129. The figure above shows a natural monopoly that the government must regulate. If the government uses, the firm produces units per week. a. the HHI; 50 b. an average cost pricing rule; 30 c. rate of return regulation; 40 d. the Sherman Act; 30 e. a marginal cost pricing rule; Earnings share regulation occurs when a. the HHI for an industry exceeds 1,800. b. price cap regulation allows a firm's profits to rise above a target level. c. firms are regulated using marginal cost pricing. d. a firm violates the Sherman Act. e. a firm violates any antitrust law Tying arrangements are a. illegal if they substantially lessen competition. b. used by regulators to force a monopoly to produce an efficient amount of production. c. used by regulators to force a monopoly to charge an efficient price. d. illegal according to the Sherman Act. e. necessary in order for a firm to price discriminate Resale price maintenance is a form of a. regulation. b. marginal cost pricing. c. average cost pricing. d. agreeing about the price that will be charged. e. setting the price cap under price cap regulation. 26

27 133. When the Department of Justice decides whether to allow firms in an industry to merge, it uses the to guide its decision. a. public interest theory b. HHI c. capture theory d. Sherman Act e. predatory pricing theory 134. Which of the following is NOT a factor of production? a. labor b. capital c. entrepreneurship d. bonds. e. land An entrepreneur a. creates firms and hires the factors of production. b. has no human capital, only financial capital. c. must have a patent on the product or service that he or she sells. d. owns the land upon which the business operates. e. None of the above answers is correct The knowledge, skills, education and training an individual possesses is known as a. physical capital. b. human capital. c. labor capital. d. resource capital. e. entrepreneurial capital People's education and skills are a. called entrepreneurship. b. not tradable. c. called human capital. d. part of financial capital. e. called entrepreneurial capital Labor consists of the a. financial contribution to the production of goods and services made by individuals. b. mental and physical contribution made to the production of goods and services by individuals. c. entrepreneurial contribution to the production process of goods and services made by individuals. d. contribution of capital goods made by individuals to the production process for goods and services. e. None of the above answers is correct Financial capital is defined as a. machinery used to produce goods and services. b. specific machinery used to make money. c. funds used to buy and operate capital such as machinery. d. the funds produced by the work of capital. e. the skills and talents possessed by people. 27

28 140. Stocks and bonds are a. traded in financial markets. b. types of entrepreneurship. c. the same as physical capital. d. traded in commodity markets. e. traded in physical capital markets As a factor of production, any of the gifts of nature are called a. land. b. labor. c. capital. d. entrepreneurial ability. e. physical capital Commodity markets are where a. labor is bought and sold. b. shares of ownership of a corporation are traded. c. raw materials are bought and sold. d. promises to pay specified sums of money are exchanged. e. the actual physical capital is bought and sold The markets for raw materials are called markets. a. stock b. resource c. land d. commodity e. raw 144. Derived demand means that the demand for a factor of production is derived from the a. supply of that factor of production. b. price of that factor of production. c. demand for the goods and services the factor of production is used to produce. d. costs of production. e. government, which forces large firms to hire at least some minimum number of different resources In the labor market, a. households demand labor. b. firms demand labor. c. firms supply labor. d. wage are determined only by firms alone. e. None of the above answers is correct Which of the following represents a derived demand? Demand for a. a taco by Sam when she is hungry. b. golf balls by Jose who is planning on going golfing with his boss. c. a grocery clerk by the local Safeway. d. an automobile by Jack who wants a car to get to school. e. new clothing by Shiniq who is starting a new job The demand for carpenters needed to build houses represents a a. direct demand. b. derived demand. c. marginal demand/cost for input. d. supplied demand. e. directed supply. 28

29 148. The value of the marginal product is equal to a. marginal product marginal cost. b. marginal product product price. c. marginal revenue marginal cost. d. marginal cost product price. e. marginal product product price If UPS hires another worker, UPS will be able to deliver an additional 20 packages an hour. The price of each package is $5. The value of this worker's marginal product is equal to a. $5. b. $100. c. $4. d. 20 packages. e. $ The value of marginal product is equal to the a. additional revenue from selling one more unit of the product. b. change in total revenue from selling one more unit of product. c. additional cost of hiring one more unit of a factor of production. d. change in revenue from hiring one more unit of a factor of production. e. change in total cost when one more unit of the product is produced Kevin owns a personal training gym in Laredo, Texas. He charges $41 per session. The above table shows the marginal product of trainers in Kevin's gym. If Kevin hires one trainer, the value of the marginal product of this trainer equals a. 4 clients. b. $164. c. $410. d. $41. e. None of the above answers is correct Kevin owns a personal training gym in Laredo, Texas. He charges $41 per session. The above table shows the marginal product of trainers in Kevin's gym. If Kevin hires three trainers, the value of the marginal product of the third trainer equals a. 2 clients. b. $82. c. 9 clients. d. $369. e. $

30 153. Kevin owns a personal training gym in Laredo, Texas. He charges $41 per session. The above table shows the marginal product of trainers in Kevin's gym. If Kevin hires four trainers, the value of the marginal product of the fourth trainer equals a. 10 clients. b. $410. c. $41. d. 1 client. e. $ The rule for employing a profit-maximizing amount of labor is to continue to hire additional workers until the additional worker's value of marginal product is a. less than the wage rate. b. equal to the wage rate. c. greater than 1. d. less than the price of the product. e. equal to the price of the product Suppose the Miami Dolphins are considering adding another backup quarterback to their roster. If the salary the Dolphins would have to pay equals $500,000 and the value of the marginal product of the new quarterback equals $800,000, to maximize their profit the Dolphins should a. add the new quarterback. b. add two new quarterbacks. c. not add the new quarterback. d. not add the new quarterback and, in fact, get rid of at least one other backup quarterback. e. Not enough information is given to determine if the Dolphins should hire the quarterback If a firm finds itself at the point where the value of the marginal product of labor is greater than its wage rate, then the firm a. stops hiring more workers but does not fire any because the firm is maximizing its profit. b. decreases the number of workers it has hired in order to increase its profit. c. increases the number of workers it hires in order to increase its profit. d. increases sales to keep its employees busy. e. changes its employment of workers and maximizes its profit by hiring the number of workers that makes the difference between the value of the marginal product and the wage rate as large as possible The demand curve for labor is the same as the firm's a. marginal revenue curve. b. marginal cost curve. c. value of marginal product curve. d. wage rate curve. e. supply of output curve If we compare the value of marginal product curve and the demand for labor curve we see that a. they are the same thing. b. the value of marginal product curve is twice as steep. c. the demand for labor curve has no relationship to the value of marginal product curve. d. the demand for labor curve is twice as steep but they share the same axes. e. the demand for labor curve lies above the value of marginal product curve. 30

31 159. A firm's demand for labor curve shifts when there is a change in i. the supply of labor. ii. population iii. the equilibrium wage rate. a. i only. b. ii only c. i and iii. d. i and ii. e. ii and iii The above figure shows the initial demand for labor curve at the local Pizza Hut. The wage rate is $6 an hour. If the demand for pizzas increases so that the price of a pizza rises, a. at the wage rate of $6 per hour, Pizza Hut hires fewer than 10 workers. b. Pizza Hut's demand for labor curve shifts rightward. c. the supply of labor curve shifts rightward. d. Pizza Hut's demand for labor curve shifts leftward. e. the supply of labor curve shifts leftward Robotic technology is a substitute for labor in many manufacturing processes. If the price of robotic technology decreases and the scale of the firm's production does not change, there is a. a decrease in the demand for labor. b. an increase in the demand for labor. c. no change in the demand for labor. d. an increase in the supply of labor. e. a decrease in the supply of labor As a result of the proliferation of ATM machines, the demand for bank tellers has a. increased. b. decreased. c. not changed. d. become perfectly inelastic. e. become perfectly elastic. 31