A.P. Macroeconomics. Practice with General Equilibrium and Perfect Competition

Transcription

1 A.P. Macroeconomics Practice with General Equilibrium and Perfect Competition 1) Examining the equilibrium conditions of individual markets and for households and firms separately is referred to as analysis. A) partial equilibrium B) general equilibrium C) comparative static D) efficiency 2) General equilibrium analysis does NOT answer the question A) Are equilibriums in different markets compatible with one another? B) Can all markets simultaneously be in equilibrium? C) How will a change in one market affect another market? D) What market outcome is most desirable for the whole society? 3) It is essential to establish specific criteria to judge the performance of any economic system. Two such criteria are A) efficiency and equity. B) profit opportunities and technological progress. C) efficiency and profit opportunities. D) technological progress and achieving general equilibrium. 4) Efficiency occurs when A) the economy is producing what people want at least possible cost. B) the economy has a fair and just distribution of income. C) all markets are in equilibrium. D) unemployment is low and prices are stable. 5) Resources are allocated efficiently when A) the market produces what people want. B) production occurs at least cost. C) output is distributed in an equitable fashion. D) Both A and B are correct. 6) Firms stop producing tapes and start producing compact discs because people prefer compact discs to tapes. This will make A) the distribution of outcome more equitable. B) the economy more stable. C) for improved efficiency. D) the economy less stable. 7) A new technology is developed for producing microwave ovens that reduces production costs by 10%. Which of the following is TRUE? A) Firms will continue to operate efficiently as long as no firm adopts this new

2 technology. B) Firms must adopt this new technology for the economy to remain efficient. C) This new technology will not affect efficiency, but it will change the equilibrium price and quantity for this industry. D) If firms do not adopt this new technology, then the economy will remain in general equilibrium, because firms will not change their price and output decisions. Refer to the information provided in Figure 12.2 below to answer the question that follows. Figure ) Refer to Figure A technological advance causes the supply of personal computers to increase. The graph of this situation represents a A) general equilibrium analysis because it identifies what happens to both equilibrium price and quantity of personal computers. B) partial equilibrium analysis because it considers only this one industry. C) firm-specific analysis because only one firm would be affected by the technological advance. D) technological analysis because the change resulted from a technological advance. 9) To conduct a general equilibrium analysis of a change in consumer preferences away from beef and toward chicken, you must consider A) changes in the equilibrium prices and quantities of beef and chicken. B) changes in the amount of resources allocated to the production of beef and chicken. C) changes in the price of resources allocated to the production of beef and chicken. D) all of the above 10) A technological change in car production will A) affect only the markets for inputs used to produce cars. B) affect only the way cars are produced.

3 C) have no effect on consumers. D) affect input and output markets in the automobile industry and other related industries. 11) Preferences have just shifted away from beef and into mutton. If you are a sheep rancher, the best profit-maximizing strategy is to A) shut down. B) produce more mutton in order to earn profits in the short run. C) shift some of your ranching capacity into cattle raising. D) cut prices to increase market share. 12) Initially the beef and mutton markets are in equilibrium, then preferences shift away from beef and into mutton. If you are a cattle rancher, the best profit-maximizing strategy is to A) shut down. B) increase output so as to increase your market share. C) shift some of your ranching capacity into cattle raising. D) decrease output so as to minimize short run losses. 13) Suppose there is a permanent shift of consumer preferences away from pretzels and toward potato chips. The most likely result would be in the A) short run economic losses in the potato chip market. B) long run a fall in the supply of potato chips. C) short run a rise in the price of pretzels. D) short run profits in the potato chip market. 14) Scientists find that eating corn three times a day will prolong life. This leads to a shift in preferences away from wheat and toward corn. As we move from one equilibrium to another, we can predict that A) all related input markets are affected. B) all related input markets but land are affected because they both use land. C) labor markets are not affected because the wheat industry and the corn industry use laborers to drive tractors. D) even if they use different technologies, no input markets are affected because they use the same inputs. 15) occurs when it is not possible to make some members of society better off without making some other members of society worse off. A) Pareto optimality B) Partial equilibrium C) General equilibrium D) Market failure 16) You value your economics textbook at $15. Someone else values it at $30, and that person is willing to pay you $20 for your textbook. Would selling your textbook to this person for $20 be Pareto efficient?

4 A) No, because you did not receive the maximum amount the other person would have been willing to pay for the textbook. B) No, the person paid you $20 for the book so his net benefit was $10, whereas your net benefit was only $5. For this change to be Pareto efficient, each of you should have the same net benefit. C) Yes, because both of you are better off as a result of the trade. D) Yes, because even though you gain from the trade and he loses, there is the potential for you to compensate him for his loss. 17) You value your favorite shirt at $100. Someone else values it at $160, and that person is willing to pay you $120 for your shirt. Would selling your shirt to this person for $120 be Pareto efficient? A) No, because you did not receive the maximum amount the other person would have been willing to pay for the shirt. B) No, the person paid you $120 for the shirt so his net benefit was $40, while your net benefit was only $20. For this change to be Pareto efficient, each of you should have the same net benefit. C) Yes, because even though you gain from the trade and he loses, there is the potential for you to compensate him for his loss. D) Yes, because both of you are better off as a result of the trade. 18) Under perfect competition, A) resources are allocated among firms efficiently. B) final products are distributed among households efficiently. C) the system produces the goods and services consumers want. D) All of the above are correct. 19) are sources of market failure. A) Private goods B) Competitive activities C) Externalities D) All of the above are correct. 20) is a source of market failure. A) An externality B) A public good C) Imperfect information D) All of the above are correct. 21) When we misallocate resources or allocate them inefficiently, then there is(are) A) market failure. B) external costs or benefits in production. C) imperfect information in the market. D) a public good involved.

5 22) Market failure occurs when firms A) that are incurring losses leave a market. B) that are perfectly competitive produce where MR = MC. C) misallocate resources or allocate them inefficiently. D) are only able to earn a normal profit. 23) We refer to the whole class of goods that firms will underproduce or not produce at all in a completely unregulated market economy as goods. A) free B) Pareto C) private D) public 24) is an example of a public good. A) An automobile B) National defense C) A restaurant meal D) A medical service 25) All of the following are true about public goods EXCEPT they: A) bestow collective benefits on members of society. B) are non-excludable since those who do not pay for them cannot be excluded from enjoying them. C) will be under supplied by the private sector. D) are only produced by government agencies. 26) Public goods are generally produced by A) the government. B) monopolies. C) perfectly competitive industries. D) freely functioning markets. 27) We cannot exclude anyone from consuming the benefits of a good. A) private B) Pareto C) public D) free 28) An example of a public good is A) an apple. B) a public utility. C) preservation of wetlands to form a national park. D) a book. 29) We would classify which of the following as an external cost? A) As more firms began hiring computer programmers, the salaries of computer

6 programmers increased and therefore the firm's production cost increased. B) A private firm will not provide national defense since it is impossible to confine the benefits to only those individuals who pay for it. C) You are unable to study at night because so much noise comes from the dorm room next door. D) When you purchase a prescription drug you are not made fully aware of all possible side effects that may result from taking the drug. 30) Your next-door neighbor has a beautiful rose garden but you are allergic to roses. You cannot use your yard because rose pollen drifts into your yard. In this case, the rose garden is an example of a A) public good. B) good that imposes an external cost. C) good that provides an external benefit. D) Pareto good. 31) Which of the following is an example of an external benefit? A) More people start to ride the bus because they become more public-spirited and, as a result, air pollution is reduced. B) Firms are able to reduce their costs of production by using a more efficient technology. C) The federal government spends a million dollars on improving national parks. D) A firm gets permission to open a landfill on property that is adjacent to your home. 32) One reason to require licensing of medical practitioners is that medical care A) involves substantial externalities. B) is so expensive. C) is a public good. D) buyers lack perfect information. 33) Imperfect information on the part of buyers and sellers A) will not stop the economy from achieving market efficiency, assuming the other conditions for market efficiency hold. B) is no longer a problem because ʺtruth-in-advertisingʺ regulations have been instituted. C) remains a barrier to achieving market efficiency, at least in some industries. D) cannot persist in a market economy.