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Worksheetsecon midterm 2
Total questions: 86
Worksheet time: 22hrs 30mins
A ________ is the price at which a trading partner is indifferent between making the trade and not doing so.
reservation value
discounted value
market value
shadow value
Consumer surplus is the ________.
difference between the buyer's reservation value and the price he actually pays
product of a buyer's reservation value and the price he actually pays
ratio of a buyer's reservation value to the price he actually pays
sum of a buyer's reservation value and the price he actually pays
If a buyer's reservation value for a good is $15 and the price at which he purchases the good is $8, his consumer surplus is ________.
$7
$1.8
$120
−$7
When buyers and sellers optimize in a perfectly competitive market, ________.
social surplus is minimized
social surplus is maximized
only consumer surplus is maximized
only consumer surplus is minimized
For social surplus to be maximized, the ________ buyers are actually making a purchase and the ________ sellers are selling the products.
highest-value; highest-cost
lowest-value; highest-cost
highest-value; lowest-cost
lowest-value; lowest-value
An outcome is Pareto efficient if ________.
the benefits of the outcome are equally distributed among all participants
the costs of the outcome are equally shared by all participants
an individual can be made better off without making someone else worse off
no individual can be made better off without making someone else worse off
If firms in a competitive industry independently operate to maximize profits, the ________ are eventually equalized across the firms.
marginal costs
revenues
total costs
profits
When two firms in a perfectly competitive market seek to maximize profit in the long run, they eventually end up ________.
producing the same level of output
producing at a suboptimal level
earning the same level of profits
minimizing the total cost of production
If firms in a perfectly competitive industry are experiencing losses in the short run, we would expect firms to exit this industry and cause the market supply curve to ________.
shift right until Price = Minimum average total cost
shift left until Price = Minimum average variable cost
shift right until Price = Minimum average variable cost
shift left until Price = Minimum average total cost
Which of the following statements is true?
In a competitive market, the invisible hand encourages the movement of resources from more productive uses to less productive uses.
At the competitive equilibrium, production occurs at the point of maximum average total cost.
Competitive equilibrium provides incentives for entrepreneurs to shift their resources from unprofitable industries to profitable ones.
In a competitive market, firms in the long run tend to earn positive economic profits.
When existing firms leave a perfectly competitive industry, ________.
both the equilibrium price and quantity increase
both the equilibrium price and quantity decrease
both the equilibrium price and quantity decrease
the equilibrium price increases, and the equilibrium quantity decreases
Which of the following statements is true of market prices in a perfectly competitive market?
Market prices are not stable and fluctuate widely.
Market prices allow for the efficient allocation of scarce resources.
Market prices are determined by the government.
Market prices are determined by the government.
If prices are held above the equilibrium price, ________.
there will be a shortage in the market
all firms will incur losses
there will be a surplus in the market
social surplus will be maximized
The decrease in social surplus from a market distortion is referred to as ________.
Pareto loss
market loss
deadweight loss
revenue loss
Efficiency is achieved in competitive markets because ________.
social surplus is maximized (the economic pie is made as large as possible)
deadweight loss is maximized
producer surplus is maximized
producer surplus is maximized
________ relates to the distribution of resources across society.
Utility
Social surplus
Equity
Efficiency
Which of the following best describes a production possibilities curve?
The rate at which an economy can trade production of one good for another
The total amount of goods an economy can produce
A relationship showing the maximum production of one good for a given level of production of another good
How much of one good an economy can produce if they forgo production of another good
The following figure shows the production possibilities curve for a software engineer who has to divide her available time between producing computer programs and Web sites.
Refer to the figure above. Which of the following combinations is attainable as well as efficient?
E
C
D
B
The slope of a production possibility curve represents ________.
the rate at which people in an economy would like to trade one good for another
the opportunity cost of producing one more unit of a good in terms of the forgone production of the other good
combinations of two goods that are not attainable with existing technology
the total cost of producing a given level of output
Which of the following statements best describes absolute advantage?
The party who has the lower opportunity cost of producing the good
The party who can produce more of the good
The party who can produce less of the good
The party who has the higher opportunity cost of producing the good
In Lithasia, the opportunity cost of producing a chair is 2 tables and in Barylia, the opportunity cost of producing a chair is 1/2 table. Which of the following statements is true?
Barylia has a comparative advantage in producing chairs.
Lithasia has a comparative advantage in producing chairs.
Lithasia has a comparative disadvantage in producing tables.
Barylia has a comparative advantage in producing tables.
Specialization occurs when each individual, firm, or country ________.
produces only those goods for which it has a higher opportunity cost of production than that for other nations
produces only a few specific goods and relies on trade for the other goods and services it needs
is self-sufficient and produces all goods and services it needs, without relying on imports
produces only those goods which are in demand in the global market and allow for high rates of profitability
Which of the following statements is true?
Trade between two nations is most beneficial when neither has a comparative advantage in the production of any goods and services.
Trade between two nations is possible only when the opportunity costs of producing goods and services in both nations are identical.
When two nations specialize and trade, there is a loss of efficiency and both the nations are made worse off.
Trade between nations allows each nation to specialize in the production of goods for which it has comparative advantage.
Terms of trade refers to the ________.
amount of money that has to be given up to import an additional quantity of a good
exchange rate of goods for goods
opportunity cost of producing the same good in two trading nations
rules and regulations that govern trade between nations
Two countries, A and B, produce Good X. Which of the following statements is true of the trading price of Good X?
The trading price of Good X will always be equal to the opportunity cost of producing the good in Country A.
The trading price of Good X will lie between the opportunity costs of producing the good in both nations.
The trading price of Good X will be greater than the opportunity cost of producing the good in both nations.
The trading price of Good X will be less than the opportunity cost of producing the good in both nations.
A(n) ________ is any good that is produced domestically but sold abroad, and a(n) ________ is any good that is produced abroad but sold domestically.
export; import
public good; private good
import; export
private good; public good
Which of the following statements is true?
If the domestic price of a good in a country is higher than the world price, the country will become an importer of the good.
Whether a country becomes an importer or an exporter of a good depends only on the world price of the good and is independent of the domestic price of the good.
If the domestic price of a good in a country is higher than the world price, the country will become an exporter of the good.
Whether a country becomes an importer or an exporter of a good depends only on the domestic price of the good and is independent of the world price of the good.
If a nation opens up to free trade and becomes an importer of goods, which of the following is then true?
Sellers gain.
Buyers gain.
Buyers lose.
The nation as a whole loses.
Which of the following statements is not true of free trade?
Free trade encourages countries to specialize in production
Free trade maximizes world living standards.
Free trade always makes each individual better off.
Free trade leads to a maximization of world output.
The use of government regulations and barriers to control trade is referred to as ________.
liberalization
protectionism
actualization
globalization
Taxes levied on goods and services transported across political boundaries are referred to as ________.
value added taxes
service taxes
tariffs
transport taxes
An externality occurs when ________.
the quantity demanded of a good exceeds the quantity supplied
the quantity supplied of a good exceeds the quantity demanded
an economic activity affects third parties not engaged in the activity
the government regulates production and consumption decisions
Externalities essentially create ________.
non-rivalry in consumption
a divergence between private and social costs
a free-rider problem
non-excludability in consumption
When the production of a good generates negative externalities, ________.
the fixed cost of production is zero
the variable cost of production is zero
the social cost of production exceeds the private cost of production
the private cost of production exceeds the social cost of production
The presence of external benefits associated with production implies that ________.
private output corresponds to the socially optimal output
private output exceeds the socially optimal output
private output is less than the socially optimal output
any of the above, depending on the relative magnitude of social and private benefits
The presence of a positive externality in a market leads to a(n) ________.
underproduction of a good
gain in producer surplus
overproduction of a good
fall in consumer surplus
The increasing popularity of hot dogs in a food joint has pushed up their prices, making it unaffordable for many students living in the surrounding areas. This is an example of a ________.
pecuniary externality
positive externality
negative externality
free-rider problem
An economic agent ________ when he accounts for the full costs and benefits of his actions.
maximizes his profit
is called a free rider
internalizes an externality
is called a rent seeker
Which of the following is the best description of the Coase Theorem?
Public goods are over-provided by the private market.
Tariffs can improve economic efficiency.
Bargaining between private parties to an economic exchange results in an efficient allocation of resources.
Only the government can force private parties to internalize externalities.
Private solutions to externalities are most effective if ________.
the transaction costs associated with bargaining are high
the transaction costs associated with bargaining are low
a large number of people are affected by the externalities
property rights are not defined clearly
The Coase Theorem relies on internalizing externalities through ________.
the imposition of corrective taxes
the provision of corrective subsidies
social enforcement mechanisms
negotiations between the parties involved
Government invention is required to solve externality problems if ________.
property rights are clearly defined
transaction costs associated with private negotiations are low
the number of people affected by the externality is large
the number of people affected by the externality is small
A government regulation that bans the use of a certain polluting technology in the production of a good is an example of a ________ used to solve an externality.
social enforcement mechanism
command-and-control approach
Coasian approach
market-based approach
A Pigouvian tax is a tax designed to ________.
induce the consumers of a good to reduce their consumption of the good
induce the producers generating positive externalities to reduce production
induce the producers generating negative externalities to reduce production
force the producers to stop the production of a good in the short run
A vaccination against a disease helps prevent the spread of the disease. Which of the following can help increase the number of people vaccinated to the socially optimal level?
A health tax
An insurance policy
An income tax
A corrective subsidy
In practice, assessing the benefits and costs of a proposed government program is difficult because ________.
some costs and benefits are difficult, perhaps impossible to quantify
the effects of the program may be difficult to determine
many benefits and costs occur in the distant future
all of the above
A good is non-rival in consumption if ________.
the demand for the good increases with an increase in the consumer's income
people cannot be prevented from using it
one person's use of the good does not preclude consumption by others
the government can regulate its production
________ are non-excludable in consumption.
Private goods and club goods
Public goods and private goods
Club goods and common pool resource goods
Public goods and common pool resource goods
A congested street is ________ in consumption.
non-excludable but rival
excludable but non-rival
excludable and rival
non-excludable and non-rival
A free rider is a person who ________.
purchases products available for discounts
receives the benefit of a good without paying for it
can produce a good at a very low cost
only consumes products provided by the government
The government should provide an additional unit of a public good if ________.
the marginal cost of providing the additional unit of the good equals the social cost of providing the additional unit
the marginal cost of providing the additional unit of the good exceeds the marginal benefit
the marginal cost of providing the additional unit of the good exceeds the average cost of providing the additional unit
the marginal benefit exceeds the marginal cost of providing the additional unit of the good
Which of the following can result in the tragedy of the commons?
A high rate of taxation on common pool resources
The use of common pool resources above the socially optimal level
A low level of satisfaction derived from the use of common pool resources
The tendency of consumers to use common pool resources without paying for them
Overfishing leading to a rapid depletion of the stock of fish is an example of the ________.
tragedy of the commons
prisoners' dilemma
paradox of thrift
free-rider problem
A green pasture has turned barren due to overgrazing. This has happened because the pasture was ________.
excludable and rival
excludable but non-rival
non-excludable but rival
non-excludable and non-rival
The congestion charge is an example of ________ to the negative externality associated with common pool resources.
a social norm solution
a command-and-control government solution
a market-based government solution
a private bargaining solution
A marginal tax rate is the ________.
tax rate on the first dollar of income earned
tax rate on the last dollar of income earned
total amount of taxes paid divided by taxable income
total amount of taxes paid
Transfer payments refer to payments from the government to ________.
the employees who work at various public departments
certain individuals or groups such as the elderly or the unemployed
private contractors who undertake infrastructure projects
individual states
The average tax rate faced by an individual is the ________.
total revenue received by the government divided by the number of taxpayers
total tax paid by her divided by the total income earned
difference between the highest tax rate and the lowest tax rate
percentage of the last dollar earned that a household pays as a tax
A ________ tax system is one in which tax rates increase with taxable base incomes.
regressive
progressive
proportional
supplementary
In a regressive tax system, ________.
low-income households pay a higher percentage of their income in taxes
all households pay the same amount of taxes irrespective of their income
high-income households pay a higher percentage of their income in taxes
all households pay the same percentage of their income in taxes
The term ________ refers to how the burden of the tax is distributed across various agents in the economy.
tax discrimination
tax haven
tax funding
tax incidence
If a tax is imposed per unit of a good sold, ________.
the supply curve for the good shifts to the left
the demand curve for the good shifts to the left
the demand curve for the good shifts to the right
the supply curve for the good shifts to the right
If a tax is imposed on a good, ________.
producer surplus increases
the equilibrium quantity of the good in the market falls
the quantity of the good traded in the market increases
consumer surplus increases
If the market supply curve of a commodity is more elastic than its market demand curve, tax incidence is likely to fall ________.
entirely on producers
more on producers than on consumers
more on consumers than on producers
entirely on consumers
The deadweight loss of taxation on a good is higher if ________.
a low rate of tax is imposed on the sale of the good
the demand for or the supply of the good is relatively price elastic
there is only one seller in the market
a progressive tax system is practiced
A price ceiling refers to ________.
the upper limit on the price of a good
the lower limit on the price of a good
the lowest price that a producer is willing to accept for a good
the highest price that a consumer is willing to pay for a good
A price floor set above the equilibrium price leads to a(n) ________.
excess supply of goods in the market
increase in social well-being
excess demand for goods in the market
positive externality
Price controls ________.
redistribute surplus within the side of the market that is a net beneficiary of the price control from those who are queued out of the market to those who can still buy/sell
result in deadweight loss if they cause a change in the market quantity
redistribute surplus from one side of the market to another (e.g. from producers to consumers or vice versa)
all of the above
An example of government failure is ________.
political corruption
the slowness of bureaucracies
bureaucratic inefficiency
all of the above
Which of the following is not an example of the welfare state?
Unemployment insurance benefits
Supplemental nutrition assistance programs (vouchers given to low-income individuals to purchase food)
Government laws establishing property rights
Government-financed healthcare
Approximately 80 percent of mothers of infants in the United States use infant formula. Infant formula has an extremely low price elasticity of demand. As a result, the government could raise substantial revenues by placing high excise taxes on infant formula, and these high taxes would generate relatively modest deadweight losses. What is the likely reason that the government does not increase the tax on infant formula? Explain your answer.
The government cares exclusively about equity.
The deadweight loss would be too large.
The government cares exclusively about efficiency.
The government trades off efficiency to promote equity.
The view that consumers do not always know what is best for them, and that the government should encourage them to modify their behavior, is known as ________.
equity-efficiency trade-off
paternalism
the welfare state
consumer sovereignty
Which of the following statements is true?
Firms are the demanders in the market for labor as well as in the market for consumer goods.
Firms are the demanders in the market for labor, whereas they are the suppliers in the market for consumer goods.
Firms are the suppliers in the market for labor, whereas they are the demanders in the market for consumer goods.
Firms are the suppliers in the market for labor as well as in the market for consumer goods.
A factor of production refers to any good or service that is ________.
produced in a competitive market
produced by the government
used to produce other goods and services
produced using scarce economic resources
The value of the marginal product of labor is the ________.
contribution of an additional unit of labor to a firm's revenue
extra output that is produced by hiring an additional unit of labor
amount of output produced by the first unit of labor hired by a firm
value of the output produced by all the workers in a firm
The decision rule for a profit-maximizing firm operating in a competitive market to hire an additional worker is that the value of the ________.
marginal product of the worker should be equal to or less than the wage rate
average product of the worker being hired should be less than the wage rate
average product of the worker being hired should be equal to the wage rate
marginal product of the worker should be equal to or greater than the wage rate
In the case of leisure, the substitution effect implies that ________.
when the price of leisure increases, people will work more
if people tend to work more and relax less, the price of leisure increases
if people tend to work more and relax less, the price of leisure decreases
when the price of leisure increases, people will work less and relax more
Other things remaining the same, which of the following is likely to happen if the price of flour products decreases?
The wage rate will decrease and the employment level will increase in the flour industry.
Both the wage rate and the employment level in the flour industry will decrease.
The wage rate will increase and the employment level will decrease in the flour industry.
Both the wage rate and the employment level in the flour industry will increase.
Other things remaining the same, which of the following is likely to happen if an industry introduces labor-complementary technology in production?
There will be a fall in the wage rate and a rise in the employment level in the industry.
There will be a rise in the wage rate and a fall in the employment level in the industry.
There will be a fall in both the wage rate and the employment level in the industry.
There will be a rise in both the wage rate and the employment level in the industry.
Which of the following does NOT cause a shift in the supply curve of labor in an industry?
The population of the concerned region
Workers' tastes and preferences
Opportunity costs faced by the workers
The price of the final good that labor produces
A person's stock of skills to produce economic value is referred to as ________.
human capital
personal wealth
personal capital
fixed capital
A compensating wage differential is a wage premium paid to ________.
attract workers to otherwise undesirable occupations
attract workers who have a family to support
improve the goodwill of a firm hiring workers
recognize a more efficient employee
If a firm pays married women less than other individuals with the same human capital (e.g., the same productivity), this is an example of ________.
taste-based discrimination
statistical discrimination
compensating wage differential
none of the above
Which of the following correctly identifies a difference between taste-based discrimination and statistical discrimination?
Employers engaging in taste-based discrimination are willing to forgo profits, whereas employers engaging in statistical discrimination are trying to enhance profits.
Employers engaging in statistical discrimination are willing to forgo profits, whereas employers engaging in taste-based discrimination are trying to enhance profits.
Taste-based discrimination is observed in the service sector, whereas statistical discrimination is observed in the manufacturing sector.
Taste-based discrimination is observed in the manufacturing sector, whereas statistical discrimination is observed in the service sector.
Technological changes that increase the productivity of skilled workers relative to that of unskilled workers are referred to as ________ technological changes.
labor-complementary
labor-saving
unskilled-biased
skill-biased
If the rental price of physical capital falls, the firm's ________.
demand for physical capital will increase
quantity demanded of physical capital will increase
quantity demanded of physical capital will fall
demand for physical capital will fall
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