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Questions and Answers of Economics

What kind of problems does the government face when trying to perform a cost-benefit analysis of whether or how much of a public project to produce?
How does a TV broad cast have characteristics of a public good? What about cable services such as HBO?
In order to get a license to practice in the United States, foreign-trained veterinarians must take an exam given by the American Veterinary Association. Only 48 people per year are allowed to take
How would the adverse selection problem arise in the insurance market? How is it like the “lemon” used-car problem?
In terms of signaling behavior:a. Why is wearing a suit a weaker signal of ability than higher educational achievement?b. Why do some majors in college provide more powerful signals to future
In terms of winner’s curse:a. Why is the winner’s curse unlikely for frequently purchased goods?b. Why would the winner’s curse be more likely as the number of bidders increases?c. Why would we
In terms of moral hazard:a. Why does someone’s willingness to pay a large deductible on an insurance policy tell an insurer something valuable about the seriousness of the moral hazard problem they
True or False:1. A negative externality is when the action of one party imposes a cost on another party.2. A positive externality is when the action of one party benefits another party.3. In the case
True or False:1. In the case of goods where all those affected benefit simultaneously and it is prohibitively costly to exclude anyone from consuming them, market failures tend to arise.2. In the
Multiple Choice Questions1. Which of the following are important roles of the government?a. Protecting property rightsb. Providing a legal systemc. Intervention when insufficient competition occurs
Multiple Choice Questions1. The ability to pay principle states:a. Those with the greatest ability to pay taxes should pay more.b. Those with the least ability to pay taxes should pay more.c.
Why does favoring market mechanisms over command and control mechanisms not mean that a person wants no government whatsoever?
Why would means-tested transfer payments (such as food stamps, in which benefits are reduced as income rises) act like an income tax facing recipients?
Why are income taxes more progressive than excise taxes such as those on alcohol, tobacco, and gasoline?
Why is the Social Security payroll tax considered regressive?
Could the burdens of a regulation be either progressive or regressive, like the effects of a tax?
Is a gas tax better described as reflecting the ability to pay principle or the benefits received principle? What about the federal income tax?
Why would the benefits received principle be difficult to apply to national defense and the provision of the justice system?
Illustrate the median voter model graphically and explain it.
Why would a candidate offering “a choice, not an echo,” run a risk of losing in a landslide?
Why might the party favorites at a political convention sometimes be harder to elect than more moderate candidates?
How can you be forced to pay for something you do not want to “buy” in the political sector? Is this sometimes good?
Why does the creation of a government program create a special interest group, which makes it difficult to reduce or eliminate it in the future?
Why are college students better informed about their own teachers’ and schools’ policies than about national education issues?
Why do you think news reporters are more informed than average citizens about public policy issues?
True or False:1. Government spending as a percentage of GDP has changed little since 1970, but the composition of government spending has changed considerably.2. The composition of state and local
True or False:1. If a higher-income person pays more in total taxes than a lower-income person, those taxes would be considered progressive.2. Excise taxes, such as those on alcohol, tobacco, and
True or False:1. In public choice analysis, bureaucrats, politicians, and voters are assumed to make choices that they believe will yield to the public expected marginal benefits greater than their
Multiple Choice:1. The increase in total utility that one receives from eating an additional piece of sushi is calleda. Marginal utility.b. Interpersonal utility.c. Marginal cost.d. Average
Multiple Choice Questions1. The law of diminishing marginal utility implies that the more of a commodity you consume, thea. More you value additional units of output.b. Less you value additional
Why can we not say that two people who chose to buy the same quantity of a good at the same price have the same marginal utility?
If someone said, “You would have to pay me to eat one more bite,” what do we know about her marginal utility? What do we know about her total utility?
Why would you not continue to consume a good in the range where there was diminishing total utility?
The following table shows Rene€™s total utility from eating escargot. Fill in the blanks that show the marginal utility that Rene derives from eatingescargot.
Plot both Rene€™s total and marginal utility curves ongraphs.
Suppose it is “All You Can Eat” Night at your favorite restaurant. Once you’ve paid $9.95 for your meal, how do you determine how many helpings to consume? Should you continue eating until your
Suppose you currently spend your weekly income on movies and video games such that the marginal utility per dollar spent on each activity is equal. If the price of a movie ticket rises, how will you
Brandy spends her entire weekly budget of $20 on soda and pizza. A can of soda and a slice of pizza are priced at $1 and $2, respectively. Brandy’s marginal utility from soda and pizza consumption
Suppose you were studying late one night and you were craving a Papa John’s pizza. How much marginal utility would you receive? How much marginal utility would you receive from a pizza that was
The Consumer Price Index (CPI) measures changes in the cost of living by comparing the cost of buying a certain bundle of goods and services over time. The quantities of each commodity remain the
A restaurant offers a free dinner with a six-pound steak, potatoes, and all the trimmings, but only if the patron can eat it all. Otherwise, he must pay $80 for the steak dinner. What does this say
How does the water-diamond paradox explain why there is such a poor correlation between the price of a good and the total utility a person receives from it?
Explain the income and substitution effects of a price reduction of a good.
Explain the book’s distinction between newspaper racks, where the price allows you access to multiple papers, and food vending machines, where you can only get one of the items purchased. Would you
True or False:1. Utility is the satisfaction or enjoyment derived from consumption.2. Economists do not think it is possible to compare the relative satisfaction derived from consumption across
Multiple Choice Questions:1. An explicit costa. Is an opportunity cost.b. Is an out-of-pocket expense.c. Does not require an outlay of money.d. Is characterized by both a and b.e. Is characterized
Multiple Choice Questions:1. The long runa. Is a period in which a firm can adjust all its inputs.b. Can vary in length from industry to industry.c. Is a period in which all costs are variable
Multiple Choice Questions:1. Total fixed costsa. Do not vary with the level of output.b. Cannot be avoided in the short run without going out of business.c. do not exist in the long run.d. Are
Multiple Choice Questions:1. Which of the following is always true?a. When marginal cost is less than average total cost, average total cost is increasing.b. When average fixed cost is falling,
As a farmer, you work for yourself using your own tractor, equipment, and farm structures, and you cultivate your own land. Why might it be difficult to calculate your profits from farming?
The salmon fishery in Alaska’s Bristol Bay has historically been one of the world’s richest. Over the past few years, poor returns of salmon to the bay and competition from farm-raised salmon
Use the table below for aâ€“c.Willie's Water Park Short-Run Production Functiona. Fill in the Total Product column.b. Willie's Water Park experiences diminishing marginal product beginning with
Harry€™s Hat Company makes hats using the technology described in the following data:a. Fill in the Marginal Product columns of these tables.b. At what point does diminishing marginal
Fill in the rest of the production function for Candy€™s Candies from the information provided.a. Candy€™s Candies begins to experience diminishing marginal product with which
Draw a typically shaped total product curve and the marginal product curve derived from it, and indicate the ranges of increasing, diminishing, and negative marginal product.
Say that your firm’s total product curve includes the following data: one worker can produce 8 units of output; two workers, 20 units; three workers, 34 units; four workers, 50 units; five workers,
Why does the law of diminishing marginal product imply the law of increasing costs?
Complete the following table describing the short-run daily costs of the Attractive Magnet Co. for2009.
As a movie exhibitor, you can choose between paying a flat fee of $5,000 to show a movie for a week or paying a fee of $2 per customer. Will your choice affect your fixed and variable costs? How?
What is likely to happen to your marginal costs when adding output required working beyond an eight-hour day, if workers must be paid time-and-a-half wages beyond an eight-hour day?
If your university pays lecture note takers $20 per hour to take notes in your economics class and t hen sells subscriptions for $15 per student, is the cost of the lecture note taker a fixed or
The Lighthouse Safety Vest Co. makes flotation vests for recreational boaters. They currently employ 50 people and produce 12,000 vests per month. Lighthouse managers know that when they hire one
Illustrate how the shape of the marginal product curve relates to the shape of the marginal cost curve.
Use the graph to answer the following questions.a. Curve A represents which cost curve?b. Curve B represents which cost curve?c. Curve C represents which cost curve?d. Curve D represents which cost
Fill in the rest of the cost function for Bobâ€™s BowlingBalls.
Buffalo Bill has a potato chip company, Buffalo’s chips. He is currently losing money on every bag of chips he sells. Mrs. Bill, who has just completed an economics class, tells Buffalo Bill he
You have the following information about long-run total cost for the following firms:a. Do any of these firms experience constant returns to scale? How do you know?b. Do any of these firms experience
Refer to the cost curve in the following exhibit:a. What is the lowest level of output at which the efficient scale of production is reached in the long run?b. In the short run described by SRATC,
True or False:1. Explicit costs include both wages paid to workers and the opportunity cost of using one’s own land, labor, or capital.2. Because implicit costs do not represent an explicit outlay
True or False:1. In the long run, the inputs that do not change with output are called fixed inputs or fixed factors of production.2. The long run can vary considerably in length from industry to
True or False:1. Variable costs vary with the level of output, while fixed costs do not.2. Marginal cost shows the change in total costs associated with a change in output by one unit, or the cost of
True or False:1. The average total cost curve is usually U-shaped.2. The declining average variable cost curve is primarily responsible for the falling segment of the average total cost curve.3.
Multiple Choice Questions1. Which of the following is false about perfect competition?a. Perfectly competitive firms sell homogeneous products.b. A perfectly competitive industry allows easy entry
Multiple Choice Questions1. In perfect competition, at a firm€™s short-run profit-maximizing output,a. Its marginal revenue equals zero.b. Its average revenue could be greater or less than
Multiple Choice Questions1. The short-run supply curve of a perfectly competitive firm isa. Its MC curve.b. Its MC curve above the minimum point of AVC.c. Its MC curve above the minimum point of
Which of the following are most likely to be perfectly competitive?a. Chicago Board of Tradeb. Fast-food industryc. Computer software industryd. New York Stock Exchangee. Clothing industry
Using the following information, which of the industries described are perfectly competitive? Check the perfectly competitive market characteristics each industry possessed and determine whether it
Given these data, determine AR, MR, P, and the short-run profit-maximizing (loss-minimizing) level ofoutput.
Illustrate the SRATC, AVC, MC, and MR curves for a perfectly competitive firm that is operating at a loss. What is the output level that minimizes losses? Why is it more profitable to continue
Industry councils promote the consumption of particular types of farm products. These groups urge us to “Drink Milk” or “Eat Apples.” Very little advertising is done by individual farmers.
Complete the following table and identify the profit-maximizing output.a.b. What is true about marginal revenue and marginal costs when profit is maximized?c. What would be the profit-maximizing
Explain why the following conditions are typical under perfect competition in the long run.a. P = MCb. P = minimum ATC
Discuss the following questions.a. Why must price cover AVC if firms are to continue to operate?b. If the firm is covering its AVC but not all its fixed costs, will it continue to operate in the
At a price of $5 the profit-maximizing output for a perfectly competitive firm is 1,000 units per year. If the average total cost is $3 per unit, what will be the firm’s profit? If the average
Use the following diagram to answer a, b, and c.a. Illustrate the relationship between a perfectly competitive firm€™s demand curve and the market supply and demand curve.b. Illustrate the
Complete the following table for a perfectly competitive firm, and indicate its profit-maximizingoutput.
Use the following diagram to answer a€“d.a. How much would a perfectly competitive firm produce at each of the indicated prices?b. At which prices is the firm earning economic profits? Zero
Use the following diagrams to answer a and b.a. Show the effect of an increase in demand on the perfectly competitive firm€™s price, marginal revenue, output, and profits in the short
In The Wealth of Nations, Adam Smith wrote, “Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public
Graph and explain the adjustments to long-run equilibrium when market demand decreases in a constant-cost industry.
Evaluate the following statements. Determine whether each is true or false and explain your answer.a. If economic profits are zero, firms will exit the industry in the long run.b. A firm cannot
Describe what would happen to the industry supply curve and the economic profits of the firms in a competitive industry if those firms were currently earning economic profits. What if they were
Given the industry description, identify each of the following as an increasing- or constant-cost industry.a. Major League Baseball: Uses the majority of pitchers. As the number of pitchers used
True or False:1. In perfect competition, no single firm produces more than an extremely small proportion of output, so no firm can influence the market price.2. Perfectly competitive firms are price
True or False:1. The perfectly competitive model does not assume any knowledge on the part of individual buyers and sellers about market demand and supply—they only have to know the price of the
True or False:1. Because the short run is too brief for new firms to enter the market, the market supply curve is the vertical summation of the supply curves of existing firms.2. As new firms enter
Multiple Choice Questions:1. Pure monopoly is defined asa. An industry consisting of a single seller.b. A market structure that involves many substitute products.c. A market in which many rival firms
Multiple Choice Questions:1. If a profit-maximizing monopolist is currently charging a price on the inelastic portion of its demand curve, it shoulda. Raise price and decrease output.b. Lower price
Multiple Choice Questions:1. Monopoly is unlike perfect competition in thata. A monopolist’s price is greater than marginal cost.b. There are no barriers to entry into a monopoly industry.c. A
Multiple Choice Questions:1. Under average cost pricing by a natural monopoly,a. Price is greater than marginal cost.b. A welfare cost will be incurred.c. The producer will earn a normal rate of

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