Ohio Northern University

IBEC 430

BASIC ECON REVIEW QUESTIONS

Chapter 2

1)Consider a situation where the U.S. Congress wants to place a special tax on private airplanes to increase tax revenue. This tax would be most effective in raising new tax revenues if the price elasticity of:

1. 1. supply is elastic.
   2. supply is inelastic.
   3. demand is elastic.
   4. demand is inelastic.

2. The price of gold is often volatile because:
   1. demand is relatively inelastic so changes in supply have a large effect on price.
   2. supply is relatively elastic so changes in demand have a large effect on price.
   3. demand is relatively elastic so changes in supply have a large effect on price.
   4. supply is relatively inelastic so changes in demand have a large effect on price.

3. Movie theaters charge lower prices to see a movie in the afternoon than in the evening because there is an:
   1. inelastic supply of movies in the evening.
   2. elastic demand to see movies in the evening.
   3. elastic demand to see movies in the afternoon.
   4. inelastic demand to see movies in the afternoon.

4. The income elasticity of demand for a food is unity. A consumer's monthly income is $2,000, of which 20 percent is spent on food. If income doubles, the amount spent on food will be:
   1. $400 per month.
   2. $500 per month.
   3. $800 per month.
   4. $1,000 per month.

5. For which product is the income elasticity of demand most likely to be negative?
   1. Computer software
   2. Used clothing
   3. Golf balls
   4. Bread

6. 

   106.

Refer to the table above. Which product is a normal good but least responsive to a change in income?

1. 1. Product W
   2. Product X
   3. Product Y
   4. Product Z

7. If a 2 percent increase in the price of product X causes the demand for product Y to increase by 6 percent, then:
   1. X and Y are substitutes.
   2. X and Y are complements.
   3. X and Y are independent goods.
   4. the demand for X is elastic.

8. Suppose that when the price of good X changes from $5 to $10, the demand for good Y changes from 110 to 100, then the cross-elasticity of demand is:
   1. -0.09 and the goods are complements.
   2. 1.44 and the goods are complements.
   3. 1.44 and the goods are substitutes.
   4. -0.143 and the goods are complements.

9. Market failures occur when:
   1. the government sets price floors and ceilings.
   2. the competitive market system under- or overallocates resources to production of goods.
   3. there are no externalities.
   4. goods are rival in consumption.

10. From the economist's perspective, "market failures" basically arise when:
    1. the quantity demanded for a good or service is greater than the quantity supplied of the good or service.
    2. the quantity supplied of a good or service is greater than the quantity demanded for a good or service.
    3. demand and supply do not accurately reflect all the benefits and all the costs of production.
    4. the market system is unable to adapt to or to accommodate change.

11. "Excludability" means that:
    1. sellers can restrict the benefits of a good to those who pay for it.
    2. buyers can restrict other buyers from making purchases in that market.
    3. when one person buys a good, it is not available for others to buy.
    4. government can prevent consumers from buying the good.

12. Allocative efficiency means that:
    1. the law of increasing opportunity costs has reached a maximum.
    2. the least costly methods are being used to produce goods and services.
    3. resources are being devoted to the production of goods and services most desired by society.
    4. the amount of other products that must be sacrificed to obtain production of a given product is at a minimum.

13. Once a government has provided a public good, everyone:
    1. pays the cost.
    2. can obtain the benefit.
    3. experiences positive externalities.
    4. experiences negative externalities.

14. 

    114.

Refer to the above supply and demand graph for a public good. Point c on the graph shows where the:

1. 1. total benefit equals the total cost of the public good.
   2. marginal benefit equals the marginal cost of the public good.
   3. average benefit equals the average cost of the public good.
   4. total benefit equals the marginal cost of the public good.

15. 
    Pa and Pb represent the prices that citizens (a) and (b), the only two people in this nation, are willing to pay for additional units of a quantity (Qc) of the public good. Qs represents the quantity of the public good supplied by government at each of the collective prices.

Refer to the above information. The collective willingness of this nation to pay for the fourth unit of the public good is:

A. $7.

B. $6.

C. $5.

D. $3.

16. 
    Waybelow Normal University has found it necessary to institute a crime-control program on its campus to deal with the high costs of theft and vandalism. The university is now considering several alternative levels of crime control. This table shows the expected annual costs and benefits of these alternatives.

Refer to the above information. The marginal benefits of crime control for Level Two are: A. $20,000.

B. $40,000.

C. $60,000.

D. $140,000.

17. 
    Assume that a government is considering a new social program and may choose to include in this program any number of four progressively larger projects. The marginal cost and the marginal benefit of each of the four projects is provided in the table.

Refer to the above table and information. What is the net benefit of undertaking all four projects?

1. 1. $2 billion
   2. $3 billion
   3. $4 billion
   4. $5 billion

18. Which is an example of a negative externality?
    1. An increase in the value of land you own when a nearby development is completed.
    2. The costs paid by a company to build an automated factory.
    3. Decreased property values in a neighborhood where several houses are burglarized.
    4. The higher price you pay when you buy a heavily advertised product.

19. If there are external or spillover benefits associated with consumption and production of a product, it can be said that the:
    1. government should consider placing a special tax on producers.
    2. government should consider prohibiting the production of the commodity.
    3. supply curve for the product lies too far to the right to provide an efficient allocation of resources.
    4. demand curve understates the total benefit from the product and resources are underallocated to its production.

20. Most economists believe that:
    1. all spillover costs should be eliminated.
    2. the control of spillovers is costless.
    3. spillover costs do not cause a misallocation of resources.
    4. spillover costs should be considered in determining optimal output.

21. It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. Operators of hydroelectric generating plants on the river find they must clean up the river's water before it flows through their equipment.

Refer to the above information. If nothing is done to correct this situation:

1. 1. there will be an overallocation of resources to the production of electricity.
   2. there will be an underallocation of resources to the production of paper goods.
   3. there will be an overallocation of resources to the production of paper goods.
   4. the price of electricity will be lower than it should be.

22. 

    122.

Refer to the above supply and demand graph. Point A represents the current equilibrium level of output of this product and point B represents the optimal level of output from society's perspective. This supply and demand graph indicates that there is(are):

1. 1. spillover benefits to the production of this product.
   2. spillover costs to the production of this product.
   3. an overallocation of resources to the production of this product.
   4. a negative externality from the production of this product.

23. One condition for individual bargaining to occur, according to the Coase theorem, is that there must be:
    1. clearly defined property rights.
    2. many people affected and involved.
    3. government intervention to establish bargaining.
    4. government creation of a market for externalities.

24. Private car alarm systems with red blinking lights would tend to:
    1. decrease the likelihood of car thefts to all car owners.
    2. increase the likelihood of car thefts to all car owners.
    3. redistribute the likelihood of a car theft from those car owners with such a device to those car owners without such a device.
    4. offer a positive externality to those car owners who did not pay for the device.

25. 

    125.

The graph above shows the market for a product where S₁ is the original supply curve and S₂ is the new supply curve following a tax on producers to reduce pollution. The tax per unit of output is:

1. 1. AB.
   2. AC.
   3. BG.
   4. AJ.

26. A market for pollution rights can be expected to:
    1. eliminate all pollution.
    2. produce a shortage of pollution.
    3. encourage potential polluters to increase emissions.
    4. provide potential polluters with a monetary incentive to reduce emissions.

27. 
    The data in the table show the marginal costs and marginal benefits to a city for five different levels of pollution control.

Refer to the above table. If the marginal benefit of pollution abatement increased by $150,000 at each level because of the community's newfound desire to attract cleaner industry, then the optimal level of pollution abatement in tons would be: A. 600.

B. 700.

C. 800.

D. 900.

28. Which of the following best reflects the ability-to-pay philosophy of taxation?
    1. Taxes on residential property.
    2. Progressive income taxes.
    3. Excise taxes on gasoline.
    4. Excise taxes on coffee.

29. The federal income tax is consistent with the            principle of taxation, whereas an excise tax on sporting event tickets is consistent with the                                  principle of taxation.
    1. benefits-received; ability-to-pay
    2. benefits-received; pay-as-you go
    3. ability-to-pay; benefits-received
    4. ability-to-pay; pay-as-you-go

30. The sales tax is a regressive tax because the:
    1. percentage of income paid as taxes falls as income rises.
    2. administrative costs associated with the collection of the tax are relatively high.
    3. percentage of income paid as taxes is constant as income rises.
    4. tax tends to reduce the total volume of consumption expenditures.

31. 

    131.

Refer to the above graph. Which of the lines in the above diagram represent(s) a regressive tax?

1. 1. Both A and B
   2. D

only

1. 3. C

only

1. 4. B

only

32. In 2007, the top 1 percent of all taxpayers in the United States paid what percent of the federal income tax?
    1. 21.2 percent
    2. 33.7 percent
    3. 39.5 percent
    4. 60.7 percent

33. (Applying the Analysis) Which of the following claims is not made by opponents of a value-added tax (VAT)?
    1. Savings and investment are discouraged because future consumption is penalized.
    2. The VAT is regressive, potentially leading to additional progressive taxes to offset the regressive VAT.
    3. Sellers bear a disproportionately large burden of the tax.
    4. The VAT is a hidden tax, and thus easier to raise to support the expansion of government.

34. A factory, mine, store, or warehouse that performs one or more functions in making and distributing goods and services is:
    1. a firm.
    2. a plant.
    3. an industry.
    4. a corporation.

35. If a company owns plants at various stages of the production process, this is called:
    1. an industry.
    2. a conglomerate.
    3. a vertically integrated firm.
    4. a multiplant firm.

36. Which of the following is correct?
    1. A person who purchases a corporate bond is borrowing money from a corporation.
    2. A person who purchases a corporate stock is buying ownership in the corporation.
    3. A person who purchases a corporate bond is guaranteed to earn dividends from the stock.
    4. A person who purchases a corporate stock gets the option to buy other shares at lower prices.

37. One major advantage of limited liability is that it:
    1. is not subject to a free-rider problem.
    2. is not subject to a principal-agent problem.
    3. has unlimited profit sharing among the firm's owners.
    4. shields the personal assets of owners from liability claims.

38. Economic cost can best be defined as:
    1. any contractual obligation that results in a flow of money expenditures from an enterprise to resource suppliers.
    2. any contractual obligation to labor or material suppliers.
    3. compensations that must be received by resource owners to ensure their continued supply.
    4. all costs exclusive of payments to fixed factors of production.

39. To the economist, total cost includes:
    1. explicit and implicit costs, including a normal profit.
    2. neither implicit nor explicit costs.
    3. implicit, but not explicit, costs.
    4. explicit, but not implicit, costs.

40. Economic profits are calculated by subtracting:
    1. explicit costs from total revenue.
    2. implicit costs from total revenue.
    3. implicit costs from normal profits.
    4. explicit and implicit costs from total revenue.

41. The basic characteristic of the short run is that:
    1. barriers to entry prevent new firms from entering the industry.
    2. the firm does not have sufficient time to change the size of its plant.
    3. the firm does not have sufficient time to cut its rate of output to zero.
    4. a firm does not have sufficient time to change the amounts of any of the resources it employs.

42. The basic difference between the short run and the long run is that:
    1. all costs are fixed in the short run, but all costs are variable in the long run.
    2. the law of diminishing returns applies in the long run but not in the short run.
    3. at least one resource is fixed in the short run, while all resources are variable in the long run.
    4. economies of scale may be present in the short run but not in the long run.

43. Which of the following statements concerning the relationships between total product (TP), average product (AP), and marginal product (MP) is not correct?
    1. AP continues to rise so long as TP is rising.
    2. AP reaches a maximum before TP reaches a maximum.
    3. TP reaches a maximum when the MP of the variable input becomes zero.
    4. MP cuts AP at the maximum AP.

44. Marginal product:
    1. diminishes at all levels of production.
    2. may initially increase, then diminish, but never become negative.
    3. may initially increase, then diminish, and ultimately become negative.
    4. is always less than average product.

45. Which of the following is not correct?
    1. Where marginal product is greater than average product, average product is rising.
    2. Where total product is at a maximum, average product is also at a maximum.
    3. Where marginal product is zero, total product is at a maximum.
    4. Marginal product becomes negative before average product becomes negative.

46. 146.

Refer to the above data. The marginal product of the fourth worker:

1. is 5.
2. is 7.

C. is 71/2.

D. cannot be calculated from the information given.

47. When total product is diminishing, marginal product is:
    1. positive and increasing.
    2. positive and decreasing.
    3. constant.
    4. negative.

48. If you operated a small bakery, which of the following would be a variable cost in the short run?
    1. Baking ovens
    2. Interest on business loans
    3. Annual lease payment for use of the building
    4. Baking supplies (flour, salt, etc.)

49. 

    149.

Refer to the above diagram. At output level Q total variable cost is:

1. 1. 0BEQ.
   2. BCDE.
   3. 0CDQ.
   4. 0AFQ.

50. 

    150.

Refer to the above diagram. The vertical distance between ATC and AVC reflects:

1. 1. the law of diminishing returns.
   2. the average fixed cost at each level of output.
   3. marginal cost at each level of output.
   4. the presence of economies of scale.

51. Other things equal, if the fixed costs of a firm were to increase by $100,000 per year, which of the following would happen?

1. 1. Marginal costs and average variable costs would both rise.
   2. Average fixed costs and average variable costs would rise.
   3. Average fixed costs and average total costs would rise.
   4. Average fixed costs would rise, but marginal costs would fall.

52. 

    152.

Refer to the above data. The marginal cost of producing the sixth unit of output is:

A. $24.

B. $12.

C. $16.

D. $8.

53. 
    Use the figure below to answer the following questions:

In the above figure, curves 1, 2, 3, and 4 represent the:

1. 1. ATC, MC, AFC, and AVC curves respectively.
   2. MC, AFC, AVC, and ATC curves respectively.
   3. MC, ATC, AVC, and AFC curves respectively.
   4. ATC, AVC, AFC, and MC curves respectively.

54. Other things equal, if the wage rates paid to a firm's labor inputs were to rise, we would expect the:
    1. AFC, AVC, ATC, and MC to rise.
    2. AVC, ATC, and MC to rise.
    3. AFC and ATC to fall.
    4. MP to fall.

55. 
    The Sunshine Corporation finds its costs are $40 when it produces no output. Its total variable costs (TVC) change with output as shown in the accompanying table. Use this information to answer the following question.

Refer to the above information. The average total cost of 3 units of output is:

A. $65.

B. $21.67.

C. $40.

D. $35.

56. Economies and diseconomies of scale explain:
    1. the profit-maximizing level of production.
    2. why the firm's long-run average total cost curve is U-shaped.
    3. why the firm's short-run marginal cost curve cuts the short-run average variable cost curve at its minimum point.
    4. the distinction between fixed and variable costs.

57. 

    157.

As the firm in the above diagram expands from plant size #3 to plant size #5, it experiences:

1. 1. increasing returns.
   2. economies of scale.
   3. diseconomies of scale.
   4. constant costs.

58. When a firm does more of something, it gets better at it. This learning-by-doing is:
    1. a source of diseconomies of scale.
    2. a source of economies of scale.
    3. called the principle of natural progression.
    4. called "spreading the overhead."

59. The minimum efficient scale of a firm:
    1. is realized somewhere in the range of diseconomies of scale.
    2. occurs where marginal product becomes zero.
    3. is in the middle of the range of constant returns to scale.
    4. is the smallest level of output at which long-run average total cost is minimized.

60. The long-run average total cost curve:
    1. displays declining unit costs so long as output is increasing.
    2. indicates the lowest unit costs achievable when a firm has had sufficient time to alter plant size.
    3. has a shape that is the inverse of the law of diminishing returns.
    4. can be derived by summing horizontally the average total cost curves of all firms in an industry.

61. In which two market models would advertising be used most often?
    1. Pure competition and monopolistic competition
    2. Pure competition and pure monopoly
    3. Monopolistic competition and oligopoly
    4. Pure monopoly and oligopoly

62. Under which market model are the conditions of entry the most difficult?
    1. Monopolistic competition
    2. Pure competition
    3. Pure monopoly
    4. Oligopoly

63. Which is a feature of a purely competitive market?
    1. There are price differences between firms producing the same product.
    2. There are significant barriers to entry into the industry.
    3. The industry's demand curve is perfectly elastic.
    4. Products are standardized or homogeneous.

64. Which is a reason why there is no advertising by individual firms under pure competition?
    1. Firms produce a homogeneous product.
    2. The quantity of the product demanded is very large.
    3. The market demand curve cannot be increased.
    4. Firms do not make long-run profits.

65. A single firm in pure competition in the short run has a:
    1. vertical supply curve.
    2. vertical demand curve.
    3. horizontal supply curve.
    4. horizontal demand curve.

66. 

    166.

Refer to the above graph for a firm in pure competition. Line B represents:

1. 1. total revenue.
   2. marginal revenue.
   3. average total cost.
   4. average fixed cost.

67. 
    Given the table below, what is the short-run profit-maximizing level of output for the firm?
    1. 2 units
    2. 3 units
    3. 4 units
    4. 5 units

68. 

    168.

Refer to the above table. The marginal revenue from the third unit of output is:

A. $40.

B. $50.

C. $120.

D. $160.

69. Which is necessarily true for a purely competitive firm in short-run equilibrium?
    1. Marginal revenue less marginal cost equals zero.
    2. Price less average total cost equals zero.
    3. Total revenue less total cost equals zero.
    4. Marginal revenue is zero.

70. 

    170.

Refer to the above data. This firm is selling its output in a(n):

1. 1. imperfectly competitive market.
   2. monopolistic market.
   3. purely competitive market.
   4. oligopolistic market.

71. A firm sells a product in a purely competitive market. The marginal cost of the product at the current output is $3.00 and the market price is $2.50. What should the firm do?
    1. Shut down if the minimum possible average variable cost is $2.00.
    2. Increase output if the minimum possible average variable cost is $2.00.
    3. Increase output if the minimum possible average variable cost is $2.50.
    4. Decrease output if the minimum possible average variable cost is $2.00.

72. 

    172.

Refer to the above graph. The level of output at which this firm is maximizing an economic profit is:

1. 1. 0A.
   2. 0B.
   3. 0C.
   4. 0K.

73. 
    The table below shows cost data for a firm that is selling in a purely competitive market.

Refer to the above table. If the market price for the firm's product is $70, the competitive firm will:

1. 1. produce one unit.
   2. produce two units.
   3. produce three units.
   4. shut down.

74. The Campus Crustacean Company receives $2 per box for its crawfish and is selling 1600 boxes to maximize its profits. What is the per-unit profit on a box of crawfish at the profit-maximizing level of output if the variable cost is $1 per box and fixed costs are $1200?

A. $0.25

B. $0.50

C. $1.00

D. $1.25

75. When a firm produces less output, it can reduce:
    1. its fixed costs but not its variable costs.
    2. its variable costs but not its fixed costs.
    3. average fixed cost.
    4. marginal revenue.

76. 

    176.

Refer to the above graph. It shows a profit-maximizing, purely competitive firm operating in the short run. Which area in the graph represents the amount of economic loss for the firm?

1. 1. 0beg
   2. bcde
   3. acdf
   4. abef

77. Candy Cane Corporation (CCC) produces 100,000 boxes of candy bars per year that sell for $3 a box. If variable costs are $2 per box and it has $125,000 in fixed operating costs, in the short run the CCC should:
    1. shut down as fixed costs are not being covered.
    2. keep producing as profits are $25,000.
    3. keep producing because variable costs are covered.
    4. reduce production until the break-even point is reached.

78. In general, in the short run, the supply curve of a purely competitive firm is:
    1. identical to the marginal-cost curve.
    2. a horizontal line equal to the market price.
    3. the rising portion of the average-total-cost (ATC) curve.
    4. the rising portion of the marginal-cost curve above the AVC curve.

79. 

    179.

Refer to the above diagram. All data are for the short run. If product price is P₂, the firm will:

79. 1. close down to avoid a loss.
    2. produce Q₂ units and make an economic profit.
    3. produce Q₅ units and break even.
    4. produce Q₂ units and suffer a loss.
80. If a purely competitive firm is in short-run equilibrium and its marginal cost exceeds its average total cost, we can conclude that:
    1. this is a decreasing-cost industry.
    2. this is an increasing-cost industry.
    3. firms will exit the industry in the long run.
    4. firms will enter the industry in the long run.

81. 

    181.

Refer to the above graphs. What will happen in the long run to industry supply and the equilibrium price of the product?

1. 1. S will decrease, P will decrease.
   2. S will increase, P will decrease.
   3. S will decrease, P will increase.
   4. S will increase, P will increase.

82. The long-run supply curve would be downsloping in:
    1. an increasing-cost industry.
    2. a decreasing-cost industry.
    3. a constant-cost industry.
    4. a variable-cost industry.

83. Which statement is correct? The long-run supply curve for a purely competitive:
    1. decreasing-cost industry is upsloping.
    2. increasing-cost industry is perfectly elastic.
    3. increasing-cost industry is upsloping.
    4. increasing-cost industry is less elastic than the industry's short-run supply curve.

84. Productive efficiency refers to:
    1. cost minimization, where P = minimum ATC.
    2. production, where P = MC.
    3. maximizing profits by producing where MR = MC.
    4. setting TR = TC.

85. In long-run equilibrium under conditions of pure competition and productive efficiency, all firms produce at minimum:
    1. average total cost.
    2. marginal cost.
    3. total cost.
    4. average variable cost.

86. Resources are efficiently allocated when production occurs at that output level where price:
    1. equals marginal cost.
    2. equals marginal revenue.
    3. is greater than marginal revenue.
    4. is equal to average variable cost.

87. If there is allocative efficiency in a purely competitive market for a product, the maximum price consumers are willing to pay is:
    1. less than marginal benefit.
    2. greater than marginal cost.
    3. equal to the amount of efficiency or deadweight losses.
    4. equal to the minimum price producers are willing to accept.

88. Which is most characteristic of a pure monopoly?
    1. There is a dominant firm in a multifirm industry.
    2. The firm produces a good or a service for which there are no close substitutes.
    3. The firm has considerable control over the quantity of the output produced, but not over price.
    4. Exit from the industry is blocked but entry into the industry is relatively easy.

89. Under conditions of pure monopoly:
    1. there are close substitutes.
    2. there is no advertising.
    3. the firm is a price taker.
    4. entry is blocked.

90. Which is a barrier to entry?
    1. Patents
    2. Revenue maximization
    3. Profit maximization
    4. Elastic product demand

91. Which is a barrier to entry in an industry?
    1. Economies of scale
    2. Allocative efficiency
    3. Profit maximization
    4. Economic profits

92. One feature of pure monopoly is that the demand curve:
    1. is vertical.
    2. is horizontal.
    3. slopes upward.
    4. slopes downward.

93. The nondiscriminating monopolist's demand curve:
    1. is less elastic than a purely competitive firm's demand curve.
    2. is perfectly elastic.
    3. coincides with its marginal revenue curve.
    4. is perfectly inelastic.

94. A pure monopoly firm will never charge a price in the inelastic range of its demand curve because lowering price to get into this region will:
    1. increase total revenue, increase total cost, and decrease profit.
    2. decrease total revenue, increase total cost, and decrease profit.
    3. increase total revenue, decrease total cost, and decrease profit.
    4. decrease total revenue, total cost, and profit.

95. Which of the above shows the correct relationship between demand and marginal revenue?
    1. A
    2. B
    3. C
    4. D