ECON 200 Lecture Notes - Lecture 8: Pareto Efficiency, Marginal Cost, Shortage
ECON 200 Full Course Notes
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1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?
| $0.60 | ||
| $0.40 | ||
| $0.75 | ||
| $0.67 |
2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:
| a tax of $5 in Market X and a subsidy of $10 in Market Y. | ||
| subsidizing both markets. | ||
| taxing Market Y and subsidizing Market X. | ||
| taxing both markets. |
3.Economic theory suggests that a natural monopoly should be:
| eliminated whenever it arises. | ||
| regulated to take advantage of economies of scale. | ||
| left alone to operate with excess capacity. | ||
| taken over by the government. |
4.When the size of the production is the most efficient:
| total cost is at the minimum. | ||
| average cost is at the minimum. | ||
| marginal cost is at the minimum. | ||
| fixed cost is at the minimum. |
5.A firm should exit the industry if which of the following conditions apply?
| TR > TC | ||
| P < AC | ||
| Lifetime expected profit is positive. | ||
| Prices are low now but expected to rise. |
6.Figure: Costs
Reference: Ref 11-6
(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:
| $75. | ||
| $300. | ||
| $225. | ||
| $0, because P = MC at P = $20. |
7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.
| too low; too high | ||
| equal to the efficient price; too low | ||
| too high; too low | ||
| equal to the efficient price; too high |
8.Which of the following statements is TRUE?
I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.
II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.
III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.
| I only | ||
| II and III only | ||
| I, II, and III | ||
| III only |
9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:
| various options. | ||
| more quantity. | ||
| more discount. | ||
| higher quality. |
10.Figure: Government Price Controls
Reference: Ref 8-3
(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:
| a shortage of 15 units. | ||
| a surplus of 15 units. | ||
| a supply of 20 units. | ||
| no effect on the market. |
11.In which of these instances does price function as a signal in the market?
| Suppliers invest more in exploration when the price of oil increases. | ||
| Consumers complain of price gouging as the price of oil skyrockets. | ||
| Government imposes price controls on the skyrocketing price of oil. | ||
| All of the answers are correct. |
12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.
| demand for; decrease; decrease | ||
| supply of; increase; increase | ||
| supply of; decrease; increase | ||
| demand for; increase; increase |
13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?
| Cotton growers in California don't pay payroll taxes. | ||
| The water used to grow California cotton is highly subsidized by the government. | ||
| Cotton growers in California are mostly operated as nonprofit enterprises. | ||
| The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield. |
14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:
| the equilibrium price will fall to $7.50. | ||
| competition among buyers will increase the current price. | ||
| the current price will fall below $7.50 as sellers compete for market share. | ||
| There is not enough information provided to answer the question. |
15.Which of the following would increase the demand for beef?
| lower pork prices | ||
| higher consumer income | ||
| higher prices of feed grains used to feed beef cattle | ||
| an increase in the price of beef |
16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.
True
False
17.Table: Production in the United States and Germany
| Labor units required to produce: |
| One Clock | One Sofa |
| United States | 2 | 5 | |
| Germany | 3 | 9 |
Reference: Ref 2-8
(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.
| two clocks; three clocks | ||
| 10 clocks; 27 clocks | ||
| 0.4 clocks; 0.33 clocks | ||
| 2.5 clocks; three clocks |
18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.
| This trade makes Ella worse off by $200. | ||
| This trade makes Mark better off by $200. | ||
| Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800. | ||
| This trade creates value by moving the guitar and drum set to people who value them more. |
1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?
| $0.60 | ||
| $0.40 | ||
| $0.75 | ||
| $0.67 |
2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:
| a tax of $5 in Market X and a subsidy of $10 in Market Y. | ||
| subsidizing both markets. | ||
| taxing Market Y and subsidizing Market X. | ||
| taxing both markets. |
3.Economic theory suggests that a natural monopoly should be:
| eliminated whenever it arises. | ||
| regulated to take advantage of economies of scale. | ||
| left alone to operate with excess capacity. | ||
| taken over by the government. |
4.When the size of the production is the most efficient:
| total cost is at the minimum. | ||
| average cost is at the minimum. | ||
| marginal cost is at the minimum. | ||
| fixed cost is at the minimum. |
5.A firm should exit the industry if which of the following conditions apply?
| TR > TC | ||
| P < AC | ||
| Lifetime expected profit is positive. | ||
| Prices are low now but expected to rise. |
6.Figure: Costs
Reference: Ref 11-6
(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:
| $75. | ||
| $300. | ||
| $225. | ||
| $0, because P = MC at P = $20. |
7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.
| too low; too high | ||
| equal to the efficient price; too low | ||
| too high; too low | ||
| equal to the efficient price; too high |
8.Which of the following statements is TRUE?
I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.
II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.
III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.
| I only | ||
| II and III only | ||
| I, II, and III | ||
| III only |
9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:
| various options. | ||
| more quantity. | ||
| more discount. | ||
| higher quality. |
10.Figure: Government Price Controls
Reference: Ref 8-3
(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:
| a shortage of 15 units. | ||
| a surplus of 15 units. | ||
| a supply of 20 units. | ||
| no effect on the market. |
11.In which of these instances does price function as a signal in the market?
| Suppliers invest more in exploration when the price of oil increases. | ||
| Consumers complain of price gouging as the price of oil skyrockets. | ||
| Government imposes price controls on the skyrocketing price of oil. | ||
| All of the answers are correct. |
12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.
| demand for; decrease; decrease | ||
| supply of; increase; increase | ||
| supply of; decrease; increase | ||
| demand for; increase; increase |
13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?
| Cotton growers in California don't pay payroll taxes. | ||
| The water used to grow California cotton is highly subsidized by the government. | ||
| Cotton growers in California are mostly operated as nonprofit enterprises. | ||
| The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield. |
14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:
| the equilibrium price will fall to $7.50. | ||
| competition among buyers will increase the current price. | ||
| the current price will fall below $7.50 as sellers compete for market share. | ||
| There is not enough information provided to answer the question. |
15.Which of the following would increase the demand for beef?
| lower pork prices | ||
| higher consumer income | ||
| higher prices of feed grains used to feed beef cattle | ||
| an increase in the price of beef |
16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.
True
False
17.Table: Production in the United States and Germany
| Labor units required to produce: |
| One Clock | One Sofa |
| United States | 2 | 5 | |
| Germany | 3 | 9 |
Reference: Ref 2-8
(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.
| two clocks; three clocks | ||
| 10 clocks; 27 clocks | ||
| 0.4 clocks; 0.33 clocks | ||
| 2.5 clocks; three clocks |
18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.
| This trade makes Ella worse off by $200. | ||
| This trade makes Mark better off by $200. | ||
| Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800. | ||
| This trade creates value by moving the guitar and drum set to people who value them more. |
Question 1
Which compensation method helps to explain the large difference between the salaries of top-level managers and mid-level managers in a firm?
| A. | Tournaments | |
| B. | New blood | |
| C. | Piece rate | |
| D. | Backloaded compensation |
3 points
Question 2
Please consider the information provided under Question 19 in Chapter 3 (page 54). Based on the stated information, the optimal number of bees kept if the externality is ignored by Yung is 5,000. Is the socially optimal number of bees higher or lower than 5,000?
| A. | We do not have enough information to answer this question | |
| B. | Same | |
| C. | Lower | |
| D. | Higher |
3 points
Question 3
Which of the following factors contribute to the existence of firms?
| A. | All of these factors contribute to firm existence | |
| B. | Risks associated with specialization | |
| C. | Incomplete contracts | |
| D. | Willingness of some people to take on risk in exchange for residual income |
3 points
Question 4
Public goods are often subject to free-rider problems because these goods are:
| A. | Non-rival and non-excludable | |
| B. | Rival and non-excludable | |
| C. | Non-rival and excludable | |
| D. | Rival and excludable |
3 points
Question 5
Which of the following is the most efficient mechanism for allocating scarce goods?
| A. | Government allocation system | |
| B. | First-come-first-served system | |
| C. | Market system | |
| D. | Random allocation system |
3 points
Question 6
Many years ago, most of the major Hollywood movie studios also owned chains of local movie theaters across the US. Today, most of the local movie theaters are owned by other companies. What has happened to the degree of integration in the movie industry over time?
| A. | Less horizontally integrated | |
| B. | Less vertically integrated | |
| C. | More horizontally integrated | |
| D. | More vertically integrated |
3 points
Question 7
Your firm produces replacement parts for the nuclear submarines operated by the US Navy. Which one of Porter's Five Forces will be most prominent in determining your strategies and profitability?
| A. | Bargaining Power of Suppliers | |
| B. | Bargaining Power of Customers | |
| C. | Threat of New Entrants | |
| D. | Threat of Substitutes |
3 points
Question 8
Which of the following statements is NOT true?
| A. | The market mechanism for allocating resources is most efficient due to the incentives it creates. | |
| B. | Markets are always the most efficient way to allocate goods, even if the market is not perfectly competitive. | |
| C. | The random allocation mechanism provides no incentives at all. | |
| D. | The government allocation mechanism provides no incentive for the economy to grow. |
3 points
Question 9
Suppose a firm's cost structure exhibits economies of scope. Which of the following actions is compatible with this cost structure?
| A. | Diversify into other product lines | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| B. | Focus on core competencies and reduce production | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C. | Focus on core competencies and maintain constant production | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| D. | Focus on core competencies and expand production Question 10 Please refer to Table 8.3 on page 132 in the book. Suppose we change the payoffs in the "low price, low price" cell to 0, 25 from 0, 0. Does this change the Nash equilibrium for the game, and is the game still a Prisoner's Dilemma?
3 points Question 11 Which of the following statements about restricting entry to markets is NOT true?
3 points Question 12 Your firm earns $2 million per quarter in total revenue, and your accounting profits are $100,000 per quarter. You do not charge the firm for the use of an old building that you own because it is 50 years old and fully depreciated. However, another firm has offered you $200,000 per quarter to use the facility, and this is the market rental rate for similar facilities. In this case, we know that your:
3 points Question 13 Please refer to Question 13 in Chapter 1 (page 17). What is the marginal cost of reducing global warming by 0.017 degrees?
3 points Question 14 In Chapter 6, Boyes focuses on negative externalities such as the various types of pollution. However, as we discussed during our online session, we can also observe positive externalities in which external benefits are generated for people. Which of the following is NOT an example of a positive externality?
3 points Question 15 Common property resources are:
3 points Question 16 The free-rider problem arises in markets for common property resources.
3 points Question 17 Firms that set their product price below the actual cost of production may be engaging in:
3 points Question 18 Under a cap-and-trade mechanism to control air pollution, what happens to the price of pollution rights if the supply of righs is reduced (i.e., the supply of rights is reduced)?
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