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Set Review 4: Economics 100 D: Introduction to Economic Principles Spring 2007 Franklin and Marshall College Department of Economics Dr. Utteeyo Dasgupta Email: utteeyo.dasgupta@fandm.edu Web: http:edisk.fandm.edu/utteeyo.dasgupta Office: Stager332 Contact Hours: T 10:30 -11:30, 2:00 3:00 R 10:30 -11:30, 2:00 3:00 and by appointment 1. Economic profit always exceeds accounting profit. 2. The total fixed cost of operating a lumberyard equals $12,000 this year. The average fixed cost of the lumberyard will not be affected by the quantity of lumber that is sold. 3. Total cost equals total variable cost plus marginal cost. 4. The law of diminishing marginal product provides an explanation for why average total cost eventually increases as output is expanded in the short run. 5. An externality is present whenever an activity has a physical impact (costs or benefits) on individuals not directly involved in the activity. 6. A cost that spills over onto individuals not directly involved in an activity is called a positive externality. 7. When negative externalities are present, it leads to an underallocation of resources in that area relative to that which is socially desirable. 8. When positive externalities are present, it leads to an underallocation of resources in that area relative to that which is socially desirable. 9. If a negative externality results from the production of chemicals, an external cost is imposed on parties not directly involved in the market for the chemicals. 10. If mining companies are able to shift some of their production costs onto outside parties, the actual output of mines is likely to fall short of society's ideal. 11. Inoculation against communicable diseases is an example of an activity that generates positive externalities. 12. Someone who does not contribute toward covering the cost of a good he desires, and yet he cannot be excluded from receiving the good, is called a free rider. 13. A public good or service can be consumed by paying and nonpaying customers alike. 14. An example of a public good is a flood control project that protects all the homes and properties near a river. 15. Admission to Disney World is an example of a private good from which nonpaying individuals can be excluded. MULTIPLE CHOICE 1) An explicit cost is: a) an opportunity cost. b) an out-of-pocket expense. c) always larger than an associated implicit cost. d) the total cost of acquiring or doing something, and therefore, includes all opportunity costs. e) both a) and b). 2) An implicit cost: a) 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 by both a) and c). 3) Firms measure their profit by: a) the sum of total sales revenue. b) subtracting total revenues from total costs. c) subtracting total costs from total revenues. d) the total value of outstanding shares of stock. 4) An economist's measurement of profit differs from an accountant's in that: a) accountants calculate total revenue differently than do economists. b) economists do not always include all of the opportunity costs when calculating total production costs. c) accountants do not always include all of the opportunity costs when calculating total production costs. d) economic profit generally exceeds accounting profit. 5) Economists normally assume that the goal of a firm is to: a) sell as many units of output as possible. b) maximize profits. c) sell products at the highest prices possible. d) maximize sales revenue. 6) An example of an explicit cost of production is: a) the cost of foregone labor earnings for an entrepreneur. b) the cost of flour for a baker. c) the foregone rent that could have been earned if land owned by a firm was not used as its parking lot. d) provided by none of the above. 2 7) An example of an implicit cost of production is: a) the cost of raw materials used to produce bread in a bakery. b) the cost of labor in a factory that assembles DVD players. c) the income an entrepreneur could have earned working for someone else. d) all of the above 8) Private costs are those borne by: a) the government. b) the producer of an item. c) both an item's producer and outside parties affected by a negative externality. d) outside parties affected by a negative externality. 9) External costs are those that are: a) borne by free riders. b) borne by exporting firms. c) borne by parties not directly involved in a transaction. d) borne by the government. e) borne by the firm that creates a negative externality. 10) The total social costs of production are: a) private costs plus private benefits. b) private benefits minus private costs. c) private costs plus external costs. d) private costs minus external costs. 11) An example of a positive externality is: a) freeway congestion. b) pollution in a resort lake. c) airport noise. d) beautiful trees on property along a parkway. 12) An externality occurs when: a) people other than those making the demand and supply decisions share the benefits or the costs of an activity. b) only the people making the demand and supply decisions share the benefits or the costs of an activity. c) private costs of production equal the full social costs associated with production of a good. d) private costs of production are ignored. 13) Costs that accrue to the total population are called _____ costs. Costs incurred by the producer consumer or who makes the decision are called _______ costs. a) negative; positive b) social; private c) private; social d) positive; negative 14) External costs are costs: a) paid by corporations rather than by individuals. 3 b) incurred by foreigners rather than domestic consumers and producers. c) unique to market economies. d) borne by nonconsenting secondary parties not directly engaged in the transaction. 15) Which of the following will most likely generate positive externalities? a) a hot dog vendor b) public education c) an automobile d) a city bus e) a polluting factory 16) Golf course developers who buy the land around the golf course they build are attempting to: a) impose external costs on non-consenting third parties. b) internalize external benefits. c) turn a private good into a public good. d) guarantee economic losses for tax purposes. e) avoid neighbor complaints about noise and traffic by preventing the construction of homes in the area. Use the graph below to answer the next two questions (19-20). 17) Currently Q0 of electrical power is being produced. The demand curve is represented by D, and the current market supply is represented by S0. It is discovered that the Rocky Mountain Electrical Co-op and Power Company is discharging waste into the area water supply. As a result, S1 represents________ and a price of _________ would represent the true internalized cost of production at that level of output. a) the supply curve with external costs included; P2 b) the supply curve with external costs included; P1 c) the supply curve with external costs included; P0 d) There is insufficient information available to provide an accurate answer. 18) Which combination, with all costs of production internalized, would represent the true cost and benefit curves and the resulting price and output levels? a) S1 and D, P2 and Q1 b) S1 and D, P1 and Q0 4 c) S1 and D, P0 and Q0 d) S0 and D, P0 and Q0 Use the graph below to answer the next two questions (36-37). 19) Suppose that education provides spillover benefits to the community as illustrated in the above diagram. Based on this information, we can say that: a) the market would fall short of the desirable level of education, Q0. b) education is overproduced by Q1 minus Q0 units. c) the socially optimal quantity of education is Q1 units. d) the socially optimal quantity of education is Q0 units. 20) The area bounded by what letters represents the associated efficiency loss resulting when there are external benefits associated with education? a) Q0, c, b, Q1 b) O, P1, b, Q1 c) O, P0, a, Q0 d) a, b, c 21) A public good is: a) a good or service for which it is relatively easy to exclude nonpaying customers from consumption. b) a good or service that is consumed by both the paying and nonpaying customers. c) any good or service that is produced by the government. d) a good or service that is consumed by private individuals and financed by private contributions. 22) Which of the following is the best example of a public good? a) a national system of healthcare b) an amusement park c) city street lights d) telephone service 5 23) Which of the following is true? a) Consumption of a public good by one individual reduces the availability of the good for others. b) It is extremely difficult to limit the benefits of a public good to the people who pay for it. c) Public goods are free whenever the government produces them. d) From an efficiency standpoint, a market economy will generally supply too much of a public good. e) None of the above are correct. 24) Where a free-rider problem exists, goods tend to be: a) underproduced. b) overproduced. c) high-priced and available only to the rich. d) low priced and available only to the poor. SHORT ANSWER 1. What are the external costs associated with cellular phone usage in automobiles? The external benefits? What is the difference between private and social costs? What distinguishes public goods from private goods? Explain why broadcast television is considered a public good. The R&J Ice Cream Company makes gallons of ice cream using the technology described below. Fill in the Marginal Product columns of these tables. When six ice cream makers are utilized each hour, at what point does diminishing marginal product set in? When eight ice cream makers are utilized? Why is the point of diminishing marginal product different in each case? 2. 4. 5. 6. 6 With 6 ice cream makers Total Product (gallons) 16 36 60 90 114 134 144 Marginal Product (gallons) With 8 ice cream makers Total Product (gallons) 18 40 70 110 152 176 190 Total Product (gallons) Labor 1 worker 2 workers 3 workers 4 workers 5 workers 6 workers 7 workers 7. 8. Labor 1 worker 2 workers 3 workers 4 workers 5 workers 6 workers 7 workers What is the law of diminishing marginal product? What causes it? Explain why some costs are considered to be variable and some fixed. How does time enter into the definition? Answer: Some factors cannot be adjusted quickly in the short run. Costs associated with these factors are called fixed costs. Variable costs are costs incurred through the utilization of factors that can be readily varied in the short term (such as raw materials or labor). Variable costs are costs that increase as output increases, and decrease as output decreases. All costs are variable in the long run when firms have sufficient time to vary all factors of production. 7 ... View Full Document

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