Review Set 4: Economics 100 D: Introduction to Economic Principles Spring 2007 Franklin and Marshall College Department of Economics Dr. Utteeyo Dasgupta Office: Stager332 Email: firstname.lastname@example.org Contact Hours: Web: http:edisk.fandm.edu/utteeyo.dasgupta 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.
2 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. M ULTIPLE C HOICE 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)
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