Microeconomics: Key Concepts and Applications
1. Comparative Advantage in Wool Production
Refer to Figure 1. From the figure, it is apparent that New Zealand has a comparative advantage in producing wool, relative to the rest of the world. (C)
2. Consumer Surplus with Trade
Refer to the figure above. When trade in wool is allowed, consumer surplus in New Zealand decreases by the area B + D. (C)
3. Negative Externality of Air Pollution
Since air pollution creates a negative externality, social welfare will be enhanced when some, but not all, air pollution is eliminated. (A)
4. Playground as a Common Resource
At the local park, there is a playground for children to use. While anyone is allowed to use the playground, it is often very busy, reducing the enjoyment of many of the children who use it. The playground is a common resource. (C)
5. Coase Theorem and Externalities
According to the Coase theorem, in the presence of externalities, private parties can bargain to reach an efficient outcome. (A)
6. Utility-Maximizing Quantities
Which of the following statements is true? Quantities Q0 and Q1 are the utility-maximizing quantities of hoagies at two different prices of hoagies. (A)
7. Individual Demand Curve for Salmon
In order to derive an individual’s demand curve for salmon, we would observe what happens to the utility-maximizing bundle when we change the price of the product and hold everything else constant. (A)
8. Downward-Sloping Linear Demand Curve
Along a downward-sloping linear demand curve, the marginal utility from the consumption of each unit of the good falls and the total utility from consuming larger quantities increases. (A)
9. Trade and Domestic Producers/Consumers
When a country allows trade and becomes an importer of a good, domestic producers become worse off, and domestic consumers become better off. (C)
10. Guatemala and T-Bone Steak Trade
The world price of a pound of T-bone steak is $9.00. Before Guatemala allowed trade in beef, the price of a pound of T-bone steak there was $12.00. Once Guatemala began allowing trade in beef with other countries, Guatemala began importing T-bone steak and the price per pound in Guatemala decreased to $9.00. (D)
11. Equilibrium without International Trade
Refer to Figure 5. With no international trade, the equilibrium price is $12 and the equilibrium quantity is 300. (A)
12. Free-Trade Policy in China
Refer to Figure 5. If China were to abandon a no-trade policy in favor of a free-trade policy, total surplus in the Chinese economy would increase. (C)
13. Tariff on Carnations
Refer to Figure 6. The imposition of a tariff on carnations decreases the number of carnations imported by 200. (C)
14. Government Revenue from Tariff
Refer to Figure 6. The amount of revenue collected by the government from the tariff is $400. (B)
15. Resistance to Tariff Imposition
Refer to Figure 6. Assuming the country currently allows free trade, who is most likely to resist the imposition of the illustrated tariff? Consumer advocacy groups. (A)
16. Positive Externality of a Well-Maintained Yard
Which of the following statements about a well-maintained yard best conveys the general nature of the externality? A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood. (C)
17. Tobacco Industry and Negative Externalities
Refer to Figure 7. This graph represents the tobacco industry. The industry creates negative externalities. (B)
18. Socially Optimal Price and Quantity in Tobacco Industry
This graph represents the tobacco industry. The socially optimal price and quantity are $1.80 and 35 units, respectively. (B)
19. Positive Externality of University Research
University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven’t contributed to the research costs. What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced? Offer grants to university researchers. (B)
20. Example of a Common Resource
An example of a common resource would be the environment. (D)
21. Identifying a Free Rider
Who among the following is a free rider? Fred watches many public television programs, but he has never sent in a contribution to the station. (D)
22. Optimal Provision of Public Goods
To achieve the optimal provision of public goods, the government must either provide the goods or subsidize their production. (D)
23. Tragedy of the Commons
The Tragedy of the Commons for sheep grazing on common land can be eliminated by the government doing each of the following except subsidizing sheep flocks. (D)
24. Diminishing Marginal Productivity
Refer to Table 1. Alyson’s pet-sitting service experiences diminishing marginal productivity with the addition of the third worker. (C)
25. Marginal Product of Labor
The marginal product of labor is equal to the increase in output obtained from a one-unit increase in labor. (D)
26. Average Total Cost
At Bert’s Bootery, the total cost of producing twenty pairs of boots is $400. The marginal cost of producing the twenty-first pair of boots is $83. We can conclude that the average total cost of 21 pairs of boots is $23. (B)
27. Total Labor Cost at Gallo’s Cork Factory
Refer to Table 2. Each worker at Gallo’s cork factory costs $12 per hour. The cost of each machine is $20 per day regardless of the number of corks produced. If Gallo’s produces at a rate of 70 corks per hour and operates 8 hours per day, what is Gallo’s total labor cost per day? $576. (C)
28. Marginal Product of Labor at Gallo’s
Refer to Table 2. Assume Gallo’s currently employs 2 workers. What is the marginal product of labor when Gallo’s adds a 3rd worker? 10 corks per hour. (B)
29. Average Fixed Cost
Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when four units of output are produced, the total cost is $175, and the average variable cost is $33.75. What would the average fixed cost be if ten units were produced? $4. (A)
30. Variable Cost at Jimmy’s Gigaplot Factory
Refer to Table 3. What is the variable cost of producing 5 gigaplots at Jimmy’s Gigaplot factory? $85. (B)
31. Average Variable Cost at Jimmy’s Gigaplot Factory
Refer to Table 3. What is the average variable cost of producing 6 gigaplots at Jimmy’s Gigaplot factory? $18. (C)
32. Value of A in Table 4
Refer to Table 4. What is the value of A? $50. (B)
33. Value of G in Table 4
Refer to Table 4. What is the value of G? $270. (D)
34. Inferences from Figure 11
Refer to Figure 11. Which of the following can be inferred from the figure? (i) Marginal cost is increasing at all levels of output. (ii) Marginal product is increasing at low levels of output. (iii) Marginal product is decreasing at high levels of output. (ii) and (iii) only. (B)
35. Total Cost Curve Starting Point
Refer to Figure 11. Why doesn’t the total cost curve begin at the origin (the point 0,0)? Because fixed costs are positive when output is zero. (B)