ECON 1100 – Global Economics (Section 08) Exam #2 – Spring 2008 (Version A) – Answer Key Multiple Choice Questions (212 points each): 1. An industry in which there are very high fixed costs or declining marginal costs of production is b. a Natural Monopoly. 2. Consider the market for “Runner Peanuts.” Between 2006 and 2008: equilibrium quantity increased from 2,485 tons to 2,732 tons, and equilibrium price increased from $412.37 per ton to $417.19 per ton. This observed change would result from a. an increase in Demand. 3. ____________ claims that the behavior of firms in an industry is highly dependent upon the ease with which new firms can enter the industry, so that the present state of industry concentration is not the only important factor in predicting firm behavior. a. Contestable Market Theory 4. Chad owns a guitar autographed by Pete Doherty of the band “Babyshambles.” His reservation price as a seller of this item is $200. If he were to sell this item for $700, then he would realize a b. Producer’s Surplus of $500 from the sale of this item. 5. Government Failure may arise because: Efficient government action often requires the ‘centralization’ of a great deal of information, however, beneficiaries of government programs often have incentives to ‘overstate’ their true benefits from government programs. This describes government failure related to c. Availability of Information. 6. Which of the following is a good example of a “Pure Public Good”? c. National Defense. 7. To maximize profit, this firm would d. charge a price of $10.00 and sell 1,700 units of output. 8. The efficient level of output for this good is _____ units. c. 2,900. 9. When this monopolist produces the level of output which maximizes profit, b. Deadweight-Loss is equal to “area (c)” plus “area (d).” 10. Incomes may differ across different individuals in a free market society due to d. All of the above answers are correct.11. Base upon the graph above, b. production/consumption of this good results in a “positive externality.” 12. The efficient level of trade in this market is ____ units, while the free market level of trade is ____ units. d. (8,600); (6,400) 13. At the “free market outcome” (that is, the outcome without any government intervention in this market), Deadweight-Loss would be equal to b. “area (c).” 14. Which of the following is NOT one of the “7 Sources of Government Failure”? b. Pricing by firms with Market Power. 15. __________ broadly refers to government policies with the primary intention of altering the partition of incomes across individuals in society. c. Redistribution 16. A “widget” is a good that is both non-excludable and non-rival in consumption. Based upon this information, we would expect that the “free market” level of trade for Widgets b. to be less than the efficient level of trade. 17. One of the desirable features of a free market system is that c. disequilibria are “self correcting,” so that if market conditions change market forces will guide us to a new equilibrium without the need for a central authority to redirect resources. 18. Social Surplus d. All of the above answers are correct. 19. Altruism refers to a. unselfish concern for the welfare of others. 20. Which of the following is a requirement for “Market Efficiency”? c. There must be no “external effects” associated with production or consumption of the good. 21. There would be “excess demand” in this market at a price of: c. $2.25 22. In equilibrium b. each unit traded is traded at a price of $3.00. 23. If 20,500 were traded, then the resulting Deadweight-Loss would be c. equal to “Area (E).”24. The “Circular Flow Diagram” c. illustrates the interaction between households and firms in a simplified free market economy. 25. “Direct Transfer Payments” refer to c. cash payments from the government to individuals. 26. Hotdog Buns are a complement to Hotdogs. It follows that an increase in the price of Hotdog Buns would ultimately a. decrease the equilibrium quantity demanded of Hotdogs. 27. Ronald Coase argued that problems related to externalities may be solved by b. “internalizing the externality,” by clearly and completely defining property rights, and then allowing affected parties to negotiate. 28. One of the Three Principle Functions of Money is that it serves as a “unit of account.” This function can be described by recognizing that money is a. used as a basic measure for economic activity. 29. A “buyer’s reservation price” a. is visually illustrated by the height of the demand curve. 30. In a free market economy, households d. More than one of the above answers are correct. 31. The equilibrium quantity of trade and equilibrium price in a free market are determined by c. the interaction of both the buyers and the sellers in the market. 32. If the “Law of Demand” is satisfied, then c. all other factors fixed, a greater quantity of a good will be demanded at lower prices. 33. A “monopolist” c. produces a good for which there are no close substitutes. 34. _______ refers to the correct observation that if public goods were supplied in the marketplace, many people would attempt to enjoy the benefits of units purchased by others, while making no financial contribution to the provision of the good. b. The Free Rider Problem 35. A good is “Excludable” if d. it is easy (or relatively costless) to prevent consumption by those who do not pay for the good.36. In a free market economy profits b. serve as a “signaling device,” directing resources to their most valued uses. 37. Consider the “Telephone Equipment” industry and the “Cement Manufacturing” industry. The value of the “Herfindahl-Hirschman Index” for “Telephone Equipment” is (1,061.1), while the value of the “Herfindahl-Hirschman Index” for “Cement Manufacturing” is (466.6). These values directly suggest that b. the “Telephone Equipment” industry is less competitive than the “Cement Manufacturing” industry. 38. Antitrust Policy refers to d. regulatory and legal action designed to promote freedom of entry into a market and to prohibit the merger or collusion of competitive firms. 39. “Market Failure” can be described as b. a situation in which the
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