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This Document Contains Chapters 13 to 14 Chapter 13 Market Failures, Government Failures, and Rent Seeking MULTIPLE CHOICE 1. Higher the economic freedom in a country: A. lower is the standard of living of the people. B. higher is the life expectancy. C. greater is the bureaucratic freedom and red-tapism. D. lower is the level of education due to lack of government schools. E. lower is the literacy rate. Answer: B 2. A market failure occurs when: A. the market outcome is viewed as unfair by a majority of consumers. B. a market fails to provide the good at a zero price. C. quantity demanded exceeds quantity supplied. D. the market outcome is not the socially efficient outcome. E. prices are determined by the interaction of the forces of demand and supply and not through central planning. Answer: D 3. The owner of a good has the right to decide how that good is used and to restrict others from using that good. This idea is known as: A. the principle of mutual excludability. B. the principle of comparative advantage. C. the principle of public ownership. D. the principle of negative externalities. E. the law of demand. Answer: A 4. A good that is both excludable and rivalrous is a(n): A. public good. B. club good. C. private good. D. inferior good. E. necessary good. Answer: C 5. The good for which neither the principle of mutual excludability nor the principle of rivalry applies is referred to as a: A. public good. B. commons good. C. club good. D. normal good. E. private good. Answer: A 6. The free rider problem arises when a good is: A. rivalrous. B. excludable. C. non excludable. D. non rivalrous. E. an absolute necessity. Answer: C 7. The free-rider problem occurs because: A. it is easy to exclude others from consuming the good. B. consumption is rivalrous, so that the consumption of a product by one individual diminishes that available for others. C. exclusion is costly or impossible, so that a consumer or producer can use the good without having to pay for it. D. costs are imposed on others not directly involved in the transaction. E. individuals are not required to pay for those goods which do not yield any utility to them. Answer: C 8. For which of the following goods will the free rider problem arise? A. Private golf course B. Cable television C. Privately owned apartment D. National defense E. Movie theatres Answer: D 9. In the case of public goods: A. the free rider problem does not arise. B. one person’s consumption of the good reduces the consumption of the good by others. C. individuals can be easily excluded from consuming the good once it is provided. D. the quantity produced by a private market would be too large from society’s viewpoint, because private firms could not force payment for the goods. E. the principle of mutual excludability and principle of rivalry does not apply. Answer: E 10. Why do market failures arise in case of public goods? A. The quantity produced is much more than is actually required by the people. B. The quality of these goods are not good enough. C. The quantity produced is too less from the society’s point of view. D. The government wastes a lot of resources for producing a public good. E. The users of such goods are required to pay a high price for these goods. Answer: C 11. When economic activity imposes costs on others not directly involved in the transaction: A. a negative externality exists. B. a positive externality exists. C. then the market, will produce too little of the good. D. the tragedy of commons problem arises. E. a free rider problem arises. Answer: A 12. Why do externalities arise? A. The costs of production are not borne by the producer B. An economic activity imposes a burden on them who are not directly involved in it C. An economic activity imposes a cost on them who are directly involved in it D. The government produces such goods and services which are consumed by only a particular class of people E. Goods of mass consumption are not produced as they do not yield profit for the producers Answer: B 13. When the benefits of an activity are received by those who are not directly involved in it: A. a negative externality exists. B. the government is producing a free good. C. the society has to bear the burden of that particular activity. D. the government has to compensate for the loss in social welfare. E. a positive externality exists. Answer: E 14. Which of the following is an example of a positive externality? A. Smoking a cigarette B. Driving a less fuel efficient vehicle C. Setting up a chemicals factory in a residential area D. Overuse of chemical fertilizers E. Beekeepers keeping bees for honey Answer: E 15. Social cost is _____. A. the sum of fixed and variable costs B. the difference between the total cost and opportunity cost C. the sum of private and external costs D. the difference between the private and external cost E. sum of fixed costs and opportunity costs Answer: C 16. When there exists a negative externality in case of a particular good and that is not reflected in the price: A. too little of that good is produced and consumed. B. too much of that good is produced and consumed. C. nothing of that is either produced or consumed. D. the government completely prohibits the production of such goods. E. the resources are allocated to their highest-valued activity. Answer: B 17. Which of the following statements is true? A. In the case of positive externalities, a private market will produce too little of the good compared with the socially efficient level of output. B. In the case of positive externalities, a private market will produce too much of the good compared with the socially efficient level of output. C. Negative externalities occur when benefits accrue to individuals not directly involved in the transaction. D. Positive externalities occur when costs are imposed on individuals not directly involved in the transaction. E. In the case of negative externalities, a private market will produce too little of the good compared with the socially efficient level of output. Answer: A 18. When all costs and benefits of a transaction are borne by the participants of that transaction: A. the market outcome will be inefficient. B. then private costs and social costs are identical. C. negative externalities exist. D. positive externalities exist. E. the private costs are more than the social costs. Answer: B 19. When social costs of producing or consuming a good exceed private costs: A. a positive externality exists. B. an inefficiently high quantity of a good will be produced and consumed. C. the direct consumers of the good will bear the external costs. D. the individuals involved in the production of the good do not bear the private costs. E. the quantity of the good produced will be less than the socially efficient level. Answer: B 20. Which of the following is true of externality? A. An externality enhances the efficiency of the market system. B. An externality is not an economic problem because it is external to the market. C. An externality is a cost borne by the people who are directly or indirectly involved in the production of a good or service. D. An externality accrues to someone who had nothing to do with the production or consumption of a good or service. E. An externality refers to some unexpected change in the equilibrium price or quantity of a product. Answer: D 21. When a divergence between social costs and private costs exists, then: A. markets will always provide an efficient allocation of resources. B. there will be too much or too little production and consumption in the market. C. there will be an acute shortage of goods and services in the market. D. there will be an excess demand for goods and services in the market. E. private costs must be greater than social costs. Answer: B 22. The existence of externalities in a market implies that: A. resources are being used efficiently. B. there is no other allocation of resources that would make society as a whole better off. C. consumers cannot be excluded from consuming the good once it is provided. D. resources are not being used in their highest valued activity. E. the societal welfare as a whole is maximized. Answer: D 23. When negative externalities exist in production: A. the social supply curve lies to the left of the private supply curve. B. the social supply curve lies to the right of the private supply curve. C. the social supply curve is identical to the private supply curve. D. the private demand curve lies to the right of the social demand curve. E. the private demand curve lies to the left of the social demand curve. Answer: A NARRBEGIN: Table 13. 1 The following table shows the costs and benefit of producing a commodity. 24. According to Table 13. 1, the external cost of producing 5 units of the output is: A. $5. B. $6. C. $10. D. $8. E. $4. Answer: B 25. According to Table 13. 1, at the free market equilibrium: A. 1 unit of output is produced. B. 2 units of output is produced. C. 5 units of output is produced. D. 4 units of output is produced. E. 3 units of output is produced. Answer: D 26. According to Table 13. 1, at the social equilibrium: A. 4 units of output is produced. B. 5 units of output is produced. C. 2 units of output is produced. D. 3 units of output is produced. E. 1 unit of output is produced. Answer: D 27. In Table 13. 1, what level of tax per unit would be appropriate to internalize the externality? A. $4 B. $6 C. $1 D. $8 E. $2 Answer: E 28. Why are cows and chickens less prone to become extinct? A. They are usually consumed in huge numbers B. They are mainly privately owned C. They are a part of common resources D. Poaching these animals for their meat is banned by the government E. They are not used for commercial purposes Answer: B 29. When the commons are converted into privately owned resources: A. utilization is increased, and benefits to the society declines. B. utilization is increased, and the benefits to the society also increases. C. utilization is decreased, and the benefits to the society also decreases. D. utilization remains unchanged, and the benefits to the society increases. E. utilization is decreased, and the benefits to the society increases. Answer: E 30. Which of the following is true of a public good? A. The demand curve for a public good is clearly defined because each consumer consumes the same quantity of the good. B. The demand curve for a public good is clearly defined because each individual pays the same price. C. The demand curve for a public good may not exist because individuals can consume the good without being forced to pay a market price for the good. D. The supply curve of a public good may not exist because individuals can consume the good without being forced to pay a market price for the good. E. The supply curve of a public good is perfectly elastic as a small increase in the price leads to an infinite increase in the supply of the good. Answer: C 31. Which of the following is not a problem with a public good? A. An incentive to free-ride B. A public good is often under-consumed C. An absence of private property rights D. An inability to limit consumption to those who purchase the good E. A public good is usually underproduced Answer: B 32. In China prior to 1990, most residential buildings were in dilapidation because: A. people were not aware of the maintenance and beautification techniques. B. the government did not encourage wastage of resources for such purposes. C. no one had a property right to a home. D. all the properties were ancestral. E. the people had private property rights so they did not have an incentive to repair the houses. Answer: C 33. One reason that some whales were hunted close to extinction is that no one can claim ownership of a whale until it is killed. If property rights to the whale population were established: A. then whales would surely be hunted to extinction. B. the owners would have the incentive to ensure a sustainable yield of whales, so the whale population could recover. C. no one would hunt whales. D. the price of whales would be kept artificially low so that trade in whales would become unprofitable. E. the whales would be hunted to extinction only when the price is high and it is profitable to trade in whales. Answer: B NARRBEGIN: Table 13. 2 Overfishing along the coastline of Helsking village led the government to impose a fee on the boats used for fishing. The fisherman were charged $50 on each boat they sent out for fishing. The following table shows the total pounds of fish caught per hour and the number of boats used for fishing. 34. Refer to Table 13. 2. Suppose fish sells for $1 per pound. If each fisherman decides whether or not to fish based on the average catch, how many boats per hour will go out to fish? A. 6 B. 5 C. 4 D. 3 E. 2 Answer: A 35. Refer to Table 13. 2. Suppose fish sells for $1 per pound. If each fisherman decides whether or not to fish based on the average catch, what is the profit that each fisherman earns? A. $500 B. $1,000 C. $3,000 D. $5,000 E. 0 Answer: E 36. Refer to Table 13. 2. Suppose fish sells for $1 per pound. What is the socially optimal number of boats that will maximize the profit earned by the fishermen? A. 1 B. 2 C. 3 D. 4 E. 5 Answer: C 37. Refer to Table 13. 2. Suppose fish sells for $1 per pound. What is the amount of total profit earned when the fishermen use the socially optimal number of boats? A. $50 B. $80 C. $45 D. $90 E. $0 Answer: D 38. One of the reasons that communism failed in the Soviet Union is that, under communism: A. no one had a property right, so there is little incentive to use resources efficiently. B. there were high rates of unemployment and homelessness accompanied by a high rate of inflation. C. planners did not have all the information necessary to make efficient decisions. D. there was a high degree of political freedom. E. there was a high degree of economic freedom. Answer: A 39. Tragedy of commons refers to: A. a problem that is created when everything is privately owned. B. a situation when the resources are owned by the government and the common people have limited access to them. C. a problem that arises when government takes incorrect measures which adversely affect common people. D. a problem that is created when everyone has an access to a particular resource. E. the adverse situation that arises when the government fails to take adequate measures to solve common problems. Answer: D 40. If the government is successful in internalizing the external costs of production in a market, then: A. social costs will equal private costs. B. an inefficient level of output will be produced. C. social costs will exceed private costs. D. social costs will be less than private costs. E. social costs will fall to zero. Answer: A 41. When the government imposes a tax on production of a commodity: A. production will invariably increase. B. the cost of production increases, so the supply curve shifts to the left. C. the benefits of consumption increases, so the demand curve shifts to the right. D. there is no change in demand or supply. E. both the demand and supply curves shift to the right. Answer: B 42. If education has positive externalities: A. the private market will provide an efficient allocation of resources. B. the private costs of production will exceed the social costs. C. the government can help to bring about a more efficient allocation through subsidies. D. the only benefits of consumption accrue to the consumers themselves. E. the government can help to bring about a more efficient allocation by levying education cess. Answer: C NARRBEGIN: Figure 13. 1 The figure below shows the demand and supply curves in the market for elementary education. Figure 13. 1 In the figure, D: Private demand curve for elementary education D + s: Demand curve which includes public benefits S: Supply curve of education Price and Quantity have been taken on vertical and horizontal axes respectively. NARREND 43. According to Figure 13. 1, the outcome of an unregulated, unsubsidized market would be: A. point a. B. point b. C. point c. D. point d. E. point e. Answer: C 44. Figure 13. 1 represents a situation of: A. positive externalities. B. negative externalities. C. excess capacity. D. optimal provision of a public goods. E. comparative advantage. Answer: A 45. In Figure 13. 1, D represents the private demand for education, and D+s represents the demand including the public benefits of education. According to the figure, the optimal subsidy is equal to: A. 0Qs - 0Qp. B. 0Ps - 0Pp. C. Qpa - Qpc. D. Qsb - Qsd. E. the distance bc. Answer: D NARRBEGIN: Figure 13. 2 The figure given below shows the demand and supply curves of steel. Sp is the private supply curve, and Ss is the social supply curve that includes both private costs and external costs. Figure 13. 2 NARREND 46. According to Figure 13. 2: A. both points a and b are socially efficient. B. both points a and b are inefficient. C. point a represents the social equilibrium, whereas point b represents the private equilibrium. D. point a represents the private equilibrium, whereas point b represents the social equilibrium. E. when external costs are zero, the socially efficient output level is equal to 0Qs units. Answer: D 47. In Figure 13. 2, external costs are equal to _____. A. Ps - Pp B. da C. Qp - Qs D. ab E. bc Answer: B NARRBEGIN: Figure 13. 3 The figure given below shows the demand and supply curves of automobiles. Figure 13. 3 In the figure, D: Demand curve of automobiles S: Supply of automobiles prior to the tax S+t: Supply of automobiles after the tax NARREND 48. According to Figure 13. 3, the market attains equilibrium before the tax at: A. point d. B. point a. C. point b. D. point c. E. point e. Answer: B 49. Figure 13. 3 represents a situation of: A. positive externality. B. Pareto efficiency. C. negative externality. D. tragedy of commons. E. free rider problem. Answer: C 50. In Figure 13. 3, the amount of tax levied by the government is equal to: A. 0Pt B. 0P. C. Qtd - Qtc. D. 0Q - 0Qt. E. Qtb - Qtd. Answer: E 51. The Clean Air Act of 1972 required some companies to install the “best available” pollution control technologies. This was an example of: A. the government using a subsidy to encourage a negative externality. B. the government using the command approach to discourage a negative externality. C. the government using the command approach to encourage a positive externality. D. a marketable pollution permit. E. a pollution tax. Answer: B 52. Which of the following is an example of the command approach to regulation? A. The market for permits to emit sulfur dioxide on the Chicago Mercantile Exchange B. A carbon tax C. Zoning in many areas that restricts the types of buildings that can be constructed D. The government providing subsidies for public education E. A Pigouvian tax Answer: C 53. When the government tries to control pollution through cap and trade, it _____. A. issues permits that enables the owners of the permit to pollute. B. strictly mentions the amount of pollutants that can be emitted by a particular firm. C. levies tax on the polluting firm. D. gives subsidies to the firms who adopt clean production technologies. E. takes legal actions against the firms who pollute beyond the specified level. Answer: A 54. The European Union Emission Trading Scheme is an example of: A. a pollution tax. B. a pollution subsidy. C. a command approach. D. cap and trade. E. a direct government control on private firms. Answer: D 55. Suppose the current price of a marketable permit to emit one ton of sulfur dioxide is $100. If the marginal cost for a firm to reduce one ton of sulfur dioxide is $80, then: A. the firm will buy the permit and emit one more ton of sulfur dioxide. B. the firm will reduce its emissions of sulfur dioxide by one ton. C. the firm will buy the permit and increase its emissions by 20 tons. D. the firm will shut down. E. the firm will be willing to pay up to $200 for a permit. Answer: B 56. Suppose that the current price of a marketable permit to emit one ton of gunk is $60. For firm A, the marginal cost of reducing one ton of gunk is $50. For firm B, the marginal cost of reducing one ton of gunk is $70. Under a marketable permit system: A. both firms will buy a permit and emit one more ton of gunk. B. firm A will buy a permit and emit one more ton of gunk, whereas firm B will reduce its emissions of gunk by one ton. C. firm B will buy a permit and emit one more ton of gunk, whereas firm A will reduce its emissions of gunk by one ton. D. both firms will reduce their emissions of gunk by one ton. E. both firms will go out of business. Answer: C NARRBEGIN: Figure 13. 4 The figure given below shows the demand for permits and the maximum permissible level of pollution. Figure 13. 4 In the figure, the downward sloping line is the demand curve of permits; the vertical line denotes the maximum permissible limit of pollution. NARREND 57. Refer to Figure 13. 4. Suppose the government wishes to reduce pollution to a quantity of Qb. If it sells marketable pollution permits at a quantity of Qb then: A. firms will bid the price of the permits up to a price of Pa, and Qa pollution will result. B. firms will bid the price of the permits up to a price of Pb, and Qb pollution will result. C. firms will bid the price of the permits up to a price of Pc, and Qc pollution will result. D. firms will bid the price of the permits up to a price of Pc, and Qb pollution will result. E. firms will not be willing to pay a price for the permits, so no pollution will be reduced. Answer: B 58. In Figure 13. 4, if the government sells Qb permits to pollute at a price of Pb each, then: A. the allocation of pollution reduction is inefficient. B. firms in the market will be forced to shut down due to excessive government regulation. C. the allocation of pollution reduction is efficient, because only those firms with a marginal cost of pollution reduction greater than Pb will buy the permits. D. the allocation of pollution reduction is efficient, because only those firms with a marginal cost of pollution reduction less than Pb will buy the permits. E. the allocation of pollution reduction is inefficient, because only those firms with the lowest costs of pollution reduction will purchase the permits. Answer: C 59. Which of the following is a measure taken by the government to internalize the externalities? A. Value Added Tax B. Income Tax C. Cap and Trade D. Tariffs E. Deficit financing Answer: C 60. Asymmetric information arises when: A. both the parties to an exchange have perfect information about the good. B. none of the parties to exchange have any information about the good. C. one party to an exchange knows more than the other party. D. a good is provided by the government. E. the market is perfectly competitive. Answer: C 61. When a good commodity is driven out of the market by a bad commodity it is called: A. moral hazard. B. adverse selection. C. positive externality. D. negative externality. E. tragedy of commons. Answer: B 62. A market in which adverse selection may not occur is: A. the market for pre-owned residential apartments. B. the lemons market. C. the market for new sports utility vehicles. D. the capital market. E. the market for health insurance. Answer: C 63. _____ occurs when unobservable qualities are valued incorrectly because of a lack of information. A. Moral hazard B. Adverse selection C. Conspicuous consumption D. Marginal selection E. Statistical discrimination Answer: B 64. Which of the following may be explained by adverse selection? A. When banks raise the interest rate on loans, high-risk applicants leave the market. B. When health insurance companies decrease insurance charges but increase deductibles, less healthy people are more willing to purchase insurance. C. As the cost of insurance rises, low-risk applicants reduce their coverage. D. Products are sold at prices that reflect their true value. E. Loan companies do not require down payments. Answer: C 65. James insured his car with a renowned insurance company that checked his driving skills and verified his accident records before insuring his car. After paying two premiums for this insurance, James took to drinking and driving. This action of James is likely to create: A. an economic loss. B. a positive externality. C. an economic bad. D. a moral hazard. E. diseconomies of scale. Answer: D 66. Moral hazard is the term used to describe the situation in which: A. a consumer may buy a low-quality product. B. consumers receive a lower price because of a mistake on the part of the clerk. C. a consumer is being compensated for a defective product. D. people may change their behavior after they have signed a contract or agreed to a specified behavior. E. people want to change their behavior after they have signed a contract or agreed to a specified behavior but are unable to do so. Answer: D 67. When each additional resource adds increasing amounts of additional output, it refers to a situation of: A. constant returns. B. economies of scale. C. diseconomies of scale. D. diminishing returns. E. increasing returns. Answer: E 68. When a firm increases its short-run supplies only by hiring more labor, other inputs remaining unchanged, eventually: A. output will increase at a decreasing rate. B. the total cost of producing the good will decline. C. the marginal productivity of the fixed inputs will decline. D. the average cost of producing the good will decline. E. the productivity of laborers will increase. Answer: A 69. Why does network externality arise? A. Each additional unit of a good sold reduces the value of the previously sold units. B. As more and more units of a good are produced, the average cost declines. C. Consumption of a good by one user does not affect the consumption of subsequent users. D. The firms enjoy economies of scale in the long run. E. Each additional unit of the good sold increases the value of the previously sold units. Answer: E 70. If the value of a network to a single user is $1 for each other user on the network, then a network of size 100 has a value of: A. $9,500. B. $9,900. C. $9,000. D. $10,000. E. $10,100. Answer: B 71. Why does an existing less efficient technology drive out a new more efficient technology? A. The existing technology is a network that has become locked in B. People are receptive to the new technology C. The new technology is costlier to hire D. The existing technology is a network that has become locked out E. The government imposes taxes on the new technology Answer: A 72. The Coase theorem states that when transactions costs are low, then: A. bargaining will never lead to a socially efficient allocation. B. bargaining will lead to a socially optimal allocation only if liability is placed on the polluter. C. bargaining will lead to a socially optimal allocation only if liability is placed on the victim of pollution. D. bargaining will lead to a socially efficient allocation regardless of where liability is placed. E. the governmental intervention becomes absolutely necessary. Answer: D 73. Wikipedia and other projects utilizing wiki technology, represent an example of: A. cap and trade. B. voluntary contributions. C. transaction cost. D. market failure. E. path dependence. Answer: B 74. The Austrian school of economists stressed on the efficiency of the markets on the pretext that: A. resources can be efficiently allocated through price system and free markets. B. governmental intervention was necessary for the efficient allocation of resources. C. the price charged under the free market system was always lower than under central planning. D. the market had never failed earlier. E. the market did not suffer from imperfect information. Answer: A 75. Which of following would help minimize moral hazard in the financial market? A. Raising the interest rate on loans B. Decreasing the down payment on a loan C. Eliminating the need for a borrower to provide collateral D. Requiring an insurance policyholder to carry a deductible E. An insurance company increasing the premium and reducing the deductible Answer: D 76. Which of the following would help to minimize adverse selection? A. Having a middleman or specialist to sell used products to consumers B. Doing away with the down payment on a loan C. Raising the price on a good or service, such as the interest rate on a loan D. Eliminating the system of providing a collateral while taking a loan. E. Eliminating the system of deductibles in health insurance. Answer: A 77. When legislators support one another’s project in order to ensure support for their own, it is referred to as: A. rent seeking. B. moral hazard. C. political hazard. D. logrolling. E. bribery. Answer: D 78. Which of the following is an example of government failure? A. Negative externalities B. Logrolling C. Club goods D. Information asymmetries E. Moral hazard Answer: B 79. When economic resources are devoted to transferring wealth from one sector of the economy to another rather than being used for productive purposes, the process is known as: A. rent seeking. B. logrolling. C. central planning. D. negative externalities. E. deficit financing. Answer: A 80. Suppose the wheat industry is in long-run equilibrium, so that farmers are earning a normal rate of return. Suppose the farmers are able to convince the Congress to provide a minimum price for wheat that is above the equilibrium price. The result would be: A. deadweight losses in the long run —higher costs to consumers and no more profits to farmers. B. deadweight losses in the short run —higher costs to consumers and no more profits to farmers. C. increase in economic efficiency in the long run. D. increase in economic efficiency in the short run. E. an increase in economic rents in the long run. Answer: A 81. Economists like Joseph Stiglitz regard market as: A. an effective mechanism of allocating resources. B. an invisible hand which often takes correct price-quantity decisions. C. an efficient way of maximizing social welfare. D. as an inefficient mechanism of resource allocation and emphasized on the positive role of the government. E. a much superior mechanism compared to central planning. Answer: D 82. As opposed to economists like Tinbergen and Galbraith, the “public choice” school argues that: A. the invisible hand of the market is inefficient in allocating resources to their best uses. B. the government often does not take correct economic decisions as it is run by self-interested politicians. C. the government takes correct decisions as it is run by conscious and educated individuals. D. the market fails to maximize social efficiency. E. the government is a non-profit making organization which works to maximize social efficiency. Answer: B TRUE/FALSE 1. A market failure occurs when the market outcome is not the socially efficient outcome. Answer: True 2. One cause of market failure may be the absence of clearly defined property rights. Answer: True 3. Both the principles of rivalry and mutual excludability apply for club goods. Answer: False 4. It is often impossible for a business firm to determine its private costs of production. Answer: False 5. Education is a good example of a positive externality because the benefits of an education accrue not only to the individual but also to society as a whole. Answer: True 6. Social cost is negative in case of a negative externality. Answer: False 7. If a gas station selling gasoline is asked to incorporate the pollution costs, its supply curve will shift to the right. Answer: False 8. When negative externalities exist in a market, that market will produce too little output compared to the socially efficient level of output. Answer: False 9. When consumers or producers do not bear the full cost of their economic decisions, they tend to produce or consume more than they otherwise would. Answer: True 10. In the case of positive externalities, too many people consume and produce the good compared to what is desired by society. Answer: False 11. Private costs exceed social cost when external benefits are created. Answer: True 12. The government should subsidize the production of goods which generate a positive externality. Answer: True 13. Production becomes more efficient if a common property is turned into a private property. Answer: True 14. When a particular resource is commonly used, it tends to get underutilized. Answer: False 15. When resources are commonly owned, there are incentives in place to ensure that the resources are used efficiently. Answer: False 16. Private property rights help to ensure an efficient use of resources, because owners of the resources must bear the costs of inefficient use. Answer: True 17. The major problem with common ownership is that, too much of the commonly owned is consumed, and not enough is produced. Answer: True 18. When the people creating an externality are made to pay for the externality by the government, the externality is said to be internalized. Answer: True 19. A pollution tax has the effect of reducing the costs of production for a firm, leading to a rightward shift of the supply curve. Answer: False 20. When a good is subsidized by the government, the amount of the good produced or consumed declines. Answer: False 21. Laws that require children to be inoculated against certain diseases before they enter kindergarten are examples of the command approach. Answer: True 22. Under a marketable pollution permit system, property rights to an externality are created so that a more efficient allocation of resources will result. Answer: True 23. Under a marketable permit system, if the government reduces the quantity of permits, the price of each permit will increase. Answer: True 24. A tradable government permit for the atmospheric release of a ton of sulfur dioxide can help reduce acid rain. Answer: True 25. A market in which adverse selection occurs is often called a lemons market. Answer: True 26. Consumers in used car markets can very easily differentiate between high-quality and low-quality cars. Answer: False 27. In order to reduce the possibility of adverse selection banks should raise their interest rates charged on the loans. Answer: False 28. A person who takes less care of his health after obtaining a health insurance is creating a negative externality. Answer: False 29. In the case of automobile and medical insurance, adverse selection might mean that, as the cost of insurance rises, the good drivers and healthy people reduce their coverage while the poor drivers and unhealthy people maintain their coverage. Answer: True 30. When consumers have perfect information about the quality of the products they purchase, the problem of adverse selection is likely to arise. Answer: False 31. After John discovered he had a serious illness, he immediately purchased health insurance without disclosing his illness to the insurance company. This is an example of adverse selection. Answer: False 32. Problems of moral hazard and adverse selection occur most frequently when excessive information exists in markets. Answer: False 33. When increase in capital is accompanied by new knowledge and by increasing number of laborers, the producer experiences increasing returns. Answer: True 34. The cost borne by an individual user to switch to another network is less if the network which he is using is large. Answer: False 35. When negotiation is costly, it makes a difference where liability is placed in terms of reaching an efficient solution to a negative externality problem. Answer: True 36. According to the Coase theorem, high transaction costs necessarily call for government action. Answer: False 37. Co-payments and deductibles provide a means of reducing moral hazard problems because they allow each party in the transaction to share in the costs. Answer: True 38. Benefits granted to powerful special interest groups in return for political support are known as rents. Answer: True 39. Suppose the American Medical Association has been able to persuade the Congress to pass a no-fault insurance law protecting doctors from malpractice suits. The reduction in costs to doctors is a rent. Answer: True Chapter 14 Resource Markets MULTIPLE CHOICE 1. The buyers and sellers in a resource market are: A. household and firms respectively. B. banks and farmers respectively. C. households and land owners respectively. D. firms and household respectively. E. exporters and importers respectively. Answer: D 2. Firms are consumers and households are the producers in the _____. A. stock market B. bond market C. labor market D. product market E. underground market Answer: C 3. Goods which are demanded to produce something else are said to have a(n): A. direct demand. B. composite demand. C. derived demand. D. joint demand. E. inelastic demand. Answer: C 4. Which of the following goods is likely to have a derived demand? A. Tractor B. T-shirt C. Italian food D. Residential buildings E. Cigarettes Answer: A 5. Tools and equipments used in production are: A. natural resources. B. entrepreneurial resources. C. human capital. D. capital resources. E. labor resources. Answer: D 6. The resource market is the same as the product market except that, in the resource market: A. the demand curve slopes upward. B. the households are the sellers and the firms are the buyers. C. there is no substitution effect. D. the supply curve is perfectly inelastic. E. there is no income effect. Answer: B 7. When studying the market for resources, it is important to understand that: A. resources are wanted not for themselves but for what they produce. B. demand for resources is generally inelastic in nature. C. derived demand does not apply to the resource market. D. resource markets do not conform to the laws of supply and demand as other markets do. E. supply is much more important than demand in determining the price of a resource. Answer: A 8. A general study of resource markets shows that the roles of firms and households are: A. reversed from what they are in the product markets. B. the same as what they are in the product markets. C. different from what they are in the product markets because households are residual claimants. D. different from what they are in the product markets because firms are residual claimants. E. different from what they are in the product markets because the laws of demand and supply do not work for the resource markets. Answer: A 9. The marginal-revenue product (MRP) is the: A. value of the additional output that an extra unit of a resource can produce. B. cost of hiring an additional unit of a resource. C. extra cost of producing an additional unit of output. D. increase in total output when an additional unit of an input is hired. E. change in total revenue when an additional unit of a good is sold. Answer: A 10. The demand curve for labor indicates that: A. as the real wage rate increases, employers will hire more workers. B. as the nominal wage rate increases, employers will hire more workers. C. as the nominal wage rate decreases, the real wage rate increases. D. as the real wage rate increases, employers will hire fewer workers. E. the real wage rate does not affect firms’ hiring decisions. Answer: D 11. The marginal-factor cost (MFC) is the: A. value of the additional output that an extra unit of a resource can produce. B. additional cost of employing an additional unit of a resource. C. additional cost of producing an additional unit of output. D. the ratio of the total fixed cost to the total cost of production. E. ratio of total cost to the total amount of resources employed. Answer: B 12. In the market for resources, demand and supply: A. do not behave in the same way as demand and supply in product markets. B. behave in exactly the same way as demand and supply in product markets. C. curves usually don’t intersect at equilibrium. D. are both controlled by firms. E. are both controlled by households Answer: B 13. Why is the marginal revenue product curve of a factor negatively sloped? A. Additional revenue generated from an additional unit of a factor remains constant as more resources are hired. B. Additional revenue generated from an additional unit of a factor declines as more resources are hired. C. Additional revenue generated from an additional unit of a factor usually becomes zero as more resources are hired. D. Additional revenue generated from an additional unit of a factor increases as more resources are hired. E. Additional revenue generated from an additional unit of a factor doubles every time new resources are hired. Answer: B 14. An automobile manufacturer uses land, labor, capital, and entrepreneurial ability to produce cars and trucks. If the price of trucks increases, the automobile manufacturer would not _____. A. pay a lower wage rate to labor B. increase truck production C. hire more workers D. increase capital used in production E. increase land used in production Answer: A 15. Which of the following statements best illustrates the relationship between the market for products and the market for resources? A. An increase in the price of cameras will decrease the demand for film. B. As income rises, people demand relatively smaller amounts of food. C. An increase in demand for textiles will increase the demand for textile workers. D. An increase in the price of butter will cause more people to buy margarine. E. A decrease in demand for tea will increase the demand for coffee. Answer: C 16. If the market price of the product that employs labor in production increases: A. the marginal product of labor increases. B. the demand curve for labor shifts to the left. C. the price of labor decreases. D. the marginal revenue product of labor increases. E. the supply curve of labor shifts to the left. Answer: D 17. Intel microchips are an input into a computer. What happens to the demand for the microchips if the demand for computers decline? A. The quantity demanded of Intel microchips increases. B. The quantity demanded of Intel microchips declines. C. The demand for Intel microchips will increase. D. The demand for Intel microchips will decrease. E. There is no change in the demand for the Intel microchips. Answer: D 18. During the recession witnessed in early 2001, many firms laid off their employees and downsized. The reason for this decrease in the demand for employees was: A. a reduction in the demand for the final good. B. a reduction in the price of the final good. C. an increase in the demand for the final good. D. an increase in the price of the final good. E. the incompetency and poor performance of the employees. Answer: A 19. Assume that labor is the only variable input and that an additional input of labor increases total output from 72 to 78 units. If the product sells for $6 per unit in a perfectly competitive market, then the MRP of this additional worker is: A. $78 B. $72 C. $36 D. $39 E. $6 Answer: C 20. The price of a resource declines when: A. both the demand for and the supply of the resource declines in the same proportion. B. demand remaining constant, supply of the resource declines. C. supply remaining constant, the demand for the resource declines. D. both the demand for and the supply of the resource increases in the same proportion. E. both the demand for and the supply of the resource declines, but supply falls by a greater proportion than demand. Answer: C NARRBEGIN: Figure 14. 1 The following figure shows the marginal revenue product of a resource [MRP]: Figure 14. 1 NARREND 21. Assume that the resource market shown in Figure 14. 1 is perfectly competitive. The MRP curve for the resource is negatively sloped because: A. the firm can sell more units of a good only at lower prices. B. the marginal physical product curve for the resource is negatively sloped. C. the resource gives increasing returns as more of the resource is employed. D. the firm hires more units of the resource at a higher price. E. average productivity of the resource increases as more units of the resource are used. Answer: B 22. In Figure 14. 1, if the price of the resource is equal to 0C and the resource market is perfectly competitive, the quantity employed of the resource would be: A. less than L2. B. equal to L1. C. equal to L2. D. equal to L3. E. more than L3. Answer: B NARRBEGIN: Figure 14. 2 The figure given below shows the marginal revenue product (MRP) of accountants in a firm. Figure 14. 2 MRP = MP ´ MR NARREND 23. According to Figure 14. 2, the: A. value of the resource to the firm declines after the second unit of the resource is used. B. marginal-physical product diminishes at every resource level if we consider the product market to be competitive. C. law of diminishing marginal product does not apply in this case. D. optimal number of units of the resource to be used is 2. E. optimal number of units of the resource to be used is 7. Answer: A 24. According to Figure 14. 2, if the marginal cost of the resource is $600: A. 1 unit of the resource is hired. B. 3 units of the resource are hired. C. any number of units beyond 3 units is hired. D. zero unit of the resource is hired. E. 7 units of the resource are acquired. Answer: B 25. If the resource market is perfectly competitive: A. the market demand for the resource is perfectly elastic. B. the market demand for the resource is perfectly inelastic. C. the suppliers can affect the input price by increasing or reducing their supply. D. the input price to each firm is constant. E. the supply of the resource is perfectly inelastic. Answer: D 26. Under perfect competition in the resource market, the marginal factor cost curve: A. is positively sloped. B. is vertical. C. is negatively sloped. D. is horizontal. E. does not exist. Answer: D 27. A firm under any market structure maximizes profits at a point where: A. marginal revenue product is greater than marginal factor cost. B. marginal revenue product is equal to marginal factor cost. C. marginal revenue product is equal to zero. D. marginal factor cost is equal to zero. E. marginal revenue product is less than marginal factor cost. Answer: B 28. A firm will demand more units of a resource if: A. the resource adds more to revenues than it costs. B. the firm experiences diseconomies of scale. C. the price of the good that uses the resource declines. D. the resource has many substitutes. E. the resource has few substitutes. Answer: A NARRBEGIN: Figure 14. 3 The figure given below represents the marginal revenue product (MRP) and the marginal factor cost (MFC) of a resource in the resource market. Figure 14. 3 NARREND 29. Consider the resource market shown in Figure 14. 3. Given that the resource market is perfectly competitive, determine the equilibrium price of the resource. A. $8 B. $3 C. $5 D. $4 E. Cannot be determined from the information given Answer: C 30. Consider the resource market shown in Figure 14. 3. Given that the resource market is perfectly competitive, how many units of the resource will be purchased when the market is in equilibrium? A. Less than 10 units B. 10 units C. Between 10 and 15 units D. 15 units E. More than 15 units Answer: D NARRBEGIN: Table 14. 1 The following table shows output per hour produced by the different units of labor. The marginal revenue product of a resource is equal to the product of the marginal product of an input and marginal revenue. NARREND 31. According to Table 14. 1, if the wage rate is $9 per hour, how many workers should this firm hire? A. 1 B. 5 C. 4 D. 2 E. 3 Answer: E 32. According to Table 14. 1, the marginal-revenue product of the: A. fourth worker is $8. B. fifth worker is $3. C. first worker is $3. D. third worker is $5. E. second worker is $12. Answer: B 33. According to Table 14. 1, if the wage rate is $6 per hour, how many workers should this firm hire? A. 3 B. 2 C. 4 D. 5 E. 1 Answer: C 34. Refer to Table 14. 1. If both the wage rate and the price of the good falls to $2, how many workers would the firm hire? A. 1 B. 2 C. 3 D. 4 E. 5 Answer: E 35. The structure of the product market as described by Table 14. 1 is: A. monopolistic. B. oligopolistic. C. perfectly competitive. D. monopsonistic. E. monopolistically competitive. Answer: C 36. After hiring 151 units of the variable input (say labor) a firm determines the MFC to be $0. 33 and the MRP to be $0. 30. The firm should: A. increase the output of its product. B. increase the use of labor. C. decrease the use of labor. D. produce 151 units. E. produce 33 units of the output. Answer: C NARRBEGIN: Table 14. 2 The following table shows the total output produced by different units of a resource. Assume that the resource and output markets are both perfectly competitive. The equilibrium price of the resource is $15. 00, and the equilibrium price of the product is $0. 50. Marginal revenue product (MRP) of a resource is the product of the marginal product of the resource and the marginal revenue. NARREND 37. Refer to Table 14. 2. What is the marginal-revenue product of the third unit of the resource? A. $6. 50 B. $13. 00 C. $17. 50 D. $70. 00 E. $20. 00 Answer: C 38. Refer to Table 14. 2. What is the marginal-factor cost for the third unit of the resource? A. $13. 00 B. $15. 00 C. $17. 50 D. $195. 00 E. $19. 50 Answer: B 39. Refer to Table 14. 2. How many units of the resource will a profit-maximizing firm hire? A. Two labor hours B. Between two and three labor hours C. Between three and four labor hours D. More than four labor hours E. Three labor hours Answer: C 40. If a resource is purchased and sold in a perfectly competitive market: A. there are a large number of resource suppliers and the resources are identical. B. there is a single buyer of resource and the resources are identical. C. there is a single buyer of resource and the resources are differentiated. D. there is a large number of resource suppliers and the resources are differentiated. E. there are a large number of resource suppliers and there is no entry or exit. Answer: A 41. If a firm hires its fourth worker for $5 and its fifth worker for $8, then A. the firm is a monopolist. B. the firm must be substituting capital for labor. C. the fifth worker must have been less productive than the fourth. D. the firm is not maximizing its profit. E. the labor market is not perfectly competitive. Answer: E NARRBEGIN: Table 14. 3 The following table shows total output produced by different units of capital. The marginal revenue product of a resource is the product of the marginal product of the resource and the marginal revenue. NARREND 42. In Table 14. 3, if there exists perfect competition in the capital market and the price per unit of capital is ten times the price of the product, the marginal factor cost at the profit maximizing level of employment is: A. $60. B. $50. C. $40 D. $30 E. $20 Answer: C 43. In Table 14. 3, how many units of capital will the firm hire if the price per unit of capital is $60? A. 1 unit of capital. B. 2 units of capital. C. 3 units of capital. D. 4 units of capital. E. 5 units of capital. Answer: B 44. The producer can raise the level of profit by hiring more units of a resource if: A. the marginal revenue product of the resource is equal to the marginal factor cost. B. the marginal factor cost becomes negative. C. the marginal revenue product of the resource is greater than the marginal factor cost. D. the marginal revenue product falls to zero. E. the marginal revenue product of the resource is less than the marginal factor cost. Answer: C 45. Consider a perfectly competitive firm that produces computers. Each additional worker at this firm can produce four computers. Calculate the marginal factor cost if the computers are sold for $1,000 each, and the firm is maximizing profit. (Assume that marginal revenue product is the product of marginal product of the input and the marginal revenue of the firm. ) A. $4,000. B. $500 C. $1,000 D. $1,500 E. $400 Answer: A 46. A perfectly competitive employer of an input will maximize profits from the employment of the input by equating: A. the value of the marginal product of the input with the price of the output. B. the marginal product of the last unit of the input employed with the input price. C. the input price with the price of the product produced. D. the marginal-revenue product of the input with the input price. E. the marginal product of the last unit of the input employed with the price of the product produced. Answer: D 47. In a perfectly competitive labor market, a profit-maximizing firm that is also perfectly competitive in the product market will: A. face a perfectly inelastic supply curve of labor. B. pay a wage that is equal to the price of the product. C. pay a wage that is equal to the marginal product of labor. D. hire more units of labor than would a firm that sells its output in a monopoly market. E. pay a wage equal to the marginal-factor cost. Answer: E NARRBEGIN: Table 14. 4 The following table shows the marginal productivity of different units of labor for producing a product. In the table, MR: Marginal Revenue MPP: Marginal Physical Product NARREND 48. In Table 14. 4, if marginal revenue product is equal to the product of MPP and MR, what wage rate would be consistent with a profit-maximizing firm hiring six laborers? A. $6 B. $10 C. $12 D. $18 E. $24 Answer: A 49. According to Table 14. 4, how many laborers should be hired if the wage rate is $18? (Marginal revenue product = MPP ´ MR) A. 2 B. 3 C. 4 D. 5 E. 6 Answer: A 50. According to Table 14. 4, what is the highest MRP the firm can reach? (MRP = MPP ´ MPP) A. 5 B. 6 C. 15 D. 18 E. 25 Answer: D NARRBEGIN: Table 14. 5 The following table shows the marginal revenue of a firm and the marginal physical product of different units of labor in a perfectly competitive labor market. Note: Marginal revenue product of a resource is the product of MPP and MR. NARREND 51. In Table 14. 5, if the wage rate is $10, how many workers will be employed by a profit-maximizing firm ? A. 1 B. 2 C. 3 D. 4 E. 5 Answer: D 52. In Table 14. 5, at what wage rate would one worker be hired by a profit-maximizing firm? A. $10 B. $25 C. $30 D. $50 E. $100 Answer: D NARRBEGIN: Figure 14. 4 The following figure represents the equilibrium in the labor markets. Figure 14. 4 In the figure, MFC: Marginal Factor Cost curve D: Demand or the Marginal Revenue Product curve S: Supply curve NARREND 53. Refer to Figure 14. 4. A competitive labor market will pay the wage rate _____ and hire _____ units of labor. A. W1; Q1 B. W1; Q2 C. W2; Q2 D. W1; Q3 E. W3; Q1 Answer: C 54. Refer to Figure 14. 4. A monopsonist will pay the wage rate _____ and hire _____ units of labor. A. W2; Q2 B. W1; Q2 C. W3; Q1 D. W1; Q3 E. W1; Q1 Answer: E 55. According to Figure 14. 4, if the government imposes a minimum wage of W1, what quantity of labor will a competitive labor market hire? A. Q1 B. Q2 C. Q3 D. Less than Q2 E. Greater than Q3 Answer: C 56. Refer to Figure 14. 4. If the government imposes a minimum wage of W2, how many units of labor will a monopsonist hire? A. Q2 B. Between Q2 and Q3 C. Q1 D. Q3 E. Between Q1 and Q2 Answer: D 57. A monopolist hiring labor in a perfectly competitive resource market is faced with a: A. perfectly elastic demand curve for labor. B. horizontal marginal factor cost curve. C. perfectly inelastic demand curve for labor. D. perfectly inelastic supply curve of labor. E. positively sloped marginal factor cost curve. Answer: B 58. A monopsonist firm pays a price to a factor that is: A. equal to the marginal revenue product of the factor. B. greater than the marginal revenue product of the factor. C. equal to the marginal factor cost. D. greater than the marginal factor cost. E. less than the marginal revenue product of the factor. Answer: E NARRBEGIN: Figure 14. 5 The figure given below represents equilibrium in the labor market. Figure 14. 5 In the figure, VMP: Value of marginal product curve MRP: Marginal revenue product curve MFC: Marginal factor cost S: Supply curve of labor NARREND 59. According to Figure 14. 5, what is the equilibrium level of employment? A. 0 units B. L1 units. C. L2 units. D. L3 units. E. L4 units. Answer: B 60. Refer to Figure 14. 5. What wage rate will this firm pay? A. W1 B. W2 C. W3 D. W4 E. W5 Answer: A 61. In Figure 14. 5, the firm is: A. a monopsonist in the labor market and a perfect competitor in the output market. B. a monopsonist in the labor market and a monopolist in the output market. C. a perfect competitor in all markets. D. a perfect competitor in the labor market and a monopolist in the output market. E. either a monopolist or a monopsonist, but not both. Answer: B NARRBEGIN: Figure 14. 6 The figure given below represents equilibrium in the labor market with the demand and supply curves of labor. Figure 14. 6 In the figure, D = MRP implies demand for labor = Marginal Revenue Product MFC represents Marginal Factor Cost curve S represents the supply curve of labor NARREND 62. According to Figure 14. 6, what is the wage and quantity of labor hired by a competitive firm? A. $12 and 75 laborers B. $20 and 75 laborers C. $15 and 125 laborers D. $10 and 250 laborers E. $23 and 50 laborers Answer: C 63. According to Figure 14. 6, what is the wage paid by a monopsonist? A. $10 B. $23 C. $20 D. $12 E. $15 Answer: D 64. Refer to Figure 14. 6. Calculate the quantity of labor hired by a monopsonist. A. 125 laborers B. 75 laborers C. 25 laborers D. 250 laborers E. 50 laborers Answer: B 65. According to Figure 14. 6, if the government imposes a minimum wage of $15, what quantity of labor will a competitive firm and a monopsonist, respectively, hire? A. 50 and 25 B. 50 and 75 C. 75 and 125 D. 125 and 250 E. 50 and 125 Answer: E 66. Other things being equal, the marginal revenue product for labor hired by a firm that is a monopolist in the output market: A. is represented by an upward sloping curve. B. is equal to the marginal revenue product for labor hired by a perfectly competitive firm. C. is less than the marginal revenue product for labor hired by a perfectly competitive firm. D. is greater than the marginal revenue product for labor hired by a perfectly competitive firm. E. is equal to the value of marginal product of labor. Answer: C 67. If resource A and resource B are substitutes of each other and the price of resource A increases, then: A. the price elasticity of demand for resource B will increase. B. the demand for resource A will increase. C. the demand for resource B will increase. D. the price elasticity of demand for resource B will decrease. E. the demand for resource B will decrease. Answer: C 68. If the ratio of marginal revenue product to marginal factor cost for labor is greater than that for capital, then: A. the producer can maximize profit by hiring more units of capital. B. the producer suffers losses by hiring more units of labor. C. the producer does not alter the resource allocation. D. the producer can maximize profit by hiring more units of labor. E. the producer will earn above normal profit by hiring less units of labor. Answer: D 69. The demand for capital, as an input in production, will decrease if: A. labor and capital are substitutes in production and the supply of labor decreases. B. the demand for the final good it produces increases. C. capital becomes more productive. D. the price of capital decreases. E. labor and capital are substitutes in production and the wage rate declines. Answer: E 70. If an individual thinks about how he purchase goods and services, he will realize that he allocates his expenditures so that the pleasure he gets out of spending one more dollar is the same no matter what he spends that dollar on. For a firm purchasing resources, this is the same as ensuring that: A. the ratio between marginal revenue product and the marginal factor cost is equal for all the resources used. B. the marginal revenue product of the resources are equal. C. the marginal factor cost of the resources are equal. D. the ratio between marginal revenue product and the marginal factor cost is greater than one for all resources. E. the marginal revenue product is greater than the marginal factor cost of all resources. Answer: A 71. Why is the value of marginal product equal to the marginal revenue product under perfect competition in the product market? A. Because price is equal to average revenue B. Because price is equal to average cost C. Because marginal revenue is equal to marginal cost. D. Because price is equal to marginal revenue E. Because average revenue is equal to average cost Answer: D 72. A firm that was initially a monopsonist but has to buy from a competitive resource market all of a sudden will: A. buy more amount of resources and pay a higher price for these resources. B. buy the same amount of resources and pay a higher price for these resources. C. buy less amount of resources and pay a lower price for these resources. D. buy less amount of resources and pay a higher price for these resources. E. buy more amount of resources and pay a lower price for these resources. Answer: A 73. Which of the following statements is not true? A. Assuming a perfectly competitive labor market, a firm selling in a monopolistic product market will have a lower marginal revenue product curve than a firm in a perfectly competitive product market. B. The intersection of market-labor supply with market-labor demand establishes equilibrium in a perfectly competitive labor market. C. In monopsonistic labor markets, an individual firm faces a positively sloped labor-supply curve. D. In a perfectly competitive labor market, an individual firm can hire as many workers as it needs at the equilibrium wage rate E. In a monopsonistic labor market, marginal revenue product is equal to the value of marginal product. Answer: E 74. The value of the marginal product of a resource is equal to: A. the marginal revenue of the firm, if the product market is perfectly competitive. B. the market price of the product divided by the price of the resource. C. the market price of the product divided by the marginal product of the resource. D. the marginal revenue product of the resource, if the product market is perfectly competitive. E. the marginal product of the resource divided by the price of the resource. Answer: D 75. Which of the following statements brings out the relationship between the value of marginal product (VMP) and the marginal revenue product (MRP)? A. They are the same for a firm selling in a perfectly competitive market structure. B. They are the same for a firm purchasing inputs in a perfectly competitive market structure. C. VMP is greater than MRP when a firm is perfectly competitive in the product market. D. VMP is less than MRP when a firm is perfectly competitive in the product market. E. They are same when a firm is a monopolist. Answer: A 76. Earnings of a resource is termed as economic rent if: A. it has a perfectly elastic demand. B. it has a perfectly elastic supply. C. it has a perfectly inelastic supply. D. it has a perfectly inelastic demand. E. it has no demand. Answer: C 77. If a resource has perfectly elastic supply curve then its income is termed as: A. economic rent. B. rental rate of capital. C. rental income. D. annuity. E. transfer earnings. Answer: E 78. If the elasticity of supply of a resource is greater than zero but less than infinity, its income will comprise of: A. only economic rent. B. only transfer earnings. C. salaries and traveling allowances. D. both economic rent and transfer earnings. E. salaries, traveling allowances, as well as other incentives. Answer: D 79. If a resource can be put to a single use and has no alternative uses then: A. economic rents are zero. B. transfer earnings are maximized. C. total earnings are zero. D. all earnings are economic rents. E. all earnings are transfer earnings. Answer: D 80. The more inelastic the supply of a particular resource: A. the higher are its transfer earnings. B. the higher is its economic rent. C. the higher are its total earnings. D. the higher is the elasticity of demand for the resource. E. the lower is the elasticity of demand for the resource. Answer: B 81. Transfer earnings of a factor is equal to its: A. economic rent. B. explicit cost. C. actual earnings. D. overhead cost. E. opportunity cost. Answer: E 82. If a person is earning $80,000 per year as a dentist and could earn at most $45,000 per year doing something else, his transfer earnings are ____, whereas his economic rent is ____. A. $45,000, $35,000 B. $80,000, $45,000 C. $45,000, $80,000 D. $80,000, $35,000 E. $35,000, $45,000 Answer: A NARRBEGIN: Scenario 14. 1 Scenario 14. 1 A worker in Firm A earns an income of $5,000 per month. He has been offered a job in Firm B where he will be paid a salary of $7,000 per month. NARREND 83. Refer to Scenario 14. 1. If the worker joins Firm B, his opportunity cost is: A. $7,000. B. $5,000. C. $2,000. D. more than $5,000 but less than $7,000. E. less than $2,000. Answer: B 84. Refer to Scenario 14. 1. If the worker joins Firm B, his economic rent is: A. $5,000. B. $7,000. C. less than $7,000 but more than $2,000. D. $2,000. E. less than $2,000. Answer: D TRUE/FALSE 1. Households’ expenditure on goods and services are sources of revenue for the firms. Answer: True 2. Because of their derived nature, resource markets are completely different from any other type of market studied by economists. Answer: False 3. If the price of a product increases, the demand for the resource used in producing that product decreases. Answer: False 4. The resource market comprises of the households and firms where the firms sell their resources to the households. Answer: False 5. Burger King has a direct demand for the cheese which it uses in its burgers. Answer: False 6. The negative slope of the demand curve of a resource indicates an inverse relationship between the price of the resource and the quantity demanded. Answer: True 7. If the government sets a minimum wage which is more than the equilibrium wage, the firms tend to demand more labor. Answer: False 8. If the resource market is perfectly competitive, the marginal factor cost is equal to the price of the resource. Answer: True 9. If the marginal factor cost is greater than the marginal revenue product of a resource, the producer can increase profits by laying off some units of the resource. Answer: True 10. Suppose output of a firm hiring workers in a competitive labor market increases by three units when an additional worker is hired. This firm will hire more laborers if the market price of its product is $4 and the wage rate is $9. [Hint: Marginal revenue product of a resource is equal to the product of marginal product of the resource and the marginal revenue of the firm. ] Answer: True 11. If the labor market is perfectly competitive the wage rate will be less than the marginal revenue product of labor. Answer: False 12. A firm is said to be a monopsonist if it is the sole seller of a commodity in the market. Answer: False 13. Monopsonists tend to exploit the resources as they are the sole employers of the resources. Answer: True 14. A market is classified as a monopsony will arise when there is only one seller of the product. Answer: False 15. The profit-maximizing number of workers for a monopsony to employ is derived at the point where the marginal-revenue product of labor is equal to the marginal-factor cost of labor. Answer: True 16. A monopsonist firm faces a negatively sloped marginal factor cost curve. Answer: False 17. If government-assured medical and other benefits increase the labor costs, everything else remaining constant, then firms will tend to hire more of the other resources instead of labor. Answer: True 18. If a dollar spent on capital yields less marginal revenue product than labor, the profit of the firm is reduced if it hires less capital than labor. Answer: False 19. For a perfectly competitive firm, the marginal-revenue product is equal to the marginal product multiplied by the output price. Answer: True 20. A perfectly competitive firm hires more resources than a monopolist firm. Answer: True 21. If there is imperfect competition in the product market, the marginal revenue product of a factor will be greater than the value of its marginal product. Answer: False 22. Consider a perfectly competitive firm that can raise its output by 2 units by hiring an additional unit of capital. If the cost of hiring this additional unit of capital is $4 and the market price of the good is $1, the firm will certainly hire this unit of capital. [Hint: MRP = MP ´ MR] Answer: False 23. Economic rent is the sum of actual earning and transfer earning. Answer: False 24. The greater the elasticity of supply of a resource the greater is its economic rent. Answer: False 25. Transfer earning is the minimum amount that has to be paid to a factor to allocate it in its next best alternative use. Answer: True 26. If a particular factor has a specific use its transfer earning is very high. Answer: False 27. As the total quantity of land is fixed the payment for land is termed as economic rent. Answer: True 28. The market-supply-of-resource curve slopes upward, indicating that as the price of a resource rises, the quantity supplied of the resource rises, everything else held constant. Answer: True Test Bank for Microeconomics William Boyes, Michael Melvin 9781111826154

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