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70 Market damage caused by producing the last unit is worth $1 (b) environmental costs are $6 for every unit produced (c) the environmental damage caused by producing the last unit only is $6 (d) the marginal social cost of producdon is $5 (e) society is imposing a subsidy of $1 for every unit produced. 23. A recent Supreme Court decision held that the present environmental quality of unpolluted regions is protected by law; this decision is: (a) efficient because there is already too much polludon (b) inefficient because the health costs of polludon in polluted dties is greater than in rural areas (c) probably inefficient because the marginal cost of keeping all pollution out is presumably greater than the marginal benefit of the environmental amenities thus preserved (d) efficient because the marginal benefit of having a clean environment is always less than the marginal cost (e) efficient because saving the environment is a high social priority. 24. Power plants emitting oxides of sulfur, a strongly toxic pollutant, are currendy required to employ "the best available technology" for removing these emissions. Which of the following is correct? (a) the law makes good sense because sulfur dioxide is so toxic (b) the law makes no economic sense because the costs and benefits of remoral are not considered (c) the law makes sense because it internalizes the externalities (d) the law is sensible provided the power companies can remain in operation (e) it would be better still to ban sulfur dioxide emissions altogether. 25. In which of the following situations is free-riding occurring? (a) after spending an hour with a salesman listening to stereo demonstrations in a high-priced store, you buy the brand youve selected for less at a low-priced store which doesnt give expensive demonstrations (b) a drug company discovers thai a certain molecule has valuable pharmaceutical properties; after it ukes out a patent, a competing company investigates closely related molecules which exhibit similar pharmaceutical activities (c) the local Mc Donalds franchise uses cheaper grades of beef than the chain would like (d) all of the above (e) none of the above 26. Which of the follovdng is correcti (a) competitive industries automatically provide the optimal amount of pollution (b) public goods are produced only by the government (c) government intervention in the case of market failure can be relied upon to improve the situadon (d) externalities would not exist in a centrally planned economy (e) none ofthe above. 27. Common property resources are resources that: (a) lack well-defined rights of exclusion (b) have well-defined rights of exclusion (c) are easily replaced (d) are overproduced by the market (e) are produced by a natural monopolist.
REVIEW QUESTIONS FOR SECTIONS VI-K Note: Because Section V is sometimes covered in the midterm and somedmes in the final, only a few quesdons from this vital secdon are included here. 1. If the curve falls condnuously over most of the range of the market demand curve, the market structure will most likely be: (a) compedtive (b) government created monopoly (c) natural monopoly (d) oligopoly (e) monopolisdc compedtion. 2. Much of the construcdon cost of modern continuous flow chemical plants consists of steel piping. The amount of steel required to make a pipe of a certain length varies with the radius of the pipe; the capacity of the pipe, however, varies with the square of the radius. Ignoring other relevant effects, we would expect in chemical production: (a) firm size to be small (b) firms to increase the length of steel pipes (c) firms to avoid using continuous flow processes (d) government restrictions on the maximum size of plant (e) large plants capturing economies of scale. 3. The supply curve of a profit maximizing monopolist is best described as: (a) the marginal cost curve (b) the marginal cost curve above minimum average variable cost (c) the total marginal cost curve above minimum average total cost (d) the average cost curve (e) none of the above; monopoly has no supply curve. 4. Which of the following is not generally true of monopoly? (a) price in excess of marginal cost (b) marginal cost equal to marginal revenue (c) marginal revenue less than average reveime (d) product demand elastic at the prerailing price (e) average revenue equal to marginal cost. 5. According to a rule of thumb used in the chemical industry, each doubling of a plants size reduces its average total cost by about 30%. Ignoring other relevant effects, we w-ould therefore expect to observe: (a) many firms engaged in perfect competition (b) many firms engaged in monopolistic competition (c) no supernormal profits (d) an oligopolistic industry structure or perhaps a natural monopoly (e) none of the above. 6. Which of the following is riot apparendy an example of price discrimination? (a) cheaper hair- cuts to children (b) cheaper medical care to the poor (c) cheaper movie tickets for students (d) cheaper air fares for tourists than for businessmen (e) cheaper gas for cash customers. 7. Which of the following is false for a monopolistic competitor operating in long run equilibrium? (a) MR is less than (b) P exceeds MR (c) P equal to (d) greater dian MC (e) continuously falling over the entire demand curve. 8. Which of the following is inconsistent with the predictions ofthe kinked demand curve model of oligopoly? (a) price rigidity under changing cost conditions (b) fixed market shares (c) the presence of economic profit (d) resistance by competitors to match price reductions, but willingness to match price increases (e) price greater than marginal 9. According to a recent article in the Wall Stret Journal , the U.S. Department of Justice has charged the President of American Airlines with price fixing for proposing that American and Braniff joindy raise fares over certain routes. This suggests that the market structure was most likely: (a) perfecdy compedtive (b) monopolistic competition (c) a joint profit maximizing carteloperatingin equilibrium (d) an oligopoly (e) any of the above are equally likely. 10. Cartels: (a) would be stable if they were not illegal under the antitrust laws (b) are impossible to organize because it always pays each cartelist to cheat on the agreement (c) are never supported and stabilized by licensing and other government supported restrictions (d) cannot succeed in raising profits unless each member of the cartel adheres stricdy to the reduced output assigned him (e) capture a portion of the consumer surplus for the participants when they are successful. 11. The fact that many people object to smoking in their presence indicates: (a) negative externalities in the production of cigarettes (b) positive externalities the production of cigarettes (c) negative externalities in the consumption of cigarettes (d) posit ernalities in the consumption of cigarettes (e) no iuve iialities in the consumption of cigarettes (d) externalities in the consumption of cigarettes external effects from cigarette smoking. 12. An industry is likely to be monopolistically competitive rather than perfecdy competitive when: (a) curves are "U" shaped (b) entry is open
( ) the product is easy to differentiate and consumers want variety (d) the product is easy to differendate, but the pubhc is indifferent to variety (e) economies of scale are achieved at low levels of output. 13. A compeddve firms marginal revenue product of labor curve slopes down because: (a) additional workers are less skillful than existing workers (b) additional output can be sold only at ever lower prices (c) economies of scale exist (d) diminishing returns reduce the marginal physical product of labor (e) diminishing marginal udlity reduces the demand for the product. 14. The sole owner of a mineral spring can sell the following quantities in a week at the following prices per botde: P 800 700 600 500 400 Q 600 800 1000 1100 1200 If the cost of producing a botde is negligible, then the profit maximizing level of output would be about: (a) 600 botdes (b) 800 botdes (c) 1000 botdes (d) 1100 botdes (e) 1200 botdes. 15. In the equihbrium of the preceding question: (a) MR = 0 and elasticity of demand = 1 (b) MR = 0 and elasticity of demand is «» (c) MR = 1 and elasticity of demand is 0 (d) MR = 1 and elasticity of demand is 1 (e) none of the above. 16. Suppose the demand curve for glue is linear and that at a price of $4 per can, none would be purchased, but that at a price of zero, 2,000 cans would be purchased per week. Suppose also that the marginal private cost of glue is constant at $1 per can and that the marginal social cost of glue is $1.50 per can. In this case a competitive industry would produce: (a) 500 cans (b) 1000 cans (c) 1500 cans (d) 2000 cans (e) zero cans. 17. For the same conditions as above, the socially efficient level of production per week would be: (a) 500 cans (b) 750 cans (c) 1000 cans (d) 1250 cans (e) 1500 cans. 18. The efficiency loss per week due to the externalities in glue production would then be about: (a) $62.50 (b) $625 (c) $1500 (d) $1437.50 (e) $1562.50. 19. The imposition of a lump sum tax, i.e., a fixed annual payment independent of the level of produc don, on a monopolist might be expected to: (a) cause the monopolist to reduce output (b) cause the monopolist to increase output (c) either force the monopolist to close down or else leave output unchanged (d) definitely result in no output change (e) definitely cause him-to close down. 20. If a successful wage claim by a labor union results in no change in a firms price or output in the short run, then we are most likely dealing with a: (a) monopoly (b) kinked demand oligopoly (c) monopolistic competitor (d) firm in perfect competition (e) joint profit maximizing cartel. 21. A bridge connecdng two islands has the following demand: Price per Crossing $2.00 $1.50 $1.00 $0.50 $0.00 Crossings per Annum 1,000 2,000 3.000 6,000 9,000 In addition, it is known that $3,000 per annum is necessary to maintain the bridge against weather damage. If these are the only costs, then the socially optimal number of crossings would be: (a) 1,000 (b) 2,000 (c) 3,000 (d) 6,000 (e) 9,000. 22. In the circumstances of the prerious question, the owner of the bridge charges a toll of $1 per crossing in order to cover the cost of maintenance. In this case the welfare loss to societ) caused by the toll would be approximately: (a) zero (b) $1,000 (c) $2,000 (d) $3,000 (e) $6,000. 23. In the presence of external costs economists usually recommend: (a) an excise tax equal to the dollar value of the marginal external costs (b) an income tax (c) a subsidy equal to the dollar value of the marginal external costs (d) a license fee (e) none ofthe . 24. Crout Mining Inc. is the only employer in Croutch, New Mexico, and faces the following short run supply of miners at various wage rates: Number of miners: 1 2 3 4 5 6 Wage rate (per wk): $50 $100 $150 $200$250 $500
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