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Micro Test 3 Chapter 5

1. A good is considered nonexcludable if it is impossible or very costly to exclude nonpaying


customers from receiving the good.

2. A good is considered nonrival-in-consumption if many individuals can share in the consumption


of the same unit of the good.

3. When economists say that an activity meets the criterion for economic efficiency, they mean the
benefits that result from the activity exceed the costs.

4. What are the two distinguishing characteristics of a public good? Nonrivalry in consumption and
nonexcludability.

5. A free-rider problem exists when a good that has the following characteristic? Nonexcludable. 6. A good that is both nonexcludable and nonrival-in-consumption is called a public good. 7. In economics, a free rider is the term used for a person who receives the benefit of a good
without contributing to its costs of production.

8. The spillover effects of actions that affect the well-being of nonconsenting third parties are
called externalities.

9. A good for which it is impossible or at least very costly to exclude nonpaying customers from
receiving the good and for which many individuals can share in the consumption of the same unit of the good is called a public good.

10. Externalities are fundamentally the result of the lack of well-defined or enforced property rights. 11. Markets fail to allocate resources efficiently when property rights are poorly enforced or not well
established.

12. Suppose external costs are present in a market which results in the actual market price of $50
and market output of 800 units. How does this outcome compare to the efficient, ideal equilibrium? The efficient outcome would be less than 800 units.

13. Suppose external benefits are present in a market which results in the actual market price of $34
and market output of 126 units. How does this outcome compare to the efficient, ideal equilibrium? The efficient outcome would be greater than 126 units.

14. When externalities are present competitive market outcomes may be inconsistent with ideal
economic efficiency.

15. From the standpoint of economic efficiency, competitive markets tend to provide less of a public
good than would be efficient.

16. When production of a good provides external benefits, there will be too few resources devoted
to its production.

17. When a firm generates external benefits, a more efficient outcome would result if the firm
produced a larger output level.

18. As a general rule, if pollution costs are external, firms will produce too much of a polluting good. 19. Because the benefits derived from an activity decline as it is expanded, it is generally efficient
to stop well before perfection is achieved.

20. Consider two goods--one that generates external benefits and another that generates external
costs. A competitive market economy would tend to produce too little of the good that generates external benefits and too much of the good that generates external costs. Chapter 9

1. Competition as a dynamic process implies that the individual firms in an industry utilize a
variety of techniques, such as product, style, and price, to win the dollar votes of consumers.

2. Which of the following is the best example of a business firm operating in a competitive pricetaker market? An Indiana hog farmer that raises pigs.

3. When a law is passed that requires businesses to obtain permission from government officials in
order to enter a market, this is an example of a barrier to entry.

4. Which of the following is a reason to study the decisions of price takers? The price-taker model
enhances our knowledge of competition as a dynamic process.

5. "Competitive price-taker markets" and "purely competitive markets" are merely alternative
names for the same concept.

6. Several states require cosmetologists to undertake 1,500 hours or more of training in order to
obtain a license to provide hair styling or braiding services. This is an example of a barrier to entry.

7. Firms that can choose what price they will charge for their product and can increase the number
of units sold by reducing price are called price searchers.

8. Competitive price-taker markets are characterized by firms that all produce the same product. 9. Which of the following is the best example of a business firm operating in a competitive pricetaker market? A Midwest farmer producing beef cattle.

10. Firms that are price takers are small relative to the total market. 11. A competitive price-taker firm would be willing to remain in the industry in the long run at zero
economic profit because it is covering all costs, including the opportunity cost of capital and labor.

12. Competition as a dynamic process implies that individual firms in a market use price
competition as well as other forms of competition to gain the dollar votes of consumers.

13. When profits occur in a competitive market, this indicates that consumers value the goods more
than the resources used to produce them.

14. If profit-seeking entrepreneurs are going to be successful, they must produce a product that the
consumers value more than the resources required for its production.

15. The owners of a firm are earning economic profit if they are earning a return on their capital that
is higher than what can generally be earned in other markets.

16. The dynamic process of competition puts the profit motive of sellers to work for buyers. 17. When the conditions in a competitive price-taker market are such that the firms are consistently
unable to cover their production costs some firms will exit from the industry, and market price will rise until the remaining firms can earn the normal rate of return.

18. The dynamic process of competition provides consumers with alternative suppliers and thus a
mechanism with which they can discipline sellers.

19. If a firm is losing money, this implies that the value of the resources used to make the product is
being reduced.

20. If an amusement park that is highly profitable during the summer months is unable to cover its
variable costs during the winter months, it should operate during the summer but shut down during the winter months. Chapter 10

1. An important variable that is left out of economic models is entrepreneurship. 2. Which of the following is not a characteristic of a competitive price-searcher market? The entry
barriers are high.

3. A practice whereby a seller charges different prices to different consumers of the same product or
service is called price discrimination.

4. Price discrimination refers to a system of pricing where consumer groups with a more elastic
demand for the product are charged lower prices.

5. A competitive price-searcher market is best described as many firms with some control over
price, and some product differentiation.

6. Competitive price-searcher markets are common in retail selling. 7. Which of the following is a term that is sometimes used to describe markets with low entry
barriers and firms that are price searchers? Monopolistic competition.

8. A competitive price-searcher market is characterized by firms being able to choose their price
and by low barriers preventing firms from entering or leaving the market.

9. Which of the following most closely approximates the conditions of a competitive price-searcher
market? The restaurant industry, which is characterized by firms producing a differentiated product in a market with low entry barriers.

10. The term price searcher applies to all firms that face a downward-sloping demand curve. 11. For effective price discrimination to occur, a seller must be able to prevent consumers from
reselling the product to other consumers.

12. A firm in a competitive price-searcher market can raise its price without losing all of its customers.
This is a result of product differentiation.

13. Which of the following is a necessary condition for price discrimination to be profitable? Groups of
consumers with different demand elasticities must be easily distinguishable.

14. Suppose that competitive price-searcher firms are experiencing losses. In the transition from this
initial situation to a long-run equilibrium the number of firms in the market decreases.

15. A price-discriminating firm charges the lowest price to the group that has the most elastic
demand.

16. When a new firm enters a competitive price-searcher market, the demand curves faced by all
existing firms in that market will shift to the left.

17. Which of the following is a necessary condition for price discrimination to be profitable? It must be
easy to distinguish consumer groups with differing responses to higher prices.

18. Long-run equilibrium in a competitive price-searcher market requires that the demand curve be
tangent to the average cost curve.

19. If a firm in a competitive price-searcher market raises its price, it will lose only some of its sales. 20. In order for effective price discrimination to occur, a seller must have at least two
distinguishable groups of consumers.

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