Download 1. The difference between marginal values and average values is that

1. The difference between marginal values and average values is that (a) Marginal values show the benefit from consuming an additional unit of a good, while average values are the cost from consuming an additional unit of a good.
(b) Marginal values show the additional benefit or cost from consuming an additional unit of a good,
while average values are the benefit or cost per unit of a good. (c) Marginal values show the total benefit or
cost from consuming a good, while average values are the total benefit or cost from consuming a good divided by the
amount of the good consumed. (d) Marginal values show the benefit or cost from consuming one unit of a good, while
average values are the benefit or cost from consuming all units of a good.
2. Free and competitive markets allocate scarce resources efficiently (a) true, so long as there are no public goods. (b) true
so long as there are no market failures. (c) true, so long as there are no externalities. (d) all of the above are
correct.
3. Utility functions are defined for (a) consumers. (b) firms. (c) government. (d) all answers are correct.
4. Government intervention in free markets (a) can improves well-being or welfare. (b) can potentially improve
well-being or welfare. (c) always leads to government failure. (d) is not supported in the economic way of thinking.
5. How does a natural experiment differ from a randomized one? (a) Natural experiments are not influenced by omitted
variables; randomized experiments contain omitted variables. (b) A natural experiment generates variation, while
a randomized experiment uses existing variation. (c) A natural experiment uses existing variation, while
a randomized experiment generates variation. (d) A natural experiment is expensive, while a randomized
experiment is cheap.
6. Which type of experiment is likely to yield more accurate results? (a) Natural, because there could be an omitted
variable. (b) Natural, because there could be reverse causality. (c) Randomized, because a natural experiment may
be completely influenced by chance. (d) Randomized, because a natural experiment may not be completely
randomized.
7. Opportunity cost is the (a) marginal value of the next best alternative that is given up in order to get a
preferred choice. (b) highest average value of an alternative given up in order to get a preferred choice. (c) monetary
value of an alternative given up in order to get something else. (d) measure of the benefit of the good or service received.
8. The demand for computers is QD = 132P , where P is the price of computers. The supply of computers is given by
. The equilibrium price of
QS = 4 + P . The equilibrium quantity of computers in competitive market is
computers is
. (a) Q = 6.5, P = 1 (b) Q =4, P = 6.5 (c) Q =7, P = 3 (d) Q = 3, P = 7
9. A tax on the supply of a good or service will (a) not change the supply of a good. (b) increase the supply of a good so
that the producer can pay the tax. (c) reduce the supply of most goods and services. (d) increase government
provision of public goods.
10. The demand/supply curves are (a) the marginal benefit/marginal cost curves. (b) used to determine shortages and
surpluses. (c) used to determine the market-clearing or equilibrium price. (d) all answers are correct.
11. When the demand for a product increases, there is usually a (a) rightward shift in the demand curve, and an
increase in the quantity supplied. (b) rightward shift in the demand curve and a decrease in quantity supplied.
(c) leftward shift in the supply curve, since costs have increased due to higher demand. (d) change in technology that
stimulated the change in demand.
12. Economic efficiency means (a) the greatest output for the least input. (b) the greatest output for least costs. (c) no
unexploited trades are available. (d) the most energy efficient allocation of environmentally sensitive resources.
13. A drought in the grape growing regions of the country increases the cost of producing grape jam. At the same time,
the price of peanut butter falls. Suppose that after both of these events the consumption of jam is left unchanged. The
law of demand
(a) does not hold, since there was no change in the quantity of jam demanded. (b) does not
hold, since the product sold is a necessity, so increasing the price will not likely affect consumption. (c) holds, since
the demand curves for both grape jam and peanut butter are downward-sloping; it is their shifts that
are determining the impact on the quantity consumed. (d) holds, since the law of demand must hold for all
goods in all instances.
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Name:
1. Government often uses the price system to help people in distress, including minimum wages, controlling the price of
food and fuel or building supplies in the aftermath of a natural disaster. The justification is that “it is the right thing
to do.” In the economic way of thinking, is this indeed the “right thing to do?” Be sure to mention and evaluate some
alternatives.
2. Suppose your total benefit from eating slices of pizza (value in dollars) is 14x − x2 ,where x is the number of slices of
pizza. Pizza is sold by the slice and costs $2 per slice. Using optimization in levels or at the margin, what is the optimal
amount of pizza for you to eat? Show work: Hint: consider benefit, cost, net benefit, and ∆ net benefit for different
numbers of slices as was done the spreadsheet posted on Blackboard.
3. Explain Pareto optimality using the prisoner of war example. What is the relationship between the Pareto Principle
and normative v. positive economic analysis?
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