ECON 101

Exercises for Chapter 11

1. Goods that are excludable include botha. natural monopolies and public goods.b. public goods and common resources.c. common resources and private goods.d. private goods and natural monopolies.

2. A lighthouse is typically considered a good example of a public good becausea. the owner of the lighthouse is able to exclude beneficiaries from enjoying the lighthouse.b. there is rarely another lighthouse nearby to provide competition.c. a nearby port authority cannot avoid paying fees to the lighthouse owner.d. all passing ships are able to enjoy the benefits of the lighthouse without paying.

3. Market failure associated with the free-rider problem is a result ofa. a problem associated with pollution.b. benefits that accrue to those who don’t pay.c. losses that accrue to providers of the product.d. a project in which costs exceed benefits.

4. Market failure with common resources occurs becausea. the government imposes a negative externality on everyone’s consumption of the resource.b. society is unable to value the social loss that results from individual consumption.c. consumption can be privately profitable even when it is socially undesirable.d. All of the above are correct.

5. Suppose all citizens in a certain city are given identical debit cards used to pay for toll roads. Which of the following statements would NOT be true, assuming that the debit cards could be sold privately from person to person?a. This would be a very egalitarian policy.b. This system would end up being a redistribution of income from those that drive more to those

that drive less.c. This system could potentially be a redistribution of income from the rich to the poor if the poor drive less.d. The cost to the government of such a program would greatly outweigh the benefit to society.

6. To remedy the presence of a negative externality such as pollution in a market, the government may choose to impose aa. Pigovian tax.b. subsidy.c. price floor.d. Coase theorem solution.

7. The Ogallala aquifer is a large underground pool of fresh water under several western states in the United States. Any farmer with land above the aquifer can at present pump water out of it. Which of the following statements about the aquifer is most likely to be true?a. The aquifer is a public good which must be publicly owned to be used efficiently.b. The aquifer is a private good which must be privately owned to be used efficiently.c. The aquifer is a common property resource, which will be overused if nobody owns it.d. The aquifer is a natural monopoly, which should be left as it is.

8. The text says that both public goods and common resources involve externalities.a. Are the externalities associated with public goods generally positive or negative? Use examples in your answer. Is the free-market quantity of publicgoods generally greater or less than the efficient quantity?b. Are the externalities associated with common resources generally positive or negative?Use examples in your answer. Is the free-market use of common resources generally greater or less than the efficient use?

9. Think about the goods and services provided by your local government.a. Identify what category each of the following goods falls into:

_ police protection_ snow plowing_ education1_ rural roads_ city streets

b. Why do you think the government provides items that are not public goods?

10. The text states that private firms will not undertake the efficient amount of basic scientific research.a. Explain why this is so. In your answer, classify basic research in one of the categories we discussed in classb. What sort of policy has the United States adopted in response to this problem?c. It is often argued that this policy increases the technological capability of American producers relative to that of foreign firms. Is this argument consistent with your classification of basic research in part (a)? (Hint: Can excludability apply to some potential beneficiaries of a public good and not others?)

11. The Washington, D.C., metro (subway) system charges higher fares during rush hours than during the rest of the day. Why might it do this?

12. Timber companies in the United States cut down many trees on publicly owned land and many trees on privately owned land. Discuss the likely efficiency of logging on each type of land in the absence of government regulation. How do you think the government should regulate logging on publicly owned lands? Should similar regulations apply to privately owned land?

13. An Economist article (March 19, 1994) states: “In the past decade, most of the rich world’s fisheries have been exploited to the point of near-exhaustion.” The articlecontinues with an analysis of the problem and a discussion of possible private and government solutions:

a. “Do not blame fishermen for overfishing. They are behaving rationally, as they have always done.” In what sense is “overfishing” rational for fishermen?b. “A community, held together by ties of obligation and mutual self-interest, can manage a common resource on its own.” Explain how such management can work in principle, and what obstacles it faces in the real world.c. “Until 1976 most world fish stocks were open to all comers, making conservation almost impossible. Then an international agreement extended some aspects of [national] jurisdiction from 12 to 200 miles offshore.” Using the concept of property rights, discuss how this agreement reduces the scope of the problem.d. The article notes that many governments come to the aid of suffering fishermen in ways that encourage increased fishing. How do such policies encourage a vicious cycle of overfishing?e. “Only when fishermen believe they are assured a long-term and exclusive right to a fishery are they likely to manage it in the same far-sighted way as good farmers manage their land.” Defend this statement.f. What other policies to reduce overfishing might be considered?

14. In a market economy, information about the quality or function of goods and services is a valuable good in its own right. How does the private market provide this information? Can you think of any way in which the government plays a role in providing this information?

15. Do you think the Internet is a public good? Why or why not?

Exercises for Chapter 13

1.Consider the following table of long-run total cost for three different firms:

QUANTITY 1 2 3 4 5 6 7FIRM A 60 70 80 90 100 110 120FIRM B 11 24 39 56 75 96 119FIRM C 21 34 49 66 85 106 129

Does each of these firms experience economies or diseconomies of scale?

2. Which of the following is an implicit cost?(i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm(ii) interest paid on the firm’s debt(iii) rent paid by the firm to lease office space

a. (ii) and (iii)b. (i) and (iii)c. (i) onlyd. All of the above are correct.

3. With regard to cookie production, the figure impliesa. diminishing marginal product of workers.b. diminishing marginal cost of cookie production.c. decreasing cost of cookie production.d. increasing marginal product of workers.

4. Which of the following statements about a production function is correct for a firm that uses labor to produce output?a. The production function depicts the relationship between the quantity of labor and the quantity of

output.b. The slope of the production function measures marginal cost.c. The quantity of output is measured along the horizontal axis.

d. All of the above are correct.

5. The marginal product of an input in the production process is the increase ina. total revenue obtained from an additional unit of that input.b. profit obtained from an additional unit of that input.c. total revenue obtained from an additional unit of that input.d. quantity of output obtained from an additional unit of that input.

6. If a firm wants to capitalize on economies of scale, it may be able to do so bya. assigning limited tasks to their employees, so they can master those tasks.b. employing a smaller number of workers.c. producing a smaller quantity of output.d. All of the above are correct.

7. When marginal cost is rising, average variable costa. must be rising.b. must be falling.c. must be constant.d. could be rising or falling.

8. Samantha has been working for a law firm and earning an annual salary of $90,000. She decides to open her own practice. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Samantha will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $1,000. Assuming that there are no additional expenses, Samantha’s annual implicit costs will equala. $55,200.b. $221,400.c. $91,000.

d. $146,200.

9. As Al’s Radiator Co. continues to add workers, while keeping the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Al’s Radiator Co. encountersa. economies of scale.b. diseconomies of scale.c. increasing marginal returns.d. diminishing marginal returns.

10. Smith Tire Co. has total fixed costs of $100,000 per year. The firm’s average variable cost is $80 for 10,000 tires. At that level of output, the firm’s average total costs equal

a. $90.b. $100.c. $110.d. $120.

11. Miller Technologies has average variable costs of $6 and average total costs of $10 when it produces 1,000 units of output. The firm’s total fixed costs equal

a. $2,000.b. $3,000.c. $4,000.d. $5,000.

12. At a firm’s current output level of 200 units per week, it has 10 employees at a weekly wage of $500 each. Raw materials, which are ordered and delivered daily, cost $1,000 per week. The weekly cost of the firm’s capital is $1,250. Which of the following statements is correct?

Variable Cost Fixed Cost Total Costa. $5,000 $2,250 $7,250b. $6,000 $1,250 $7,250c. $1,250 $6,000 $7,250d. $2,250 $ 500 $2,750

13. If marginal cost is greater than average total cost thena. profits are increasing.b. economies of scale are becoming greater.c. average total cost remains constant.d. average total cost is increasing.

14. The minimum points of the average variable cost and average total cost curves occur wherea. the marginal cost curve lies below the average variable cost and average total cost curves.b. the marginal cost curve intersects those curves.c. wages are the lowest.

d. the slope of total cost is the smallest.

15. When the marginal product of labor falls, the marginal cost of outputa. falls, then rises.b. becomes negative.c. rises.d. remains constant.

16. Given the cost curve described in the diagrams below, the efficient scale of production occurs at point a. A.b. B.c. C.d. D.

17. Economies of scale a. requires a change in the size of operations and therefore is a long-run consideration.b. requires a more intensive use of existing plant and therefore is a short-run consideration.c. means that a doubling of plant size will double output.d. requires a change in the size of plant and therefore is a short-run consideration.

18. Some reasons that firms may experience diseconomies of scale include thata. the firm is too small to take advantage of specialization.b. large management structures may be bureaucratic and inefficient.c. if there are too many employees, the work place becomes crowded and people become less productive.d. average fixed costs begin to rise again.

19. A local bagel company plans to keep and maintain its bagel factory, which is estimated to last 25 years. All cost decisions it makes during the 25-year perioda. are short-run decisions.b. are long-run decisions.c. involve only maintenance of the factory.d. are zero, since the cost decisions were made at the beginning of the business.

20. Which of the following explains why long-run average cost at first decreases as output increases?a. diseconomies of scaleb. less-efficient use of inputsc. fixed costs becoming spread out over more units of outputd. gains from specialization of inputs

21. The total cost to the firm of producing zero units of output is

a. zero in both the short run and the long run.b. its fixed cost in the short run, zero in the long run.c. its fixed cost in both the short run and the long run.d. its variable cost in both the short run and the long run.

The figure below depicts average total cost functions for a firm that produces automobiles.

22. Which of the curves is most likely to characterize the short-run average total cost curve of the smallest factory?a. ATCAb. ATCBc. ATCCd. ATCD

23. Which curve represents the long-run average total cost?a. ATCAb. ATCBc. ATCCd. ATCD

24. In the long run, the firm can operate on which of the following average total cost curves?a. ATCA

b. ATCBc. ATCCd. All of the above are correct.

25. This firm experiences diseconomies of scale at what output levels?a. output levels above Nb. output levels between M and Nc. output levels below Md. All of the above are correct, if the firm is operating in the long run.

26. At levels of output below M the firm experiencesa. economies of scale.b. diseconomies of scale.c. economic profit.d. accounting profit.

27. Fill in the blanksa. The true cost of taking some action is ______.b. _______ is falling when marginal cost is below it, and rising when the marginal cost is above itc. A cost that does not depend on the quantity produced is a _______d. In the ice cream industry in the short run, ______ includes the cost of cream and sugar, but not the cost of the factory.e. Profits equal total revenue less _________f. The cost of producing an extra unit of output is the _________

28. Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant. a. Define opportunity costb. What is your aunt’s opportunity cost of running a hardware story for a year? If your aunt thought she could sell $510,000 worth of merchandise in a year, should she open the store? Explain.

29. . Suppose that your college charges you separately for tuition and for room and board.a. What is a cost of attending college that is not an opportunity cost?

b. What is the explicit opportunity cost of attending college?c. What is an implicit opportunity cost of attending college?

30. A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught:

HOURS QUANTITY OF FISH

0 01 10

2 18

3 24

4 28

5 30

a. Graph the production function.b. What is the marginal product for each hour spent fishing? c. The fisherman has a fixed cost of $10 (his pole). The opportunity cost of his time is $5 per hour.

Graph the total cost curve.

31. Nimbus Inc., makes brooms and sells them door to door. The production function is given by:

HOURS QUANTITY OF FISH

0 01 202 503 904 1205 1406 1507 155

Find the marginal products.Assume a worker costs $100 a day, and the firm has a fixed cost of $200. Find total cost, ATC, MC. Explain the relationship between marginal product and marginal cost. Explain the relationship between ATC and MC.

32. Consider the following cost information for a pizzeria

What is the pizzeria’s fixed cost? Construct a table of marginal costs using the information on total costs. Do the same using the information on variable costs. Compare the two.

33. Your cousin Vinnie owns a painting company with fixed costs of $200 and the following schedule for variable costs:

Quantity of Houses Painted per Month

1 2 3 4 5 6 7

Variable Costs 10 20 40 80 160 320 640

Q TOTAL COST

VARIABLE COST

0 300 01 350 502 390 903 420 1204 450 1505 490 1906 540 240

Calculate the average fixed cost, average variable cost, and average total cost for each quantity. What is the efficient scale of the painting company?

34. Healthy Harry’s Juice Bar has the following cost schedules :Q VARIABLE COST TOTAL COST0 0 301 10 402 25 553 45 754 70 1005 100 1306 105 165

Calculate AVC, ATC, MC for each quantity. Graph the three curves. What is the relationship between MC and AVC, Between MC and ATC?

35. Consider the following table of long-run total cost for three different firms:QUANTITY 1 2 3 4 5 6 7FIRM A 60 70 80 90 100 110 120FIRM B 11 24 39 56 75 96 119FIRM C 21 34 49 66 85 106 129

Does each of these firms experience economies or diseconomies of scale?