AREC 202 Final Examination – Kroll Questions with Answers Latest Update 2024, Exams of Business Economics

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AREC 202 Final Examination – Kroll Questions with

Answers Latest Update 2024

1. THE rule (and it variations): How is the optimal level of any activity (for consumers, firms or governments) determined? - Correct answer the principle of marginal analysis says that the optimal quantity is the quantity at which marginal benefit is equal to marginal costMB = MC (the intersection on a graph)-If there is no quantity at which MB = MC, then choose the largest quantity, at which MB > MC!
2. On the 2x2 efficiency table: What effect on efficiency (total surplus) do government interventions have in a market in which originally the government had not intervened? - Correct answer Market works well - marginal benefit =marginal cost total surplus was maximized, and the government intervenes things will go wrong and vice versa (if it's not broke don't broke don't fix it and vice versa) (tax, regulation, etc.)
3. Why is perfect competition (under certain assumptions) efficient? - Correct answer Price = marginal cost (amount needed to produce last unit) (can't charge higher price cause will go by from someone else) (multiple sellers of same product) won't let sellers place a higher price then needed
4. If firms make profits (or losses) in the short run, what do economic models predict to happen in this market? - Correct answer They will go away (always return to 0 eventually) (will fix itself)
5. What is the difference between "shutting down" and "exiting"? - Correct answer shutting down - still paying amount of fixed cost exiting - completely out of the market
6. What is the difference between the short-run and the long-run equilibrium in perfect competition? - Correct answer Long-run: nothing is fixed (when anything can happen) Short run: at least something is fixed (when you can't make changes to anything)
7. What is the basic difference between economic profit and economic rent? And why did the great chef in the example in class make so much money, even in the long run? - Correct answer Economic profit - amount you take in - all costs
8. Economic rent - scarcity (what people can't take from you) (economic profit that is based on a special skill)
9. What is the difference between the demand one single perfectly competitive firm faces and the demand in an entire market (or equivalently, the demand curve a

monopolist faces)? - Correct answer Single - faces fixed or flat income (no influence over the price)

10. Entire - downward sloping demand curve
11. Does a monopolist always make a positive profit? - Correct answer Yes
12. How do quantity and price compare between a perfectly competitive market and a monopoly with the same demand and marginal cost curves? - Correct answer Price in PC will be lower than M and quantity will be higher and vise versa
13. What is the relationship between marginal revenues and demand for a monopolist? - Correct answer In order to sell another unit, they must look at what the next person is willing to pay (control the curve) (curves are the same)
14. Is a monopoly socially efficient and inefficient, and why? - Correct answer Inefficient because they sell at price above marginal cost
15. What are deadweight loss and total surplus when a monopolist can use perfect price discrimination? - Correct answer (can charge different people different prices) total surplus doesn't change but allocation (who gets what) does (no deadweight loss if they perfectly price discriminant)
16. What is the "hurdle method" of price discrimination for a monopolist, and what effect does it have the quantity sold and total surplus compared to a single-price monopolist? - Correct answer Charge different groups of people different things (quantity sold would go down just a bit) (total surplus would decrease - not making and selling as much) (consumer surplus increases)
17. What are externalities, and what for what kind of externalities is environmental pollution an example? - Correct answer Any effect on society that isn't captured in market interaction (+ or -) ( pollution is negative) (costing other people more)
18. In the context of externalities, what are "social marginal benefits" and "social marginal costs"? - Correct answer what your benefits and costs actually are
19. What is the optimal level of pollution? - Correct answer social marginal benefits = social marginal costs
20. Given external costs and costs of decreasing pollution (think of the Ben-and- Jerry example), what is socially optimal, keep polluting or decrease pollution? - Correct answer Limit pollution (estimate of cost of pollution)
21. If negotiations between a polluter and a victim of pollutions are possible and costless, will these negotiations result in the socially optimal outcome? - Correct answer They should (depending) (depends on the rights)

34. When do consumers bear more of a burden from a sales tax than producers? - Correct answer low elasticity (closer to perfect elasticity) and vice versa
35. How much does the equilibrium price in a competitive market with "regular" (= not perfectly price- inelastic) supply and demand curves increase when a per-unit tax is imposed on the sellers? - Correct answer The price for the consumer will go up just not as much as the tax (if perfectly elastic pride will go up by amount of tax)
36. Does doubling the sales tax on a good with "regular" (= not perfectly price- inelastic) supply and demand curves double tax revenues? - Correct answer No
37. How is the motivation for using a progressive tax (a tax where higher incomes are taxed over proportionally more than lower incomes) related to the income elasticity of demand for public goods? - Correct answer Tax based on income
38. What is the basic problem with "asymmetric information"? (from chapter 11) - Correct answer welfare loss for everyone