Human capital is a type of social capital.
The more homogeneous are consumers’ preferences, the more product variety will be
observed.
A perfectly competitive system is efficient.
Assuming a perfectly competitive market implies that households do not need
knowledge of qualities and prices of everything available in the market.
Owning a corporate bond entitles the bondholder to a portion of the firm’s profits.
Policies designed to promote import substitution often encouraged capital-intensive
production methods.
A laissez-faire economy is one in which individual people and firms pursue their own
self-interest without any central direction or regulation.
A person’s wealth is the total value of all the things they own.
The World Bank is an international agency that lends money to individual countries for
projects that promote economic development.
Average fixed costs fall continuously as quantity of output rises.
Supply is determined by how much suppliers are willing and able to produce.
Average total cost is minimized in long-run equilibrium for a monopolistically
competitive firm.
Table 1
B’s Strategy
Refer to Table 14.1. Firm A does not have a dominant strategy.
When the slope of a demand curve is constant, price elasticity of demand is constant as
well.
Inferior goods are also known as substitute goods.
There are a few firms selling differentiated products in a monopolistically competitive
industry.
Households are paid income for the resources they supply in an input market.
For economic analysis, the long run is any period in which all inputs are variable
(regardless of the length of time involved).
Monopolistic competition is a rare form of market structure in the United States.
Consumption is the total value of all goods that a household consumes in a given
period.
Factors of production are traded in the product market.
When demand is inelastic, a decrease in price will result in a decrease in total revenue.
The Five Forces Model illustrates the forces that determine the level of competition and
profitability in an industry.
Total utility can be positive even when marginal utility is negative.
Student absenteeism is a problem facing education in the developing world.
Inferior goods will experience decreasing demand when incomes increase.
The payments made for the use of money are called investment.
Transfer payments are made to people with both high and low incomes.
When there are no profits in an industry, firms will not undertake any investment
projects.
Well-being is best measured by income or wealth.
When demand is inelastic, an increase in price will result in an increase in total revenue.
The government uses the four firm concentration ratio as a guideline to determine
which proposed mergers are acceptable.
Average variable cost is minimized in long-run equilibrium for a monopolistically
competitive firm.
Figure 10.2
Refer to Figure 10.2. This firm’s marginal cost curve has shifted from MC0 to MC1. A
likely explanation for this is that
A) the productivity of a variable input declined.
B) the price of a variable input decreased.
C) the demand for the firm’s product decreased.
D) the supply of a variable input decreased.
If the average variable cost of the fifth hat is $50, then the total variable cost of five hats
is
A) $10.
B) $250.
C) $1800.
D) indeterminate from this information.
If the government stops enforcing its collusion laws and oligopolies are now able to
collude, they will ________ the price charged and ________ the total output produced.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Among the methods of nonprice rationing are
A) coupons.
B) favored customers.
C) waiting in line.
D) all of the above
In factor, or input, markets
A) consumers purchase products.
B) firms supply goods.
C) firms demand resources.
D) households demand goods.
The Lawn Ranger, a landscaping company, has total costs of $5,000 and total fixed
costs of $3,000. The Lawn Ranger’s total variable costs are
A) $2,000.
B) $3,000.
C) $5,000.
D) indeterminate because the firm’s output level is not known.
In order to achieve market power, monopolistically competitive firms use ________.
A) their size
B) product differentiation
C) strategic behavior
D) predatory pricing
Under perfect competition, the person that ends up with the ________ unit is the person
that values it exactly at its price.
A) first
B) last
C) marginal
D) only
Which of the following is an example of an external benefit?
A) More people start to ride the bus because they become more publicspirited and, as a
result, air pollution is reduced.
B) Firms are able to reduce their costs of production by using a more efficient
technology.
C) The federal government spends a million dollars on improving national parks.
D) A firm has just gotten permission to open a landfill on property that is adjacent to
your home.
Figure 3.7
Refer to Figure 3.7. Assume the market is initially at Point B and that pizza is a normal
good. A decrease in income would cause the market to move from Point B on demand
curve D2 to
A) demand curve D1.
B) demand curve D3.
C) Point A on demand curve D2.
D) Point C on demand curve D2.
Figure 1.4
Refer to Figure 1.4. Panel D shows a curve which has a slope that is
A) first positive and then negative.
B) first negative and then positive.
C) infinite throughout.
D) zero throughout.
Economists usually assume that labor is ________ input in the ________ run.
A) a fixed; short
B) a fixed; long
C) a variable; short
D) part fixed and part variable; long
The government imposes a price ceiling on heating oil that is below the market price.
The rationing scheme that will minimize the misallocation of resources would be
A) using rationing coupons that cannot be resold.
B) using rationing coupons that can be resold.
C) using rationing on a first-come, first-served basis.
D) using rationing only on weekdays.
Which of the following is LEAST likely to be considered a firm in an imperfectly
competitive industry?
A) a Burger King in Pittsburgh, Pa.
B) Ohio Bell Telephone Company
C) a wheat farmer in Kansas
D) the only locally owned and operated bank in Severn, MD.
Figure 2.4
According to Figure 2.4, as the economy moves from Point D to Point B, the
opportunity cost of hybrid cars, measured in terms of motorcycles,
A) remains constant.
B) decreases.
C) increases.
D) initially increases, then decreases.
The ________ of R dollars to be paid in t years is the amount you have to put aside now
if you want to ensure that you end up with R dollars t years from now.
A) future discounted value
B) present actual value
C) present discounted value
D) investment value
The government imposes a maximum price on apartments that is ABOVE the
equilibrium price. You accurately predict that
A) the law will have no economic impact.
B) the law will create a surplus of apartments.
C) renters will find that landlords start offering to furnish the apartments.
D) landlords are less likely to do routine maintenance work in the apartments.
Table 8.3
Refer to Table 8.3. From the information in the given table,
A) the firm is in the long run.
B) the firm eventually experiences diminishing returns to its variable input.
C) the marginal cost curve intersects the average total cost curve between 3 and 4 units
of output.
D) the difference between total cost and total variable cost decreases as output
increases.
There is great concern over the fact that global warming is causing permanent damage
to the global environment. A study of the costs and benefits of purchasing carbon
offsets to combat global warming is an example of
A) labor economics.
B) normative economics.
C) positive economics.
D) laissez-faire economics.
Resources are allocated efficiently when
A) the market produces what people want.
B) production occurs at least cost.
C) output is distributed in an equitable fashion.
D) Both A and B are correct.
Figure 7.9
Refer to Figure 7.9. If the price of capital is $25, then along isocost line AB total cost is
A) $1,200.
B) $1,500.
C) $2,000.
D) indeterminate from this information since the price of labor is not given.
Favored customers are customers who receive special treatment from dealers during
periods of
A) excess demand.
B) excess supply.
C) price above equilibrium.
D) equilibrium.
Because public goods are characterized by being collectively consumed,
A) the government cannot produce them.
B) they are illegal.
C) they are very expensive; thus the private sector cannot provide them.
D) the private sector may not provide them because they cannot exclude those who do
not pay.
Figure 8.2
Refer to Figure 8.2 above. If The Barber Shop produces 300 haircuts, the average fixed
costs are
A) $.20.
B) $5.
C) $10.
D) $100.
Related to the Economics in Practice on page 179: A college has an annual operating
budget of $120 million. It educates and houses 1,500 students, for an average cost of
$80,000 per student per year. Revenues per student from tuition, room, and board are
considerably less than $80,000. Which of the following, if true, would strengthen the
claim that increasing the number of students educated per year will result in a net
financial gain for the college?
A) Other colleges spend more than $80,000 per student per year.
B) The vast majority of the operating budget is composed of fixed costs.
C) Spending more than it earns will force the college to either borrow or use some of its
endowment to make up the difference.
D) The college expects that it will be able to maintain its academic standards even if it
increases enrollment.
A monopolistically competitive firm that is incurring a loss will ________ as long as its
revenue covers variable costs.
A) produce in the long run
B) shut down in the short run
C) earn a profit in the long run
D) produce in the short run
Lettuce and spinach are substitutes. Lettuce and tomatoes are complements. Lettuce is a
normal good. During the winter, about 20% of the lettuce crop was destroyed by
flooding.
The government wants to protect consumers from rising food prices. Therefore, price
restrictions are imposed on lettuce growers prohibiting them from raising the price of
lettuce. This will cause
A) an excess supply of lettuce.
B) an excess demand for lettuce.
C) an increase in the demand for lettuce.
D) a decrease in the supply of lettuce.
Table 8.5
Refer to Table 8.5. Assume that fruit baskets are sold in a perfectly competitive market.
The market price of a fruit basket is $22. To maximize profits, Exotic Fruit should sell
________ fruit baskets and their profit is ________.
A) three; $5
B) four; $7
C) five; $14
D) six; $14
Which of the following statements is false?
A) Low productivity in the agricultural sector in developing countries means that farm
output per person is barely sufficient to feed a farmer’s own family.
B) Income tends to be more equally distributed in developing countries than in
developed countries.
C) The percentage of the labor force employed in urban areas is greater in developed
nations than in developing nations.
D) Developed nations account for only about one-quarter of the world’s population, but
they consume about three-quarters of the world’s output.
Figure 2.4
According to Figure 2.4, as the economy moves from Point E to Point A, the
opportunity cost of hybrid cars, measured in terms of motorcycles,
A) increases.
B) decreases.
C) remains constant.
D) initially increases, then decreases.
Figure 18.4
Refer to Figure 18.4. Suppose that the Lorenz curve ran along the ________ to 100%,
then became ________ to 100%. This would mean that only one family earned all the
income.
A) X-axis; vertical
B) X-axis; horizontal
C) Y-axis; vertical
D) Y-axis; horizontal
Why, in the labor market, are contracts often designed to include a variable salary
component that is tied to some measure of performance?
A) Such contracts provide workers with the incentive to work hard.
B) Most people are risk-loving and thus variability in their compensation leads to
higher total utility.
C) Firms use such contracts to differentiate between high and low quality workers.
D) Both A and C are correct.
Why is the minimum of the average variable cost curve called the shutdown point?
Discuss how tax burdens are related to the elasticity of labor. What do most economists
believe is true about the elasticity of labor supply in the United States and the burden if
any that workers bear?
Flowers.com is earning a total revenue of $100,000 per year. Its annual total fixed costs
are
$25,000 and its annual total variable costs are $75,000. What is the operating profit for
Flowers.com? What is economic profit?
Scenario 1
Assume there are two steel plants in a city. The first one operates a plant that is fifty
years old and the second one is an ultra modern facility. Each dumps thermal water into
the same river. Both firms add 5 million gallons of thermal water to the river each. The
government has mandated that each steel company only dump 1 million gallons. The
cost of abating the thermal water for the old plant is 25 cents per gallon. By contrast the
modern plant only costs 5 cents per gallon.
Using Scenario 1 calculate the total cost of pollution when both steel companies are
allowed to pollute only one million gallons of thermal water each but the rights to
pollute are genuine property rights sanctioned and protected by the government and
therefore tradable.
What is the distribution of the world’s population between the developed nations and
developing nations? What is the distribution of income between these two groups and
their consumption as a percentage of world income?
Explain the adverse selection problem that is faced by health insurance companies
when offering individual health insurance policies. What method do health insurance
companies employ to combat the problem?
Suppose that Firm ABC currently has a market share of 8 percent. Firm XYZ has a
market share of 12 percent. What will happen to the Herfindahl-Hirschman index if the
two firms merge? Show your work.
Empirical evidence suggests that saving tends to rise when there is an increase in
interest rates. What does this imply about the relative sizes of the income and
substitution effects? Explain.
Assume that instead of having a federal income tax, the federal taxes are levied as a
consumption tax based upon a flat rate of 10 percent of all that you consume. How
would this tax be different from an income tax? Would you expect this tax to be
progressive, proportional, or regressive? What do you think would happen to the
amount that people save under such a tax scheme? Explain your answers.
As a manager of a fast-food restaurant, you estimate that the total product of labor used
to make meals varies according to the following data:
Fill in the table above.
Define the utility possibilities frontier. Explain what it means when society is inside the
utility possibilities frontier. Explain what it means when society is on the utility
possibilities frontier. Explain what determines the point that society arrives at on the
utility possibilities frontier.
Critically evaluate the following statement. “Since monopolies are by definition a
one-firm industry they are able to charge the consumer the highest price possible.”
What two conditions must be present for a cartel to work?
In the early 1990s Intel produced a 486 microchip for personal computers that
contained a math co-processor that increased its speed of performing calculations and
other operations. After a time Intel decided to disable the coprocessor on large numbers
of their chips before sending them out for shipment and sale. What could have been the
motive of Intel to deliberately reduce the quality of some of its chips?
What are natural experiments?
What would be the impact of a minimum wage that is set below the equilibrium wage
that would otherwise prevail in the labor market?
How is a long-run average cost curve different from a short-run average cost curve?
How are they related?