A restriction on imports is likely to cause further restrictions on trade.
Input prices fall as entry occurs in an increasing-cost industry.
Under Temporary Aid to Needy Families a recipient loses their cash benefits when they
get a job.
Scarcity is a situation in which resources are unlimited in quantity and can be used in
different ways.
Consumer surplus is the difference between the price that a buyer pays and the price a
seller requires.
If marginal cost is above average cost, average cost must be rising.
The government’s policies regarding anti-competitive actions are called industrial
policy.
If the average total cost is increasing over a given output range, the average total cost
must be smaller than the marginal cost.
When a firm engages in price discrimination it sets marginal revenue equal to marginal
cost for each separate set of consumers.
If one variable A falls as the other variable B falls, then a line generated by putting
variable A on the x-axis and variable B on the y-axis should be upward sloping.
A comparative advantage is the ability of one person or nation to produce a good at an
opportunity cost that is lower than that of another person or nation.
If we switch from a perfectly competitive market to a monopoly, consumers will be
better off.
Price elasticity of demand remains unit elastic as you move up the demand curve.
A dominant strategy is one that always produces the maximum profits for both firms.
The long run is when at least one cost is fixed.
Adverse selection problem in the kiwifruit market leads to the presence of low-quality
kiwifruit that will increase the number of high-quality kiwifruit.
Manufacturer’s rebates for appliances are an example of price discrimination.
Most modern economic analysis is normative in nature, but involves questions with
positive aspects.
The price elasticity of supply is measured by dividing the percentage change in quantity
supplied by the percentage change in price.
The input-substitution effect associated with an increase in the wage implies that as the
wage increases, a firm will substitute other inputs for the relatively expensive labor.
If Tom purchases a comprehensive auto insurance because he knows he is is a reckless
driver, his behavior is an example of moral hazard.
Externalities always consist of benefits that are not confined to the person or
organization that decides how much of a good to produce or consume.
If a 10% increase in price increases the quantity supplied by 15%, the price elasticity of
supply is 0.67.
The principle of voluntary exchange is the concept that a voluntary exchange between
two people makes both people better off.
If the cross-price elasticity of salt and pepper is positive the goods must be
complements.
A firm’s accounting cost is always higher than its economic cost.
Labor unions tend to drive wages higher than they would be otherwise.
The opportunity cost of going to a particular college is not the same for everyone.
If the market price of a DVD is $15 and a consumer was willing to pay $20 for it, that
consumers surplus on the DVD is $5.
A tax on a good or service generally creates a deadweight loss.
At all prices below the shutdown point, optimal short-run output is zero.
A firm’s health insurance premiums that are based on an experience rating are affected
by the amount of medical claims by the firm’s employees.
Diminishing marginal utility is when total utility declines as a consumer consumes
more of a good.
If firms make a profit in the short run, firms will exit the market in the long run.
When a student is thinking at the margin, he analyzes how many more points he would
get on his economics final exam if he devotes one more hour for studying.
Patent protection is always efficient from society’s perspective.
Many cartels exist in the U.S. because cartels and price-fixing are legal under United
States law.
The government is able to use its taxing power to provide a good that would otherwise
not be provided.
Refer to Figure 8.3. Micro Oven’s total fixed costs are:
A) $0.
B) $200.
C) $500.
D) indeterminate from this information.
Which of the following is an example of a monopolistically competitive firm?
A) Farmer Smith’s corn farm
B) Tino’s Italian eatery, a local restaurant
C) TCI Cablevision, a supplier of cable television services
D) Northwest Electricity, a supplier of electricity in the Northwest U.S.
Refer to Figure 18.1. The opportunity cost of bicycles in the United States is:
Figure 18.1
A) 1/3 of a hang glider.
B) 1/2 of a hang glider.
C) 3 hang gliders.
D) 4 hang gliders.
In the market equilibrium, with a price of $500 there are 2000 apartments. If the
government decides to enact a rent control policy, with a maximum price of $400, it
reduces the quantity to 1500 apartments. Due to the rent control decreasing the total
surplus of the market, the policy generates a(n) ________.
A) excess supply.
B) equilibrium.
C) higher price.
D) deadweight loss.
Dino spends his income on two goods, cigars and peppermints. He considers both
goods to be normal goods. If Dino’s income decreases and the prices of the two goods
remain constant, he will purchase:
A) more cigars and fewer peppermints.
B) more cigars and more peppermints.
C) fewer cigars and more peppermints.
D) fewer cigars and fewer peppermints.
To maximize profit, an unregulated natural monopoly will produce at a level where:
A) marginal revenue is greater than marginal cost.
B) marginal revenue is greater than average revenue.
C) marginal revenue is less than marginal cost.
D) marginal revenue is equal to marginal cost.
Which of the following is an example of an external cost?
A) a loud, crying baby in a public restaurant
B) emissions of methane into the atmosphere
C) a homeowner who likes to mow the lawn at 7 a.m. on Saturday morning
D) all of the above
Which of the following would NOT be considered price discrimination?
A) charging business travelers more money than leisure travelers for plane tickets
B) charging houses in expensive neighborhoods more money for mowing the same size
lawn than in a less expensive neighborhood
C) charging a lower price for dry cleaning men’s shirts than women’s shirts
D) charging more money for a large luxury car than a small economy car
The pollution tax in Figure 16.4:
Figure 16.4
A) increases equilibrium output.
B) decreases equilibrium price.
C) gives the firm an incentive to switch to a cleaner production process.
D) all of the above
Figure 18.3
Refer to Figure 18.3. With free trade, the equilibrium price is:
A) $0.
B) $12.
C) $10.
D) $8.
Compared with a low benefit reduction rate, a relatively high benefit reduction rate in a
cash assistance program:
A) reduces the incentive to work.
B) increases the incentive to work.
C) does not affect the incentive to work.
D) will reduce the incentive to work through the substitution effect but will increase the
incentive to work through the income effect.
Figure 9.2 shows the cost structure of a firm in a perfectly competitive market. Suppose
that market price falls to $6. If the firm produces at an output level that causes it to
suffer an economic loss of $120, its average total cost (X) is:
A) $8.
B) $7.5.
C) $6.5.
D) $4.
Recall the Application. For many entrepreneurs, starting a new business means leaving
paid employment. The pay given up by the entrepreneur when starting a new business is
an example of ________ for that entrepreneur.
A) an explicit cost
B) an implicit cost
C) both an explicit and an implicit cost
D) neither an explicit cost nor an implicit cost
Recall the application about a town building a clock tower and only putting clock faces
on three sides of the tower. How might a town eliminate the free-rider problem
associated with a good, such as a clock tower?
A) charge each person for their usage
B) only allow the clock to face one direction
C) decrease the size of the tower
D) not provide the clock
Most people who gamble do so:
A) because the expected reward is positive.
B) despite the expected award being positive.
C) because the expected reward is negative.
D) despite the expected reward being negative.
One factor which was responsible for roughly one-fifth of hybrid vehicles purchased in
2007 was a federal subsidy of up to $3,400 per hybrid vehicle. The average cost of
abating one ton of CO2 emissions through the hybrid subsidy is $177, but a switch from
coal to natural gas in power plants would reduce CO2 emissions at less than one-third
the cost of the hybrid subsidy. The economic approach to spam is to:
A) establish a price for commercial e-mail.
B) ignore the spam issue because it has no economic implications.
C) have it legislated on the local level since it is a microeconomic issue.
D) ban all e-mail from international servers.
Refer to Table 17.1. If the product sells at a market price of $3, the marginal revenue
product of the fourth worker is:
Table 17.1
A) $40.
B) $60.
C) $15.
D) $10.
The change in the quantity of labor demanded resulting from a change in the relative
cost of labor is known as the ________ effect.
A) input-substitution
B) price elasticity
C) output
D) derived demand
Recall the Application about pollution tax variations in rural and urban areas to
answer the following question(s).
Recall the Application. Appropriate pollution taxes are equal to the marginal damage
from pollution, so the tax on a polluter in a rural area should be ________ a tax on a
polluter in an urban area.
A) higher than
B) equal to
C) less than
D) unrelated to
In the long run, which two curves are tangent for a firm in monopolistic competition?
A) marginal cost and marginal revenue
B) marginal cost and demand
C) average total cost and demand
D) average total cost and marginal revenue
Suppose a monopolist has costs such that when output is 1,000 units per hour, average
cost is $5. If the monopolist is regulated by a policy of average-cost pricing, the
monopolist will charge a price of:
A) $5.
B) $5 only if the quantity demanded is 1,000 units per hour at a price of $5.
C) $5 only if the quantity demanded is greater than 1,000 units at a price of $5.
D) $5 only if the quantity demanded is less than 1,000 units per hour at a price of $5.
The difficulty with enforcing anti-dumping laws is that predatory pricing is difficult to
determine if the lower price is due to:
A) price discrimination.
B) higher costs.
C) firm generosity.
D) economies of scale.
Refer to Table 4.1, which shows Flo’s and Rita’s individual supply schedules for frozen
latte-on-a-stick. Assuming Flo and Rita are the only suppliers in the market, what is the
market quantity supplied at a price of $5?
Quantity of Frozen Latte-On-A-Stick Supplied
Table 4.1
A) 3
B) 12
C) 15
D) 27
Refer to Figure 5.1. Using the initial-value method, if the price of a hamburger is
increased from $2 to $4, the price elasticity of demand equals:
A) 0.2.
B) 2.0.
C) 1.0.
D) 5.0.
If a profit-maximizing firm in a perfectly competitive market is currently producing the
output where (price – average variable cost) = average fixed cost, the firm is:
A) making a positive economic profit.
B) making a zero economic profit.
C) suffering an economic loss.
D) none of the above
If the demand for a product increases, we would expect that price will initially
________, and eventually ________.
A) rise; fall
B) rise; continue to rise
C) fall; rise
D) fall; continue to fall
Recall the application about unisex automobile insurance in the European Union. Why
did the average for 18-year-old women’s insurance prices went up compared to
18-year-old men when the gender discrimination prohibition went into effect?
A) 18-year-old men are more costly to the insurance companies and are now included in
the same pool with women, raising the insurance prices up.
B) 18-year-old men are less costly to the insurance companies and are now included in
the same pool with women who on average are more reckless divers who raise the
insurance prices up.
C) 18-year-old men and women are the same cost to the insurance that is the reason
why they were put in the same pool and charge the same amount regardless the gender.
D) None of the above are correct.
Recall the Application. A 2009 study on air pollution found that the damage from
pollution in rural areas is ________ the damage from pollution in urban areas.
A) greater than
B) equal to
C) less than
D) the primary cause of
For normal goods, the substitution effect and the income effect work in ________,
generating a ________ sloped demand curve.
A) opposite directions; downward
B) the same direction; downward
C) opposite directions; upward
D) the same; upward
Joe runs a business and needs to decide how many hours to stay open. Figure 2.4
illustrates his marginal benefit of staying open for each additional hour. Suppose that
we observe Joe staying open 6 hours per day. If he is following the marginal principle,
what must his marginal cost be?
Figure 2.4
A) $16
B) $24
C) $32
D) $48
The consumption possibilities curve shows the combinations of goods that can be:
A) consumed by a nation before trade begins.
B) consumed by a nation after trading begins.
C) produced by a nation before trading begins.
D) produced by a nation after trade begins.
Which of the following is NOT a characteristic of a perfectly competitive market?
A) a small number of firms in a market
B) selling a standardized product
C) no barriers to entry
D) an individual firm having no control over price
When would a consumer be indifferent about continuing to search for a lower price?
What is a network externality?
What are economies of scale? What are diseconomies of scale? What are constant
returns to scale?
Consider the following weekly production possibilities of bagpipes and accordions in
Poland and Scotland:
What is each country’s opportunity cost of producing bagpipes and accordions? If the
countries could, should they trade?
Would an economist consider clean air a scarce resource? Explain.
Alissa is studying for her principles of economics exam. She tells her study partner that
“Only a very small number of people ever get to become astronauts and go into space.
Therefore space exploration is not a public good.” Do you agree? Explain.
What is the difference between comparative and absolute advantage.
Explain the difference between a change in quantity demanded and a change in demand.
How does the introduction of cognition into a consumer’s choice between consumption
now and saving affect marginal utility per dollar, the amount spent on consumption
now, and the amount saved? Assume utility is maximized.
Suppose that you lend $5,000 to a friend who pays you back $5,400 the next year.
Suppose that prices that year rose by six percent and the real rate of return in the stock
market was five percent. Your friend says that he or she was being more than fair by
giving you more than the rate of inflation as a return. What do you think?
What is meant by product differentiation? Why is it employed by firms?
Can a monopolistically competitive firm producing a good with lots of very close
substitutes earn large positive profits in the long run?
Is demand more elastic in the short run or the long run? Why?
Explain how an excess demand would lead to an increase in prices in an unregulated
market.
What is a market economy?
What is voting with your feet?
Explain why a firm’s shut-down decision does not incorporate the fixed costs of the
production facility.
What is the shape of the marginal revenue curve for a perfectly competitive firm? Why
is it that way?
Draw a graph showing the effect on the market of the imposition of a quantity
restriction. Show the effect on consumer and producer surplus.
