When market price is higher than the equilibrium price, a surplus is created. This will
put downward pressure on price, causing quantity demanded to increase and quantity
supplied to decrease until equilibrium is reestablished.
The weak euro in 1999-2000 put upward pressure on inflation in Europe by increasing
the price of imported goods.
The long-run aggregate supply curve is influenced by the price level.
Because unemployment is a macroeconomic topic, an increase in unemployment would
not be expected to have any impact on the equilibrium price or quantity in the market
for an individual good.
Assume a firm is producing 1000 units of a good by using two inputs, capital and labor,
whose per unit prices are $50 and $20. Assume also that the marginal physical product
of the last unit of capital is 25 and the marginal physical product of the last unit of labor
is 15. In order to minimize its costs of production, the firm should adjust its
combination of inputs by employing more labor and less capital.
When the supply of a good increases, the quantity supplied at each price is increasing as
well.
Assume a firm sells two complementary products. Bundling is more likely to be a
successful price discrimination strategy when one group of customers is willing to pay a
higher price for one of the items in the bundle and another group is willing to pay a
higher price for the other item.
Assume the players in a game have reached a Nash equilibrium. It is then reasonable to
assume that each player has chosen its dominant strategy.
An index of the weighted exchange value of the U.S. dollar versus the currencies of a
broad group of major U.S. trading partners is called the trade-weighted dollar.
One of the primary sources of diseconomies of scale is the inefficiencies associated
with managing large scale operations.
We would expect the cross price elasticity of demand between digital cameras and film
cameras to be positive.
Currency appreciation will decrease net exports.
Any firm that operates in an imperfectly competitive market faces a downward-sloping
demand curve for its product.
Capital inflows occur if foreign interest rates are greater than domestic interest rates.
The study quoted in the text demonstrated that calorie posting did not cause any
significant changes in Starbucks revenue over all.
The monopoly characteristic of monopolistically competitive firms ensures that such
firms will earn positive economic profits over the long run.
The fixed fee a firm is able to charge as part of a two-part pricing strategy is inversely
related to the amount of consumer surplus the customer realizes at the
profit-maximizing level of output.
As practiced by book publishers, versioning involves first selling the hardcover edition
of a book and then switching to a paperback edition to sell additional copies. As such,
this is an application of second-degree price discrimination.
The law of diminishing returns is a result of the fact that more and more units of a
variable input are being added to a fixed input. Because of the limitations imposed by
the fixed input, at some point the productivity of additional units of the variable input
must decline.
For lock-in to be an effective competitive strategy, a firm must successfully raid the
customer base of competing firms on a regular basis.
From the airlines’ perspective, amenities competition is preferable to price competition
because revenues are not adversely affected and it is easier to determine the strategies
of one’s competitors.
The BLS obtains employment information from a monthly survey of a sample of
approximately 60,000 households.
Consideration of the minimum efficient scale of operation would suggest that, to
minimize production costs, the market should be served by a large number of small
firms when the LRAC curve slopes downward over the relevant range of output.
The producer price index focuses on price changes of domestically produced goods and
includes services, construction, and imported goods.
Log-linear demand function is also called a constant-elasticity demand function.
The Resolution Trust Corporation insures bank deposits.
A decrease in consumer confidence would shift the aggregate demand curve rightward.
An increase in the number of people in the United States with health insurance could
cause the cost of providing health care services to increase as the incentive for health
care providers to minimize costs decreases.
A demand elasticity coefficient is a measure of the sensitivity of quantity demanded to a
change in one of the determinants of demand.
When a consumer moves from a lower to a higher indifference curve, the marginal rate
of substitution automatically increases.
Although Coca-Cola and PepsiCo are major players in the soft drink industry, the large
number of other competing firms means that the industry is most accurately
characterized as monopolistically competitive.
Because there is no formal agreement among the participating firms, firms that engage
in tacit collusion are exempt from prosecution under the anti-trust laws.
Because each firm has a relatively large share of the market, the actions of one firm do
not have much effect on the decision making of other firms in an oligopolistic market.
A firm encounters its “shutdown point” when:
A) average total cost equals price at the profit-maximizing level of output.
B) average variable cost equals price at the profit-maximizing level of output.
C) average fixed cost equals price at the profit-maximizing level of output.
D) marginal cost equals price at the profit-maximizing level of output.
A trade surplus means:
A) the country has positive net savings, which it lends abroad.
B) the country has negative net savings, which it lends abroad.
C) the country has positive net savings, which it borrows from abroad.
D) the country has negative net savings, which it borrows from abroad.
The function of money that enables money to be used for future purchases is called:
A) medium of exchange.
B) store of value.
C) unit of account.
D) measure of power.
Assume the demand function for good X can be written as Qd = 80 – 3Px – 6Py + 10I,
where Px = the price of X, Py is the price of Y and I is consumer income. If the price of
Y decreases by 5 dollars, what would the reduction in Px have to be in order to keep the
quantity demanded of X unchanged by the change in the price of Y?
A) decreased by 10 dollars
B) decreased by 5 dollars
C) decreased by 2.5 dollars
D) decreased by 1 dollar
Assume that goods X and Y are substitutes and are produced in perfectly competitive
markets. If there is a decrease in the supply of good X, which of the following will
happen in the market for good Y in the long run?
A) Firms will exit, causing market price to rise.
B) Firms will enter, causing market price to fall.
C) Price will be higher at the new long-run equilibrium as a result of entry into the
market.
D) The firms that were already in the industry will continue to earn positive economic
profit.
In 2002 – 2003, some McDonalds’ franchise owners reported that profits were declining
from selling the discounted items from the Dollar Menu. This suggests that:
A) those items are price elastic.
B) those items are price inelastic.
C) those items are price unitary elastic.
D) none of the above.
You are given the following consumption function C = 50 + .80YD.What is the amount
of autonomous consumption expenditures?
A) 75
B) 100
C) 5
D) 50
Refer to Scenario 1. What is the average product of the first three hours of labor?
A) 60
B) 80
C) 100
D) 240
Which of the following pairs of goods would be expected to have a positive cross-price
elasticity of demand?
A) coffee and tea.
B) gasoline and large SUVs.
C) tennis racquets and tennis balls.
D) hot dogs and hot dog buns.
All of the following are characteristics of a perfectly competitive market except:
A) a large number of sellers.
B) perfectly elastic demand.
C) a homogeneous product.
D) barriers to entry.
Economic variables that generally turn down after a recession begins and turn back up
after the recovery starts are called:
A) leading indicators.
B) coincident indicators.
C) lagging indicators.
D) none of the above.
Jim, a U.S. citizen, works only in Croatia. The value added to production from his
employment is:
A) included in only Croatian GNP.
B) included only in U.S. GDP.
C) included only in U.S. GNP.
D) not included in either U.S. GDP or U.S. GNP.
The dominant strategy for each of the players in the prisoner’s dilemma game does not
yield the optimal outcome for each player because:
A) each player is misinformed about the decision that has been made by the other
player.
B) the players do not understand the consequences of each of the choices they can
make.
C) the two players are not allowed to communicate or otherwise cooperate with each
other.
D) each player fails to consider how the other player might act.
At a given price level, an increase in stock market wealth will shift the aggregate
demand curve:
A) rightward.
B) leftward.
C) both.
D) none of the above.
The capacity utilization rate is the ratio of ________ to ________.
A) production; capacity
B) capacity; production
C) capacity; potential GDP
D) none of the above
Assume a firm uses two inputs, capital and labor. All else constant, an increase in the
price of labor would create an incentive for the firm to:
A) substitute labor for capital in its production function.
B) substitute capital for labor in its production function.
C) hire more capital and labor.
D) hire less capital while holding the amount of labor employed constant.
If a firm experiences constant returns to the variable input in the short run:
A) marginal cost will be greater than average variable cost, but the two will become
more equal as output increases.
B) marginal cost will be less than average variable cost, but the two will become more
equal as output increases.
C) marginal cost will be greater than average variable cost, and the difference between
the two will become larger as output increases.
D) marginal cost and average variable cost will be equal over the range of output in
question.
Increase in business taxes will ________ the expenditure curve:
A) decrease.
B) increase.
C) not change.
D) none of the above.
The long-run aggregate supply curve is influenced by:
A) resources available.
B) efficiency levels.
C) level of technology.
D) all of the above.
The Chinese policy of one child per family provided McDonald’s the opportunity to
actively market to:
A) children.
B) senior citizens.
C) parents.
D) none of the above.
All else constant, the choice of whether to use a labor-intensive production process or a
capital-intensive one is depends on:
A) the absolute prices of capital and labor.
B) the relative prices of capital labor.
C) the type of market in which the firm operates.
D) whether the economy is growing or shrinking.
The fact that supermarkets, a land-intensive form of organization, have become the
dominant form of grocery store in the United States suggests that:
A) there is little or no potential for input substitution in the grocery store business.
B) transportation costs are insignificant in the grocery store business.
C) land is a relatively inexpensive input in the grocery store business.
D) labor is relatively inexpensive in the grocery store business.
A decrease in government expenditure would shift the:
A) aggregate demand curve rightward.
B) aggregate demand curve leftward.
C) aggregate supply curve rightward.
D) aggregate supply curve leftward.
Which of the following would not cause the supply curve for gasoline to shift?
A) A change in the wages paid to gas station attendants.
B) A change in the number of gas stations.
C) A change in the incomes of drivers.
D) A change in the cost of refining oil.
When price is less than average variable cost at the profit-maximizing level of output, a
firm should:
A) continue to produce the level of output at which marginal revenue equals marginal
cost if it is operating in the short run.
B) continue to produce the level of output at which marginal revenue equals marginal
cost if it is operating in the long run.
C) shutdown, because it will lose nothing in that case.
D) shutdown, because it cannot even cover all of its variable costs let alone its fixed
costs if it stays in business.
The term “network externality” refers to a barrier to entry that exists because:
A) the value of the product to a consumer depends on the number of consumers using
the product.
B) a group of firms has divided the market into interconnected shares controlled by
each firm.
C) several firms are able to network with each other and control the market.
D) consumers are unable to network, i.e., cooperate, with each other to control market
price.
An increase in the costs of resources or inputs of production would shift the:
A) short-run aggregate supply curve rightward.
B) short-run aggregate supply curve leftward.
C) long-run aggregate supply curve rightward.
D) long-run aggregate supply curve leftward.
In the money market, a decrease in money demand will:
A) result in a rightward shift in the money demand curve increasing interest rates.
B) result in a rightward shift in the money demand curve decreasing interest rates.
C) result in a leftward shift in the money demand curve increasing interest rates.
D) result in a leftward shift in the money demand curve decreasing interest rates.
Much of the research on the minimum efficient scale suggests that for many firms,
economies of scale are:
A) relatively modest.
B) nonexistent.
C) substantial.
D) heavily dependent on the minimum efficient scale of the firm’s production process.
Refer to Table 11.1. What is the value of gross private domestic investment?
A) $1,500.
B) $1,400.
C) $1,600.
D) $2,000.
Assume that, for a particular demand curve, when price rises from $50 to $60, total
revenue falls from $8,750 to $7800.
a. Based on this information, what is the quantity demanded at each price.
b. Without calculating the coefficient of elasticity, is demand over this range elastic or
inelastic? How do you know?
If farmers operating in the competitive wheat industry are incurring losses, and are not
kept in business with government subsidies, which of the following will result?
A) Price and quantity produced will both increase in the long run.
B) Resources will be reallocated out of the wheat industry into more productive uses.
C) Farmers will run economic losses indefinitely, if they are rational.
D) The supply of wheat will fall to near zero and the U.S. will become dependent on
foreign suppliers of food.
If a market is perfectly competitive and is in long-run equilibrium, which of the
following conditions does not hold?
A) Price is equal to the minimum long-run average cost of production.
B) Economic profit equals zero.
C) The value of the last unit of output produced is equal to the value of the resources
used to produce it.
D) There is an incentive for additional firms to enter the market because existing firms
are earning revenues in excess of the explicit costs of production.
In the money market, an excess supply of money will:
A) increase the demand for bonds, increase bond prices, and decrease interest rates.
B) increase the demand for bonds, decrease bond prices, and decrease interest rates.
C) decrease the demand for bonds, increase bonds prices, and increase interest rates.
D) decrease the demand for bonds, decrease bond prices, and increase interest rates.
Data on productivity gains in the 1990s in the United States strongly suggest that a
significant share of those gains was attributable to:
A) improvements in education and training.
B) improvements in information technology.
C) substantial reductions in labor costs.
D) increased demand for goods and services.
What are the three monetary policy tools of the Fed? Briefly describe how each tool can
be used to implement an expansionary monetary policy and a contractionary monetary
policy.
The monetary base is $1,000 billion and the money multiplier is 5.5. What is the size of
the money supply?
Many restaurants offer “early-bird specials” to dinner customers. These specials consist
of a significant price reduction on selected menu items purchased before some
pre-determined time, e.g., 6 p.m. Is such a practice a form of price discrimination? If so,
what type?
The text’s discussion of the airline industry, the soft drink industry, and the doughnut
industry reveals a common theme when it comes to the types of competitive practices
firms in each industry engage in. What is it and what advantage does it offer firms?
It is often observed that the prices charged for gasoline by the various gas stations in a
particular city tend to move together very closely. Is this an example of tacit collusion
that should be prosecuted in the United States? Why or why not?
What factors will shift the aggregate expenditure function for a given level of real
domestic income?
Assume good X is produced in a monopolistically competitive market. In addition, each
of the firms in the industry uses essentially the same technology. Competitors
distinguish their individual products primarily through persuasive advertising. Assume
that one of the firms in the market discovers a new production process that substantially
reduces the average costs of production. Analyze the effects of this discovery on
long-run equilibrium in the market.
Autonomous aggregate expenditures increases by $100 million, the marginal propensity
to consume is 0.60, marginal propensity to invest is 0.20, and the marginal propensity to
import is 0.10. Calculate the change in income.
What is the difference between a sterilized and non-sterilized central bank intervention
in the foreign exchange market?
Over time, state and local governments have passed regulations that limit entry into
certain markets. For example, in most locations beauty shops and barber shops must
obtain a license to do business. The usual justification for such licensing requirements is
to better ensure that only qualified people are offering such services. Considering the
efficiency implications of having more or less firms serve a particular market, and the
fact that consumers can “vote with their feet” (i.e., buy from a different if they aren’t
satisfied), is such regulation justified from an economic perspective? Why or why not?
The U.S. exports computers with a domestic price of $100,000 and the yen/dollar
exchange rate is 120 on January 1, 2003. On January 1, 2004 the yen/dollar exchange
rate is 125. What is the yen price of the computers on January 1, 2003? What is the yen
price of the computers on January 1, 2004?
Illustrate graphically the effect the credit market crisis in the United States in 2008 had
in the market for existing single-family homes. Assuming the demand for existing
single-family homes is relatively inelastic, what is likely to happen to the total revenues
of home sellers as a result of the credit market crisis?
Define the concept of demand and explain, on an intuitive level, why the demand curve
for a good is downward sloping.
Explain how the value of marginal cost affects the values of average variable cost and
average total cost and what this means for the relationship between the marginal cost
curve and the average variable and total cost curves.
Compare and contrast the potential for a perfectly competitive firm and a
monopolistically competitive firm to earn positive economic profits in the short run
versus the long run. Explain your reasoning.
Explain why X-inefficiency is likely to be more prevalent in an industry in which firms
have market power.
What are the costs associated with inflation?
When the government decides to impose a tax on sellers of a good or service, sellers try
to pass the tax on to consumers by raising the price of the good being sold. Assume the
government decides to place a $1 tax on each unit of a good sold, e.g., tires. Using the
simple model of supply and demand, illustrate what would happen to the price and
quantity of tires sold. Would the amount of tax paid by the consumer (as opposed to the
producer) be greater when demand is elastic or inelastic? Why?
Historically, empirical evidence showed that it was more cost effective to have a single
generator of electricity serve a particular region’s electricity needs than to have several
smaller units compete against each other. More recently, technological advances have
occurred in the generation of electricity that allow much smaller generating units to
produce electricity for the same average cost as much larger units. Explain how this
change would be reflected in the firm’s long-run average cost curve and minimum
efficient scale.