If a monopolistically competitive firm is producing an output level where its marginal
cost is equal to its marginal revenue but it still earns a loss, then it should always
shutdown in the short run.
Efficiency is the condition in which the economy is producing what people want at the
least possible cost.
The Cournot model assumes that the firms take their competitors output as variable.
Queuing is a system of nonprice rationing.
The Cournot model assumes that the firms take their competitors output as fixed.
Recent data suggests that the percentage of the population in poverty for
African-American persons is approximately equal to that of Hispanic persons.
If capital and labor are substitute inputs, the productivity of labor falls as the use of
capital increases.
Normative economics questions “What ought to be?” Positive economics predicts the
consequences of alternative actions, answering the questions “What is?” or “What will
be?”
Producer surplus is the difference between the most a person is willing to pay and
market price.
When demand is elastic, a decrease in price will result in an increase in total revenue.
A simultaneous decrease in both the supply of and the demand for silk boxer shorts
would cause a decrease in the equilibrium quantity of silk boxer shorts.
All government payments to individuals are called transfer payments.
Average total cost of producing 100 units of output is $5. If the marginal cost of
producing the 101st unit is $6, then average total cost of 101 units is less than $5.
Public goods are goods that we all agree are useful and therefore are all willing to pay
for. This implies that there is no efficiency problem in the production of public goods.
If marginal cost is increasing, then average variable cost must be increasing
simultaneously.
Rapid population growth tends to make the population older in developing economies.
General equilibrium exists when all markets in an economy are simultaneously in
equilibrium.
Recent data suggests that the percentage of the population in poverty for
African-American families is approximately three times that of white families.
The public choice field in economics views public officials as having a significant
capacity to make efficient choices and to eliminate bureaucratic waste.
Ration coupons are tickets or coupons that give someone a right to purchase a certain
amount of a product each time period such as a month.
Poverty rates among the elderly have risen in the past few decades.
Stability implies a steady rate of economic growth regardless of the inflation rate.
About 75 percent of American women over the age of 16 are in the labor force.
As the variable on the Y-axis rises, the variable on the X-axis falls. The relationship
between X and Y is said to be positive.
If price is above the equilibrium, then quantity supplied will be greater than quantity
demanded, putting downward pressure on price.
The Heckscher-Ohlin theorem explains why Japan both imports and exports rice.
Residential structures and inventories are examples of tangible capital.
Monopolistically competitive firms engage in both price and quality competition.
Marginal cost is the difference between the marginal social cost and the marginal
damage cost.
Moral hazard occurs when buyers and sellers take actions to communicate quality in a
world of uncertainty.
With price rationing, those who are both able and willing to pay for a product get it.
If a country’s imports are greater than its exports, a country has a trade deficit.
The argument most often used against redistribution is that a society as wealthy as the
United States has a legal obligation to provide all its members with the basic necessities
of life.
Oligopolists have limited to no market power.
Remittances are used to fund housing and education for families left behind in the home
countries.
When making the decision to invest, the evaluation of the expected flow of future
productive services that the investment project will yield is an important consideration.
This statement is accurate for firms
A) but not for governments and households.
B) and governments, but not for households.
C) and households, but not for governments.
D) and households and governments.
Figure 12.2
Refer to Figure 12.2. A technological advance causes the supply of personal computers
to increase. The graph of this situation represents a
A) general equilibrium analysis because it identifies what happens to both equilibrium
price and quantity of personal computers.
B) partial equilibrium analysis because it considers only this one industry.
C) firm-specific analysis because only one firm would be affected by the technological
advance.
D) technological analysis because the change resulted from a technological advance.
Recall the Economics in Practice on page 370: According to a study discussed in the
Economics in Practice, ________ matters in terms of an individual’s future earnings.
A) class size
B) the gender of teachers
C) teacher quality
D) the age of teachers
Figure 7.9
Refer to Figure 7.9. The firm is currently along isocost CD. If the price of capital is
$25, then the price of labor is
A) $1.
B) $25.
C) $80.
D) indeterminate from the information given.
If the cross-price elasticity of demand between shrimp and oysters is 4, then a 2%
increase in the price of shrimp will result in a ________ in the quantity of oysters
demanded.
A) 5% increase
B) 8% increase
C) 4% increase
D) 2% decrease
When it comes to ________ goods, it is important to remember only one level of output
can be realized, and consumers are ________ for that level.
A) public; only willing to pay the same amount
B) public; willing to pay different amounts
C) private; only willing to pay the same amount
D) private; willing to pay different amounts
The United States would have an absolute advantage compared to Canada in the
production of wheat if
A) wheat sells for a higher price in the United States than in Canada.
B) the demand for wheat is higher in the United States than in Canada.the United
States.
C) the United States uses fewer resources to produce wheat than Canada does.
D) wheat can be produced at lower cost in terms of other goods than it could be in
Canada.
Figure 6.7
Refer to Figure 6.7. Along budget constraint AB, the price of good X is $25 and the
price of good Y is $18. If the price of Y decreases to $14, the budget constraint will
A) pivot in at point B.
B) pivot out at point A.
C) shift in parallel to AB.
D) pivot in at point A.
Figure 4.3
Refer to Figure 4.3. An example of an effective price floor would be the government
setting the price of pencils at
A) $0.00.
B) $0.40.
C) $0.45.
D) $0.50.
Figure 8.4
Refer to Figure 8.4. Micro Oven’s average total costs are ________ if it produces six
microwave ovens.
A) $33.33
B) $83.33
C) $116.67
D) $200.00
Figure 10.3
Refer to Figure 10.3. The market wage is initially W0 and the firm is initially at Point A.
Labor supply decreases from S0 to S1. The firm’s MRPL curve will shift from MRPL at
K1 to MRPL at K2 because
A) the factor substitution effect will cause the firm to substitute capital for the
higher-priced labor.
B) the supply of labor decreased, and therefore the productivity of labor decreased.
C) the output effect led to a decrease in the demand for capital, which in turn decreased
the productivity of labor.
D) the firm is no longer maximizing profits.
In general, oligopolists compete
A) on price.
B) on research and development.
C) on marketing and advertising.
D) All of the above are correct.
As you move up the production possibility frontier, the absolute value of the marginal
rate of transformation
A) increases.
B) decreases.
C) initially increases, then decreases.
D) initially decreases, then increases.
The law of diminishing marginal returns results in ________ eventually increasing at an
increasing rate.
A) AVC
B) ATC
C) MC
D) all of the above
Which of the following statements is false?
A) Developing countries have a lower per capita income compared to developed
countries.
B) Developing countries have a lower infant mortality rate compared to developed
countries.
C) Developing countries have lower life expectancy compared to developed countries.
D) A smaller percentage of the population live in urban areas in developing countries
compared to developed countries.
Imperfect information on the part of buyers and sellers
A) will not stop the economy from achieving market efficiency, assuming the other
conditions for market efficiency hold.
B) is no longer a problem because “truth-in-advertising” regulations have been
instituted.
C) remains a barrier to achieving market efficiency, at least in some industries.
D) cannot persist in a market economy.
Mustard and mayonnaise are substitutes. Mustard and relish are complements. Mustard
is a normal good. During the summer, about 50% of all mustard was recalled by
manufacturers and removed from store shelves.
Refer to Scenario 3.2. The mustard recall would have caused the equilibrium price of
mayonnaise to ________ and the equilibrium quantity of mayonnaise to ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Figure 4.4
Refer to Figure 4.4. Assume that initially there is free trade. The price of oil in the
United States will increase to $150 per barrel if the United States then imposes
________ tax per barrel of imported oil.
A) no
B) a $25
C) a $50
D) a $100
Figure 3.18
Refer to Figure 3.18. The current quantity of bags of pretzels supplied is You accurately
predict that in this market,
A) price tends to remain constant, and quantity supplied increases.
B) price, quantity demanded, and quantity supplied decrease.
C) price and quantity supplied decrease, and quantity demanded increases.
D) price and quantity demanded increase, and quantity supplied decreases.
Figure 5.4
Refer to Figure 5.4. The demand for milkshakes is unit elastic at Point C. If the
milkshake price rises from P2 to P1, total revenue will
A) increase.
B) decrease.
C) remain constant.
D) either increase or decrease.
The rising part of a perfectly competitive firm’s ________ cost curve is the firm’s short
run ________ curve.
A) average total; supply
B) average variable; demand
C) average fixed; demand
D) marginal; supply
Consider the following game. You roll a six-sided die and each time you roll a 6, you
get $30. For all other outcomes you pay $6. What is the expected value of the game?
A) -$6
B) $0
C) $6
D) $30
A firm ________ if it earns zero economic profit.
A) earns a negative rate of return
B) will leave the industry
C) earns a positive but below normal rate of return
D) earns exactly a normal rate of return
Sponsors invest $250,000 in a new deli on the promise that they will earn a return of
10% per year on their investment. The deli sells 52,000 sandwiches per year. The deli’s
fixed costs include the return to investors and $79,000 in other fixed costs. Variable
costs consist of wages ($1,000 per week) plus materials, electricity, etc. ($3,000 per
week). The deli is open 52 weeks per year.
The deli is earning exactly a normal profit. Thus, the average price per sandwich must
be ________.
A) $1.52
B) $2
C) $4
D) $6
If the average variable cost curve is above the marginal cost curve, then
A) marginal costs must be decreasing.
B) average variable costs must be increasing.
C) marginal costs must be increasing.
D) marginal costs can be either increasing or decreasing.
All points along the utility possibilities frontier are
A) inefficient but equally desirable.
B) inefficient but may not be equally desirable.
C) efficient and equally desirable.
D) efficient but may not be equally desirable.
At a price of $8, quantity supplied is 200; and at a price of $12, quantity supplied is
240. Using the midpoint formula, the price elasticity of supply is ________ and supply
is ________.
A) 1; inelastic
B) 45; inelastic
C) 2; elastic
D) 10; elastic
The version of the law of diminishing returns that applies to production
A) applies only in the long run.
B) applies only in the short run.
C) is true only when all inputs are variable.
D) applies in the short and long run.
Cashews are measured in bushels and tea is measured in pounds (lbs.)
Table 20.2
Refer to Table 20.2. In Vietnam, the opportunity cost of
A) a lb. of tea is 2/15 of a bushel of cashews.
B) a lb. of tea is 1/8 of a bushel of cashews.
C) a lb. of tea is 40 bushels of cashews.
D) a bushel of cashews is 4/3 of a lb. of tea.
Figure 7.4
Refer to Figure 7.4. The marginal product of the fourth worker is
A) 8.
B) 12.5.
C) 48.
D) 92.
Critically evaluate the following statement. “Monopolists are able to pass on the full
amount of any increase in their fixed cost to the consumer in the form of higher prices.”
Table 15.1
Refer to Table 5.1. Plot the Lorenz curve for 1960 and 1997. What does the area
between the Lorenz curve and the 45-degree line represent? How is this related to the
Gini coefficient? Which of the distributions is more equal? Unequal?
Graph the budget constraint for Px = 2, Py = 3, and I = 1500 with the additional
condition that X is free for the first 250 units. Measure units of X along the horizontal
axis and units of Y along the vertical axis.
Why might a country like Brazil have to offer a much higher interest rate on its
government bonds than those offered by the Great Britain?
On the graph below, draw an isoquant that shows the least-cost combination of capital
and labor to produce 100 units of output. Assume that the price of a unit of capital is $1
and the price of a unit of labor is $1. What is the slope of the isoquant at the least-cost
combination of labor and capital? Explain.
Figure 17.1
Use Figure 17.1 above to answer the following questions. Suppose Bob is at a Casino in
Las Vegas and has already won $60,000 at the Black Jack table. Now the manager of
the casino approaches him and offers him the following deal. He can either walk away
with his $60,000 or he can flip a coin with the chance of earning an additional $20,000.
If the coin turns up heads he wins if it turns up tails he must forfeit $20,000 of his
winnings. What will Bob agree to do and why? Make sure to prove your answer.
What is meant by the term economic growth?
What would the Lorenz curve look like if the income distribution were equal?
Define price discrimination and explain why a monopolist would price discriminate?
Suppose that Fred’s Bed Company was started in 1999 and 100 percent of the $500,000
needed to start up the company was raised by selling shares of stock. In 2000, the
company distributed its entire profit of $35,000 to shareholders. If the market interest
rate is 8 percent, what is the level of economic profit earned by the firm’s stockholders?
Suppose that an industry has a Herfindahl-Hirschman index of 2,000. Two firms have
proposed a merger. Firm A has a current market share of 9 percent. Firm B has a market
share of 5 percent. Will the Justice Department challenge the merger? Explain.
The figures below represent the demand for a public good for two consumers, Tom and
Jerry. Assuming that these are the only two buyers, draw a graph showing the market
demand curve for this public good.
Explain why input demand curves slope downward using the concepts of the factor
substitution effect and the output effect.
How is it that economists can claim that perfectly competitive markets give people what
they want?
You are a major stockholder of a large corporation. You have news from a credible
source that the company’s earnings report is going to indicate record losses. If you and
other major stockholders receive the same news, what is your likely behavioral
response and what impact will that have on the price of the company’s stock?
Comment on the following statement: “When average product and marginal product are
equal, marginal product is at its maximum.”
A candidate in the 1992 presidential election argued that our current federal income-tax
system should be replaced with a flat-tax. That is, every individual should pay the same
percentage of income in federal taxes regardless of his or her income. Evaluate the
merits of this policy. In your answer, be sure to include a discussion of both the equity
and efficiency considerations of such a tax proposal.
Explain how it is possible for a downward-sloping demand curve to have a constant
slope but still have a variation of elasticity of demand along it.