A monopolistically competitive firm that is profitable in the short run will face
competition that will eventually eliminate the firm’s profits in the long run. But the firm
can stave off competition and continue to earn economic profits if
A) it can successfully sue its competitors for copyright infringement.
B) it can move to another country where there is less competition.
C) it can lobby the government to establish a price floor for its product.
D) it can find new ways to differentiate its product.
Figure 6-1
Refer to Figure 6-1. A perfectly elastic demand curve is shown in
A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.
Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He
asks his friend, Carmen, if she’d like to join him in setting up a partnership to start the
business. What is one disadvantage in joining the partnership that Carmen should
consider?
A) Carmen should realize that profits in the partnership will be reduced by dividend
payments to shareholders.
B) Carmen should realize that, as an owner of the business, she will be personally
responsible for the debts of the business.
C) Carmen should realize that the profits of the business will also be taxed as dividend
income, so she faces the potential for double taxation of that business income.
D) Carmen should realize that the Jeremy will have complete control over the business
because it was his idea.
An example of a factor of production is
A) a bottle of wine produced by a vineyard.
B) a vintner hired by a vineyard.
C) a loan granted to a vineyard.
D) the wine exported by a vineyard.
Figure 3-8
Refer to Figure 3-8. The graph in this figure illustrates an initial competitive
equilibrium in the market for sugar at the intersection of D1 and S1 (point A). If there is
an increase in the price of fertilizer used on sugar cane and there is a decrease in tastes
for sugar-sweetened soft drinks, how will the equilibrium point change?
A) The equilibrium point will move from A to B.
B) The equilibrium point will move from A to C.
C) There will be no change in the equilibrium point.
D) The equilibrium point will move from A to E.
In game theory, the three key characteristics of a game are
A) rules, strategies, and payoffs.
B) rules, regulations, and payoffs.
C) winners, losers, and rules.
D) risks, rewards, and penalties.
Table 4-2
Refer to Table 4-2. The table above lists the highest prices five consumers are willing to
pay for a theater ticket. If the price of one ticket rises from $10 to $19
A) only three tickets will be sold.
B) consumer surplus decreases from $31 to $6.
C) consumer surplus increases from $44 to $71.
D) no one will buy a ticket.
If a consumer receives 20 units of utility from consuming two candy bars, and 25 units
of utility from consuming three candy bars, the marginal utility of the third candy bar is
A) 25 utility units.
B) 20 utility units.
C) 5 utility units.
D) unknown as more information is needed to determine the answer.
Figure 9-5
Bragabong currently both produces and imports almonds. The government of
Bragabong decides to restrict international trade in almonds by imposing a quota that
allows imports of only 10 million kilos each year. Figure 9-5 shows the estimated
demand and supply curves for almonds in Bragabong and the results of imposing the
quota.
Use Figure 9-5 to answer questions a-j .
a. If there is no quota what is the domestic price of almonds and what is the quantity of
almonds demanded by consumers?
b. If there is no quota how many kilos of almonds would domestic producers supply
and what quantity would be imported?
c. If there is no quota what is the dollar value of consumer surplus?
d. If there is no quota what is the dollar value of producer surplus received by producers
in Bragabong?
e. If there is no quota what is the revenue received by foreign producers who supply
almonds to Bragabong?
f. With a quota in place what is the price that consumers of Bragabong must now pay
and what is the quantity demanded?
g. With a quota in place what is the dollar value of consumer surplus? Are consumers
better off?
h. With a quota in place what is the dollar value of producer surplus received by
producers in Bragabong? Are domestic producers better off?
i. Calculate the revenue to foreign producers who are granted permission to sell in
Bragabong after the imposition of the quota.
j. Calculate the deadweight loss as a result of the quota.
Unlike firms that sell stock in financial markets, which are known as ________ firms,
companies which do not sell stock in financial markets are known as ________ firms.
A) public; private
B) open; closed
C) corporate; proprietary
D) stock market; bond market
If we have information about workers’ marginal products, then total and average
product can be found by
A) dividing marginal costs by the number of workers.
B) multiplying the average marginal product times the number of workers.
C) summing the marginal values to find the total and multiplying it times the number of
workers to get the average.
D) summing the marginal values to find the total and dividing it by the number of
workers to get the average.
Which of the following is a common mistake consumers commit when they make
decisions?
A) They take into account nonmonetary opportunity costs but ignore monetary costs.
B) They are overly pessimistic about their future behavior.
C) They fail to ignore sunk costs.
D) They sometimes value fairness too much.
Arbitrage refers to the act of
A) resolving a dispute in front of an arbitrator instead of a court of law.
B) buying a product in one market at a low price and reselling in another market at a
higher price.
C) trading in the foreign exchange market.
D) suing a producer for illegal business practices.
The largest source of revenue for the federal government of the United States is from
A) tariffs collected on imported goods.
B) property taxes imposed on private property.
C) sales taxes on items purchased for consumption.
D) individual income taxes.
Figure 14-1
Assume that Lexus (L) is the first automobile company to produce a luxury class hybrid
automobile and is the only such company for the past four years. BMW is now
considering producing its own luxury hybrid automobile and Lexus must decide
whether or not to lower the price of its luxury hybrid to counter BMW’s entry into the
luxury hybrid niche.
Refer to Figure 14-1. If Lexus lowers its price, will this deter BMW from entering the
market?
A) Yes, because BMW stands to lose $100 million if it competes with Lexus.
B) Yes, because BMW will make a smaller profit than Lexus if it chooses to compete.
C) No, because BMW will still make a profit of $120 if it competes with Lexus.
D) No, because BMW will be able to break Lexus’ first-mover advantage.
An individual seller in perfect competition will not sell at a price lower than the market
price because
A) demand for the product will exceed supply.
B) the seller would start a price war.
C) the seller can sell any quantity she wants at the prevailing market price.
D) demand is perfectly inelastic.
If there is pollution in producing a product, then the market equilibrium price
A) is too high and equilibrium quantity is too low.
B) and equilibrium quantity are too low.
C) and equilibrium quantity are too high.
D) is too low and equilibrium quantity is too high.
Figure 12-19
Refer to Figure 12-19. The figure above shows the cost curves of a perfectly
competitive firm in the coffee market. Use the graph in Figure 12-19 to answer the
following questions. Assume the market price is $3 per pound.
a. What is the lowest price at which the coffee grower will supply output in the short
run?
b. In the diagram draw the firm’s demand curve (label this “MR” for marginal revenue).
c. What is the firm’s profit-maximizing output?
d. Is the firm earning a profit or a loss? Identify the area in the graph that represents the
firm’s profit or loss.
e. Explain how entry or exit will occur in the market to ensure that firms will break
even in the long run.
The bargaining power of buyers increases if
A) there are many large buyers.
B) the input in question has few substitutes.
C) the input in question is not a critical component of production.
D) there are wide variations in the quality of inputs from supplier to supplier.
If a firm wanted to know whether the demand for its product was elastic, unit elastic, or
inelastic, then the firm could
A) survey competitors and ask them what they think demand elasticity is for the
product.
B) talk to its customers.
C) change price a little bit and observe what happens to total revenue.
D) not do anything as there is no way to find an elasticity value.
Arnold Harberger was the first economist to estimate the loss of economic efficiency
due to market power. Since Harberger’s findings were published, other researchers have
studied this same issue. How do the results of these researchers compare to Harberger’s
results?
A) The other researchers reached conclusions similar to Harberger’s; namely, the loss of
economic efficiency due to market power is about 10 percent of the value of production
in the United States.
B) The other researchers reached conclusions different from Harberger’s; namely, they
found that the loss of economic efficiency due to market power is only about 1 percent
of the value of production in the United States, much less than Harberger’s estimate.
C) The other researchers reached conclusions different from Harberger’s; namely, the
loss of economic efficiency due to market power is about 10 percent of the value of
production in the United States, significantly greater than Harberger’s estimate.
D) The other researchers reached conclusions similar to Harberger’s; namely, the loss of
economic efficiency due to market power is about 1 percent of the value of production
in the United States.
All of the following are critical functions of the government in facilitating the operation
of a market economy except
A) protecting private property.
B) enforcing property rights.
C) ensuring an equal distribution of income to all citizens.
D) enforcing contracts.
Economic efficiency requires that a natural monopoly’s price be
A) equal to average total cost where it intersects the demand curve.
B) equal to marginal cost where it intersects the demand curve.
C) equal to average variable cost where it intersects the demand curve.
D) equal to the lowest price the firm can charge and still make a normal profit.
Suppose the government grants child care subsidies to mothers entering the labor force.
What is likely to happen to the equilibrium wage and quantity of labor?
A) The equilibrium wage and the equilibrium quantity of labor rise.
B) The equilibrium wage and the equilibrium quantity of labor fall.
C) The equilibrium wage falls and the equilibrium quantity of labor rises.
D) The equilibrium wage rises and the equilibrium quantity of labor falls.
When Walmart decides to build a new retail store in a town, it will decide to build a
large store rather than a small store if the large store is expected to earn a greater
economic profit. What other motive would Walmart have for choosing to build a large
store?
A) A larger store will help Walmart maintain its position as the leading retail company
in the world more than a smaller store would.
B) A larger store will give Walmart greater political influence in the community.
C) A larger store may deter entry into the town by a rival firm.
D) Because of economies of scale, the average total cost of production is less for a
larger store than a smaller store.
Table 5-1
In an effort to maintain privacy and enhance property values, three homeowners,
Deidre, Eugene and Farhad, are considering leasing a portion of adjoining vacant land
for a private park. Table 5-1 shows each person’s willingness to pay for each quantity of
the land.
a. Complete the column in Table 5-1.
b. Graph the marginal social benefit curve.
c. Suppose the landowner is willing to lease a portion of her land according to the
following supply schedule given in Table 5-2. On the same diagram, graph the supply
curve.
Table 5-2
d. What is the optimal quantity of land that homeowners should lease? Explain your
answer.
e. Explain why a park of 5 acres is not optimal.
Which of the following is an example of a compensating wage differential?
A) Nurse anesthetists are paid less than anesthesiologists (who have medical degrees).
B) Workers in a dynamite mine receive higher wages than if they worked in other jobs
that require the same level of skills.
C) In the market for lawyers, top graduates from the top programs earn starting salaries
that are significantly higher than the starting salaries earned by lower-ranked graduates
from the lower-ranked programs.
D) Popular movie stars like George Clooney command much higher salaries than other
talented but lesser-known actors.
Table 4-4
Table 4-4 shows the demand and supply schedules for the labor market in the city of
Pixley.
Refer to Table 4-4. What is the equilibrium hourly wage (W*) and the equilibrium
quantity of labor (Q*)?
A) W* = $10.50; Q* = 590,000
B) W* = $11.50; Q* = 570,000
C) W* = $9.50; Q* = 570,000
D) W* = $10.50; Q* = 1,180,000
What is the difference between a public franchise and a public enterprise?
A) A public franchise grants a firm the right to be the sole legal provider of a good or
service. A public enterprise refers to a service that is provided directly to consumers
through the government.
B) A public enterprise grants a firm the right to be the sole legal provider of a good or
service. A public franchise refers to a service that is provided directly to consumers
through the government.
C) A public enterprise is owned by the public through its holdings of shares of stock in
the enterprise. A public franchise is a firm owned by the government.
D) Both refer to a service provided directly to consumers through the government, but
“public franchise” is a term more commonly used in the United States while “public
enterprise” is more commonly used in European countries.
Some markets have many buyers and sellers but fall into the category of monopolistic
competition rather than perfect competition. The most common reason for this is
A) there are high barriers to entering these markets.
B) firms in these markets sell identical products.
C) firms in these markets make high profits.
D) firms in these markets do not sell identical products.
The president of Toyota’s Georgetown plant was quoted as saying, “Demand for high
volumes saps your energy. Over a period of time, it eroded our focus [and] thinned out
the expertise and knowledge we painstakingly built up over the years.” Based on this
quote, what must be true of the plant’s average cost of production curve?
A) It is upward-sloping.
B) It is downward-sloping.
C) It is a ray from the origin.
D) It is U-shaped.
Consider the market for opticians. What is likely to happen to the equilibrium wage and
quantity of opticians if more and more people turn to laser eye surgery instead of
wearing glasses or contact lens?
A) The equilibrium wage and the equilibrium quantity of opticians rise.
B) The equilibrium wage and the equilibrium quantity of opticians fall.
C) The equilibrium wage rises and the equilibrium quantity of opticians falls.
D) The equilibrium wage falls and the equilibrium quantity of opticians rises.
Unlike a perfectly competitive firm, for a monopolistically competitive firm
A) price ≠ marginal cost for all output levels.
B) price ≠ marginal revenue for all output levels.
C) price ≠ average revenue for all output levels.
D) marginal revenue = marginal cost at the profit-maximizing output.
The income effect of a price change refers to
A) the change in demand that occurs when consumer income changes.
B) the change in the quantity demanded that results from a change in price, making the
good more or less expensive relative to other goods, holding everything else constant.
C) the change in demand that occurs when both income and price change.
D) the change in the quantity demanded of a good that results from the effect of a
change in price on consumer purchasing power, holding everything else constant.