A profit-maximizing firm should hire workers up to the point where labor’s marginal
revenue product equals the wage rate.
Maximizing average profit is equivalent to maximizing total profit.
Merger guidelines developed by the Antitrust Division of the U.S. Department of
Justice use four-firm concentration ratios as measures of concentration.
The demand for a Giffen good slopes upward.
Marginal benefit is the total benefit to a consumer from consuming one more unit of a
good or service.
A virtuous cycle refers to the development of new products that follows when a
monopoly earns economic profits.
A consumer’s indifference curves can never cross.
A successful strategy of price discrimination requires that a firm be a price-taker.
Scarcity is defined as the situation that exists when the quantity demanded for a good is
greater than the quantity supplied.
When diminishing marginal utility sets in, total utility must be negative.
An increase in the unemployment rate may be represented as a movement from a point
on the production possibilities frontier to a different point on the frontier.
In an optimal two-part tariff pricing schedule, consumer surplus is zero.
The Walt Disney Company uses cost-plus pricing to determine the prices it charges for
admission and rides at Disneyland and Walt Disney World.
An decrease in quantity supplied is represented by a leftward shift of the supply curve.
Policies based on positive economic ideas tend to decrease economic efficiency and
reduce equity.
Goodyear’s sales are now greater outside the United States than inside the United
States.
A majority of people in the United States have private health insurance.
The U.S. economy would gain from the elimination of tariffs and quotas even if other
countries do not reduce their tariffs and quotas.
If the substitution effect of a wage increase dominates the income effect, the labor
supply curve has a positive slope.
A born global firm is a company that engages in international business from or near its
inception.
The U.S. government would never approve a proposed merger between two firms that
could significantly increase the newly merged firm’s market power even if the
efficiency gains from the newly merged firm could make consumers better off.
If the market wage rate increases, a firm’s labor demand curve does not shift but the
labor supply curve shifts to the right.
A public good that is a good that is both rival and excludable.
Economists have shown that when the ultimatum game experiment is carried out, both
allocators and recipients act as if fairness is important.
One result of a tax is an increase in economic efficiency.
It is possible to have an absolute advantage in producing a good or service without
having a comparative advantage.
A two-part tariff refers to a pricing schedule under which a buyer must pay a fixed fee
for the right to purchase the product, in addition to a per-unit price.
A change in supply is represented by a shift of the supply curve.
Firms are more likely to find themselves in a prisoner’s dilemma in sequential games as
opposed to simultaneous games.
“Cost disease” refers to the tendency for low productivity in the service sector to lead to
higher costs in those industries.
Unlike a perfect competitor, a monopolist faces the market demand curve.
Horizontal equity means that two people in identical economic situations should pay the
same amount of taxes.
If demand is inelastic, the absolute value of the price elasticity coefficient is greater
than one.
Firms in different countries that face different input prices may produce the same good
using different combinations of inputs, even though they have access to the same
technology.
A college must decide if it wants to offer more Internet-based classes. This decision
involves answering the economic question of “what to produce.”
The only Giffen goods that have been identified so far in the real world are luxury
goods.
If demand for a product is perfectly inelastic a change in price will not change total
revenue.
Economic costs include implicit costs but not explicit costs.
Consider a used car market in which half the cars are good and half are bad (lemons). If
buyers are rational, the prices being offered for used cars will result in
A) an equal proportion of a good cars and lemons being sold in an efficient market.
B) a larger proportion of good cars being sold and consequently, consumer surplus is
increased.
C) a larger proportion of lemons being sold and consequently, producer surplus is
increased.
D) an equal proportion of good cars and lemons being sold in an inefficient market.
Figure 4-10
Refer to Figure 4-10. Suppose the market is initially in equilibrium at price P1 and then
the government imposes a tax on every unit sold. Which of the following statements
best describes the impact of the tax?
A) The consumer will bear a smaller share of the tax burden if the demand curve is D1.
B) The consumer’s share of the tax burden is the same whether the demand curve is D1
or D2.
C) The consumer will bear a smaller share of the tax burden if the demand curve is D2.
D) The consumer will bear the entire burden of the tax if the demand curve is D2 and
the producer will bear the entire burden of the tax if the demand curve is D1.
If demand is perfectly elastic, the absolute value of the price elasticity coefficient is
A) infinity.
B) zero.
C) more than one.
D) equal to the absolute value of the slope of the demand curve.
Table 14-1
Godrickporter and Star Connections are the only two airport shuttle and limousine
rental service companies in the mid-sized town of Godrick Hollow. Each firm must
decide on whether to increase its advertising spending to compete for customers. Table
14-1 shows the payoff matrix for this advertising game.
Refer to Table 14-1. Let’s suppose the game starts with each firm adhering to its
original budget so that Godrickporter earns a profit of $6,000 and Star Connections
earns a profit of $12,000. Is there an incentive for any one firm to increase its
advertising budget?
A) No, neither firm has an incentive to raise its advertising spending.
B) Yes, both firms have an incentive to raise their advertising budgets.
C) Yes, Star Connections has an incentive to increase its advertising budget, but
Godrickporter does not.
D) Yes, Godrickporter has an incentive to increase its advertising budget, but Star
Connections does not.
What is the difference between a firm’s marginal revenue and its marginal revenue
product?
A) Marginal revenue is the change in sales revenue from selling one more unit of output
while marginal revenue product is the profit earned from hiring one more worker.
B) Marginal revenue is the change in sales revenue from selling one more unit of output
while marginal revenue product is the change in total revenue from hiring one more
worker.
C) Marginal revenue is the increase in revenue when a firm raises its output price while
marginal revenue product is the increase in marginal product when a firm hires an
additional worker.
D) There is no difference between the two terms.
Figure 13-7
Figure 13-7 shows short-run cost and demand curves for a monopolistically competitive
firm in the footwear market.
Refer to Figure 13-7. Which of the following statements describes the best course of
action for the firm depicted in the diagram?
A) The firm should exit the industry because its price is less than its average total cost.
B) The firm should minimize its losses by producing Qy units and charging a price of
P0.
C) The firm should minimize its losses by producing Qy units and charging a price of
P2.
D) The firm should minimize its losses by producing Qy units and charging a price of
P1.
Figure 11-13
Refer to Figure 11-13. The lines shown in the diagram are isocost lines. Which of the
following shows an increase in the firm’s total cost while the price of labor and capital
remain unchanged?
A) the movement from CE to BF
B) the movement from CE to AF
C) the movement from BD to AF
D) the movement from BD to CE
An insurance company is likely to attract customers like Clancy who want to purchase
insurance because he knows better that the company that he is more likely to make a
claim on a policy. What is the term used to describe the situation above?
A) moral hazard
B) adverse selection
C) asymmetric information
D) economic irrationality
Sefronia and Bella share an apartment and they are deciding whether or not to purchase
a weekly housecleaning service. The value of the service to each of them is $50 and it
costs $80 to hire a housecleaner. Suppose Bella is lazy and a spendthrift and Sefronia
suspects that Bella will be willing to pay $80. What is Sefronia likely to do, given that
she is as rational as any other person?
A) She will correctly rationalize that Bella’s laziness and spendthrift ways are irrelevant
to the decision at hand.
B) She might claim that she is not willing to pay for a housecleaner, hoping that Bella
would pay the entire $80.
C) She might offer to do Bella’s housecleaning chores if Bella would pay her $50.
D) She will come clean and tell Bella that since Bella is lazy and a spendthrift she
should pay a bigger share of the $80.
If a store like hhgregg has higher costs than a comparable Best Buy store, the only way
it can have higher profits is if
A) it has more locations than Best Buy.
B) its marginal revenue is lower than Best Buy’s.
C) the demand for its goods is higher than Best Buy’s.
D) it sells the quantity associated with its minimum average total cost.
Gowri has $6 per day to purchase lunch. She spends all of her lunch money on pizza
and iced tea. The price of pizza is $2.00 per slice and iced tea costs $1 per bottle.
a. Draw Gowri’s budget constraint and label it BC0. Put pizza on the horizontal axis and
iced tea on the vertical axis. Be sure to identify the intercept values.
b. If the price of iced tea rises to $1.20 per bottle, show what will happen to her budget
constraint in your diagram. Be sure to indicate any new intercept values.
Which of the following are examples of a firm experiencing a positive technological
change?
a. A firm is able to reduce its inputs by 15 percent and still produce the same level of
output.
b. A seminar attended by the firm’s workers makes them more productive.
c. A firm adds 5 percent to its workforce and is able to maintain its initial level of
output.
d. A firm restructures its distribution system and is able to save on its shipping times.
e. A firm rearranges its warehouse and finds that it can use fewer workers to maintain
its productivity level.
Table 2-4
Refer to Table 2-4. The Fruit Farm produces only apples and pears. The table
aboveshows the maximum possible output combinations of the two fruits using all
resources and currently available technology.
a. Graph The Fruit Farm’s production possibilities frontier. Put apples on the horizontal
axis and pears on the vertical axis. Be sure to identify the output combination points on
your diagram.
b. Suppose The Fruit Farm is currently producing at point D. What is the opportunity
cost of producing an additional 8,000 pounds of pears?
c. Suppose The Fruit Farm is currently producing at point D. What happens to the
opportunity cost of producing more and more pears? Does it increase, decrease or
remain constant? Explain your answer.
d. Suppose The Fruit Farm is currently producing at point G. What happens to the
opportunity cost of producing more and more apples? Does it increase, decrease or
remain constant? Explain your answer.
e. Suppose The Fruit Farm is plagued by the apple maggot infestation which destroys
apple trees but not pears. Show in a graph what happens to its PPF.
Each point on a ________ curve shows the willingness of consumers to purchase a
product at different prices.
A) demand
B) supply
C) production possibilities
D) marginal cost
Figure 9-1
Figure 9-1 shows the U.S. demand and supply for leather footwear.
Refer to Figure 9-1. Suppose the government allows imports of leather footwear into
the United States. What will be the domestic quantity supplied?
A) 5 units
B) 10units
C) 15 units
D) 20 units
Figure 3-5
Refer to Figure 3-5. At a price of $10, the quantity sold
A) is 2 units.
B) is 4 units.
C) is 6 units.
D) is 8 units.
Figure 15-11
In 2011, Verizon was granted permission to enter the market for cable TV in Upstate
New York, ending the virtual monopoly that Time Warner Cable had in most local
communities in the region. Figure 15-11 shows the cable television market in Upstate
New York.
Refer to Figure 15-11. Following the entry of Verizon, the subscription price falls from
PM to PC. What is the increase in consumer surplus as a result of this change?
A) the areaA + B + C
B) the areaB + C
C) the areaD + F
D) the areaB + C + D
Figure 13-6
Refer to Figure 13-6. Suppose Dell finds the relationship between the average total
cost of producing notebook computers and the quantity of notebook computers
produced is as shown by Figure 13-2. Dell will maximize profits if it produces
________ notebook computers per month.
A) 100,000
B) 200,000
C) 300,000
D) Not enough information is given to determine the profit-maximizing quantity.
Figure 5-2
Figure 5-2 shows a market with a negative externality.
Refer to Figure 5-2. The private profit maximizing quantity for the firm is
A) Qa.
B) Qb.
C) Qb– Qd.
D) Qd.
________ refers to the reduction in economic surplus resulting from not being in
competitive equilibrium.
A) Marginal cost
B) Producer atrophy
C) Deadweight loss
D) Economic shortage
Marginal revenue is
A) total revenue divided by the total quantity of output.
B) the change in profit divided by the change in the quantity of output.
C) the change in total revenue divided by the change in total cost.
D) the change in total revenue divided by the change in the quantity of output.
Which of the following statements is true about competition in a market?
A) Competition forces firms to outsource the production of their labor-intensive
products.
B) Competition forces firms to undercut their selling price, thus benefiting consumers
who will be able to purchase products at the lowest price possible.
C) Competition forces firms to produce and sell products as long as the marginal benefit
to consumers exceeds the marginal cost of production.
D) Competition forces firms to add only low profit margins to their costs of production.
Table 1-1
Lydia runs a small nail salon in the town of New Hope. She is debating whether she
should extend her hours of operation. Lydia figures that her sales revenue will depend
on the number of hours the nail salon is open as shown in the table above. She would
have to hire a worker for those hours at a wage rate of $10 per hour.
Refer to Table 1-1. What is Lydia’s marginal cost if she decides to stay open for two
hours instead of one hour?
A) $10
B) $20
C) $25
D) $40
The endowment effect suggests that that people
A) have a strong attachment to their entitlement, regardless of whether they paid to
acquire them.
B) have a strong sense of fairness.
C) are concerned about the welfare of others.
D) act in ways to distort market prices.
Figure 16-5
Refer to Figure 16-5. Suppose the firm represented in the diagram decides to use a
two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the
monopoly price. What is the revenue collected from the fixed fee portion of the price?
A) $10,240
B) $7,870
C) $2,560
D) $1,440
Figure 6-1
Refer to Figure 6-1. A perfectly inelastic demand curve is shown in
A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.
Suppose at the going wage rate of $20 per hour, firms can hire as many hours of
janitorial services as it desires. If any firm tries to lower the wage rate to $19, it will not
be able to hire any janitor. What does this indicate about the supply curve for janitorial
services?
A) Supply is unit-elastic.
B) Supply is perfectly elastic.
C) Supply is perfectly inelastic.
D) Supply is relatively inelastic.
Table 2-8
Table 2-8 shows the number of labor hours required to produce a digital camera and a
pound of wheat in China and South Korea.
Refer to Table 2-8. What is South Korea’s opportunity cost of producing one digital
camera?
A) 0.05 pounds of wheat
B) 20 pounds of wheat
C) 25 pounds of wheat
D) 60 pounds of wheat
Figure 10-9
Refer to Figure 10-9. If the consumer has $240 to spend on DVDs and CDs, what is the
price of a CD if the budget constraint is BC2?
A) $8
B) $10
C) $20
D) $40
Suppose a competitive firm is paying a wage of $12 an hour and sells its product at $3
per unit. Assume that labor is the only input. If the last worker hired produces four units
of output per hour, then to maximize profits the firm should
A) not change the number of workers it currently hires.
B) lay off some workers.
C) hire another worker.
D) There is not enough information to answer the question.
On average, people in high-income countries ________ than people in low-income
countries.
A) have a shorter life expectancy
B) are subject to a higher infant mortality rate
C) are taller
D) are exposed to more severe diseases
Book publishers use price discrimination routinely, but the form of price discrimination
they use is different from the form used by airlines and other industries. Explain.
What is a mixed economy?
Identify two ways by which the government controls monopolies?
When is demand perfectly elastic? When is demand perfectly inelastic? What are the
values of the price elasticity of demand when demand is perfectly elastic or perfectly
inelastic? What do perfectly elastic and perfectly inelastic demand curves look like?
What happens to a monopoly’s revenue when it sells more units of its product?
What is the difference between explicit and implicit costs?
Explain the effect of price elasticities of supply and demand on tax incidence.
Suppose the price elasticity of demand for cigarettes is -0.4. The FDA decides to
regulate tobacco production, which increases the price of cigarettes and causes the
quantity of cigarettes demanded to decrease by 25 percent. What is the percentage
increase in price which would lead to the 25 percent decrease in quantity demanded? If
the price elasticity was -4, what would be the percentage increase in price?
In which types of business do owners have unlimited personal liability and in which do
owners have limited personal liability?
If you own the only bookstore in a small town, do you have a monopoly?
You are the manager of a theater. At present the theater charges the same admission
price of $8 to all customers, regardless of age. You propose a two-tier pricing scheme:
$5 for children under the age of 12 and $10 for adults. You tell your supervisor that
your proposal is likely to increase revenues. What must be true about the price elasticity
of demand if your proposal is to achieve its goal of raising revenue? Explain your
answer.
Explain what potential conflict exists between shareholders in a corporation and the
corporation’s managers.
Complete the following table.
With state and multistate lotteries, winners are typically given the choice between a
lump sum payment today or a 20 year series of annuities. How should a winner decide
which is better?