A subgame is a simultaneous game embedded in a sequential game.
The success of Walt Disney’s animated film The Lion King in 1994 increased
production of animated films, increasing the demand for animators much faster than the
supply of animators was increasing. As a result, in the market for animators, the
equilibrium wage fell and the equilibrium quantity increased.
The private cost of a good or service is the cost borne by the producer.
If the income elasticity for canned food is 0.8, then canned food is an inferior good.
In the short run, a firm that incurs losses might choose to produce rather than shut down
if the amount of its revenue is less than its fixed cost.
If the demand curve for a product is vertical, any tax increase on the product is paid for
entirely by the consumer.
The iPod is a product without any significant network externalities.
In economics, the optimal level of pollution is the level for which the net benefit from
reducing the pollution is the greatest.
For a profit-maximizing monopolistically competitive firm, for the last unit sold, the
marginal cost of production is less than the marginal benefit received by a customer
from the purchase of that unit.
The application of economic analysis to human resources issues is called personnel
economics.
Issuing tradable emission allowances to polluting firms will result in those firms
polluting more than is socially desirable.
Because many business situations are repeated games, firms may be able to avoid the
prisoner’s dilemma and implicitly collude to keep prices high.
One result of a tax is an increase in economic efficiency.
For a monopolistically competitive firm, price equals average revenue.
One possible reason as to why consumers respond to sales is that by displaying a “high”
regular price and a “low” sale price, sales provide consumers with a reference point to
interpret the prices being offered.
The government of Silverado raises revenue to operate the city’s hospital, open to all
residents, through a general income tax paid by its residents. This method of raising
revenue is consistent with the benefits-received principle.
In the short run, even if a monopoly’s total revenue does not cover its variable costs, it
should continue to produce because ultimately in the long run, the monopoly will start
earning profits.
If a country produces only two goods, then it is not possible to have an absolute
advantage in the production of both goods.
Dell Computers allows potential consumers to customize personal computers to their
desires. Dell’s strategy is successful because offering bundles that more exactly meet a
consumer’s preference allows Dell to extract more consumer surplus.
The decisions Apple makes in determining production levels for its iPhone is an
example of a microeconomics topic.
It is possible to have an absolute advantage in producing a good or service without
having a comparative advantage.
The price elasticity of demand for Kellogg’s Raisin Bran is larger in absolute value than
the price elasticity for all breakfast cereals.
Jobs lost to foreign trade are generally easy to identify, but jobs created by foreign trade
are generally less easy to identify.
The substitution effect explains why there is a direct relationship between the price of a
product and the quantity of the product demanded.
The total amount of producer surplus in a market is equal to the area below the supply
curve.
Once a country has a comparative advantage in producing a product, it cannot lose that
advantage.
When the government imposes a tax equal to the external cost of producing a product
that causes pollution, the government is said to externalize the externality.
Holding everything else constant, government approval of horizontal mergers is more
likely to be granted if the “market” that firms are in are broadly defined rather than
narrowly defined.
The income effect of a price increase for a Giffen good outweighs the substitution
effect.
If marginal revenue is negative then the revenue lost from receiving a lower price on all
the units that could have been sold at the original price is smaller than the additional
revenue from selling one more unit of the good.
An economic model is a simplified version of reality used to analyze real-world
economic situations.
Lucinda buys a new GPS system for $250. She receives consumer surplus of $75 from
the purchase. What value does Lucinda place on her GPS system?
A) $75
B) $175
C) $250
D) $325
Figure 4-3
Figure 4-3 shows the market for tiger shrimp. The market is initially in equilibrium at a
price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40in
order to raise the price to $18.
Refer to Figure 4-3. What is the value of producer surplus at a price of $18?
A) $240
B) $300
C) $340
D) $720
Economic decline (negative growth) is represented on a production possibilities frontier
model by the production possibility frontier
A) shifting outward.
B) shifting inward.
C) becoming steeper.
D) becoming flatter.
Which of the following describes the substitution effect of a price change?
A) The change in demand that results from a change in price, making the good more or
less expensive relative to other goods, holding constant the effect of the price change on
consumer purchasing power.
B) The change in quantity demanded of a good that results from the effect of a change
in price on consumer purchasing power, holding everything else constant.
C) The change in quantity demanded of a good that results from the change in the price
of a substitute for the good.
D) The change in quantity demanded of a good that results from a change in price,
making the good more or less expensive relative to other goods, holding constant the
effect of the price change on consumer purchasing power.
Figure 3-2
Refer to Figure 3-2. A decrease in the expected future price of the product would be
represented by a movement from
A) A to B.
B) B to A.
C) S1 to S2.
D) S2 to S1.
If the demand for a steak is unit elastic, then
A) the percentage change in quantity demanded is 1 percent greater than the percentage
change in price.
B) the percentage change in quantity demanded is equal to the percentage change in
price.
C) the percentage change in quantity demanded is 100 percent greater than the
percentage change in price (in absolute value).
D) quantity demanded does not respond to changes in price.
Which of the following is a characteristic of a bond?
A) A bond represents a promise to repay a fixed amount of funds.
B) The face value or principal plus interest is repaid at a specified period of time.
C) The length of coupon payments is fixed by the stated maturity period.
D) All of these are characteristics of bonds.
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 profit earned under this pricing scheme?
A) $5,760
B) $6,400
C) $7,680
D) $7,870
What is allocative efficiency?
A) It refers to a situation in which resources are allocated to their highest profit use.
B) It refers to a situation in which resources are allocated such that goods can be
produced at their lowest possible average cost.
C) It refers to a situation in which resources are allocated such that the last unit of
output produced provides a marginal benefit to consumers equal to the marginal cost of
producing it.
D) It refers to a situation in which resources are allocated fairly to all consumers in a
society.
Figure 16-6
Watanabe Sensei operates the only martial arts school in Hartfield. For simplicity,
assume that consumers have identical demand curves and that Sensei knows what this
demand curve is. Figure 16-6 shows this demand curve.
Refer to Figure 16-6. Sensei’s friend, Marcel, suggests that he charge a one-time
membership fee to use the martial arts school, in addition to a per-class charge. Suppose
Sensei charges the monopoly price for each class and also imposes a one-time
membership fee. What is the maximum amount of revenue from the membership fee he
can collect from all his customers?
A) an amount equal to the area A + B
B) an amount equal to the area E + F
C) an amount equal to the area H + G
D) an amount equal to the area A + C + H
Which of the following is not a characteristic of indifference curves?
A) Indifference curves cannot intersect.
B) Indifference curves are usually bowed in, or convex.
C) The slope of an indifference curve is negative.
D) The closer to the origin, the greater the utility level.
Buyers rush to purchase stocks in California vineyards following a forecast of a 30
percent decline in this year’s grape harvest. What happens in the California wine market
as a result of this announcement?
A) The demand curve for California wine shifts to the left in anticipation of higher
prices in the future.
B) The demand curve for California wine shifts to the right in anticipation of higher
prices in the future.
C) The supply curve for California wine shifts to the right in anticipation of higher
prices in the future.
D) The supply curve for California wine shifts to the left in anticipation of lower
quantities in the future.
The difference between the salaries paid to movie stars and to actors who play
supporting roles is much greater today than it was in the 1930s and 1940s. What factor
explains this increase in relative salaries over time?
A) Technological advances in the entertainment industry increase the revenue that
successful movies can earn. This has increased the movie studios’ willingness to pay
high salaries to movie stars.
B) Agents of movies stars are effective in obtaining large salaries for their clients today.
Few movie stars had agents to negotiate for them in the 1930s and 1940s.
C) The studio system that dominated the industry in the 1930s and 1940s no longer
exists. The studio system allowed movie studios to sign actors to long-term contracts
that kept salaries down.
D) There was no actors’ union in the 1930s and 1940s. The rise of strong actors’ unions
has caused salaries of movies stars to be greater today than in previous years.
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
How will an increase in population affect the labor market?
A) It will shift the market supply curve.
B) It will cause a decrease in the quantity of labor demanded.
C) It will increase the supply of jobs.
D) It will increase the opportunity cost of leisure.
A free market fails when
A) there is government intervention.
B) there is an external effect in either production, consumption, or both.
C) firms that produce goods which create positive externalities go bankrupt.
D) firms that produce goods which create negative externalities earn high profits.
Figure 11-6
Figure 11-6 contains information about the short run cost structure of a firm.
Refer to Figure 11-6. In the figure above which letter represents the average variable
cost curve?
A) A
B) B
C) C
D) D
Figure 2-4
Figure 2-4 shows various points on three different production possibilities frontiers for
a nation.
Refer to Figure 2-4. Consider the following events:
a. an increase in the unemployment rate
b. a decrease in a nation’s money supply
c. a war that kills a significant portion of a nation’s population
Which of the events listed above could cause a movement from Y to W?
A) a, b, and c
B) a and b only
C) a and c only
D) a only
E) c only
What characteristic of a competitive market has made the “long run pretty short” in the
market for iPhone applications?
A) few firms in the market
B) identical products
C) ease of entry
D) blocked entry
The central role of ________ in a market economy is bringing together savers and
borrowers.
A) corporations
B) sole proprietors
C) financial intermediaries
D) stock exchanges
Positive technological change in the production of LCD televisions caused the price of
LCD televisions to fall. Holding everything else constant, how would this affect the
market for Blu-ray players (a complement to LCD televisions)?
A) The supply of Blu-ray players would increase and the equilibrium price of Blu-ray
players would decrease.
B) The demand for Blu-ray players would increase and the equilibrium price of Blu-ray
players would increase.
C) The demand for Blu-ray players would decrease because consumers could afford to
buy fewer LCD televisions and Blu-ray players.
D) The demand for Blu-ray players would increase and the equilibrium price of Blu-ray
players would decrease.
a. Draw a production possibilities frontier for a country that produces two goods, beer
and pretzels. Assume that resources are equally suited to both tasks.
b. Define opportunity costs.
c. Use your production possibilities frontier graph to demonstrate the principle of
opportunity costs.
A perfectly competitive industry achieves allocative efficiency in the long run. What
does allocative efficiency mean?
A) Each firm produces up to the point where the price of the good equals the marginal
cost of producing the last unit.
B) Each firm produces up to the point where all scale economies are exhausted.
C) Production occurs at the lowest average total cost.
D) Firms use an input combination that minimizes cost and maximizes output.
Table 12-2
Table 12-2 lists the various pounds (lbs.) of apples that Margie Stattler can sell. Assume
that Margie operates in a perfectly competitive market.
Refer to Table 12-2. How many pounds of apples should Margie sell to maximize her
profit?
A) 300 pounds
B) 400 pounds
C) This cannot be determined without knowing Margie’s total or marginal production
costs.
D) This can be determined only when all of the values for market price, total revenue,
average revenue and marginal revenue are given.
Markets promote
A) equity and competition.
B) voluntary exchange and equality.
C) equity and equality.
D) competition and voluntary exchange.
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.
A monopolistically competitive firm faces a downward-sloping demand curve because
A) it is able to control price and quantity demanded.
B) there are few substitutes for its product.
C) of product differentiation.
D) its market decisions are affected by the decisions of its rivals.
If a monopolist’s price is $50 at 63 units of output and marginal revenue equals
marginal cost, and average total cost equals $43, then the firm’s total profit is
A) $3,150.
B) $2,709.
C) $441.
D) $7.
Which of the following statements applies to a monopolist but not to a perfectly
competitive firm at their profit-maximizing outputs?
A) Marginal revenue is less than price.
B) Marginal revenue equals marginal cost.
C) Price equals marginal cost.
D) Average revenue equals average cost.
Figure 14-4
Rainbow Writer (RW) is a small online company selling a highly rated software
package for engraving words onto objects produced by 3D printers. The firm currently
earns a profit of $2 million per year selling its package exclusively on its Website.
Odeon, the producer of the most popular 3D printers has expressed interest in bundling
Rainbow Writer’s product with its printers. Odeon expects that bundling would further
boost its sales and allow it to sell its printers at a higher price, thus raising its profits
beyond its current profit of $12 million. Figure 14.4 shows the decision tree for the
Rainbow Writer-Odeon bargaining game.
Refer to Figure 14-4. How will Rainbow Writer respond to Odeon’s two possible
offers?
A) Rainbow Writer will reject either offer.
B) Rainbow Writer will only accept an offer of $30 per copy of the software package.
C) Rainbow Writer will only accept an offer of $40 per copy of the software package.
D) Rainbow Writer will accept either offer.
Economists have used the ultimatum game and the dictator game in experiments
designed to determine
A) whether consumers care about fairness when they make decisions.
B) whether consumers believe it is fair for producers to raise the price of a product for
which there is excess demand.
C) whether consumers understand the difference between implicit costs and explicit
costs.
D) whether consumers understand the rule of equal marginal utility per dollar spent.
Table 17-3
Hotspur Incorporated, a manufacturer of microwave ovens, is a price taker in its input
and output markets. The firm hires labor at a constant wage rate of $800 per week and
sells microwave ovens at a constant price of $80. Table 17-3 shows the relationship
between the quantity of labor it hires and the quantity of microwave ovens it produces.
Refer to Table 17-3. What is the amount of profit added as a result of hiring the fourth
worker?
A) $7,200
B) $1,200
C) $800
D) $400
Figure 3-2
Refer to Figure 3-2. An increase in the price of substitutes in production would be
represented by a movement from
A) A to B.
B) B to A.
C) S1 to S2.
D) S2 to S1.
“Because apples and oranges are substitutes, an increase in the price of oranges will
cause the demand for apples to increase. This initial shift in demand for apples results in
a higher price for apples; this higher price will cause the demand curve for apples to
shift to the right.” Which of the following correctly comments on this statement?
A) The statement will be true if consumer tastes for apples and oranges do not change.
B) The statement is false because a change in the price of apples would not change the
demand for apples.
C) The statement is false because oranges are inferior goods; apples are normal goods.
D) The statement is false because one cannot assume that apples and oranges are
substitutes for all consumers.
How might a monopolistically competitive firm continually earn economic profit
greater than zero?
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?
If grocery stores were legally required to charge a 10-cent fee for disposable grocery
bags, who would bear the largest burden of this fee?
What was the source of the problems encountered by many financial firms during the
late 2000s?
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?
Companies often find it to be more profitable to use a commission or piece-rate system
of compensation rather than a salary system, yet many firms continue to pay their
workers salaries. List three reasons why a firm would choose a salary system of
compensation.
Is a typical person likely to gather more information when buying a new computer or
when voting for a member of the U.S. Senate? Why?
Studies on consumer behavior have found that most people value fairness enough that
they will refuse to participate in transactions they consider unfair, even if they are worse
off as a result. How does this affect a firm’s decision to raise prices in the event of a
temporary increase in demand?
Equilibrium in a perfectly competitive market results in the greatest amount of
economic surplus, or total benefit to society, from the production of a good. Why, then,
did Joseph Schumpeter argue that an economy may benefit more from firms that have
market power than from firms that are perfectly competitive?
If you pay $3,000 in taxes on an income of $28,000, and $4,450 in taxes on an income
of $38,000, what is your marginal tax rate? Show your work.
If you own a bond with a seven percent coupon rate and new bonds are paying five
percent, what will happen to your bond’s market price?
Explain why market power leads to a deadweight loss. Is the total deadweight loss from
market power in the United States large or small?
What is an economic model?
What is minimum efficient scale? What is likely to happen in the long run to firms that
do not reach minimum efficient scale?
What are the three most important variables that cause the market supply curve of labor
to shift?