1) Figure 14-5
Suppose a firm operating in a competitive market has the following cost curves:
In the short run,if the market price is higher than P4 but less than P6, individual firms in
a competitive industry will earn
a.positive profits.
b.zero profits.
c.losses but will remain in business.
d.losses and will shut down.
2) The most popular movie stars have high incomes for a number of reasons. One such
reason is
a.an ability for almost everyone to enjoy movies at a relatively low cost.
b.the above-average intellect of the average movie star.
c.a compensating differential.
d.a lack of technological advances in the movie industry.
3) Two firms, A and B, each currently emit 100 tons of chemicals into the air. The
government has decided to reduce the pollution and from now on will require a
pollution permit for each ton of pollution emitted into the air. The government gives
each firm 40 pollution permits, which it can either use or sell to the other firm. It costs
Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air,
and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted
into the air. After the two firms buy or sell pollution permits from each other, we would
expect that Firm A will emit
a.20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of
pollution into the air.
b.100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of
pollution into the air.
c.50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution
into the air.
d.20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of
pollution into the air.
4) The decrease in total surplus that results from a market distortion, such as a tax, is
called a
a.wedge loss.
b.revenue loss.
c.deadweight loss.
d.consumer surplus loss.
5) Table 17-2
Imagine a small town in which only two residents, Abby and Brad, own wells that
produce safe drinking water. Each week Abby and Brad work together to decide how
many gallons of water to pump. They bring water to town and sell it at whatever price
the market will bear. To keep things simple, suppose that Abby and Brad can pump as
much water as they want without cost so that the marginal cost is zero. The weekly
town demand schedule and total revenue schedule for water is shown in the table
below:
Refer to Table 17-2. If this market for water were perfectly competitive instead of
monopolistic, how many gallons of water would be produced and sold?
a.12 gallons
b.8 gallons
c.6 gallons
d.0 gallons
6) A good that is rival in consumption and not excludable is called a
a.public good.
b.common resource.
c.club good.
d.private good.
7) Which of the following examples best describes the signaling theory of education?
a.The hiring manager offers a job to a recent college graduate because she is more
beautiful than the rest of the applicants.
b.The hiring manager offers a job to a recent college graduate because she is expected
to be more productive than other applicants due to her educational attainment.
c.The hiring manager offers a job to a recent college graduate because the hiring
manager has a bias toward people with college degrees.
d.The hiring manager offers a job to a recent college graduate because education is
correlated with natural ability.
8) Advertising
a.provides information about products, including prices and seller locations.
b.has been proven to increase competition and reduce prices compared to markets
without advertising.
c.signals quality to consumers, because advertising is expensive.
d.All of the above are correct.
9) If the social value of producing robots is greater than the private value of producing
robots, the private market produces too few robots.
a.True
b.False
10) Because there are positive externalities from higher education,
a.private markets will under-supply college classes.
b.private markets will over-supply college classes.
c.the government should impose a tax on college students.
d.government intervention cannot improve the market for college classes.
11) In his 1951 book, Social Choice and Individual Values, Kenneth Arrow used the
term “unanimity” to mean
a.A beats B only if everyone prefers A to B.
b.if everyone prefers A to B, then A beats B.
c.if A beats B and B beats C, then A must best C.
d.everyone who is eligible to vote must vote; otherwise, the outcome is invalid.
12) If Miguel expects to earn a higher income next month, he may choose to
a.save more now and spend less of his current income on goods and services.
b.save less now and spend more of his current income on goods and services.
c.decrease his current demand for goods and services.
d.move along his current demand curves for goods and services.
13) As price elasticity of supply increases, the supply curve
a.becomes flatter.
b.becomes steeper.
c.becomes downward sloping.
d.shifts to the right.
14) Figure 7-19
At the equilibrium price, total surplus is
a. $125.
b. $450.
c. $250.
d. $500.
15) If the price of a good increases, all else equal, consumers perceive
a.an increase in purchasing power if the good is an inferior good.
b.an increase in income if the price increase occurs for a normal good.
c.a decrease in purchasing power.
d.a net gain in purchasing power if they decrease consumption of some goods.
16) Altering incentives so that people take account of the external effects of their
actions
a.is called internalizing the externality.
b.can be done by imposing a corrective tax.
c.is the role of government in markets with externalities.
d.All of the above are correct.
17) The commercial value of ivory is a threat to the elephant, but the commercial value
of beef is a guardian of the cow. This is because
a.the cow is raised in developed countries, while the elephant lives primarily in
less-developed countries.
b.cows are private goods, while elephants tend to roam freely without owners.
c.cows and elephants are public goods, but ivory is nonrival.
d.ivory is nonrival and nonexclusive, but beef is rival and exclusive.
18) Patents, copyrights, and trademarks
a.are examples of government-created monopolies.
b.are examples of barriers to entry.
c.allow their owners to charge higher prices.
d.All of the above are correct.
19) The poverty rate is a measure of the percentage of people whose incomes fall below
a.a relative level of income.
b.an absolute level of income.
c.the median income for a family of three.
d.the bottom 20 percent of the income distribution.
20) Scenario 17-4.
Consider two cigarette companies, PM Inc. and Brown Inc. If neither company
advertises, the two companies split the market and earn $50 million each. If they both
advertise, they again split the market, but profits are lower by $10 million since each
company must bear the cost of advertising. Yet if one company advertises while the
other does not, the one that advertises attracts customers from the other. In this case, the
company that advertises earns $60 million while the company that does not advertise
earns only $30 million.
Refer to Scenario 17-4. If these two companies collude and agree upon the best joint
strategy,
a.neither company will advertise.
b.both companies will advertise.
c.PM Inc. will advertise but Brown Inc. will not.
d.Brown Inc. will advertise but PM Inc. will not.