Farah has $100 to spend each month on bread and chicken. Suppose the price of bread
is $4 a loaf and the price of chicken is $5 per pound.
a. Draw her budget constraint and label it BC0. Put bread on the horizontal axis and
chicken on the vertical axis. Be sure to identify the intercept values.
b. Suppose Farah is a utility maximizer and she consumes 10 loaves of bread and 12
pounds of chicken. On the same graph you drew in part (a), draw an indifference curve
to identify her optimal bundle. Label this bundle “E.”
c. Is her budget exhausted? Verify your answer.
d. Now suppose Farah’s income falls to so that she can now devote $80 to the two
goods. Prices however remain unchanged. In the same diagram, graph her new budget
constraint and label it BC1. Be sure to identify any new intercept values.
e. Following the change in income, can Farah consume the same bundle “E“? Explain
your answer.
f. What must happen to her total utility following the decrease in her income?
Figure 12-20
Refer to Figure 12-20. If the market price is P1, what is the allocatively efficient output
level?
A) Q0
B) Q1
C) Q2
D) There is no allocatively efficient output level because the firm is making a loss.
Sequential games are used to analyze
A) firms that are subject to the prisoner’s dilemma.
B) cartels.
C) second-price auctions.
D) situations in which one firm acts and other firms respond.
Arthur buys a new cell phone for $150. He receives consumer surplus of $150 from the
purchase. What value does Arthur place on his cell phone?
A) $0
B) $150
C) $225
D) $300
Consider the following items:
a. the album “Wilder Mind” by Mumford & Sons
b. a Dutch horticulturalist’s new method for cultivating hybrid tulips
c. Rolls Royce’s “Spirit of Ecstasy” hood ornament design
d. the sale of Tumi luggage at a Macy’s department store
Which of the items listed is an example of intellectual property?
A) a and b only
B) a, b, and c
C) a and d only
D) all of the items listed
Figure 5-4
Suppose there are several paper mills producing paper for a market. These mills,
located upstream from a fishing village, discharge a large amount of wastewater into the
river. The waste material affects the number of fish in the river and the use of the river
for recreation and as a public water supply source. Figure 5-4 shows the paper market.
Use this Figure to answer the following question(s).
Refer to Figure 5-4. Why is there a deadweight loss?
A) because the marginal social cost of producing each additional unit in excess of Q2
exceeds the marginal benefit
B) because the marginal private cost of producing each additional unit in excess of Q2
exceeds the marginal benefit
C) because the marginal social benefit of producing each additional unit in excess of Q2
exceeds the private cost
D) because the marginal private benefit of producing each additional unit in excess of
Q2 exceeds the social cost
Figure 5-5
Figure 5-5 shows a market with an externality. The current market equilibrium output of
Q1 is not the economically efficient output. The economically efficient output is Q2.
Refer to Figure 5-5. If, because of an externality, the economically efficient output is
Q2 and not the current equilibrium output of Q1, what does D1 represent?
A) the demand curve reflecting external benefits
B) the demand curve reflecting social benefits
C) the demand curve reflecting private benefits
D) the demand curve reflecting the sum of private and social benefits
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.
Sunk costs
A) are costs associated with repairing something you already own.
B) are important for optimal decision making.
C) are costs that have already been paid and cannot be recaptured in any significant
way.
D) are costs that firms sink into marketing.
Figure 4-8
Figure 4-8 shows the market for beer. The government plans to impose a unit tax in this
market.
Refer to Figure 4-8. How much of the tax is paid by sellers?
A) $2
B) $5
C) $7
D) $12
The division of labor and specialization explain
A) why, when the marginal product of labor increases, so does the average product of
labor.
B) why the average product of labor falls when firms use more capital or change the
layout of their businesses.
C) why the marginal product of labor rises as a firm hires its first units of labor.
D) why firms may find it profitable to use more workers when the marginal product of
labor is negative.
When you buy newly-issued shares of Twitter stock, this transaction takes place in the
A) primary market.
B) bond market.
C) secondary market.
D) bear market.
Figure 11-2
Refer to Figure 11-2. The curve labeled “E” is
A) the total product curve.
B) the average product curve.
C) the marginal product curve.
D) the output supply curve.
Income inequality in the United States has increased somewhat over the past 25 years.
Two factors that appear to have contributed to this are
A) tax cuts on high-income individuals and large increases in prices of stocks.
B) strong economic growth and low inflation.
C) rapid technological change and expanding international trade.
D) outsourcing of jobs by U.S. firms and cuts in taxes on capital gains.
The prices college students and faculty members pay for Apple computers are lower
than the prices Apple charges on its Web site and in retail stores. Apple charges lower
prices to college students and faculty members because
A) college students and faculty members have a more elastic demand for computers
than the general public.
B) Apple can deduct from its federal taxes some of the costs of the computers it sells to
college students and faculty members.
C) college students and faculty members have a more inelastic demand for computers
than the general public.
D) college students and faculty members typically buy more supplies from Apple (print
cartridges, paper, etc.,) than the general public.
Which of the following are implicit costs for a typical firm?
A) the cost of labor
B) the opportunity cost of capital owned and used by the firm
C) the cost of energy used in production
D) a business licensing fee
A reason why there is more competition among restaurants than among large discount
department stores is that restaurants
A) have to cater to a variety of consumer tastes while department stores do not.
B) unlike department stores, have to abide by government sanitation rules.
C) unlike department stores, do not have significant economies of scale.
D) have more elastic demand for their product compared to department stores.
Figure 6-6
Refer to Figure 6-6. As price falls from PA to PB, the quantity demanded increases
most along D1; therefore,
A) D1 is unit elastic.
B) D1 is more inelastic than D2 or D3.
C) D1 is more elastic than D2 or D3.
D) D1 is elastic at PA but inelastic at PB.
The Arrow impossibility theorem explains
A) why there is no system of voting that will consistently represent the underlying
preferences of voters.
B) why government regulation of private markets will always result in a reduction in
economic efficiency in these markets.
C) why voters are always rationally ignorant.
D) why it is not possible to provide the economically efficient amount of any public
good.
Which of the following is a consequence of the voting paradox?
A) A majority of voters elect a candidate that does not represent the preferences of the
voter who is in the political middle.
B) Politicians support small groups of individuals and firms that benefit from special
interest legislation, rather than a much larger group of voters who pay the cost for this
legislation.
C) Individuals and firms who benefit from government actions engage in rent seeking.
D) The collective preferences of voters are not transitive and voting outcomes are
inconsistent.
Figure 12-8
Refer to Figure 12-8. Suppose the firm produces 4,000 units. What does the shaded
area labeled A represent?
A) total variable cost
B) profit
C) total fixed cost
D) total revenue
Sole proprietorships are ________ type of business.
A) the most profitable
B) the least common
C) the most common
D) the least risky
Figure 4-1
Figure 4-1 shows Arnold’s demand curve for burritos.
Refer to Figure 4-1. If the market price is $1.00, what is the maximum number of
burritos that Arnold will buy?
A) 1
B) 2
C) 3
D) 4
Carolyn spends her income on popular magazines and music CDs. If the price of a CD
is four times the price of a magazine and if Carolyn is maximizing her utility, she buys
A) both goods until the marginal utility of the last CD purchased is four times the
marginal utility of the last magazine purchased.
B) both goods until the marginal utility of the last magazine purchased is four times the
marginal utility of the last CD purchased.
C) four times as many magazines as CDs.
D) four times as many CDs as magazines.
If a firm expects that the price of its product will be higher in the future than it is today,
A) the firm will go out of business.
B) the firm has an incentive to increase supply now and decrease supply in the future.
C) the firm has an incentive to decrease quantity supplied now and increase quantity
supplied in the future.
D) the firm has an incentive to decrease supply now and increase supply in the future.
The supply curve of a public good shows
A) the total quantities that all producers are willing and able to supply at each price.
B) the maximum amount suppliers require to produce each quantity of the good.
C) the total cost of producing each unit of the good.
D) the marginal cost of producing each unit of the good.
A bond is a financial security that represents
A) ownership in a corporation.
B) the portion of profits paid to shareholders.
C) the interest rate paid on a share of stock.
D) a promise to repay a fixed amount of funds.
An article on how prices in South Bend, Indiana rise during Notre Dame home football
games noted: “For the Sept. 16 game against the University of Michigan, the South
Bend Marriott is charging $649 a night for a double room…. The Marriott’s regular
weekend price is $149 a night.”
Source: Ilan Brat, “Notre Dame Football Introduces Its Fans To Inflationary Spiral,”
Wall Street Journal, September 7, 2006, p. A1.
Which of the following statements is true?
A) The Marriott is practicing first-degree price discrimination by charging what the
market will bear.
B) This is evidence of third-degree price discrimination because hotel accommodation
on a particular day is not a product that can be resold later.
C) There is no evidence of price discrimination; the Marriott is responding to increased
demand for hotel rooms in the face of constant supply.
D) The Marriott has adopted this pricing strategy to capitalize on arbitrage profits.
A firm’s total profit can be calculated as all of the following except
A) total revenue minus total cost.
B) average profit per unit times quantity sold.
C) (price minus average total cost) times quantity sold.
D) marginal profit times quantity sold.
Suppose that in Canada the government places a $1,500 tax on the buyers of new
snowmobiles. After the purchase of a new snowmobile, a buyer must pay the
government $1,500. How would the imposition of the tax on buyers be illustrated in a
graph?
A) The tax will shift the supply curve to the left by $1,500.
B) The tax will shift the demand curve to the right by $1,500.
C) The tax will shift both the demand and supply curves to the right by $1,500.
D) The tax will shift the demand curve to the left by $1,500.
Table 18-12
Table 18-12 shows income distribution data for two countries. Use this data to answer
the following questions.
Refer to Table 18-12.
a. Draw a Lorenz curve for each country.
b. Which country has the more equal distribution of income?
c. Based on the Lorenz curves for the two countries, can you determine which country
has the more progressive tax system? Explain your answer.
Figure 3-1
Refer to Figure 3-1. If the product represented is an inferior good, an increase in
income would be represented by a movement from
A) A to B.
B) B to A.
C) D1 to D2.
D) D2 to D1.
Which of the following would shift the supply curve for MP3 players to the right?
A) an increase in the price of a substitute in production
B) an increase in consumer income (assuming that all MP3 players are normal goods)
C) a decrease in the number of firms that produce MP3 players
D) a decrease in the price of an input used to produce MP3 players