If the cost of the Department of Agriculture’s minimum food budget for two people is
$2,000 per year, the official poverty line for a family of two would be
A) $667.
B) $2,000.
C) $6,000.
D) $12,000.
The ________ automatically distributes scarce goods.
A) price system
B) barter system
C) laissez faire economy
D) command economy
If the market price of green tea is $20.00 per pound but the government will not allow
green tea growers to charge more than $15.00 per pound of green tea, which of the
following will happen?
A) Demand must eventually decrease so that the market will come into equilibrium at a
price of $17.50.
B) There will be a shortage of green tea.
C) Supply must eventually increase so that the market will come into equilibrium at a
price of $17.50.
D) There will be a surplus of green tea.
You agree to lend ________ to a friend for a year at an annual interest rate of 10%. At
the end of the year your friend pays you $500 in interest.
A) $50
B) $550
C) $5,000
D) $5,500
An efficient market is a market
A) in which everyone always gets what they want.
B) in which profit opportunities are eliminated almost instantaneously.
C) in which profits are always very high and persistent.
D) in which opportunity costs are zero.
Figure 8.3
Refer to Figure 8.3. If total fixed costs are $100, then average total cost of producing 10
basketballs is
A) $2.
B) $10.
C) $13.
D) $130.
If the cost of the Department of Agriculture’s minimum food budget for two people is
$3,000 per year, the official poverty line for a family of two would be
A) $1,000.
B) $3,000.
C) $9,000.
D) $18,000.
Mark has two job offers when he graduates from college. Mark views the offers as
identical, except for the salary terms. The first offer is at a fixed annual salary of
$50,000. The second offer is at a fixed salary of $20,000 plus a possible bonus of
$60,000. Mark believes that he has a 50-50 chance of earning the bonus. If Mark takes
the offer that maximizes his expected utility and is risk neutral, which job offer will he
choose?
A) Mark will take the first offer.
B) Mark will take the second offer.
C) Mark is indifferent between the offersboth yield the same expected utility.
D) Indeterminate from the given information.
Figure 14.7
Refer to Figure 14.7. Firms form a cartel that maximizes profits. The profits are
A) $0.
B) $1,080.
C) $1,800.
D) indeterminate from this information.
Figure 15.2
Refer to Figure 15.2. In this monopolistically competitive industry, in the long run,
A) firms will enter until all firms earn a normal profit.
B) firms will continue to earn economic profits.
C) demand for the product will decrease so that profits are decreased.
D) the government will impose price controls to eliminate any economic profits.
Related to the Economics in Practice on page 5: The opportunity cost to Mattel of
having its Barbie doll assembled in China is
A) the low wages paid to Chinese workers.
B) the $2 export value the doll carries when it leaves Hong Kong.
C) the $8 of its $10 retail value which is captured in the United States.
D) having the Barbie doll assembled in the next best available location.
During periods of ________, favored customers receive special treatment from dealers.
A) excess supply
B) excess demand
C) price above equilibrium
D) equilibrium
Table 8.1
Refer to Table 8.1. Assume the price of labor (L) is $5 per unit, the price of capital (K)
is $10 per unit, and that firms attempt to minimize costs. The marginal cost of
producing the third unit of output is
A) $30.
B) $40.
C) $50.
D) indeterminate from this information.
Two criteria used to judge the performance of any economic system are
A) efficiency and equity.
B) profit opportunities and technological progress.
C) efficiency and profit opportunities.
D) technological progress and achieving general equilibrium.
A developing economy is considering restricting the amount of money its citizens can
invest abroad. What might the purpose of this restriction be?
A) to increase the dependency of the economy on developed economics
B) to increase capital formation by forcing its citizens to invest in their own country
C) to reduce the nation’s trade deficit so that interest rates will be reduced and capital
formation will increase
D) to increase the degree of equality in the income distribution
Figure 3.15
Refer to Figure 3.15. A movement from Point A to Point B on supply curve S2 would be
caused by a(n)
A) increase in the price of gardenburgers.
B) decrease in the demand for gardenburgers.
C) increase in the price of tomatoes.
D) increase in the price of hamburgers, assuming hamburgers are a substitute for pizza.
Alicia spends $20,000 on remodeling a storefront that she then opens as a flower shop.
Her business has not been very successful, and she needs an additional $8,000 to keep
the flower shop. Which of the following is true?
A) The $20,000 Alicia spent on remodeling represents a part of the total variable cost of
her business.
B) The $8,000 represents her marginal costs of production.
C) The $20,000 Alicia spent on remodeling is a fixed cost of her business.
D) The $8,000 Alicia needs to keep the flower shop open represents her total fixed
costs.
As a firm’s total cost for capital and labor increases, its isocost line
A) shifts parallel outward from the original isocost line.
B) shifts parallel inward from the original isocost line.
C) rotates outward on the Y-intercept.
D) rotates outward on the X-intercept.
A monopolist will not produce
A) a positive level of output when its marginal revenue is declining.
B) a positive level of output when its price is less than average total cost but greater
than average variable cost.
C) in the inelastic portion of its demand curve, where marginal revenue is negative.
D) in the perfectly competitive level of output when it engages in perfect price
discrimination.
The relationship between the price that a perfectly competitive firm can charge buyers
and the firm’s marginal revenue is that the price is ________ marginal revenue over all
output.
A) above
B) below
C) equal to
D) sometimes above and sometimes below
A profitmaximizing firm in a monopolistically competitive market structure behaves
much like a ________ in the short run.
A) perfectly competitive firm
B) monopolistic firm
C) dominant firm
D) Cournot duopolist
Better insurance benefits increase the incentive of some individuals to work. This
statement is best described as
A) a positive statement.
B) an example of the ceteris paribus assumption.
C) a normative statement.
D) a comparative economics statement.
Education generates external benefits. When these external benefits are not considered,
the market will produce
A) an efficient level of education.
B) more than the efficient level of education.
C) less than the efficient level of education.
D) zero units of education.
Figure 20.3
Refer to Figure 20.3. The domestic price of shoes is $80. After trade the price of a pair
of shoes is $60. Now domestic production costs fall so that the equilibrium domestic
price of a pair of shoes is $70. This would cause the number of pairs of shoes imported
into this country to
A) increase.
B) decrease.
C) remain the same.
D) fall to zero.
The price elasticity of demand for bottled water in New York is -3, and the price
elasticity of demand for bottled water in Florida is -0.6. In other words, demand in New
York is ________, and demand in Florida is ________.
A) elastic; inelastic
B) inelastic; elastic
C) elastic; unit elastic
D) inelastic; unit inelastic
Tom borrowed $40,000 from his parents to open a donut stand. He agrees to pay his
parents a 5% yearly return on the money they lent him. His other yearly fixed costs
equal $10,000. His variable costs equal $25,000. He sold 40,000 dozen donuts during
the year at a price of $2.00 per dozen.
Tom’s total costs equal
A) $37,000.
B) $40,000.
C) $50,000.
D) $59,000.
Figure 5.5
Refer to Figure 5.5. As the price of good W increased, the demand for good Y shifted
from D1 to D2. The cross-price elasticity of demand between W and Y is
A) positive.
B) negative.
C) zero.
D) indeterminate from this information.
The largest in-kind transfer program in the United States is ________.
A) Medicare
B) the Housing Program
C) Food Stamps
D) Welfare
Pappy’s Popcorn Emporium operates in a perfectly competitive industry and hires you
as an economic consultant. Pappy’s is currently producing at a point where market price
equals its marginal cost. Its total revenue exceeds its total variable cost, but is less than
its total cost. You advise Pappy’s to
A) cease production immediately because it is incurring a loss.
B) lower its price so that it can sell more units of output.
C) produce in the short run to minimize its loss, but exit the industry in the long run.
D) raise its price until it breaks even.
One formula for ________ is ΔTVC/Δq.
A) AVC
B) TFC
C) ATC
D) MC
Suppose that the equilibrium rent for a two-bedroom apartment in downtown Chicago
is $900 per month. The city council decides to place a price ceiling on apartments and
will not allow landlords to charge more than $700 per month. Draw this situation using
a graph. Make sure that you show the original equilibrium and the effect of the price
ceiling on the market. What will happen in this market?
The Securities and Exchange Commission of the U.S. government requires that mutual
fund companies publish a long and detailed prospectus which covers an array of areas
including the cost of owning the fund, the types of stocks the fund invests in, the
management fee, administrative fees and an assessment of the type of risk that holding
the fund represents. This is clearly designed with the intent of mitigating the imperfect
information problem. However, can you think of any reason why the value of these
documents is likely to be quite marginal?
Figure 16.2
Use Figure 16.2 above to answer the following question. Assume that MPC represents
the marginal private cost and MB is the marginal private benefit for a particular firm.
Assume however, that the MDC represents the marginal damage cost of this firm’s
activity and the MSC is the marginal social cost. How much output would the firm
produce if it had to internalize the negative externality.
Using the above figure determine which country has the comparative advantage in the
production of corn. In addition, determine which has the comparative advantage in the
production of barley.
Consider a large public university in which a chemistry lecture is usually attended by
300 students or so but with large amounts of available seats on any given day. Is this a
pure public good? If not, why not? Is this good likely to be provided in an efficient
manner if the professor is vigilant in making sure that only registered students attend?
Explain.
SCENARIO 1: The following diagram represents the U.S. market for oil.
Refer to Scenario 1. Use the total revenue test (on all oil sold) to determine elasticity of
demand with a price drop from $18 to $16.
Many people have bemoaned the fact that hand-written personal letters have become
largely a thing of the past. They have also noted that the number of emails they receive
have increased quite dramatically and can hardly be compared to the volume of letters
that they used to receive by mail. Explain in terms of opportunity cost why this might
be the case. Explain why junk email is probably more of a problem than traditional junk
mail delivered to our mail box.
An IRA (Individual Retirement Account) allows taxpayers to invest money out of their
personal income before taxes. Financial advisors will often tell their clients that they
will realize more net pay (income after taxes) if they invest with an IRA versus saving
their money in a simple savings account at a bank. Explain how this is so.
Why is it difficult to determine whether an industry is operating efficiently when there
is rapid technological process underway?
What does diminishing marginal utility imply about the shape of a person’s demand
curve? Explain.
What determines how much labor a household will supply?
Using the table below explain why the economic profit and the accounting profit of this
firm may be different.
Given the graphs below explain what would happen if one of the purely competitive
firms in this industry raised its price above $6.00.
Assume that there were decreasing opportunity costs of production in an island
economy that only produced two goods. What would the shape of the production
possibilities frontier look like and why?
Suppose that a state needs to build both prisons and schools with a budget limited to 10
million dollars. Schools cost $1 million each to build and prisons cost $2 million each
to build.
What is the opportunity cost of building one more prison?
Should economics be considered a science? Why or why not?