The term “Fourth World” is used to describe countries that
A) are stagnant and have fallen far behind the economic advances of the rest of the
world.
B) have experienced rapid economic growth.
C) are more developed than “Third World” countries.
D) are closer to developed countries than transitional economies.
Which of the following are benefits associated with the oligopoly model?
A) allocative efficiency
B) pricing at marginal cost
C) product variety and innovation
D) None of the above are benefits associated with the oligopoly model.
According to the theory of comparative advantage, trade and specialization ________
productivity by ________ opportunity costs.
A) raise; raising
B) raise; lowering
C) lower; raising
D) lower; lowering
Figure 15.4
Refer to Figure 15.4. In the long run, in this monopolistically competitive industry,
A) some firms will leave the industry until the remaining firms earn a normal profit.
B) firms will leave the industry until each firm earns a positive economic profit.
C) firms will enter the industry, which will increase the demand for the product.
D) the government will subsidize the firms to eliminate any losses the firms incur.
Which statement is NOT true regarding the total variable cost curve?
A) It increases as output increases.
B) It shows the variable cost of production given current factor prices.
C) It starts at the origin.
D) It is a horizontal line.
You work as a forecaster for the major producer of digital cameras. You know that there
is a strong positive relationship between the demand for digital cameras and the birth of
a first child. A report has just been issued predicting that the birthrate is expected to
increase steadily over the next 10 years. You should recommend which of the following
courses of action to the firm?
A) Don’t change the amount of investment made, but raise the price of digital cameras
in response to the expected increase in the demand.
B) Suggest that the investment in new capital to produce digital cameras be made only
after it can be verified that the birthrate has increased.
C) Start to increase investment now so that when the birthrate increases and the demand
for digital cameras increases, the firm will be able to meet that new demand.
D) Suggest that the firm curtail its advertising to avert a substantial increase in demand
for digital cameras.
The table shows the relationship between income and utility for Celeste.
Table 17.1
Refer to Table 17.1. Suppose Celeste has a 1/3 chance of becoming disabled in any
given year. If she does become disabled, she will earn $0. If Celeste does not become
disabled, she will earn her usual salary of $120,000. Celeste has the opportunity to
purchase disability insurance which will pay her her full salary in the event she
becomes disabled. On average, such a contract would cost the insurance company
________ per insured person.
A) $40,000
B) $60,000
C) $80,000
D) $120,000
Figure 7.1
Refer to Figure 7.1. A corn producer’s total revenue is $1,000. If she sells each bushel of
corn for $5, she must be selling ________ bushels of corn.
A) 200
B) 450
C) 900
D) 4,500
The income elasticity of demand for low-quality beef is -2. Thus, an 5% decrease in the
quantity of low-quality beef demanded
A) is the result of a decrease in income of 2.5%.
B) is the result of an increase in income of 10%.
C) is the result of an increase in income of 2.5%.
D) is unrelated to any change in income.
Relating to the Economics in Practice on page 360: An individual with a parent who
has Huntington’s disease has a 50 percent chance of also having the disease, and can use
this information when deciding on the purchase of health insurance. This is an example
of ________ favoring potential insurance buyers.
A) moral hazard
B) asymmetric information
C) market signaling
D) adverse selection
Refer to the information provided in Figure 16.1 below to answer the questions that
follow.
Figure 16.1
Refer to Figure 16.1. The marginal damage cost imposed as a result of producing
fertilizer is
A) $5.00 per bag of fertilizer.
B) $10.00 per bag of fertilizer.
C) $15.00 per bag of fertilizer.
D) indeterminate from this information.
The Reliable Auto Repair Shop is earning a total revenue of $7,000. Its total fixed costs
are $700, and its total variable costs are $2,500. The Reliable Auto Repair Shop s profit ʹ
is
A) -$1,800.
B) $3,800.
C) $4,500.
D) $6,300.
Table 18.4
Refer to Table 19.4. The tax rate structure in this example is
A) proportional.
B) progressive.
C) regressive.
D) marginal.
You cause a fire insurance company to face a moral hazard problem when you take
________ you buy fire insurance from the company.
A) fewer precautions to prevent fires after
B) more precautions to prevent fires after
C) fewer precautions to prevent fires before
D) the same precautions to prevent fires before and after
Rented DVDs and movies shown in theaters are substitutes. Rented DVDs and plasma
TVs are complements. Plasma TVs and movies shown in theaters are normal goods.
People watch rented DVDs more often in the winter than in the summer.
Most plasma TVs sold in the United States are imported from Japan. If the United
States government reduces the number of plasma TVs that can be imported into the
United States, ceteris paribus, what would happen?
A) The price of plasma TVs and the rental price of DVDs would decrease.
B) The price of plasma TVs would decrease, and the rental price of DVDs would
increase.
C) The price of plasma TVs would increase, and the rental price of DVDs would
decrease.
D) The price of plasma TVs and the rental price of DVDs would increase.
Table 2.1
Refer to Table 2.1. For Molly, the opportunity cost of designing four tattoos is
________ avatar designs.
A) 6
B) 8
C) 12
D) 24
Figure 15.2
Refer to Figure 15.2. At We Do Hair, a monopolistically competitive firm, the
________ perm is $32.
A) average total cost of a
B) marginal cost of a
C) profit on each
D) profit-maximizing price for a
The Eyes on the World Company monopolizes the production of a specialized contact
lens. The Eyes on the World Company will find it profitable to reduce output as long as
marginal cost is
A) greater than marginal revenue.
B) equal to marginal revenue.
C) less than marginal revenue.
D) positive.
Figure 4.5
Refer to Figure 4.5. Assume that initially there is free trade. The quantity demanded of
CD-Rom drives will be reduced by 3 million CD-Rom drives if the United States
imposes ________ tax per CD-Rom drive on imported CD-Rom drives.
A) no
B) a $10
C) a $15
D) a $25
Periods of full employment correspond to
A) points outside the ppf.
B) points inside the ppf.
C) points on the ppf.
D) either points inside or outside the ppf.
A World Bank study found that charging user fees for medical treatment in developing
countries dramatically reduced treatment rates, indicating that these medical treatments
have elasticities
A) less than 1.
B) greater than 1.
C) equal to 1.
D) equal to zero.
We cannot exclude anyone from consuming the benefits of a ________ good.
A) private
B) Pareto
C) public
D) free
A firm suffering economic losses decides whether or not to produce in the short run on
the basis of whether
A) revenues cover variable costs.
B) revenues from operating are sufficient to cover fixed costs.
C) revenues from operating are sufficient to cover fixed plus variable costs.
D) Firms suffering economic losses will always shut down.
The quantity demanded of Pepsi has decreased. The best explanation for this is that
A) the price of Coca-Cola has increased.
B) Pepsi’s advertising is not as effective as in the past.
C) the price of Pepsi has increased.
D) Pepsi consumers had an increase in income.
________ cost refers to the full economic costs of production.
A) Total
B) Marginal
C) Average variable
D) Total variable
Related to the Economics in Practice on page 39: In the survey conducted by Esther
Duflo and Abhijit Banerjee, the extremely poor were found to consume ________ of
their budgets on weddings, funerals, and other festivals.
A) virtually none
B) less than 5 percent
C) almost 10 percent
D) over half
If the marginal utility of income decreases as income increases, transferring income
from the rich to the poor will
A) increase total utility.
B) decrease total utility.
C) not change total utility.
D) increase marginal utility, but not change total utility.
Adriana is maximizing her utility. Her MUx/Px=10 and MUy=60. Then the price of Y
must be
A) $1.
B) $6.
C) $10.
D) $60.
Which of the following is the best definition of economics?
A) the study of how individuals and societies choose to use the scarce resources that
nature and previous generations have provided
B) the study of how consumers spend their income
C) the study of how business firms decide what inputs to hire and what outputs to
produce
D) the study of how the federal government allocates tax dollars
A proportional income tax means that those with a higher income pay ________.
A) a lower percentage of their income in taxes than low-income people
B) a higher percentage of their income in taxes than low-income people
C) the same percentage of their income in taxes as low-income people
D) all the taxes in the economy
Use Figure 19.2 to answer the following question. Assume a tax in the amount T as
measured by the bracket in the graph is imposed on this good with price of P0 equal to
marginal cost. Show the deadweight loss that would result and explain what is going on.
Answer:
SCENARIO 1: Consider the interactions between the markets for beer and cola drinks.
Both industries are initially in long-run equilibrium. Assume that they are substitutes in
consumption and that labor is mobile between the two industries.
Refer to Scenario 1. Graphically illustrate the effect of a decrease in the demand for
beer in its market, unrelated to the cola market. What are the effects on beer industry
profits and exit from the industry?
Assume a company has a cafeteria where it lets all its workers eat without making them
pay up front. Instead, at the end of the month the total cost of eating at the company
cafeteria is added up and divided by the total number of workers. This amount is then
deducted from each worker’s paycheck. Explain how this practice may lead to a
negative externality.
What are the three decisions that all firms must make?
A firm purchasing labor in a competitive market has the following marginal revenue
product curve:
The current equilibrium wage is $10 and the firm is currently
hiring 6 workers. The manager tells you that he is considering hiring another worker
and asks your advice. Should he? Explain.
List and define two types of capital income.
Use the budget constraint below to identify economic meaning of each of the choice
points: A, B, C, D, and E.
What can we say about the employment of resources if the economy is at a point on its
production possibility frontier?
Most economists will argue that the minimum wage causes unemployment. Even
politicians will recognize this when pressed. However, typically liberals will tout the
benefits of the minimum wage while conservatives will decry the disruption that it
causes in the labor market. Which economic objective seems to be more important for
liberals and which is more important to conservatives if this general observation is
correct? Which side is right?
Suppose that you and two friends have an opportunity to purchase a pizza restaurant.
Each of you would put up $75,000. The revenue from the restaurant is expected to
remain $200,000 per year for the next several years. The costs (not including the
opportunity costs of your investment) of operating the restaurant are expected to remain
steady at $185,000 for the next several years. The current market rate of interest is 7
percent per year. Should you go in on this deal? Explain.
The rash of hurricanes that pelted the Gulf Coast in 2005 resulted in a large decline in
gasoline production as many offshore rigs were shut down and many refineries were
taken off line while waiting out the hurricane. The decrease in supplies of gasoline led
to a run up in prices. Many voters clamored for relief by calling on their congressman
and senators to enact temporary price controls. Analyze the impact on the gasoline
market that would have transpired had politicians actually headed the calls by voters to
impose price controls on gasoline.
Scenario 2
Assume that a poor person has an income of $500. There are only two goods that he can
consume ” food and “all other goods”. Food prices are $2 and “all other goods” are $1.
Assume that the government is considering two possible way to help this person. Plan A
involves providing $100 in cash. Plan B involves providing $100 in food coupons that
can only be spent on food.
What happens to the budget constraint of the recipient when he receives the $100 cash
under Plan A? What is likely to happen to his consumption of both food and “all other
goods” if they are both normal goods?
What is mechanism design? Give at least two examples.
A firm producing bottled water reports the following production information:
The bottled water sells in a competitive market at a price of 10 cents per gallon. The
firm hires workers in a competitive labor market at a wage of $7 per hour. The firm is
currently hiring 20 workers and is considering hiring another 10. What would you
recommend the firm do? Why?
The table above represents five points on the production possibility frontier for the
small country of Baca, which produces only rugs (measured in thousands) and wheat
(measured in thousands of bushels):If the economy is currently at point A, what is the
opportunity cost of producing an additional 10,000 bushels of wheat? If the economy is
currently at point B, what is the opportunity cost of producing an additional 10,000
bushels of wheat? What if the economy is currently at point D?
Explain what economists mean when they characterize the income tax system as
progressive.
What is rent-seeking behavior?
Explain why using a firm’s profits to reinvest in the company is really not “free
borrowing”?
Events prior to the 1995 baseball season, including a threatened “lockout” by owners if
the players decided to end their strike, likely had a great effect on attendance at baseball
games. Consider in this scenario market attendance as a measure of quantity and ticket
prices as the measure of price.
Explain the effect of consumer dissatisfaction on themarket for beer purchased at
baseball games.
A supermarket manager discovers that his generic brand beans are disappearing off of
his shelves faster than he can restock them and the premium brand beans are staying on
the shelf going unsold. What can we probably say about the current prices of each of
these products in relation to the market-clearing price?