If consumers believe the price of iPads will decrease in the future, this will cause the
demand for iPads to decrease now.
A consumer maximizes her total utility from a bundle of goods when her marginal
utility from each good is equal.
An increase in the price of grape juice causes an increase in the marginal revenue
product of labor used to produce grape juice.
If the cross-price elasticity of demand for goods A and B is zero, this means the two
goods are unrelated.
Scarcity is defined as the situation that exists when the quantity demanded for a good is
greater than the quantity supplied.
The median voter theorem states that the outcome of a majority vote is likely to
represent the preferences of the voter who is in the political middle.
Suppose the absolute value of the price elasticity of demand for basketball game tickets
on your campus is greater than 1. Increasing ticket prices will increase the total revenue
from ticket sales.
A perfectly competitive firm in long-run equilibrium produces output at the lowest
possible average total cost.
When workers are paid on a piece-rate basis, an employer must be able to easily
measure each worker’s output.
If a firm is experiencing diseconomies of scale, its long-run average cost curve is
increasing.
The demand curve for an inferior good can never be downward sloping.
According to the benefits-received principle, those who receive the benefits from a
government program should pay the taxes that support the program.
A public franchise gives the exclusive right to produce a product for 20 years from the
date the product is invented.
If a monopolistically competitive firm breaks even, the firm is earning as much in this
industry as it could in any other comparable industry.
The marginal product of labor is the increase in output as a result of hiring an additional
worker while the marginal revenue product of labor is the increase in profit as a result
of hiring an additional worker.
Economic efficiency is a market outcome in which the marginal benefit to consumers is
equal to the marginal cost of production and the sum of consumer surplus and producer
surplus is maximized.
Black markets only exist in developing nations.
Rent-seeking behavior, unlike profit-maximizing behavior in competitive markets,
wastes society’s scarce resources.
Accounting costs exclude implicit costs.
If the number of firms producing mouthwash increases and consumer preference for
mouthwash increases, the equilibrium price of mouthwash will definitely increase.
Competition has driven the economic profits in the video rental business to zero. Surya
Bacha, who owns a video rental business, would be better off leaving the industry for
another alternative.
There is no evidence that odd pricing succeeds in convincing consumers that prices are
lower than they really are.
If price is equal to average variable cost, a perfectly competitive firm breaks even.
Firms in perfect competition produce the allocatively efficient output in the short run
and in the long run.
If Sanjaya can shuck more oysters in one hour than Tatiana, then Sanjaya has a
comparative advantage in shucking oysters.
Perfect price discrimination will lead a firm to produce up to the point where price
equals marginal cost, the efficient level of output.
If it costs Danitra $225 to create 4 necklaces and $275 to create 5 necklaces, then $50 is
the marginal cost of producing the 5th necklace.
To increase gas mileage, automobile manufacturers make cars small and light. Large
cars absorb more of the impact of an accident than small cars but yield lower gas
mileage. These facts suggest that a negative relationship exists between safety and gas
mileage.
Costs that change as output changes are called incremental costs.
Scarcity refers to a situation in which unlimited wants exceed the limited resources
available to fulfill those wants.
The short-run supply curve for a perfectly competitive firm is that part of the firm’s
marginal cost curve that lies above the minimum point of its average variable cost
curve.
In a two-good, two country world, if one country has an absolute advantage in the
production of both goods, it must also have a comparative advantage in the production
of both goods.
The absolute value of the price elasticity of demand for telescopes is 1.5. Therefore,
telescopes can be classified as a luxury.
According to Porter’s Five Competitive Forces Model, similar products produced by
different firms within the industry affects a firm’s ability to raise prices far more than
substitutable products produced outside the industry.
Exempting food purchases from sales tax is consistent with the ability-to-pay principle,
although not necessarily consistent with vertical equity.
If at a price of $10, a vendor sells 5 units of a product and at a price of $8, 6 units are
sold, then, using the midpoint formula, the demand for this good is inelastic.
Firms are more likely to find themselves in a prisoner’s dilemma in sequential games as
opposed to simultaneous games.
If a firm can produce a product at a lower average cost than its competitors, it stands a
better chance of earning economic profit.
In the short run, changes in output can only be brought about by a change in the
quantity of variable inputs.
Figure 12-1
Refer to Figure 12-1. If the firm is producing 700 units
A) it is making a profit.
B) it is making a loss.
C) it should cut back its output to maximize profit.
D) it should increase its output to maximize profit.
A good is path dependent when
A) consumers get utility from consuming goods that others are consuming, such as
restaurants.
B) the first technology that was adopted has an advantage over a better technology that
came later.
C) people who move location follow the path of people who moved before them.
D) it can only be used in one way.
In a production possibilities frontier model, a point ________ the frontier is
productively inefficient.
A) along
B) inside
C) outside
D) at either intercept of
The prisoner’s dilemma illustrates
A) how oligopolists engage in implicit collusion under strategic situations.
B) why firms will not cooperate if they behave strategically.
C) why firms have an incentive to cheat on agreements.
D) how cooperation in strategic situations leads to the economically efficient market
outcome.
Implicit costs can be defined as
A) accounting profit minus explicit cost.
B) the non-monetary opportunity cost of using the firm’s own resources.
C) the deferred cost of production.
D) total cost minus fixed costs.
The town of Harmonia gives away all 500 tickets to its annual Founder’s Day Free
Concert-in-the-Park to local residents. Each year, more than 500 people wish to attend
the concert, so some of the residents who receive the free tickets sell them for as much
as $75 each. Is a transaction where someone pays a resident $75 for a “free ticket”
economically efficient?
A) No, people should never be allowed to sell items they received for free.
B) Yes, it was a voluntary exchange that benefited both parties.
C) No, the buyer paid too much for the ticket.
D) Yes, but it is efficient only from the perspective of the seller and not from the
perspective of the buyer.
The process of rapidly adjusting prices based on information gathered on consumers’
preferences and their responsiveness to changes in price is called
A) yield management.
B) elasticity management.
C) brand management.
D) marketing.
Table 3-2
Refer to Table 3-2. The table above shows the demand schedules for caviar of two
individuals (Ari and Sonia) and the rest of the market. If the price of caviar rises from
$65 to $75, the market quantity demanded would
A) decrease by 36 oz.
B) increase by 52 oz.
C) increase by 36 oz.
D) decrease by 52 oz.
Table 2-10
Table 2-10 shows the output per day of two pet groomers, Tammi and Horace. They can
either devote their time to grooming dogs or bathing cats.
Refer to Table 2-10. What is Horace’s opportunity cost of grooming a dog?
A) half a bathed cat
B) two bathed cats
C) two-thirds of a bathed cat
D) one and a half bathed cats
Golda Rush quit her job as a manager for Home Depot to start her own hair dressing
salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of
$30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close
friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000
to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 in
expenses on equipment and hairdressing material. Based on this information, what is
the amount of her implicit costs?
A) $80,000
B) $70,000
C) $42,000
D) $41,500
If policymakers use a pollution tax to control pollution, the tax per unit of pollution
should be set
A) equal to the marginal external cost at the economically efficient level of pollution.
B) equal to the marginal private cost of production at the economically efficient level of
pollution.
C) equal to the amount of the deadweight loss created in the absence of a pollution tax.
D) at a level low enough so that producers can pass along a portion of the additional
cost onto consumers without significantly reducing demand for the product.
Figure 3-6
Refer to Figure 3-6. The figure above represents the market for canvas tote bags.
Assume that the price of tote bags is $15. At this price
A) the quantity demanded exceeds the quantity supplied by 75. The price will
eventually rise to $25 where quantity demanded will equal quantity supplied.
B) the demand exceeds the supply of tote bags by 55. Some consumers will have an
incentive to offer to buy tote bags at a higher price.
C) there is a shortage, equal to 55 tote bags, that will be eliminated when the price rises
to $25.
D) there is a shortage equal to 55 tote bags; the price of tote bags will rise until demand
is equal to supply.
The minimum efficient scale is
A) the level of output where diminishing returns have not set in yet.
B) the plant size that yields the most profit.
C) the level of operation where long-run average costs are lowest.
D) the smallest output level where the firm finally reaches productive efficiency.
Table 14-1
Godrickporter and Star Connections are the only two airport shuttle and limousine
rental service companies in the mid-sized town of Godrick Hollow. Each firm must
decide on whether to increase its advertising spending to compete for customers. Table
14-1 shows the payoff matrix for this advertising game.
Refer to Table 14-1. Is there a dominant strategy for Godrickporter and if so, what is it?
A) No, its outcome depends on what Star Connections does.
B) Yes, Godrickporter should increase its advertising budget.
C) Yes, Godrickporter should not change its advertising budget.
D) Yes, Godrickporter’s dominant strategy is to collude with Star Connections.
When Congress passed a law that imposed a tax designed to fund its Social Security
and Medicare programs it wanted employers and workers to share the burden of the tax
equally. Most economists who have studied the incidence of the tax have concluded
A) the tax is not high enough to cover the future costs of Social Security and Medicare.
B) the tax on employers is too high because it reduces the employment of low-skilled
workers.
C) the burden of the tax falls almost entirely on workers.
D) the tax rate should be greater for high-income workers than for low-income workers.
Table 15-4
Shakti Inc. has been granted a patent for its Arnica toothache balm. Table 15-4 shows
the demand and the total cost schedule for the firm.
Refer to Table 15-4. What is the economically efficient output level?
A) 5 units
B) 6 units
C) 7 units
D) 8 units
If, as your taxable income decreases, you pay a larger percentage of your taxable
income in taxes, then the tax is
A) regressive.
B) proportional.
C) progressive.
D) unfair.
An industry’s long-run supply curve shows
A) the relationship in the long run between market price and quantity supplied.
B) how the government determines the price of the product.
C) how average productivity is changing.
D) greater than normal profit.
When every good or service is produced up to the point where the last unit provides
________, allocative efficiency occurs.
A) a marginal benefit to society equal to the marginal cost of producing it
B) a marginal benefit to society greater than the marginal cost of producing it
C) a marginal benefit to society less than the marginal cost of producing it
D) a marginal benefit to society equal to zero
Figure 17-2
Figure 17-2 shows the marginal revenue product for Becca’s Baubles, a producer of
hand-beaded bracelets.
Refer to Figure 17-2. If the wage rate is $20, how many workers should Becca hire?
A) 6
B) 5
C) 4
D) 3
Figure 4-6
Figure 4-6 shows the demand and supply curves for the almond market. The
government believes that the equilibrium price is too low and tries to help almond
growers by setting a price floor at Pf.
Refer to Figure 4-6. What area represents the deadweight loss after the imposition of
the price floor?
A) C + D + G
B) F + G
C) C + D
D) C + D + F + G
Figure 5-7
Refer to Figure 5-7. What is the incremental benefit of increasing the quantity of
pollution reduction from QBto QE units?
A) PF
B) PF×QE
C) the value of the area BEF
D) the value of the area QBBFQE
A monopoly is a firm that is the only seller of a good or service that does not have
A) a patent.
B) a close complement.
C) a barrier to entry.
D) a close substitute.
Figure 5-2
Figure 5-2 shows a market with a negative externality.
Refer to Figure 5-2. The efficient output level is
A) Qd.
B) Qb.
C) Qa.
D) Qb– Qd.
The U.S. Bureau of Labor Statistics predicts that 13 of the 20 fastest growing
occupations over the next ten years will be in
A) the medical field.
B) the travel and leisure industry.
C) education.
D) construction.
A very large number of small sellers who sell identical products imply
A) a multitude of vastly different selling prices.
B) a downward sloping demand curve for each seller’s product.
C) the inability of one seller to influence price.
D) chaos in the market.
Which of the following is a fixed cost?
A) payment to hire a security worker to guard the gate to the factory around the clock
B) wages to hire assembly line workers
C) payments to an electric utility
D) costs of raw materials
The income effect of an increase in the price of salmon
A) is the change in the demand for salmon when income increases.
B) refers to the relative price effect – salmon is more expensive compared to other types
of fish – which causes the consumer to buy less salmon.
C) refers to the effect on a consumer’s purchasing power which causes the consumer to
buy less salmon, holding all other factors constant.
D) is the change in the demand for other types of fish, say trout, that results from a
decrease in purchasing power.
Assume that the price for swimming pool maintenance services has risen and sales of
these services have fallen. One can conclude that
A) the law of supply has been violated.
B) the demand for swimming pool maintenance services has increased.
C) the supply of swimming pool maintenance services has decreased.
D) swimming pool maintenance services are becoming more technologically advanced.
The costs in time and other resources that parties incur in the process of agreeing to and
carrying out an exchange of goods or services are called
A) exchange costs.
B) implicit costs.
C) transactions costs.
D) selling costs.
The DeBeers Company of South Africa was able to block competition through
A) economies of scale.
B) ownership of an essential input.
C) government-imposed barriers.
D) differentiating its product.
Figure 5-15
Figure 5-15 shows the market for Atlantic salmon, a common resource. The current
market equilibrium output of Q1 is not the economically efficient output. The
economically efficient output is Q2.
Refer to Figure 5-15. Identify the area that shows the deadweight loss from
overfishing.
A) egh
B) ekh
C) efh
D) eghk
A change in which variable will change the market demand for a product?
A) the price of the product
B) population
C) technology
D) the prices of substitutes in production
A Federal Reserve publication proclaimed that “Trade is a win-win situation for all
countries that participate.” This statement is
A) false since it ignores the workers who lose their jobs as result of international trade.
B) false since not all countries participate in international trade.
C) true because it refers to countries; individuals may be losers as a result of
international trade.
D) true because all consumers and workers benefit from international trade.
Former Alabama Governor George Wallace ran for president several times, once as a
third-party candidate in 1968. Wallace claimed there was “not a dime’s worth of
difference” between the Democratic and Republican parties during one of his
campaigns. How does Wallace’s comment relate to the median voter theorem?
How does a negative externality in production reduce economic efficiency?
Suppose that Hawaii legalizes casino gambling. By imposing a tax on casino revenues,
the state government is able to eliminate the state income tax on wages. What is likely
to be the effect on the labor supply curve in Hawaii?
What is the relationship between marginal revenue and average revenue for a
monopolist and is it the same for a perfect competitor?
Briefly explain the economic concept of elasticity.
To maximize profit, a firm will produce the level of output where MR = MC. If a firm
actually makes a profit depends on the relationship of price to average total cost. What
are the three possible relationships between price and average total cost that determine
if a firm will make a profit, experience a loss, or break even?
Suppose the price elasticity of demand for cigarettes is -0.4. The FDA decides to
regulate tobacco production, which increases the price of cigarettes and causes the
quantity of cigarettes demanded to decrease by 25 percent. What is the percentage
increase in price which would lead to the 25 percent decrease in quantity demanded? If
the price elasticity was -4, what would be the percentage increase in price?
Nearly a quarter of China’s 1.3 billion people are under the age of How will this affect
high school enrollment over the next fifteen years? The labor market over the next
fifteen years?
How is accounting profit found?
Why do many film processing companies have a policy of printing every picture on a
roll of film or a memory card, even if the picture is very fuzzy and customers are
allowed to ask for refunds on any pictures they do not like?
Explain the effect of price elasticities of supply and demand on tax incidence.
What is meant by the “law of one price”? In discussing the law of demand, Hubbard
and O’Brien claim there has been no evidence of an exception to the law (that is, no
evidence of an upward-sloping demand curve). Are there exceptions to the law of one
price?
How do firms raise external funds through indirect finance?
What is the difference between scarcity and a shortage?
What is the difference between an invention and an innovation?
In a corporation, what are “inside directors” and “outside directors”?
Use a long-run average cost curve graph to illustrate how diseconomies of scale would
not make it beneficial for two companies to go through with a merger.