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If the price is consistently below the average variable cost, then in the short run a
perfectly competitive firm should:
A) raise the price.
B) sell more output.
C) shut down.
D) lower the price to sell more.
(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for
Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each
firm can produce gadgets at a marginal cost of $2 and no fixed cost. If the industry were
perfectly competitive, the output would be _____ gadgets, and the price would be
_____.
A) 0; $10
B) 500; $5
C) 600; $4
D) 800; $2
Figure: Market Failure
(Figure: Market Failure) Look at the figure Market Failure. Suppose the supply curve
represents the marginal cost of providing streetlights in a neighborhood that is
composed of two people, Ann and Joe. The demand curve represents the marginal
benefit that Ann receives from the streetlights. Suppose that Joe's marginal benefit from
the streetlights is a constant amount equal to AC. The marginal social benefit of G
streetlights is:
A) 0.
B) A.
C) B.
D) C.
The income effect of a price change is the effect on consumption changes as a result of
a change in:
A) income when all prices change in the same proportion.
B) purchasing power caused by a change in the price of the good.
C) income caused by a change in the price of labor.
D) income sufficient to offset the effect of a price change.
External benefits are associated with the production of batteries. Without government
regulation, the market will:
A) produce too many batteries.
B) price batteries at less than the marginal social cost.
C) price batteries at less than the marginal social benefit.
D) price batteries above the marginal social cost.
Good X and good Y are substitutes. Holding all other things constant, this means that
when the price of good X increases, the:
A) demand for good X will increase.
B) demand for good Y will increase.
C) demand for both good X and good Y will increase.
D) demand for good Y will decrease.
Suppose the price of barley increases by 16.53%. If breweries buy 3.28% less barley
after the price increase, the total revenue for barley producers will _____ because the
_____ effect is greater than the _____ effect.
A) decrease; quantity; price
B) increase; price; quantity
C) not change; quantity; price
D) increase; quantity; price
The _____ tomatoes will decrease if fertilizer prices rise.
A) demand for
B) quantity demanded of
C) supply of
D) equilibrium price of
(Table: Marginal Benefit of Fire Hydrants) Look at the table Marginal Benefit of Fire
Hydrants. Suppose that the marginal cost of installing a hydrant is $10. A) What is the
most that Nancy would be willing to pay to have one hydrant installed in the
neighborhood? B) If Nancy had to pay for fire hydrants on her own, how many
hydrants would there be? C) What is the optimal number of fire hydrants in the
neighborhood?
Because monopoly firms are price setters:
A) they can sell more only by lowering price.
B) they sell more at higher prices than at lower prices.
C) they take the market-determined price as given and sell all they can at that price.
D) they charge the highest possible price.
(Table: Marginal Analysis of Sweatshirt Production II) Look at the table Marginal
Analysis of Sweatshirt Production II. The optimal quantity of sweatshirts to produce is:
A) two.
B) three.
C) four.
D) five.
The price elasticity of demand for soft drinks has been estimated to be 0.55. If the
government enacts a major increase in the tax on imported sugar (a major ingredient in
soft drink manufacturing), how will that affect total expenditures on soft drinks, all
other things equal?
A) Total expenditures will remain unchanged.
B) Total expenditures will fall.
C) Total expenditures will rise.
D) People will buy Pepsi instead of Coke.
Chuck spends all of his income on tacos and milkshakes. His income is $100, the price
of tacos is $10, and the price of milkshakes is $2. If the price of each good doubles and
Chuck's income doubles:
A) Chuck's budget line will be unaffected.
B) Chuck's budget line will shift out.
C) Chuck's budget line will shift in.
D) Chuck will be able to buy more of both goods.
A(n) _____ is a single firm with _____, whereas a(n) _____ implies an industry with
_____ firm(s) and _____.
A) oligopoly; no barriers to entry; monopoly; many; easy entry and exit
B) monopoly; barriers to entry; monopolistic competition; many; easy entry and exit
C) monopoly; barriers to entry; oligopoly; few; no barriers to entry
D) monopolistic competitor; barriers to entry; monopoly; one; barriers to entry
The belief that trade must be bad for exporting countries because the foreign workers
are paid very low wages by our standards is the:
A) pauper labor fallacy.
B) sweatshop labor fallacy.
C) third-world country fallacy.
D) Nike fallacy.
(Table: Demand for Lenny's Coffee) Look at the table Demand for Lenny's Coffee.
Lenny's Café is the only source of coffee for hundreds of miles in any direction. If
Lenny's marginal cost of selling coffee is a constant $2 and the government forces
Lenny to charge a price that eliminates deadweight loss, Lenny will charge _____ per
cup and sell _____ cups.
A) $0; 10
B) $2; 8
C) $4; 6
D) $5; 5
After you graduate from college, you open a business selling computers. Many other
businesses in your city sell similar but not identical computers. Based on this
information, the price elasticity of demand for the computers that your business sells
will be:
A) 1.
B) 0.
C) highly elastic.
D) highly inelastic.
If the price elasticity of demand is found to be 6, then demand is:
A) price-inelastic.
B) price-elastic.
C) price unit-elastic.
D) horizontal.
Economists believe that there are more efficient ways to deal with pollution than with
environmental standards because these standards do NOT:
A) reduce pollution enough.
B) allow reductions in pollution to be achieved at minimum cost.
C) internalize the externality.
D) provide for any means of enforcement.
(Table: The Market for Soda) Look at the table The Market for Soda. If the government
imposes a price ceiling of $1 per can of soda, the quantity of soda demanded will be:
A) 10 cans.
B) 8 cans.
C) 6 cans.
D) 4 cans.
Figure: The Profit-Maximizing Output and Price
(Figure: The Profit-Maximizing Output and Price) Look at the figure The
Profit-Maximizing Output and Price. Assume that there are no fixed costs and AC =
MC = $200. At the profit-maximizing output and price for a monopolist, consumer
surplus is:
A) $0.
B) $600.
C) $1,000.
D) $1,600.
Which of the following is NOT a characteristic of a perfectly competitive industry?
A) Firms seek to maximize profits.
B) Profits may be positive in the short run.
C) There are many firms.
D) Products are differentiated.
(Table: Spring Water) The table Spring Water shows the demand and cost data for a
firm in a monopolistically competitive industry producing drinking water from
underground springs. If the industry were in perfect competition, the profit-maximizing
output would be _____ cases.
A) 6
B) 5
C) 7
D) 8
Figure and Table: The Market for Taxi Rides
(Figure and Table: The Market for Taxi Rides) Look at the figure and table The Market
for Taxi Rides. If the government imposes an excise tax of $1 per ride (causing the
supply curve to shift upward by that amount), then people who ride taxis will pay
_____ of each $1 tax.
A) $1
B) $0.50
C) $0.25
D) $0.00
The demand for textbooks is price-inelastic. Which of the following would explain this?
A) Many alternative textbooks can be used as substitutes.
B) Students have a lot of time to adjust to price changes.
C) Textbook purchases consume a large portion of most students' income.
D) Textbooks are a necessity.
If labor is abundant in South Africa but capital is scarce, when South Africa opens to
trade, the price of labor will _____ and the price of capital will _____.
A) rise; rise
B) fall; fall
C) rise; fall
D) fall; rise
A leftward shift in the labor supply curve will result if:
A) people begin to value leisure more highly.
B) people have less nonlabor income.
C) transit costs to and from work decline.
D) the population increases.
An increase in demand and a decrease in supply will lead to _____ in equilibrium
quantity and _____ in equilibrium price.
A) a decrease; a decrease
B) an indeterminate change; an increase
C) an indeterminate change; a decrease
D) an increase; an indeterminate change
(Table: The Market for Soda) Look at the table The Market for Soda. If the government
imposes a price ceiling of $0.50 per can of soda, there will be:
A) a shortage of two cans.
B) a shortage of three cans.
C) a surplus of three cans.
D) equilibrium in the market for soda.
A factor that has been associated with the increase in income inequality in the United
States is:
A) the growth in technology.
B) the reduction in the percentage of the population over the age of 65.
C) the smaller gap between the wages of skilled and unskilled workers.
D) affirmative action programs.
