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1) Suppose that Family A borrows money when its car breaks down and saves money
when the wife receives a holiday bonus from her employer. Suppose that Family B
borrows money to buy elaborate birthday presents for the children and spends the
husband's holiday bonus on a vacation to Florida. Which of the following is correct?
a.Both Family A's and Family B's spending habits suggest that they base their
purchasing decisions on transitory income.
b.Family A's spending habits suggest that it bases its purchasing decisions on transitory
income rather than permanent income. Family B's spending habits suggest that it bases
its purchasing decisions on permanent income rather than transitory income.
c.Family A's spending habits suggest that it bases its purchasing decisions on permanent
income rather than transitory income. Family B's spending habits suggest that it bases
its purchasing decisions on transitory income rather than permanent income.
d.Both Family A's and Family B's spending habits suggest that they base their
purchasing decisions on permanent income.
2) Table 14-8
Suppose that a firm in a competitive market faces the following revenues and costs:
In order to maximize profits, the firm will produce
a.1 unit of output because marginal cost is minimized.
b.4 units of output because marginal revenue exceeds marginal cost.
c.5 units of output because marginal revenue equals marginal cost.
d.7 units of output because total revenue is maximized.
3) Table 15-19
A monopolist faces the following demand curve:
If a monopolist faces a constant marginal cost of $3, how much output should the firm
produce?
a.3 units
b.4 units
c.5 units
d.6 units
4) Which of the following statements about the Coase theorem is true?
a.Underlying the results of the Coase theorem is the idea that private parties can bargain
without cost over the allocation of resources.
b.The Coase theorem asserts that private solutions to externalities invariably lead to
inefficient allocations of resources.
c.The Coase theorem applies to negative externalities, but not to positive externalities.
d.All of the above are correct.
5) To say people respond to incentives means that people may alter their decisions when
the costs and benefits of an action change.
a.True
b.False
6) Assume that demand for a product that is produced at zero marginal cost is reflected
in the table below.
a.What is the profit-maximizing level of production for a group of oligopolistic firms
that operate as a cartel?
b.Assume that this market is characterized by a duopoly in which collusive agreements
are illegal.
What market price and quantity will be associated with a Nash equilibrium?
7) Natural monopolies differ from other forms of monopoly because they are
a.not subject to barriers to entry.
b.not regulated by government.
c.unable to sustain long-run profits.
d.are generally not worried about competition eroding their monopoly position in the
market.
8) Most economic models
a.incorporate the assumption of rational behavior on the part of economic actors.
b.incorporate the notion that people are usually reluctant to change their minds.
c.are meant to precisely duplicate reality.
d.assume that people often make sub-optimal choices.
9) Saddle shoes are not popular right now, so very few are being produced. If saddle
shoes become popular, then how will this affect the market for saddle shoes?
a.The supply curve for saddle shoes will shift right, which will create a shortage at the
current price. Price will increase, which will decrease quantity demanded and increase
quantity supplied. The new market equilibrium will be at a higher price and higher
quantity.
b.The supply curve for saddle shoes will shift right, which will create a surplus at the
current price. Price will decrease, which will increase quantity demanded and decrease
quantity supplied. The new market equilibrium will be at a lower price and higher
quantity.
c.The demand curve for saddle shoes will shift right, which will create a shortage at the
current price. Price will increase, which will decrease quantity demanded and increase
quantity supplied. The new market equilibrium will be at a higher price and higher
quantity.
d.The demand curve for saddle shoes will shift right, which will create a surplus at the
current price. Price will decrease, which will increase quantity demanded and decrease
quantity supplied. The new market equilibrium will be at a lower price and higher
quantity.
10) Property rights are well established for
a.private goods.
b.public goods.
c.common resources.
d.both (b) and (c).
11) The administrative burden of any tax system is part of the inefficiency it creates.
a.True
b.False
12) The history of the textile industry raises important questions for economic policy.
a.True
b.False
13) When the government intervenes in markets with externalities, it does so in order to
a.increase production when negative externalities are present.
b.protect the interests of bystanders.
c.make certain all benefits are received by market participants.
d.reduce production when positive externalities are present.
14) A Giffen good is one for which the quantity demanded rises as the price rises
because the income effect
a.reinforces the substitution effect.
b.reinforces and is greater than the substitution effect.
c.counteracts but is smaller than the substitution effect.
d.counteracts and is greater than the substitution effect.
15) A competitive firm's profit will be increasing as long as marginal revenue is greater
than marginal cost.
a.True
b.False
16) Suppose the market consists of Adam, Barb, and Carl. If the price falls by $2, the
quantity demanded in the market increases by
a.4 units.
b.6 units.
c.8 units.
d.10 units.
