Scarcity is a situation in which resources are limited in quantity and can be used in
different ways.
The long-run supply curve can be used to determine the long-run price after an increase
in demand.
Free trade will affect a country’s employment in different industries.
The market demand curve shows the relationship between the price and the quantity
demanded by all consumers, everything else being equal.
If a market is in equilibrium, there is not any pressure to change the price upward or
downward. Is this a true or false assumption?
Protecting endangered species is NOT an example of a public good because there are no
external benefits associated with it.
Using celebrities and other expensive advertising to advertise a product can signal
consumers that the producer expects few repeat customers.
The vertical sum of the marginal cost curves (above minimum AVC) of all the firms in
an industry is the long-run industry supply curve.
A good driver who becomes more reckless after obtaining automobile insurance is an
example of moral hazard.
Monopolist marginal revenue rises with output.
If a firm currently sells a product at a point where the price elasticity of demand is 0.5,
the firm needs to raise the price to maximize its total revenue.
The minimum efficient scale is the output at which the long-run average cost curve
becomes horizontal.
In order for a market to reach equilibrium producers must have enough information to
make informed decisions about purchasing the product.
The price elasticity of demand is measured by dividing the percentage change in
quantity demanded by the percentage change in price.
The least costly method for reducing pollution would be to have all firms lower their
levels of emissions by the same amount.
A politician might pursue his own interest even though it may differ from the public
interest.
The individual labor supply curve is positively sloped in the short run.
Coase bargaining works best in a situation with a large number of affected parties and
the transactions costs of bargaining are relatively low.
An increase in the price of a product decreases the marginal utility per dollar of that
product.
A reservation price is the price at which a consumer is indifferent about additional
search for a lower price.
A “market” is an arrangement that enables people to exchange goods and services.
The price elasticity of supply tends to become more elastic in the long run.
When the wage rate rises, the demand for leisure falls.
About one-third of the annual costs from automobile collisions is borne by the driver
who causes the collision.
In some monopolistically competitive markets, products are differentiated by location.
The low-price guarantee results in an outcome equivalent to perfect competition.
The income effect and the substitution effect associated with a wage increase influence
workers in the same direction.
As the price of a product rises, the demand for the product falls.
Moral hazard occurs when individuals become more careful after purchasing insurance.
Car companies offer certified pre-owned vehicles to reduce the problem of moral
hazard.
The dopamine rewards for near misses are problematic in truly random environments
like gambling.
Normative economics answers the question, “What ought to be?” Positive economics
predicts the consequences of alternative actions, answering the questions, “What is?” or
“What will be?”
Adam Smith is:
A) considered the founder of economics.
B) responsible for a branch of economics bearing his name.
C) responsible for refining the model of supply and demand.
D) the author of this text.
Table 2.3
Increasing the number of workers from 2 to 3 will increase output per day by:
A) 60 units.
B) 90 units.
C) 150 units.
D) 240 units.
During pledge week your local public television station asks viewers to contribute to
the station. People who watch public television but do NOT contribute are:
A) free-riding.
B) engaged in moral hazard.
C) those who do not value public television.
D) causing adverse selection.
The biggest problem with using a tax as a way to solve an externality problem is that:
A) the tax sometimes increases the external cost.
B) damages must be estimated in financial terms to determine the correct level of the
tax.
C) the firm will pass the entire tax onto the consumer.
D) the commerce clause forbids such taxes.
Recall the Application about the reason for the high price of movie popcorn to
answer the following question(s).
Recall the Application. Suppose a low demander is willing to pay $8 for a movie, while
a high demander is willing to pay $12 for a movie and popcorn. The theater could
charge ________ for admission and ________ for popcorn for each consumer to
receive a consumer surplus of $2.
A) $8; $2
B) $10; $0
C) $6; $4
D) $9; $3
Suppose your bank pays you 4 percent interest per year on your savings account, so that
$1,000 grows to $1,040 over a one-year period. If prices increase by 1 percent per year
over that time, approximately how much real value do you gain by keeping $100 in the
bank for a year?
A) $0
B) $10
C) $30
D) $50
CARFAX is a company that compiles and sells histories of used cars. Used car dealers
offer to give their customers a copy of the CARFAX history of the cars in their
inventory to:
A) give buyers additional information about used cars for sale.
B) give sellers additional information about used cars for sale.
C) cause adverse selection.
D) so they need not offer warranties.
In the Application, which of the following decreased the incentive to buy hybrid
vehicles?
A) Purchases of hybrid vehicles qualified for a $3400 subsidy from the federal
government.
B) Oil prices increased.
C) Hybrid vehicles were more expensive than regular vehicles.
D) Hybrid vehicles had lower emissions than the non-hybrid vehicles.
Suppose nation A produces only two goods, apples and oranges. If nation A produces
only apples, it can make 16 apples per day. If nation A produces only oranges, it can
make 4 oranges per day. If the country has a constant production trade-off between
apples and oranges, then the opportunity cost of one apple in nation A is:
A) .25 oranges.
B) 4 oranges.
C) 16 oranges.
D) 2 oranges.
According to the Application about the market for meteorites, the market price of
meteorites varies from a few dollars per gram to hundreds of dollars per gram. In a
market system like the market for meteorites, prices vary due to:
A) government intervention in the pricing of the products.
B) the lack of accounting rules in this market.
C) the relative scarcity, or rarity, of the product.
D) outsourcing.
London reduced its road congestion by:
A) banning cars in the inner city during the daytime.
B) making city buses free.
C) raising the fare for the London subway system, the Underground.
D) imposing a daytime driving tax.
In the extreme case of a perfectly contestable market:
A) profits will be the same as monopoly profits.
B) profits will be the same as cartel profits.
C) profits will be the same as duopoly profits.
D) profits will be zero.
Recall the Application. Among the winners when there is an increase in labor migration
to the United States are:
A) U.S. consumers.
B) firms in the country the workers left.
C) U.S. workers with the same skill level of the immigrants.
D) all of the above
Figure 6.5 illustrates the market for sugar. If sugar imports were banned, total surplus in
the market would be shown as area:
A) ABC.
B) AEF.
C) CBD.
D) ABD.
Suppose Greg’s Carpet factory experiences economies of scale up to a certain point and
constant returns of scale beyond that point. Its long-run average cost curve is most
likely to be:
A) upward sloping to the right.
B) downward sloping to the right.
C) horizontal.
D) L-shaped.
Which of the following firms will find it most useful to engage in advertising?
A) perfectly competitive firms
B) monopolistically competitive firms
C) monopolies
D) members of a cartel
Elasticity of demand is:
A) the same as the slope of the demand curve.
B) the change in price for a given change in quantity demanded.
C) measured in dollars.
D) a measure of the percentage change in quantity demanded for a given percentage
change in price.
The 3 key economic questions include all of the following EXCEPT:
A) “what products do we produce?”
B) “how do we produce these products?”
C) “where should these products be produced?”
D) “who consumes the products?”
In a market economy, what provides potential investors with reliable information about
the financial performance of a firm?
A) contracts
B) insurance
C) patents
D) accounting rules
Total economic costs include:
A) a normal rate of return.
B) out-of-pocket costs.
C) opportunity costs of all inputs.
D) all of the above
When the government provides its citizens an unemployment insurance program, it is
providing its citizens:
A) a social safety net.
B) a public good.
C) a new job.
D) uncertainty.
When comparing a monopoly to a perfectly competitive industry at the equilibrium
point, we find that monopoly is:
A) inefficient because it charges higher prices.
B) inefficient because it generates less output.
C) efficient because it generate more output due to economies of scale.
D) is neither efficient nor inefficient.
This Application exemplifies how a change in ________ in one market impacts the
________ in a different market.
A) demand; demand
B) demand; supply
C) supply; supply
D) supply; demand
Refer to Figure 6.1. If the price of a donut is $1.25, consumer surplus is:
A) $1.75.
B) $1.25.
C) $ .75.
D) $ .50.
What of the following is another mental shortcut to monitor consumption?
A) bundles
B) utilities
C) accounts
D) none of the above
In an increasing-cost industry, the average cost of production increases as the total
output increases due to:
A) increasing input prices.
B) price equals marginal cost.
C) increasing in demand for outputs.
D) all of the above.
The U.S. government offers tax credits on hybrid automobiles. This tax credit:
A) reduces the personal cost of abatement of car pollution.
B) encourages people to drive and pollute more.
C) increases the demand for gasoline.
D) all of the above.
Brodie sells fish in a perfectly competitive market. Suppose the current market price of
fish is $4.50 per pound.
A) Brodie can sell as many fish as he can catch at $4.50 per pound.
B) Brodie can charge any price he likes for his fish, but will maximize profit if he sells
for less than $4.50.
C) Brodie should charge more than $4.50.
D) Brodie can charge more than $4.50 and still sell some fish.
According to the income effect of labor supply, if leisure is a normal good, then an
increase in the wage rate will ________ the quantity of labor ________.
A) increase; supplied
B) decrease; supplied
C) increase; demanded
D) decrease; demanded
Which of the following firms have market power?
A) private universities
B) fast food chains such as McDonald’s
C) theme parks
D) All of the above have market power.
Table 2.1 in the application showed that when the bags of nitrogen applied went from 0
to 1 to 2 to 3 to 4, crop yield went from 85 to 120 to 135 to 144 to 147 bushels per acre.
The principles of diminishing return began to take effect on the ________ bag of
fertilizer per acre.
A) 1st
B) 2nd
C) 3rd
D) 4th
If the marginal product of the third worker employed by a computer manufacturer is 50
computers, and the price of a computer is $500, the third worker’s marginal revenue
product is:
A) $50.
B) $500.
C) $25,000.
D) It cannot be determined; more information is needed.
What is the current WTO policy regarding environmental standards and trade?
What does it mean when a firm has a dominant strategy?
Explain why the marginal revenue product of labor curve is the firm’s short-run demand
curve for labor.
Martha was willing to pay $200 for a new winter coat, but the current market price of
coats is $150. Calculate Martha’s consumer surplus. What happens to consumer surplus
if the price of a coat rises to $175?
What is the difference between price discrimination and predatory pricing?
Suppose that buyers are willing to pay $8000 for a plum used car and $2000 for a
lemon. If buyers expect 70% of the used cars to be lemons, what is the maximum
amount that buyers will be willing to pay for a used car?
What is dumping and why would firms engage in it?
What is a merger?
Comment on the following statement: “Elasticity is constant along a straight-line
demand curve.”
Why should a system of marketable pollution permits lead to less costly pollution
abatement than a command-and-control system?
Why would a country want to shield domestic workers from foreign competition?
What are the benefits and costs associated with monopolistic competition?
Draw a graph to illustrate the effect of higher gasoline prices on the demand for large
SUVs. What is the relationship between gasoline and SUVs?
How does the demand curve facing a monopoly firm compare with the demand curve
facing a perfectly competitive firm?
If two people both produce goods and each has a comparative advantage, and they
exchange goods with each other for mutual benefit, it is called a ________.
Baseballs cost $5 each and baseball gloves cost $20. Assume you have $100 to spend
on these items. Putting baseballs on the vertical axis, draw the budget line representing
this situation. What is the slope of the budget line?