If the price elasticity of supply is:
A) greater than 1, then the supply is price-elastic.
B) greater than 1, then the supply is price-inelastic.
C) zero, then the supply is price unit-elastic.
D) greater than 1, then the quantity supplied is relatively unresponsive to price changes.
Scenario: Countries A and B Two countries, A and B, produce two goods, wheat (W)
and steel (S). Each has a linear production possibility frontier in both goods. If country
A spends all of its available resources to produce wheat, it can produce 500 tons of
wheat and no steel. If it uses all of its resources to produce steel, it can produce 250
tons of steel and no wheat. If country B spends all of its available resources producing
wheat, it can produce 400 tons of wheat, and if it spends all of its resources on the
production of steel, it can produce 400 tons of steel.
(Scenario: Countries A and B) Look at the scenario Countries A and B. If each country
devotes half of its resources to the production of wheat and half to the production of
steel, then their combined total production of wheat will be _____ tons and their
combined total production of steel will be _____ tons.
A) 450; 325
B) 900; 650
C) 500; 250
D) 400; 400
Temporary monopolies via the provision of sole ownership rights to profit from the
production, use, or sale of a good are provided by:
A) patents and copyrights.
B) natural monopolies.
C) profit-maximizing behavior.
D) network externalities.
For consumers, pizza and hamburgers are substitutes. A rise in the price of a pizza
causes _____ in the equilibrium price of a hamburger and _____ in the equilibrium
quantity of hamburgers.
A) a rise; an increase
B) a rise; a decrease
C) a fall; an increase
D) a fall; a decrease
Higher indifference curves represent _____ lower curves.
A) less utility than
B) more utility than
C) the same utility as
D) either more or less utility than
For a nonexcludable good like national defense, the private market will lead to _____ of
the good.
A) too much production
B) too much consumption
C) too little production
D) the efficient level of consumption
(Table: Cherry Farm) Look at the table Cherry Farm. If all cherry farms are the same
size, how much will each farm produce in long-run equilibrium?
A) 0 pounds
B) 4 pounds
C) 5 pounds
D) 7 pounds
Jane is a utility-maximizing consumer who is spending her entire budget on the optimal
quantity of wallets and eyeglasses. The price of wallets falls. Jane will _____ her
consumption of wallets if wallets are a(n) _____ good and (because) the income effect
_____ the substitution effect.
A) decrease; inferior; is weaker than
B) increase; inferior; is stronger than
C) increase; normal; reinforces
D) decrease; normal; reinforces
When the price of chocolate-covered peanuts decreases from $1.10 to $0.95, the
quantity demanded increases from 190 bags to 215 bags. If the price is $1.10, total
revenue is _____, and if the price is $0.95, total revenue is _____.
A) $209; $204.25
B) $209; $236.50
C) $236.50; $209
D) $180.50; $209
(Table: Variable Costs for Lots) Look at the table Variable Costs for Lots. During the
winter, Alexa runs a snow-clearing service in a perfectly competitive industry. Assume
that costs are constant in each interval; that is, the variable cost of clearing anywhere
from 1 through 10 lots is $200. Her only fixed cost is $1,000 for a snowplow. Her
variable costs include fuel, her time, and hot coffee. What is Alexa’s shut-down price in
the short run?
A) $20
B) $15
C) $50
D) $42
If the regulation of a monopoly results in a price equal to marginal cost but the price is
below average total cost:
A) the firm can still make an economic profit.
B) the firm will earn only a zero economic profit.
C) efficiency in allocation will be less.
D) the firm will need subsidies to stay in business.
(Table: Madeline’s Preferences for T-Shirts and Coffee) Look at the table Madeline’s
Preferences for T-Shirts and Coffee. Assume each consumption bundle provides the
same level of utility for Madeline. Suppose Madeline is consuming bundle C. If she
changes her purchases to bundle D, this means that she:
A) gives up 2 T-shirts to obtain 1 more cup of coffee.
B) gives up 1 cup of coffee to obtain 2 more T-shirts.
C) will now have 11 cups of coffee and 40 T-shirts.
D) doesn’t give up any T-shirts to obtain more coffee.
(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. Suppose that these
two producers have formed a cartel, agreed to split production of output evenly, and are
maximizing total industry profits. If Margaret decides to cheat on the agreement and
sell 100 more gadgets, Margaret’s price effect will be a(n) _____ in profit of _____.
A) decrease; $400
B) increase; $400
C) increase; $200
D) decrease; $200
Public goods should be produced up to the point at which the marginal cost of
production equals:
A) the maximum price any individual is willing to pay for that unit.
B) the sum of the individual marginal benefits from all consumers of that unit.
C) zero, which is the marginal cost of allowing another individual to consume the good.
D) the highest marginal benefit from any individual consumer of the good.
Advertising is an economically productive activity and NOT a waste of resources
because:
A) advertisements increase profits.
B) advertisements can convey information about the product.
C) if consumers don’t have good information about a product, ads can serve as indirect
signals about the provider.
D) advertisements can convey information about the product, and if consumers don’t
have good information about a product, ads can serve as indirect signals about the
provider.
An indifference curve map illustrates _____ levels of utility, while each indifference
curve in the map indicates consumption bundles that yield _____ level of utility for an
individual.
A) different; the same
B) the same; a different
C) the same; the same
D) different; a different
The best example of a common resource is:
A) public education.
B) a municipal library.
C) clean water.
D) cable television programming.
The maximum amount of one good a consumer would be willing to give up to obtain an
additional unit of another is called the:
A) marginal rate of substitution.
B) marginal rate of utility exchange.
C) average rate of substitution.
D) marginal rate of exchange.
(Table: Lunch) Look at the figure Lunch. Joe makes and sells picnic lunches to people
taking all-day rafting trips on the river. The marginal cost and average cost of each
lunch are a constant $4. If Joe is one of many firms in a competitive industry, what is
deadweight loss in the long run?
A) $0
B) $4
C) $180
D) $360
Figure: The Demand Curve for Crossings
(Figure: The Demand Curve for Crossings) Look at the figure The Demand Curve for
Crossings. This graph examines the demand for crossing a bridge over a very large
river. By the midpoint method, the price elasticity of demand between $0.90 and $1.10
is approximately:
A) 0.1.
B) 0.2.
C) 1.
D) 1.9.
An increase in the market demand for electricians might occur if:
A) the price of electrical repair and installation services rises.
B) the demand for new houses falls.
C) the price of copper electrical wiring increases.
D) the wage for electricians falls.
(Table: Marginal Benefit, Cost, and Consumer Surplus) The table Marginal Benefit,
Cost, and Consumer Surplus shows six consumers’ willingness to pay for one iTunes
download. If the marginal social cost is constant at _____, then _____ consumers will
purchase this good and consumer surplus is _____.
A) $5; three; $30
B) $4; four; $18
C) $5; two; $37
D) $4; four; $34
The principle of diminishing marginal utility:
A) refers to the tendency of total utility to increase until an individual’s budget is no
longer constrained.
B) refers to the tendency of marginal utility to decline as the amount of consumption of
a good or service increases.
C) indicates that if a good is inferior, less of it will be purchased when income falls.
D) assumes all goods are normal.
A perfectly competitive firm is definitely earning an economic profit when:
A) MR > MC.
B) P > ATC.
C) P > MC.
D) P < ATC.
The habit of mentally assigning dollars to different accounts so that some dollars are
worth more than others is:
A) status quo bias.
B) bounded rationality.
C) loss aversion.
D) mental accounting.
(Table: Willingness to Pay for Peanuts) Using the table Willingness to Pay for Peanuts,
if the price of a bag of peanuts is $9, who will purchase a bag?
A) George
B) All of the consumers
C) Dave
D) Alvin and Theodore
A price control is:
A) control of the price of a good by the firm that produces it.
B) a legal restriction on how high or low a price in a market may go.
C) an upper limit on the quantity of some good that can be bought or sold.
D) a tax on the sale of a good that controls the market price.
The age group in the United States which has undergone the largest reduction in the
poverty rate because of government programs was:
A) 65 years old and older.
B) young and middle-aged adults.
C) children 6 to 18 years old.
D) children under 6 years old.
If the market for tickets to the World Series is in equilibrium but owners of tickets who
would have sold their tickets are not allowed to sell, while fans who would not sell their
tickets are required to sell, total surplus would decrease.
When economic profits in an industry are zero:
A) firms are really doing badly.
B) firms are doing as well as they could do in other markets.
C) firms should exit so they can make an economic profit in some other market.
D) the industry is not in long-run equilibrium.
A firm employs capital as a fixed input and labor as a variable input in the short run. If
the cost of capital falls, what will happen to the AVC, ATC, and MC curves? Explain.
Figure: The Market for Books
(Figure: Market for Books) Look at the figure The Market for Books. Suppose the price
is temporarily $18. Do consumers gain or lose from this price, and by how much? Do
producers gain or lose from this price control, and by how much? How is total surplus
affected?
Suppose a short-run production function always increases at a constant rate of three
units of output for every additional worker added. What does this imply about the
marginal product of labor? Is this realistic? Explain.
The most efficient way to dispose of industrial waste is to dump it in a nearby river or
parcel of land. Why is this illegal?
Some people say, “There are too many cooks in the kitchen,” to describe any chaotic
scene where nothing gets done. Relate this phrase to short-run production functions.
In the following cases, explain what happens to demand or quantity demanded and how
the change would be shown on a graph of the demand schedule. I. Assuming that tickets
to an NFL game are normal goods, what is the effect of an increase in the incomes of
NFL fans? II. Assuming that Direct TV and Dish satellite are substitutes, what happens
if the price of a Direct TV subscription increases? III. Assuming that data plans and cell
phones are complements, what happens if the price of data plans decreases?
Molly must drive across a bridge over a river eight times each week. Because the bridge
is narrow and traffic is congested, Molly’s willingness to pay for the eighth and final
weekly trip is $0.50. Now the governor has promised to refurbish this old bridge and
widen it to lessen the congestion and increase traffic flow over the river. Molly will
have to pay extra taxes to finance the repair, but the toll for crossing the bridge will fall,
and she expects to make 10 trips instead of just 8. How would you figure out how much
Molly is willing to pay in taxes for the bridge repair?
(Table: Workouts) Look at the table Workouts. Suppose that Eli receives an offer from
the club for a weekly membership fee of $50 that allows him to use the club as much as
he wants. Assuming Eli joins the club, how many times will Eli use the club per week,
and how much consumer surplus will he receive?
Table: MP3 Music Downloads
(Table: MP3 Music Downloads) Jen spends her daily income of $28 on MP3 music
downloads and jumbo diet sodas. One MP3 music download costs $2, and one jumbo
diet soda costs $4. The table provided shows three consumption bundles. Identify the
bundle that is unaffordable, the one that lies on her budget line, and the one that is
affordable but does not use all of her income.
At most airports there are multiple security guards ready to screen passengers and their
luggage through the X-ray and metal detector checkpoints. The length of the wait for
each line is about the same. Why?
