Assume a firm is currently producing 800 units of output, P = $10, MC = $10, ATC =
$8, and AVC = $6. In this case, the firm is maximizing its profit, which equals $1,600.
Under a fixed exchange rate system, a central bank’s intervention in the foreign
exchange market will not affect the domestic money supply.
Unlike markup pricing, the strategy of price discrimination is totally independent of the
price elasticity of demand for the good in question.
The most liquid form of money is M3.
The coefficient of determination is the proportion of the variation that is not explained
by the regression model.
The coefficient of determination represents the ratio of the regression sum of squares to
the total sum of squares.
A firm is more likely to use a labor-intensive method of production when the relative
amount of available labor is greater than the available amount of capital.
The elasticity of demand for a particular perfectly competitive firm’s output is
positively related to the number of firms supplying the market.
Assume that in an effort to discourage competitors, firm X has lowered its price below
its average total costs of production. This is an illustration of the limit pricing form of
strategic entry deterrence.
In the prisoner’s dilemma game, each player’s dominant strategy leaves her with a larger
payoff than she could receive by cooperating with the other player; however, the
“prisoner’s dilemma” is that as a result of noncooperation she cannot chose her
dominant strategy.
All else constant, as the price elasticity of demand for a good at the equilibrium price
decreases, the amount of consumer surplus derived from purchasing the equilibrium
quantity of the good increases.
When the firms in a perfectly competitive market are incurring economic losses, some
of the firms will exit the market, causing the supply curve to shift left and market price
to rise until losses incurred by the remaining firms are eliminated.
The aggregate demand curve shows the alternative combinations of the price level and
real income that result in simultaneous equilibrium in both the goods and money
markets.
Licensing requirements for doctors, which are intended primarily to maintain the
quality of persons who work in the profession, have no the effect on the profits of those
individuals because the number of competitors is so large.
Effective price discrimination will enable a perfectly competitive firm to earn positive
economic profits in both the short run and the long run.
Exports are positively related to domestic income and negatively related to the
exchange rate.
An increase in resources available would decrease potential GDP and the long-run
aggregate supply curve.
All else constant, a cartel agreement will become more difficult to enforce as the
number of firms competing the market increases and the members of the cartel produce
a differentiated product.
A simultaneous improvement in the technology used to produce computers and increase
in the number of buyers in the computer market would cause the equilibrium price of
computers to drop but have an uncertain effect on equilibrium quantity.
Gross Domestic Product (GDP) is defined as the market value of all goods and services
purchased in the economy during a particular year.
Studies and recent experience suggest that there is considerable potential for
substitution between doctors and nurses in the production of health care services.
Assuming capital and labor are substitutes, an improvement in technology that affects
only the productivity of capital would cause a firm to employ more capital but leave the
amount of labor employed unchanged.
The kinked demand curve model is based on the assumption that firms’ pricing
decisions are independent of one another because demand is determined by non-market
forces.
In the Airline Pricing Strategies case discussed in the text, a product with fewer rules
and restrictions can command a higher price.
Because it has a direct effect on the hiring decisions of firms, a change in business
confidence has a much larger impact on the level of economic activity than does a
change in consumer confidence.
Expansionary monetary policy decreases the federal funds rate.
As the price elasticity of demand for a particular good decreases, the corresponding
Lerner Index, and hence the amount of market power attributed to the firm that
produces the product in question, decreases as well.
If net capital flow were zero for a country, then exports would not equal imports.
An increase in nominal GDP implies that the country is producing a greater quantity of
goods and services.
In the prisoner’s dilemma game, each player’s dominant strategy is also the Nash
equilibrium.
Changes in the macro environment affect individual firms and industries through the
microeconomic factors of demand, production, cost, and profitability.
Because of the large number of firms that operate in the agricultural industry, the supply
of agricultural products is inelastic over the entire range of output.
The fast-food industry in the U.S. consists of many firms, but despite that it can still be
viewed as an oligopoly because the top few firms control a significant share of the
market.
If the government spending increases without an equal increase in taxes, the
government must borrow funds in the financial markets.
All else constant, an increase in the level of competition among firms would be
expected to reduce the amount of X-inefficiency that exists in a particular industry.
Studies suggest that brand loyalty is based primarily on real differences among
competing products, suggesting that persuasive advertising is an ineffective means to
maintain or increase market share.
Assume the demand function for good X can be written as
Qd = 80 – 3Px – 2Py + 10I
where Px = the price of X,
Py = the price of good Y, and
I = Consumer income.
This equation implies that X and Y are complements.
Deposits held by commercial banks are insured by the:
A) Federal Trade Commission.
B) Federal Deposit Insurance Corporation.
C) Federal Communications Commission.
D) Resolution Trust Corporation.
Determine whether each of the following outputs is considered an intermediate good, a
final good, or neither for purposes of calculating GDP in the current year.
a. New tires put on a new Corvette at Big O Tire store
b. The net sales price of a home built in 1990 when it is resold in 1997
c. The commission earned by a stock broker on the sale of stock
d. The net price that is paid for 1000 shares of stock in Dell
According to the text there appear to be very limited opportunities for input substitution
in the production of pipe organs. Which of the following is the most plausible
explanation for this observation?
A) Capital costs have made it too expensive to purchase more capital stock.
B) It requires a large amount of highly trained labor to produce a single pipe organ.
C) The marginal productivity of additional trained workers is zero.
D) The capital used in producing pipe organs is much more expensive than the labor
inputs.
Assume a firm is currently producing 100 units of output, total fixed costs are $10,000,
and average variable costs are $8. Based on this information we can conclude, with
certainty, that the firm’s:
A) marginal costs are $8.
B) total variable costs are $8000.
C) average fixed costs are $2.
D) total costs are $10,800.
Perfectly competitive firms are said to be “small.” Which of the following best
describes this smallness?
A) The individual firm must have fewer than 10 employees.
B) The individual firm faces a downward-sloping demand curve.
C) The individual firm has assets of less than $2 million.
D) The individual firm is unable to affect market price through its output decisions.
Which of the following statements is false? In the circular flow model:
A) the funds needed to finance investment spending come from the saving of
households.
B) GDP can be measured either by the income received or by the expenditures made.
C) factor payments are made to business firms.
D) consumption expenditures are made by households.
Assume there is a decrease in the number of substitutes for a good produced by a
profit-maximizing price-setting firm. All else constant, this would cause the firm’s
ability to markup price above average cost to:
A) decrease.
B) stay the same.
C) increase.
D) cannot be determined with the information given.
The coefficient of determination is defined as the:
A) ratio of the total sum of squared errors to the sum of squared errors.
B) ratio of the regression sum of squares to the sum of the squared errors.
C) ratio of the sum of squared errors to the total sum of squared errors.
D) none of the above.
Which of the following best describes the influence of successful advertising on the
market for aspirin?
A) The market demand curve shifts to the right, creating a shortage at the original
equilibrium price.
B) Individuals’ demand curves shift to the right, but the market demand curve remains
at its original position.
C) The market supply curve shifts to the right, creating a surplus at the original
equilibrium price.
D) The market supply curve for aspirin shifts to the right, causing equilibrium price to
decrease.
Refer to Scenario 3. The average total cost of 5 units of output is:
A) $8.
B) $10.
C) $29.
D) $39.
“Demand” is best defined as the relationship between:
A) the price of a good and the quantity consumers are willing and able to buy at each
price level.
B) the current price of a good and the quantity demanded at that price.
C) the quantity supplied and the price people are willing to pay for a good.
D) the amount of income someone has and the price he is willing to pay for a good.
An increase in resources, efficiency, or technology will shift the:
A) short-run aggregate supply curve rightward.
B) short-run aggregate supply curve leftward.
C) long-run aggregate supply curve rightward.
D) long-run aggregate supply curve leftward.
The demand curve faced by the individual perfectly competitive firm is:
A) perfectly elastic.
B) perfectly inelastic.
C) unit elastic.
D) elastic or inelastic depending on price.
The slope of the aggregate expenditure function is the sum of the:
A) marginal propensity to consume and marginal propensity to save.
B) marginal propensity to consume and marginal propensity to invest.
C) marginal propensity to consume, marginal propensity to save, and marginal
propensity to import.
D) marginal propensity to consume, marginal propensity to invest, and marginal
propensity to import.
For the U.S. economy, the largest expenditure category is:
A) government expenditures.
B) net export expenditures.
C) personal consumption expenditures.
D) investment expenditures.
Which of the following statements is true when the consumer is in utility-maximizing
equilibrium?
A) The number of units of each good purchased is equal.
B) The prices of the goods in question must be equal.
C) The total benefits the consumer receives from every good consumed must be the
same for all goods.
D) The rate at which the consumer is willing to trade one good for another is equal to
the ratio of their market prices.
Commodities that last less than three years and may be consumed very quickly are
called:
A) durable goods
B) nondurable goods
C) services
D) none of the above
Which of the following statements is correct?
A) The monopolist’s supply curve is its MC curve.
B) The monopolist’s supply curve is that section of its MC curve that lies above its AVC
curve.
C) The monopolist’s supply curve is that section of its MC curve that lies above its MR
curve.
D) The monopolist does not have a supply curve.
Refer to Scenario 3. Diminishing marginal returns are incurred when output is increased
from:
A) 1 to 2 units of output.
B) 2 to 3 units of output.
C) 3 to 4 units of output.
D) 4 to 5 units of output.
All of the following are cited as potential explanations for the decrease in demand for
Kleenex-brand facial tissues except:
A) consumers switching to substitute products.
B) market entry by lower-priced private brands.
C) the failure of the producer of Kleenex tissues to develop any new and innovative
products.
An international organization created at the Bretton Woods conference in 1944 that
helps coordinate international financial flows and can arrange short-term loans between
countries is called the:
A) World Bank.
B) International Monetary Fund.
C) U.S. Treasury.
D) U.S. Agency for International Development.
The opportunity cost of hold real money balances is the:
A) interest rate.
B) price level.
C) all of the above.
D) none of the above.
All of the following are strategies a firm with market power can adopt to increase it
profits over time except:
A) mergers with, and acquisitions of, competing firms.
B) erecting barriers to entry.
C) setting price equal to the marginal costs of production.
D) influencing the regulatory process.
The primary objective of a cartel is to:
A) maximize the amount of profit received by each member of the organization.
B) maximize the joint profits of the members of the organization.
C) ensure each member of the organization some minimum amount of profit.
D) maximize the average profits of the members of the organization.
Which of the following is an example of price discrimination?
A) Increasing the price of a product when demand for the product increases.
B) Charging different prices for a product in different regions of the country due to
differences in transportation costs.
C) Bundling complementary products to attract additional sales.
D) Reducing the price of a product to reduce excess inventory.
Assume a perfectly competitive firm is producing a level of output at which MR < MC.
What should the firm do to maximize its profits?
A) The firm should do nothing it wants to maximize the difference between MR and
MC in order to maximize its profits.
B) The firm should decrease output.
C) The firm should increase price.
D) The firm should increase output.
Assume the inverse demand function for a good can be written as: P = 30 – 2Q.
Assuming P = $10, the resulting consumer surplus would be equal to:
A) $50.
B) $100.
C) $200.
D) $225.
The practice of setting price by increasing the average costs of production by some
percentage is referred to as:
A) average cost pricing.
B) percentage pricing.
C) rate-of-return pricing.
D) markup pricing.
Zoran, a Croatian citizen, only works in the United States. The value added to
production from his employment is:
A) included in Croatian GDP.
B) included only in U.S. GDP.
C) included only in U.S. GNP.
D) not included in either U.S. GDP or U.S. GNP.
Increase in the real interest rate will ________ the expenditure curve:
A) decrease.
B) increase.
C) not change.
D) none of the above.
When demand is inelastic and price decreases:
A) the effect of the decrease in price on total revenue dominates the effect of the
increase in quantity demanded on total revenue; overall total revenue declines.
B) the effect of the increase in quantity demanded on total revenue dominates the effect
of the decrease in price on total revenue; overall total revenue increases.
C) the effects of the decrease in price on total revenue and the corresponding increase in
quantity demanded on total revenue perfectly offset one another; overall total revenue
remains unchanged.
D) quantity demanded and total revenue fall to zero.
The value of currently produced final goods and services measured in current year
prices is called:
A) real GDP.
B) nominal GDP.
C) imputed values.
D) inflation.
The firm depicted in Figure 8.1 is:
A) earning a positive economic profit.
B) incurring an economic loss and should shut down.
C) incurring an economic loss but it should continue to operate in the short run so long
as price exceeds average variable costs.
D) earning a zero economic profit.