Jim used to be very careful with his car. However, once he bought full auto insurance
on it, he stopped turning on his alarm or even locking it when parking it. This is an
example of adverse selection.
Marginal social cost is the difference between marginal damage cost and marginal cost.
Advertising serves no productive purpose and is thus welfare decreasing.
The more differentiated the products produced by oligopolists, the more their behavior
will resemble that of the monopolist.
In the presence of externalities and public goods, we get farther away from the efficient
allocation of resources through government intervention than by leaving everything to
the market.
At the optimal level of public goods provision, society’s total willingness to pay per unit
is equal to the marginal cost of producing the good, which only occurs when marginal
cost equals zero.
Liability rules are laws that require party A to compensate party B for damages
imposed.
The life insurance industry is an example of an industry with imperfect information.
The government produces only what the market is willing to pay for.
A Gini coefficient of 0.4 represents less inequality in income distribution than a Gini
coefficient of 0.25.
The level of household savings impacts the level of firm investment.
The stock of knowledge, skills, and talents that people possess is called personal
capital.
An increase in the wage rate of steel workers will reduce the supply of steel.
An efficient outcome can always be reached by requiring the individual who produces
the externality to fully compensate individuals for any damage inflicted.
A positive cross-price elasticity between two goods implies that the two goods are
compliments.
Economic growth guarantees economic development.
Evidence shows that firms in more highly concentrated industries spend more on R&D
than firms in less concentrated industries.
Despite India being on the World Bank’s list of low-income countries, its capital city,
Mumbai, is one of the top ten centers of commerce in the world.
If the marginal product of labor is less than the average product of labor, then the
average product of labor is decreasing.
Monopolistically competitive firms are like perfectly competitive firms in that they both
sell homogeneous products.
A country enjoys an absolute advantage in the production of a good if that good can be
produced at a lower cost in terms of other goods.
Dividing the change in quantity on the X axis by the change in quantity on the Y axis
calculates the slope of a line.
Capital is defined as the current market value of a firm’s productive assets.
The collection and use of data to test economic theories is called empirical economics.
All models of oligopoly involve pricing above marginal cost and output levels below
the competitive level.
Pure rent is the return to any factor of production that is in fixed supply.
Disaggregating the distribution of income by race shows that the mean household
income for the bottom 20% of African-American households was very similar to that of
the bottom 20% of white households.
A tax that exacts a higher proportion of income from higher-income people than it does
from lower-income households is a regressive tax.
Education’s benefit to society is an example of an externality.
If a market outcome is efficient, then by definition it must also be equitable.
Expected value and expected utility are synonyms.
If Belgium has exports of 50 billion euros and imports of 40 billion euros, then it is
running a trade deficit.
A change in the price of a good or service leads to a change in the demand of the good.
In general, a firm will be unlikely to invest as long as the
A) interest rate is greater than the inflation rate.
B) firm has to borrow any money to make the investment.
C) profits realized from the investment are insufficient to cover the interest payments.
D) firm cannot sell bonds directly to the public and instead must borrow from a bank.
The gap between rich and poor countries has ________ over time because poor
countries find it difficult to devote resources to ________ production.
A) increased; capital
B) decreased; capital
C) remained constant; capital
D) remained constant; capital and consumer goods
If scarcity were eliminated,
A) trade would become unnecessary.
B) opportunity costs would increase.
C) all nations would have an absolute advantage in producing all products.
D) the concept of trade-offs would become irrelevant.
Figure 3.1
Refer to Figure 3.1. Which of the following would be most likely to cause the demand
for Dr. Pepper to shift from D0 toD1?
A) an increase in income, assuming that Dr. Pepper is a normal good
B) a decrease in the price of 7-UP, assuming 7-UP is a substitute for Dr. Pepper
C) an increase in the price of Dr. Pepper
D) an increase in the price of sugar used to make Dr. Pepper
Consider the following game. You pick a card from a deck and each time you select an
ace, you get $260. For all other cards you must pay $13. What is the expected value of
the game?
A) -$12
B) $0
C) $8
D) $32
Assuming that labor is the only variable input if society values a good ________ it costs
firms to hire the workers to produce that good, the good ________ be produced.
A) more than; will
B) less than; will
C) more than; will not
D) equal to what; will not
Predatory pricing is
A) often effective and a relatively inexpensive means of eliminating competition.
B) legal under the U.S. antitrust laws.
C) the practice by which a large, powerful firm attempts to drive its competitors out of
the market by temporarily setting an artificially low price.
D) generally more effective when barriers to entry exist.
The ________ is based on the ability-to-pay principle.
A) proportional income tax
B) personal property tax
C) retail sales tax
D) progressive income tax
Table 3.2
Refer to Table 3.2. If the price per cheeseburger is $7, the price will
A) remain constant because the market is in equilibrium.
B) increase because there is an excess demand in the market.
C) increase because there is an excess supply in the market.
D) decrease because there is an excess supply in the market.
When monopolistically competitive firms earn ________ profits, other firms ________
the industry in the long run.
A) positive economic; exit
B) normal; enter
C) negative economic; exit
D) normal; exit
Table 16.2
Refer to Table 16.2. The marginal damage costs imposed on society from processing 4
tons of glass are
A) $2.50 per ton of glass.
B) $10 per ton of glass.
C) $20 per ton of glass.
D) indeterminate from this output.
Assume a society can produce either beer or wine. If the marginal rate of transformation
of gallons of beer into gallons of wine is 5, then the opportunity cost of wine is
A) the 2 gallons of beer that must be forgone.
B) the 2 gallons of wine that must be forgone.
C) the 0.5 gallons of beer that must be forgone.
D) the additional 0.5 gallons of beer that can be produced.
Figure 12.3
Refer to Figure 12.3. The DVD industry is a constant-cost industry. As the demand for
DVD players shifts from D’ to D, which of the following will NOT occur?
A) Fewer resources will be allocated to produce DVD players.
B) The demand for DVDs will decrease.
C) If the market for DVD players is competitive, the price will decrease to $4.00 in the
short and long run.
D) If the market for DVD players is perfectly competitive, economic profits in this
industry will decrease in the short run, but will fall back to zero in the long run.
Figure 20.1
Refer to Figure 20.1. The opportunity cost of producing a bushel of soybeans in the
United States is
A) 300 bushels of alfalfa.
B) 2 bushels of alfalfa.
C) 1 bushel of alfalfa.
D) half a bushel of alfalfa.
From 1978 to 2003, the economy of ________ grew on average 8 percent per year, a
rate faster than any other country in the world.
A) India
B) China
C) the United States
D) Russia
Figure 6.2
Refer to Figure 6.2. Mr. Lingle’s budget constraint is AC. Point A is
A) an available option and Mr. Lingle exactly spends all of his income.
B) an available option and Mr. Lingle does not spend all of his income.
C) not in Mr. Lingle’s opportunity set but is on his budget constraint.
D) not available because it represents a combination of gardenburgers and beer that Mr.
Lingle cannot purchase with his current income.
Figure 6.5
Refer to Figure 6.5. Molly’s budget constraint is CD. If her income increases, her new
budget constraint is
A) AD.
B) BD.
C) EF.
D) It is not shown on this graph.
When countries specialize in producing those goods in which they have a comparative
advantage, they ________ their combined output and allocate their resources ________
efficiently.
A) maximize; less
B) maximize; more
C) minimize; less
D) minimize; more
Individuals are allowed to deduct a percentage of their expenditures for health care
from their taxable income if these expenditures are above a certain amount. This
reduces the amount that must be paid in taxes. Allowing for these deductions would
improve ________ of the federal income tax.
A) the horizontal equity
B) the vertical equity
C) both vertical and horizontal equity
D) the progressivity
An automobile finance company faces a(n) ________ problem if borrowers with a
greater chance of defaulting on their car loans get loans from the lender.
A) adverse selection
B) moral hazard
C) external cost
D) free-rider
The demand for Alaskan fishermen is the same as the demand for deep-sea divers in
Hawaii. The annual earnings of Alaskan fishermen is 30% higher than the earnings of
Hawaiian deep-sea divers. What is a possible explanation for this?
A) Alaskan fishermen can work only part of the year, but deep-sea divers can work year
round in Hawaii.
B) The amount of human capital needed to be a deep-sea diver must be greater than the
amount of human capital necessary to be a fisherman in Alaska.
C) Alaskan fishermen must face discrimination that is not encountered by Hawaiian
deep-sea divers.
D) Being a fisherman in Alaska must be more dangerous than being a deep-sea diver in
Hawaii.
Outputs in the production process are
A) pollution.
B) money.
C) goods and services of value to households.
D) resources.
In Chicago there are many restaurants. Each restaurant is slightly different from every
other restaurant. Restaurants are an example of which market structure?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
Figure 3.6
Refer to Figure 3.6. The number of DVDs Isabel rents per week decreases from 7 to 4.
This is caused by
A) a decrease in income if DVDs are a normal good.
B) an increase in the price of popcorn which is a complement to DVDs.
C) an increase in the rental price of DVDs.
D) a decrease in the cable price of pay-per-view movies.
You are the owner and only employee of a company that sets odds for sporting events.
Last year you earned a total revenue of $100,000. Your costs for rent and supplies were
$50,000. To start this business you invested an amount of your own capital that could
pay you a return of $20,000 a year.
Your economic profit last year was
A) -$40,000.
B) -$10,000.
C) $10,000.
D) $30,000.
Figure 20.2
Refer to Figure 20.2. The opportunity cost of 1 ________ is 0.25 ________ in the
United States and 0.67 ________ in England.
A) car; trucks; trucks
B) truck; cars; cars
C) car; cars; trucks
D) truck; trucks; cars
A theory of fairness that holds that taxpayers should contribute to the government in
________ the benefits they receive from public expenditures is the benefits-received
principle.
A) a greater proportion than
B) a smaller proportion than
C) proportion to
D) The benefits-received principle does not equate taxpayer contributions to the
government and benefits received from public expenditure.
If the wage rate is less than the marginal revenue product of labor, the firm should
________ to maximize profits.
A) hire less labor and produce less output
B) hire less labor and produce more output
C) hire more labor and produce less output
D) hire more labor and produce more output
An entrepreneur is a person who
A) assumes the risk of a firm.
B) organizes and manages a firm.
C) turns a new idea or product into a business.
D) all of the above
The amount of money a household can spend during a given time period without
increasing or decreasing its net worth is called ________ income.
A) economic
B) money
C) after-tax
D) property
Suppose that the economy has only two sectors, Y and Z. Assume that both are initially
in long-run competitive equilibrium. Public service campaigns have indicating that the
consumption of good Y helps people lose weight in a healthy manner. The public is
convinced of the veracity of these claims and consumes more of this good. Use graphs
(both showing the market and a representative firm for each sector) to show the impact
of the government report on both sectors of the economy.
List the two characteristics that define a public good.
Comdex Computer Company is producing at a price of $10 with an average total cost of
$12 and a fixed cost of $300. The firm is currently producing 100 units. What are the
operating profits of this firm? What are the economic profits of this firm?
Graphically illustrate each of the following effects on the market for home fitness
equipment with supply and demand curves. State the effects on price and quantity.
Consider each effect separately.
“Infomercials” advertising home fitness equipment begin
to run at night on Cable TV stations.
Assume two people live in the same neighborhood, the same size house and earn
identical incomes. Both are unmarried without children. How might one of them
actually be poorer than the other?
As the president of your firm, you are considering the purchase of a new piece of
machinery. The machine is expected to increase profits by $5,000 per year for five
years. After that, the machine will have no value. If the machine costs $22,000 and the
market rate of interest is 5 percent, should your firm purchase the machine? Explain.
Using indifference curves and budget constraints, explain how a consumer maximizes
utility. Show how this analysis can be used to derive a demand curve for a good.
Why does capital depreciate?
Describe three features of monopolistic competition that differentiate it from monopoly.
Suppose that you are an analyst working for a venture capital firm. An individual
contacts you about backing his brand new Internet company. What information would
you want before making this decision?
Explain in basic terms what the voting paradox is all about.
The table below shows the monthly output and total monthly cost of widgets for three
firms in the widget industry. Given the information in the table, can we draw any
conclusions about the returns to scale in the widget industry? If so, what does the
information suggest about the shape of the long-run average cost curve?
What is the optimal level of provision of public goods?
Draw a graph showing a monopolistically competitive firm in long-run equilibrium.
Scenario 1
Let’s say that you only have enough time to take two college courses in a semester. You
also only have 15 hours per week to devote to both courses ” French and Economics.
Assume that you could earn a “70” in both courses even if you didn’t study at all for
either course. If you study for either course your productivity is such that each hour
spent studying for a course earns you 2 points for your grade in that course.
Using Scenario 1 what would happen to your budget constraint if suddenly you
discovered an extra 10 hours in your schedule that you could use to study. What would
happen to the slope of the budget constraint? What would happen to the positioning of
the budget constraint?
Land in the South can often be used to grow either tobacco or cotton. Suppose the price
of tobacco increases. Explain how the market for cotton will be affected.