Based on a World Bank study, medical treatment in developing countries has an
elasticity value greater than 1.
Owning a share of stock entitles the shareholder to a portion of the firm’s profits.
Monopolistically competitive firms are able to affect the market price of their output
because they are able to control the price of their own output.
If Mexico has exports of 40 billion pesos and imports of 50 billion pesos, it is running a
trade surplus.
A firm that sells a motorcycle for $15,000 also gets producer surplus of $15,000.
Firms are more likely to avoid a prisoner’s dilemma when they interact repeatedly than
when they rarely interact.
Capital stock is defined as the retail value that was paid for a firm’s productive assets.
The return to a factor that is in fixed supply is a pure rent.
Savers and investors interact directly in financial capital markets.
After-tax income is much less equally distributed than before-tax income.
A demand curve with continuously changing slope over all quantity values will always
have a constant price elasticity of demand.
Firms are the consuming units of the economy.
When a firm retains earnings for investment purposes, it is effectively costing its
shareholders potential future profits
Neither economists nor mathematicians have actually shown the existence of a set of
prices that will clear all markets in a system simultaneously, known as equilibrium
price.
In a “black market,” goods are traded at the same prices as they would be in a normal
market.
In a developing economy, scarcity of capital may have less to do with any absolute
scarcity of income available for capital accumulation than with a lack of incentive for
citizens to save and invest productively.
If the assumptions of competitive market theory hold, the market system would lead to
an equitable outcome.
Market failure results in an inefficient allocation of resources.
In general, the demand curve facing the monopolistically competitive firm is more
elastic than the demand curve facing the monopoly.
An industry in which there are five firms each accounting for 20 percent of the market
has an HHI of 100.
Freely functioning markets in the real world always result in efficient allocations of
resources.
If Harold runs a grocery store and earns a normal rate of return, we can infer that he
also makes a positive economic profit.
Efficiency and equity are synonymous.
Under the collusion model, the outcome in an oligopoly is the same as a monopoly.
Inferior goods are always substandard.
An oligopoly with a dominant price leader will produce a level of output between that
which would prevail under competition and that which a monopolist would choose in
the same industry.
Taxes can be used to internalize negative externalities.
Wealth is a flow measure.
A tax that exacts a higher proportion of income from higher-income people than it does
from lower-income households is a progressive tax.
A Gini coefficient of 0.25 represents less inequality in income distribution than a Gini
coefficient of 0.4.
Establishing a list of favored customers is an alternative rationing mechanism to price
rationing.
A country with limited human capital is likely to have a comparative advantage in
highly technical goods.
Savers and investors interact through intermediaries in financial capital markets.
In 2011, the poverty threshold for a family of four in the United States was slightly
greater than $23,000.
In the United States, the distribution of wealth is more unequal than the distribution of
income.
Perfectly competitive firms are price setters.
The total of producer and consumer surplus is maximized when there is overproduction.
Mechanism design can be used to provide employers and employees with the right
incentives in labor markets.
Market failures may be corrected through government intervention.
Among the resources used in production are land and capital.
A government policy that tries to minimize inflation and unemployment can best be
described as trying to achieve economic
A) efficiency.
B) equity.
C) profitability.
D) stability.
Figure 15.5
Refer to Figure 15.5. Assume the Custom Sweater Shop has fixed costs of $500 and is a
monopolistically competitive firm. To maximize profits in the short run, this firm
should set a price of
A) $36.
B) $44.
C) $46.
D) $50.
Table 2.1
Refer to Table 2.1. Which of the following statements is true?
A) Molly has a comparative advantage in both avatar design and tattoo design.
B) Pete has a comparative advantage in both avatar design and tattoo design.
C) Molly has a comparative advantage in avatar design, and Pete has a comparative
advantage in tattoo design.
D) Pete has a comparative advantage in avatar design, and Molly has a comparative
advantage in tattoo design.
When MR = MC and P = ATC for a monopolistically competitive firm, the firm is in
A) shortrun disequilibrium.
B) longrun disequilibrium.
C) longrun equilibrium.
D) neither shortrun nor longrun equilibrium.
Corn is produced in a perfectly competitive market. The demand for ethanol increases.
This will cause the individual corn farmer’s marginal revenue to ________ and his
profit maximizing level of output to ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Whenever a former governor is elected president, the unemployment rate decreases;
whenever a former congressman is elected president, the inflation rate increases. This
statement is an example of
A) fallacy of composition.
B) post hoc, ergo propter hoc fallacy.
C) ceteris paribus fallacy.
D) fallacy of inductive reasoning.
Pie-Oh-My, a monopolistically competitive firm, is producing 80 gourmet pies per day
and selling each pie for $32. At that production level, ATC is $40, AVC is $30, AFC is
$10, and both MR and MC are $16. In the short run, this firm should
A) continue to produce 80 pies, as price is greater than AVC.
B) increase output to the point where price equals marginal cost.
C) decrease output to the point where price equals average total cost.
D) shutdown and produce zero pies and pay fixed costs.
Rented DVDs and movies shown in theaters are substitutes. Rented DVDs and plasma
TVs are complements. Plasma TVs and movies shown in theaters are normal goods.
You observe that the rental price for DVDs is higher in the summer than in the winter.
This would be explained by the fact that
A) the quantity demanded of rented DVDs is higher in the summer than in the winter.
B) there are more DVDs released into the rental market in the summer than in the
winter.
C) demand for rented DVDs is higher in the summer than in the winter.
D) the supply of rented DVDs is higher in the summer than in the winter.
Figure 16.4
Refer to Figure 16.4. At 20 units of output there are external
A) costs of $2 per unit.
B) benefits of $2 per unit.
C) costs of $5 per unit.
D) benefits of $5 per unit.
Figure 7.10
Refer to Figure 7.10. The slope of isocost CD is
A) greater than the slope of isocost AB.
B) less than the slope of isocost AB.
C) equal to the slope of isocost AB.
D) indeterminate from this information, as the prices of capital and labor are not given.
A firm is currently producing in the inelastic portion of its demand curve. What course
of action do you recommend for it, assuming it wants to raise revenue?
A) Continue producing at the current output level, because it maximizes its total
revenue by producing in the inelastic portion of its demand curve.
B) Reduce price, because if it reduces price and demand is inelastic, total revenue will
increase.
C) Increase price, because if it increases price and demand is inelastic, total revenue
will increase.
D) Continue selling at the same price, but increase the amount it produces.
Figure 17.1
Refer to Figure 17.1. Suppose John’s utility from income is given in the figure. From
this we would say that John is ________.
A) risk neutral
B) risk averse
C) risk loving
D) a risk taker
The idea that individuals who work for companies should receive ________ is known
as minimum wage.
A) at least an equitable hourly income
B) fair compensation for their skills
C) compensation based on the riskiness of their jobs
D) increases in wages based on the longevity of employment
Pareto optimality is the condition in which
A) the distribution of income is equal.
B) no change is possible that will make some members of society better off without
making at least one other member of society worse off.
C) firms are forced to internalize the effects of all externalities.
D) it is possible to make one person better off without making someone else worse off.
The ultimate distribution of a tax’s burden is the
A) tax structure.
B) tax incidence.
C) tax base.
D) tax rate.
We would NOT consider ________ an act of capital investment.
A) a son paying for his mother to go back to college
B) a company purchasing solar panels for its headquarters
C) a city government building a new fire station
D) FedEx delivering a package
Figure 3.11
Refer to Figure 3.11. Assume hamburgers are a normal good. A decrease in income will
cause a movement from
A) Point A to Point B.
B) Point G to Point F.
C) D2 toD1.
D) S2 toS1.
For a particular product, an effective price floor results in
A) quantity demanded greater than quantity supplied.
B) quantity supplied greater than quantity demanded.
C) quantity demanded equal to quantity supplied.
D) demand equal to supply.
As an individual consumes more of a product within a given period of time, it is likely
that each additional unit consumed will yield
A) successively less satisfaction.
B) successively more satisfaction.
C) the same amount of satisfaction.
D) less satisfaction for a while and then start to add more satisfaction.
Figure 6
Refer to Figure 2.6. Which of the following will NOT cause the production possibility
frontier to shift from ppf1 to ppf2?
A) the discovery of previously unknown oil fields
B) an improvement in technology
C) an increase in the stock of capital
D) a decrease in the unemployment rate
Table 16.1
Refer to Table 16.1. This salt processing firm is perfectly competitive and is forced to
take damage costs into account. If the market price of the product is $30 a ton and the
firm behaves as a profit-maximizer, how much total damage will result?
A) $0
B) $20
C) $30
D) $50
A profit-maximizing firm will continue to employ land until
A) MPLAND = PLAND.
B) MRPLAND = 0.
C) MRPLAND = MPLAND.
D) MRPLAND = PLAND.
Table 8.5
Refer to Table 8.5. Assume that Polynesian Fruit sells fruit baskets in a perfectly
competitive market. The market price of a fruit basket is $30. To maximize profits,
Polynesian Fruit should sell ________ fruit baskets and their profit it ________.
A) zero; $0
B) two; -$70
C) three; -$52
D) five; -$42
Verizon® has a monopoly over local telephone service. If Verizon® is producing where
marginal revenue is greater than marginal cost, the firm
A) could increase profits by reducing output.
B) could increase profits by increasing output.
C) is maximizing profits.
D) must be earning zero profit.
One way that perfect competition and monopoly differ is that in
A) perfect competition, there is a difference between firm and industry demand.
B) perfect competition, there is only one firm in the industry.
C) monopoly, there is a difference between firm and industry demand.
D) monopoly, the firm produces less than the total market quantity supplied.
In 2006, the largest population group (2.4 billion people) occurred in countries
classified as
A) low-income.
B) lower middle-income.
C) upper middle-income.
D) high-income.
Figure 3.7
Refer to Figure 3.7. If pizza and beer are complementary goods, an increase in the price
of beer will cause a movement from Point B on demand curve D2 to
A) demand curve D1.
B) demand curve D3.
C) Point A on demand curve D2.
D) Point C on demand curve D2.
Consumers purchase products in ________ markets.
A) output
B) factor
C) resource
D) input
Which of the following are examples of market signals?
A) warranties
B) education
C) extracurricular activities
D) all of the above
A situation where illegal trading at market prices takes place is known in economics as
a
A) smuggler’s market.
B) pirate market.
C) black market.
D) command market.
If Brazil has a comparative advantage in the production of coffee compared to the
United States, then
A) Brazil also has an absolute advantage in the production of coffee.
B) the United States has an absolute advantage in the production of coffee.
C) Brazil can produce coffee at a lower opportunity cost than the United States.
D) the United States cannot produce coffee.
The Celler-Kefauver Act of 1950
A) declared every contract or conspiracy to restrain trade illegal.
B) outlawed specific monopolistic behaviors such as tying contracts, price
discrimination, and unlimited mergers.
C) extended the language of the Federal Trade Commission Act to include “deceptive”
as well as “unfair” competition methods.
D) extended the government’s authority to ban vertical and conglomerate mergers.
The tragedy of commons relates to the idea that
A) central planning sets all production targets.
B) all wages, prices, and interest rates are controlled by government.
C) collective ownership may not provide the proper private incentives for efficiency
because individuals do not bear the full costs of their own decisions, but enjoy the full
benefits.
D) central planning sets all distribution targets.
The price of a new portable CD player falls from $100 to $90. The quantity of CD
players demanded rises from 15,000 per year to 20,000 per year. Use the midpoint
formula to calculate the price elasticity of demand for portable CD players. Is the
demand elastic, inelastic, or unit elastic?
What do you believe is one of the chief criticisms of the Coase Theorem that render it
useless in real-world situations.
Comment on the following statement: “In order for a natural monopoly to be present,
economies of scale must be realized at a scale that is close to total demand in the
market.”
If a comparative advantage implies that a country can produce a product at a lower
opportunity cost than another country then why do we see two countries often trading
the same goods? For instance, for most agricultural products the U.S. has a comparative
advantage. Japan, one of America’s largest trading partners has a comparative advantage
in the production of most economy cars. Explain what is going on here when we still
see the U.S. exporting cars to Japan and the U.S. importing some foods from Japan.
Assume you are the owner of a delivery service company with a large fleet of trucks
and drivers. Each of your drivers is allowed two thirty-minute breaks per day. However,
some of them take longer breaks than your policy allows. You find out about this
problem only by accident when you heard a couple of employees discussing during a
morning coffee break. What kind of a problem is this for you from an economic point of
view and what methods might you employ to mitigate this problem?
Why is it more difficult for a firm to calculate the marginal revenue product of a player
in the industry of professional sports versus that of a worker in a competitive
manufacturing industry?
Figure 9.1
Using Figure 9.1, explain what a firm would do in the short run if the market price of its
product dropped below P1.
What are some of the forms that central planning has taken in developing nations
today?
A monopoly firm is producing where its marginal revenue is equal to marginal cost. At
this level of output, the firm’s price is $3.75 and its average total cost is $4.50. Is the
firm earning a profit? Explain. How could this firm determine whether it should
continue to operate in the short run or if it should shut down?
In the 1980s the CEO of Coca Cola corporation found out that its core business was
making roughly 15% rate of return on investor capital. However, he also discovered that
some of the newly acquired subsidiaries were not making anywhere near that amount.
He decided to ask each of these companies to come up with a plan to push the rate of
return closer to the 15% mark or he warned that these companies might be sold. Why
would the CEO sell off companies or operations that are still profitable?
What is an entrepreneur?
Is it possible in the present to produce at a point that is outside the production
possibilities frontier? Why or why not? With the passage of time how might a point
outside the present production possibilities frontier be possible?
Assume a manager of a major league baseball team has a player that is the best pitcher
on team the team. However, he decides to to have him play right field instead. It turns
out that he is not the best right fielder on the team. How might this manager defend his
decision?
Assume that there is a shortage of lobster and that for whatever reason prices have not
risen to choke off the excess demand. Instead, the government has exhorted people to
voluntary refrain from lobster consumption to “maintain a balance between supply and
demand.” Assume that the temporary public service announcements are “effective” and
the public reduces its consumption of lobster. Explain using supply and demand
analysis what should happen to the equilibrium quantity of lobster and its equilibrium
price. Why would this plan not have much of an impact on the lobster market in the
long run?
Use a graph to explain how a Gini coefficient is calculated.
Explain what is meant by the term ceteris paribus. Why is this concept often used in
economic models?
Assume that there is a long-lost painting by Monet was discovered. The owner decides
to auction it off to the highest bidder at Sotheby’s. But before he auctions it he secretly
makes a digital image of the painting so that he can make reproductions. What can we
safely assume will happen to the demand and the price of these reproductions in the
short run? What about the long run?
Suppose that a state needs to build both prisons and schools with a budget limited to 10
million dollars. Schools cost $1 million each to build and prisons cost $2 million each
to build.
Assume that the price of prison production falls to $1.5 million each. Draw the new
production possibilities frontier. In addition, what is the new opportunity cost of
producing one more prison?
Assume that two countries are the same in every way except that one
allocated more of its resources to the production of capital goods as opposed to
consumer
goods.
What would be the impact of improvements in technology assuming that each country
spends one-half of its resources on capital goods?