If you purchase a share of stock from your friend who initially purchased the stock
three years ago, your purchase of the stock represents a transaction in the secondary
financial market
When there is a negative externality, the competitive output is more than the
economically efficient output level.
If a monopolist’s price is $50 at the output where marginal revenue equals marginal cost
and average total cost is $43, then the incremental profit from the last unit sold is $7.
In a free market there are virtually no restrictions, or at best few restrictions on how
factors of production can be employed.
The excess burden of a tax is also a deadweight loss.
Monopolistically competitive firms face a perfectly elastic demand curve.
If a monopolist’s price is $50 at the output where marginal revenue equals marginal cost
and average total cost is $43, then the average profit is $7.
If a firm’s total variable cost exceeds its total revenue, the firm should stop production
by shutting down temporarily.
Resistance to worldwide trade agreements has resulted in some nations placing greater
emphasis on regional pacts.
If the demand for labor is unchanged, population growth will increase the supply of
labor and increase the equilibrium wage.
A prisoner’s dilemma leads to a noncooperative equilibrium.
All consumption bundles along a given indifference curve are equally desirable.
“The distribution of income should be determined by the government” is an example of
a positive economic statement.
The Coase Theorem asserts that government intervention is a prerequisite for
addressing externality problems.
Goodwill is listed as an asset on a firm’s balance sheet.
The actual division of a tax between buyers and sellers in a market is the excess burden
of the tax.
A shortage is defined as the situation that exists when the quantity of a good supplied is
greater than the quantity demanded.
Products marketed in all countries essentially without any changes are known as
continental products.
Market power in the United States causes a huge loss of economic efficiency.
The government of Silverado raises revenue to operate the city’s hospital, open to all
residents, through a general income tax paid by its residents. This method of raising
revenue is consistent with the benefits-received principle.
The market price of a factor of production that is in fixed is determined only by
demand.
A decrease in the unemployment rate may be represented as a movement from a point
on the production possibilities frontier to a point outside the frontier.
Because many business situations are repeated games, firms may be able to avoid the
prisoner’s dilemma and implicitly collude to keep prices high.
Assume that the personal computer industry is perfectly competitive. The fact that the
price of personal computers over the last decade has fallen despite increases in demand
signifies that the industry is a decreasing-cost industry.
According to Porter’s Five Competitive Forces Model, similar products produced by
different firms within the industry affects a firm’s ability to raise prices far more than
substitutable products produced outside the industry.
“A decrease in the price of tablet computers will decrease the demand for desktop
computers.” This statement is an example of a normative economic statement.
The government makes all economic decisions in a market economy.
Jobs lost to foreign trade are generally easy to identify, but jobs created by foreign trade
are generally less easy to identify.
If Estonia has an absolute advantage in the production of two goods compared to
Norway, Estonia can not benefit from trade with Norway.
A consumer’s utility-maximizing combination of goods is given by the bundle that
corresponds to the highest point on his indifference curve.
Figure 12-4
Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a
perfectly competitive market.
Refer to Figure 12-4. What is the amount of its total fixed cost?
A) $1,080
B) $1,440
C) $2,520
D) It cannot be determined.
Figure 15-11
In 2011, Verizon was granted permission to enter the market for cable TV in Upstate
New York, ending the virtual monopoly that Time Warner Cable had in most local
communities in the region. Figure 15-11 shows the cable television market in Upstate
New York.
Refer to Figure 15-11. Suppose the local government imposes a $2.50 per month tax on
cable companies. What happens to the price charged by the cable company following
the imposition of this tax?
A) The price rises from PMto (PM+ $2.50).
B) The price rises from PM but it increases by an amount less than $2.50.
C) The price rises from PM but it increases by an amount greater than $2.50 to reflect
the monopoly’s markup.
D) The price remains at PM.
Allison’s Auto Art is a company that applies pinstripes to vehicles. Allison’s cost for a
basic 1-color pinstriping job is $35, and she charges $95 for this service. For a total
price of $175, Allison will apply a fancier 3-color pinstripe application to an
automobile, a service that adds an additional $40 to the total cost of the package. What
is Allison’s marginal benefit if she sells a basic 1-color job?
A) $35
B) $60
C) $95
D) The marginal benefit cannot be determined.
The cross-price elasticity of demand measures the
A) absolute change in the quantity demanded of one good divided by the absolute
change in the price of another good.
B) percentage change in the quantity demanded of one good divided by the percentage
change in the price of another good.
C) percentage change in the price of one good divided by the percentage change in the
quantity demanded of another good.
D) percentage change in the quantity demanded of one good in one location divided by
the price of the same good in another location.
Both buyers and sellers are price takers in a perfectly competitive market because
A) the price is determined by government intervention and dictated to buyers and
sellers.
B) each buyer and seller knows it is illegal to conspire to affect price.
C) both buyers and sellers in a perfectly competitive market are concerned for the
welfare of others.
D) each buyer and seller is too small relative to others to independently affect the
market price.
Figure 4-8
Figure 4-8 shows the market for beer. The government plans to impose a unit tax in this
market.
Refer to Figure 4-8. How much of the tax is paid by producers?
A) $2
B) $5
C) $7
D) $12
Suppose that American firms claim that protectionism in Canada is on the rise as the
Canadian government attempts to protect its infant industries with a “Buy Canadian”
provision. This policy, similar to the original “Buy American” provision in the 2009
U.S. stimulus bill, is likely to cause
A) exporting countries to retaliate by placing trade barriers on Canadian imports.
B) Canadian manufacturers to become more efficient.
C) Canadian companies to pay lower prices for protected products.
D) most countries to reduce their own trade barriers to be able to better compete with
Canadian imports at home.
What is the poverty rate?
A) the rate at which the number of people relative to the size of the population fall
below the poverty line
B) the percentage of the population earning an annual income below the poverty line,
according to the federal government’s definition
C) the percentage of working adults whose annual income is sufficiently low as to be
are exempt from paying income taxes
D) the percentage of households who qualify for government assistance to meet the
minimal requirement for adequate nutrition
Of the following high-income countries, which has the highest number of CT scanners
per 1 million population?
A) Canada
B) Japan
C) the United Kingdom
D) the United States
If a monopolistically competitive firm breaks even, the firm
A) is earning an accounting profit and will have to pay taxes on that profit.
B) is earning zero accounting and zero economic profit.
C) should advertise its product to stimulate demand.
D) should expand production.
If the marginal cost curve is below the average variable cost curve, then
A) average variable cost is increasing.
B) average variable cost is decreasing.
C) marginal cost must be decreasing.
D) average variable cost could either be increasing or decreasing.
The income effect due to a price decrease will result in an increase in the quantity
demanded for
A) a Giffen good.
B) an inferior good.
C) a public good.
D) a normal good.
Which of the following is a source of market failure?
A) unforeseen circumstances which leads to the bankruptcy of many firms
B) a lack of government intervention in a market
C) incomplete property rights or inability to enforce property rights
D) an inequitable income distribution
Table 2-6
Table 2-6 shows the output per week of two jewelers, Serena and Haley. They can either
devote their time to making bracelets or making necklaces.
Refer to Table 2-6. Which of the following statements istrue?
A) Haley has an absolute advantage in making both products.
B) Serena has an absolute advantage in making both products.
C) Haley has an absolute advantage in making bracelets and Serena in making
necklaces.
D) Haley has an absolute advantage in making necklaces and Serena in making
bracelets.
Table 11-4
Refer to Table 11-4. The table above shows the following relationship between hours
spent fishing and the quantity of fish caught for Juan, a commercial fisherman.
a. Complete the Marginal Product column in Table 11-4.
b. Characterize the production function, i.e. does the production function display
increasing marginal returns, diminishing marginal returns, etc.
c. Using the data above, graph Juan’s marginal product curve. Be sure to label the
horizontal and vertical axes. Is your graph consistent with your answer to part (b)?
Explain.
d. Juan uses the following inputs for fishing a small wooden boat (B), a fishing pole (P)
and of course, his labor (L). Treating the boat and the fishing pole as fixed inputs and
using the data above, graph Juan’s Total Product of Labor curve. Be sure to label the
horizontal and vertical axes.
e. (Extra Credit) The opportunity cost of Juan’s time is $8 per hour. If Juan receives $2
per pound for his fish, what is the optimal number of hours he should spend fishing?
Explain how you arrived at your answer. Hint: Recall marginal benefit and marginal
cost analysis.
Figure 9-2
Suppose the U.S. government imposes a $0.40 per pound tariff on rice imports. Figure
9-2 shows the impact of this tariff.
Refer to Figure 9-2. The increase in domestic producer surplus as a result of the tariff is
equal to the area
A) C.
B) C + G.
C) A + C + G.
D) C + D + G + H + I.
Table 10-4
Refer to Table 10-4. For steak and cheese and grilled chicken sandwiches, the table
contains the values of the marginal utility (MU) and marginal utility per dollar (MU/P)
for Mabel Jarvis. Mabel has $14 to spend on steak and cheese and grilled chicken
sandwiches. Which of the following statements is false?
A) The price of steak and cheese sandwiches is $4. The price of grilled chicken
sandwiches is $2.
B) If Mabel maximizes her utility she will buy three grilled chicken sandwiches.
C) If Mabel maximizes her utility she will buy two steak and cheese sandwiches.
D) We do not have enough information to determine how many sandwiches Mabel will
buy to maximize her utility.
Figure 12-9
Figure 12-9 shows cost and demand curves facing a profit-maximizing, perfectly
competitive firm.
Refer to Figure 12-9. At price P2, the firm would produce
A) Q2 units.
B) Q3 units.
C) Q4 units.
D) zero units.
Table 13-3
Table 13-3 shows the demand and cost schedules for a monopolistically competitive
firm.
Refer to Table 13-3. What is its average variable cost of production at its optimal output
level?
A) $0 (because its optimal output =0)
B) $15
C) $14.75
D) $29
Table 9-3
Bryce and Tina are artisans who produce homemade candles and soap. Table 9-3 lists
the number of candles and bars of soap Bryce and Tina can each produce in one month.
Refer to Table 9-3. Select the statement that accurately interprets the data in the table.
A) Bryce has an absolute advantage in making candles and soap.
B) Tina has an absolute advantage in making candles and soap.
C) Neither Bryce nor Tina has an absolute advantage in making candles.
D) Neither Bryce nor Tina has an absolute advantage in making soap.
Figure 10-3
Refer to Figure 10-3. Best friends Laurel and Hardy both enjoy watching romantic
comedies and science fiction movies. Based on the diagrams above what can you
conclude about their movie preferences?
A) They have identical movie preferences.
B) Hardy enjoys romantic comedies more than Laurel.
C) Hardy enjoys science fiction movies more than Laurel.
D) The diagrams do not provide any information about relative preferences.
If a 35 percent increase in price of golf balls led to an 42 percent decrease in quantity
demanded, then the demand for golf balls is
A) unit-elastic.
B) perfectly elastic.
C) relatively inelastic.
D) relatively elastic.
A monopoly is characterized by all of the following except
A) there are only a few sellers each selling a unique product.
B) entry barriers are high.
C) there are no close substitutes to the firm’s product.
D) the firm has market power.
Which of the following statements is true?
A) The marginal revenue of a monopolistically competitive firm will be positive at high
prices and negative at low prices.
B) Because the demand curve for a monopolistically competitive firm is
downward-sloping its marginal revenue will be negative.
C) The marginal revenue of a monopolistically competitive firm will be always be
positive.
D) The marginal revenue of a monopolistically competitive firm will be positive at low
prices and negative at high prices.
Economists Cade Massey and Richard Thaler analyzed whether teams in the National
Football League distributed salaries efficiently. Massey and Thaler found that
A) the first few players selected in first round of the NFL draft are paid much higher
salaries relative to their marginal products than players drafted later in the first round.
B) rookies are paid salaries greater than their marginal products; veteran players are
paid salaries less than their marginal products.
C) veteran players who sign as free agents are paid more relative to their marginal
products than rookie players selected in the first round of the draft.
D) both rookie players and veteran players are paid less than the value of their marginal
products because of the lack of competition among teams.
If national laws protecting the health and safety of workers completely eliminate any
and all risk, then
A) workers in risky occupations become better off.
B) compensating wage differentials disappear and workers in risky occupations may be
no better off.
C) compensating differentials would grow because workers could not be compensated
by being given lower risk jobs.
D) more people would be employed.
As a business type, corporations ________ in the United States.
A) earn the majority of revenues
B) are the most common
C) are the least common
D) are subject to the fewest taxes
The term ________ in economics refers to a group of buyers and sellers of a product
and the arrangement by which they come together to trade.
A) collective
B) cooperative
C) market
D) trade-off
Pookie’s Pinball Palace restores old Pinball machines. Pookie has just spent $300
purchasing and cleaning a 1960s-era machine which he expects to sell for $2,000 once
he is finished with the restoration. After having spent $300, Pookie discovers that he
will need to rewire the entire machine at a cost of $1,100 in order to finish the
restoration. Alternatively, he can sell the machine “as is” now for $1,000. What is the
marginal cost of completing the task?
A) $300
B) $800
C) $1,100
D) $1,400
Most employees ________ pay taxes on the value of health insurance provided by
employers, and most people ________ get a tax break when buying individual health
insurance policies.
A) do; do
B) do; do not
C) do not; do
D) do not; do not
What is “tax incidence”? What determines tax incidence in a competitive market?
Fill in the columns in the following table and use the values in the table to determine
the profit-maximizing level of output.
Economists have noted that businesses of a certain type tend to congregate
geographically, attracting workers with skills in those fields. This, in turn, lures more
firms seeking employees with those skills. Some examples include commercial
banking, software development, and the automobile industry. What mechanism is at
work here? Briefly explain how the mechanism works to the advantage of employers
and employees.
Why do many film processing companies have a policy of printing every picture on a
roll of film or a memory card, even if the picture is very fuzzy and customers are
allowed to ask for refunds on any pictures they do not like?
Molly received an autographed poster of David Hasselhoff for her 21st birthday. Her
friend Helga offered her $50 for the poster, but Molly refused to sell the poster even
though she knows she would never pay that much to replace it if it was ever damaged or
destroyed. Explain this inconsistency in Molly’s behavior.
If the labor demand curve shifts to the right and the labor supply curve remains
unchanged, what will happen to the equilibrium wage and the equilibrium level of
employment? Illustrate your answer with a graph.
Explain how the decision by parents to not immunize their children, hoping that their
children will not get sick because other parents have had their children immunized, is
an example of free riding. How is this behavior dangerous to the public?
What did economists Robert Jensen and Nolan Miller determine must be true for a good
to be a Giffen good, where the income effect is larger than its substitution effect?
Goods differ on the basis of whether their consumption is rival and excludable. Explain
the terms “rivalry” and “excludability” as they are used to define goods. List the four
categories of goods, and define these categories in terms of rivalry and excludability.
What is the difference between zero accounting profit and zero economic profit?
What is the difference between between total costs, variable costs, and fixed costs?
What is an externality?
What role do well functioning financial markets play in a market economy?
What is a monopsony?
Explain why selling output at a price below that at which marginal revenue equals
marginal cost (MR = MC) might serve to deter entry of a potential competitor.
What is meant by “excess capacity”? How does it relate to consumer utility?