A monopolistically competitive firm maximizes profit by producing where marginal
revenue is less than marginal cost.
In order to get his bachelor’s degree, Timothy gave up an offer for a full time job as a
bartender. Therefore, Timothy incurred an opportunity cost.
The congestion tax implemented in London reduced traffic volume and cut travel time
for cars and buses in half.
Suppose that Jack promises that if Jill chooses the high price, he will too. Jill has no
incentive to cheat on the agreement.
At a price of $18, the marginal revenue of a movie seller is $12. If the marginal cost of
a movie is $9, the firm should increase its price.
Labor unions may increase worker productivity by facilitating smooth relations
between labor and management.
In the final two decades of the 20th century, sub-Saharan African economies grew
rapidly.
The patented outcome of a research project financed by a private organization is a
private good.
Tradeoffs involve an exchange of one thing for another because resources are limited
and can be used in different ways.
A “market” is an arrangement that allows people to exchange things.
Additional factors beyond supply and consumer purchasing desire can affect demand.
In the long run, the price elasticity of supply is limited because of the principle of
diminishing returns.
The prisoners’ dilemma shows that if one party must pick first and the other party
knows their choice, the outcome of a game can be different.
Labor economists consider an increase in demand for skill the most important reason
for growing inequality.
The free-rider problem is larger for private goods than it is for public goods.
If Tom can produce 20 multiple choice questions or 30 true/false questions in an hour,
and Mary can produce 15 multiple choice questions or 15 true/false questions in an
hour, then Tom has a comparative advantage in writing multiple choice questions.
Advertising can create an image about a product inducing people to try the product.
Free trade makes the people of a country worse off.
Entry leads to higher prices and profits in an industry.
Assuming that the demand for a product is stable, a increase in price will lead to an
increase in consumer surplus.
A product produced in a foreign country and purchase by residents of the home country
is an import.
The notion of anchoring helps explain the large effects of ‘sales” for retail goods.
Because in oligopoly the actions of one firm has a perceptible affect on the other firms,
oligopoly firms act strategically.
One example of a microeconomic question is, “Should unemployment benefits be
increased?”
Decreasing marginal product implies decreasing marginal costs.
As new firms enter an industry the existing firms will decrease their output.
All the combinations of two goods on a consumer’s budget line must generate different
levels of utility.
If a country bans the importation of a particular good, the market equilibrium is shown
by the intersection of the demand and domestic supply curves.
If the elasticity of supply is .5, then a 10% decrease in price will result in a 5% increase
in quantity supplied.
Microeconomics helps explain economic fluctuations, why the economy shrinks and
expands and why some of the economy’s resources are idle.
Talking about alternatives is the first step in a process that helps us make better choices
about how we use our resources.
If education results in external benefits, the government could subsidize education to
lead the market to an inefficient level of output.
Economically speaking, it would be socially optimal to chose the level of pollution
where the marginal abatement cost is considerably less than the marginal benefit.
A pollution tax internalizes the costs of pollution a firm is imposing on others.
Which of the following goods is likely to have the most inelastic demand?
A) restaurant meals
B) air travel
C) movies
D) cigarettes
Figure 9.2 shows the cost structure of a firm in a perfectly competitive market. Suppose
the current market price is $10 and the firm produces the profit maximizing output
level. If the firm’s total fixed cost increases due to a new government regulation, the
short-run response of the firm should be to:
Note: since the question does not restrict the firm’s response to the short run, we can’t
rule out that the rise in fixed cost will push the firm below the breakeven point and that
the firm will exit the industry in the long run, thus decreasing its current output level.
A) produce its current output level.
B) increase its current output level.
C) decrease its current output level.
D) There isn’t sufficient information.
Oligopoly differs from monopoly and perfect competition in that:
A) firms consider each other’s actions when choosing price and quantity.
B) there are a few firms in the industry.
C) firms act strategically.
D) all of the above
Recall the Application. The asymmetric information about kiwifruit was reduced by:
A) reducing the price of U.S. kiwifruit.
B) advertising.
C) a federal government marketing order.
D) all of the above
The real value of money:
A) is another word for the face value.
B) reflects the purchasing power of the sum of money.
C) matters less to people than its nominal value.
D) Both B and C are correct.
Figure 15.3 depicts a one-mile stretch of beach with 100 swimmers distributed evenly
along the beach. There are two ice cream vendors – 1 and 2 – on the beach selling an
identical product. Assume that each swimmer buys only one ice cream cone and that
they prefer to buy ice cream from the nearer vendor. If neither vendor has an incentive
to adjust their locations:
A) vendor 1 is at B while vendor 2 is at C.
B) vendor 1 is at A and while vendor 2 is at D.
C) vendor 1 is at A while vendor 2 is at E.
D) both vendors are at C.
Prices below the free market equilibrium price are inefficient because:
A) they prevent mutually beneficial transactions.
B) no one can be made better off without hurting someone by participating in another
transaction.
C) all mutually beneficial transactions happen.
D) more goods could be produced using society’s resources.
Scarcity can best be defined as a situation in which:
A) there are no buyers willing to purchase what sellers have produced.
B) there are not enough goods to satisfy all of the buyers’ demand.
C) the resources we use to produce goods and services are limited.
D) there is more than enough money to satisfy consumers’ wants.
The combinations of goods a nation can consume after trade and specialization begin
are illustrated by the ________ curve.
A) supply
B) production possibilities
C) consumption possibilities
D) demand
Figure 12.8 depicts an advertising game between two stores. Which of the following
possible outcomes is a Nash equilibrium of the game?
A) Neither store advertises.
B) Only Store A advertises.
C) Only Store B advertises.
D) Both Store A and Store B advertise.
Accounting rules:
A) specifies the term of exchange, facilitating exchange between strangers.
B) increases the profitability of inventions, encouraging firms to develop new products.
C) provides the public with reliable information about the performance of a firm.
D) increases the risk faced by entrepreneurs.
One reason that college graduates earn higher wages than non-graduates is because:
A) college graduation serves as a signal of the individual’s productivity.
B) there are no additional skills learned in college that increase productivity.
C) college graduates are always less intelligent than non-college graduates.
D) college graduates are less equipped to deal with technological change, as their skills
are technology-specific.
The Act which made it illegal to engage in practices that resulted in the restraint of
trade was the:
A) Sherman Act.
B) Clayton Act.
C) Robinson-Patman Act.
D) Celler-Kefauver Act.
If a firm is indifferent between operating and shutting down in the short run, then it
must be true that:
A) total revenue equals total cost.
B) total revenue equals total variable cost.
C) total revenue equals fixed cost.
D) fixed cost is zero.
If the demand for a product in an increasing cost perfectly competitive industry
decreases, we would expect that price in the long run would ________ and the number
of firms in the market would ________.
A) decrease; decrease
B) increase; increase
C) decrease; increase
D) increase; decrease
Which of the following contains most of the characteristics of a public good?
A) education
B) trash collection
C) public transportation
D) fireworks shows
A company earns $70,000 in profit if it is allowed to dump untreated waste in the river
and only $40,000 in profit if it is forced to treat the waste before dumping it into the
river. The local fishermen earn $35,000 in profit if the river is polluted and $55,000 in
profit if the river is not polluted. The fishermen would be willing to pay the company
up to ________ not to pollute the river, and the company would be willing to accept a
minimum of ________ if it agrees not to pollute the river.
A) $15,000; $30,000
B) $20,000; $30,000
C) $30,000; $20,000
D) $20,000; $5,000
Suppose we observe that a firm’s total revenue doesn’t change when price and quantity
change by the same percentage. Which of the following is a possible value of its price
elasticity of demand?
A) 0
B) 0.5
C) 1
D) 2
In game theory, a strategy that represents the best choice for a firm no matter what the
other firm does is termed:
A) a dominant strategy.
B) a Nash equilibrium.
C) a prisoners’ dilemma.
D) a duopolists’ dilemma.
Figure 17.1 depicts a firm’s marginal revenue product curve. The marginal revenue
product curve is negatively sloped because ________ decreases as the firm uses more
labor.
A) the hourly wage
B) the marginal product of labor
C) the product price
D) none of the above
If an economy is represented by a point along its production possibilities curve:
A) it can produce more of one product even if it does not produce less of another
product.
B) it can produce more of one product only if it produces less of another product.
C) it cannot produce more of one product unless it stops producing the other product
entirely.
D) it cannot possibly produce more of one product, even if it produces less of another
product.
What does a firm use to decide how much labor to hire at a particular wage?
A) marginal cost
B) price of output
C) marginal revenue product of labor
D) marginal product of labor
Which of the following is a reason why the marginal product increases as output
increases:
A) decreasing repetition.
B) increasing continuity.
C) both A and B
D) neither A nor B
Free riding is a problem with public goods but not with private goods because for the
private good:
A) the good is a rival good.
B) the marginal cost of production is greater than zero.
C) the good is an excludable good.
D) the good is free.
Refer to Figure 7.5. If the consumer is uses cognition to offset present bias, he will
consume ________ now and save ________ to maximize utility.
Figure 7.5
The consumer must decide how to split $20 between spending and saving.
A) $12; $8
B) $18; $2
C) $12; $2
D) $0; $20
An import restriction ________ the market price and ________ the total surplus of the
market.
A) increases; decreases
B) increases; increases
C) decreases; increases
D) decreases; decreases
Assume six firms comprising an industry have market shares of 30, 30, 10, 10, 10, and
10 percent. The Herfindahl-Hirschman Index for this industry is ________.
A) 80
B) 2,200
C) 1,600
D) 2000
Suppose that you own a house. What is the opportunity cost of living in the house?
A) There is no opportunity cost because you own the house.
B) There is no opportunity cost unless you could set up a business in the house.
C) The opportunity cost is the rent you could have received from a tenant if you didn’t
live there.
D) The opportunity cost is the cost of your monthly mortgage payment plus bills.
Suppose that the price elasticity of supply is one and the quantity supplied increases by
5%. Other things being equal, the percentage change in the price should be:
A) a 0.5% increase in the price.
B) a 5% increase in the price.
C) a 0.2% increase in the price.
D) a 2% increase in the price.
Suppose that Tim is willing to pay $50 for a dozen of roses for Kim on Valentine’s Day.
If he actually pays $2.50 per rose for the 12 roses, his total consumer surplus is:
A) $50.
B) $30.
C) $20.
D) $12.
In the United States, the average collision-related external cost of travel is about
________ per mile driven, and the fuel cost per mile driven is about ________.
A) 4.4 cents; 10 to 15 cents
B) 0.002 cents; 20 to 22 cents
C) 66 cents; 5 cents
D) 21.5 cents; 21.5 cents
A good is nonrival in consumption when it:
A) has either positive or negative external costs.
B) is priced at its marginal cost.
C) can be enjoyed by one person without that interfering with another’s consumption.
D) is nonexcludable.
Since a firm in monopolistic competition has some market power, its long-run price will
be greater than its:
A) average total cost.
B) marginal cost.
C) total cost.
D) none of the above
Would you expect the income elasticity of demand for Cadillacs to be positive or
negative? Why?
Why is there a prisoners’ dilemma?
What is consumer surplus and how is it calculated?
Using a graph, illustrate the effect that an increase in production costs will have on the
equilibrium price and quantity of a good.
Describe the Sherman Antitrust Act.
What does it mean for a firm to be suffering an economic loss? Does this imply that the
firm is incurring a loss in the accounting sense? Explain.
Why are some long-run average cost curves steeper on the downward side than others?
Why is a monopolist’s marginal revenue less than the price?
What is the difference between comparative advantage and absolute advantage?
Graphically illustrate and explain the effect of an increase in product price on the
demand curve for labor.
Draw a graph showing a short-run average variable cost curve, a short-run average total
cost curve, and a short-run marginal cost curve. Briefly explain the shape of each curve
and how they relate to each other.
What does the price elasticity of supply measure? How is it calculated?
Comment on the following statement: “Individual consumers and producers acting in
their own self-interest will lead a perfectly competitive market to the efficient level of
output.”
The price elasticity of demand for restaurant meals is 1.5 for type A consumers and 0.9
for type B consumers. If a restaurant decides to price discriminate, which group will be
charged a higher price? Explain.
Explain why some firms may suffer diseconomies of scale.
Can an individual with no absolute advantage find himself with a comparative in
producing a good or a service?
Explain why the price elasticity varies even when a firm faces a linear demand curve.
The text lists 4 types of puzzling consumer behavior which have been identified by
economists and psychologists. What are these 4 types of consumer behavior?
Explain what guaranteed price matching means. What are the consequences of such a
policy?
Describe two features of monopolistic competition that differentiate it from monopoly.