Behavioral economics goes against the basic teachings of both psychology and
economics.
The price of any factor of production in a competitive market depends on the value of
the final product it is used to produce.
Performance compensation that is tied to outcomes out of the employee’s control will
provide employees with the incentive to work hard.
The voting paradox demonstrates how majority-rule voting can lead to contradictory
and inconsistent results.
If the first worker produces ten custom picture frames a day, and the second worker
produces twelve additional custom picture frames a day, then diminishing marginal
returns have not yet set in.
Marginal damage costs are easily measured.
Those goods produced by the economic system that are used as inputs in the production
of future goods and services are known as inventory.
If Germany has exports of 90 billion euros and imports of 110 billion euros, then it is
running a trade deficit.
A tax on a good whose demand is price elastic will be effective in discouraging
consumption of that good.
The value of capital is based only on the value of goods and services that it currently
produces.
Market socialism is characterized by collective ownership of firms but market
allocation of goods.
The funds that firms use to buy capital come directly or indirectly from households.
One worker produces 10 rocking chairs. If diminishing returns have already set in, a
firm will need to hire more than two workers to produce 20 rocking chairs.
Natural comparative advantage comes from factor endowments.
Quantity demanded is determined by how much consumers are willing to pay for the
good or service.
Average total cost of producing 100 units of output is $5. If the marginal cost of
producing the 101st unit is $4, then average total cost of 101 units is less than $5.
Absent externalities and public goods, a perfectly competitive system is equitable.
In economics, “investment” refers only to the creation of new capital.
Export promotion policies try to encourage firms to produce more of products the
country has a comparative advantage in.
Related to the Economic in Practice on page 717: Corruption often leads to less
efficient firms producing the goods and services in a society.
Total income is more unevenly distributed than labor income.
Vertical equity holds that those with greater ability to pay should pay more.
Ronald Coase argued that property rights should never be assigned to the party that is
generating a negative externality.
A diagram of an individual’s utility from income will be a line with an increasing slope
if the individual is risk neutral.
Moving from socialism to capitalism as fast as possible is known as gradualism.
In any case where there is a negative externality, forming a government agency to solve
the problem rarely results in an efficient outcome.
According to Karl Marx, the value of any product is dependent upon the labor, capital,
and land inputs used in production.
The aggregate price level is a topic of macroeconomics.
Imperfect competition results in inefficiency but greater equity than pure competition.
An oligopoly with a dominant price leader will produce a level of output less than that
which would prevail under competition and that which a monopolist would choose in
the same industry.
San Francisco International Airport (SFO) is located adjacent to the community of San
Bruno. The noise from air traffic negatively affects individuals living in San Bruno,
however, this cost is not considered by airlines or air travelers. The airlines feel they
have a right to use the airspace while the individuals living in San Bruno feel they have
the right to quiet. The following diagram depicts the marginal costs and marginal
benefits associated with air travel.
Figure 16.5
Refer to Figure 16.5. The ________ associated with the efficient level of air travel is
$100.
A) marginal social cost
B) marginal damage cost
C) marginal cost
D) marginal benefit
Figure 6.10
Refer to Figure 6.10. The current price of a turkey sandwich is $8. If Kyle is currently
buying seven turkey sandwiches a week, he ________ maximizing utility because the
marginal utility ________ than its price.
A) is; from the seventh sandwich is greater
B) is; from the seventh sandwich is less
C) is not; gained from the seventh sandwich is less
D) is not; gained from the seventh sandwich is greater
Building infrastructure is referred to as
A) human capital.
B) physical capital.
C) social overhead capital.
D) financial capital.
________ is the practice of lending very small amounts of money, with no collateral,
and accepting small savings deposits.
A) Microfinance
B) Capital flight
C) Debt rescheduling
D) A stabilization program
Figure 6.1
Refer to Figure 6.1. Assume Tom’s budget constraint is AC. He does NOT spend his
entire income at point
A) A.
B) B.
C) E.
D) D.
Strawberries are produced in a perfectly competitive market. Average consumer
incomes decrease. This will cause the individual strawberry farmer’s marginal revenue
to ________ and their profit maximizing level of output to ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Unlike a monopolistically competitive firm’s product, a monopolistic firm’s product
A) is homogeneous.
B) has a vertical demand curve.
C) has many close substitutes.
D) has no close substitutes.
If the market for blue tooth headsets is unregulated and is presently characterized by
excess demand, you can accurately predict that price will
A) increase, the quantity demanded will fall, and the quantity supplied will rise.
B) increase, the quantity demanded will rise, and the quantity supplied will fall.
C) decrease, the quantity demanded will rise, and the quantity supplied will fall.
D) decrease, the quantity demanded will fall, and the quantity supplied will rise.
If the slopes of the production possibility frontiers involving sugar and rice in countries
A and B are equal,
A) the opportunity cost of producing sugar is less in Country A.
B) the opportunity cost of producing rice is less in Country B.
C) specialization does not benefit either country.
D) each country will produce identical quantities of sugar and rice.
Figure 7.9
Refer to Figure 7.9. If the price of capital is $30, then along isocost line AB total cost is
A) $1,200.
B) $1,800.
C) $2,400.
D) indeterminate from this information, as the price of labor is not given.
Figure 15.5
Refer to Figure 15.5. In the long run, in this monopolistically competitive industry,
A) some firms will leave the industry until the remaining firms earn a positive
economic profit.
B) some firms will leave the industry until the remaining firms earn a normal profit.
C) some firms will enter the industry and increase the demand for the product.
D) the government will subsidize the firms to eliminate any losses the firms incur.
Within a fully employed, centrally planned economy, there ________ unemployment
insurance, welfare, and other social programs.
A) is no need for
B) are growing costs for
C) is a desperate need for
D) is privately funded
Firms stop producing DVDs and start producing Blu-ray discs because people prefer
Blu-ray discs to DVDs. This will
A) make the distribution of outcome more equitable.
B) make the economy more stable.
C) improve efficiency.
D) make the economy less stable.
In the long run,
A) a firm can shut down, but it cannot exit the industry.
B) there are no fixed factors of production.
C) a firm can vary all inputs, but it cannot change the mix of inputs it uses.
D) all firms must make economic profits.
The Pet Emporium hires workers to bathe cats. The Emporium sells this service for $20.
The marginal revenue product of this store’s fifth worker is $100. The marginal product
of the fifth worker is
A) 2 bathed cats.
B) 1 bathed cat.
C) 5 bathed cats.
D) indeterminate from this information.
Figure 16.3
Refer to Figure 16.3. If Bill is forced to take into consideration the costs he imposes on
his wife by playing the saxophone, he will play his saxophone for ________ hours per
day.
A) zero
B) three
C) four
D) seven
Studies of the income tax show that its burden as a percentage of income
A) remains about the same as income increases.
B) decreases as income rises.
C) rises slightly as income rises.
D) initially increases and then decreases as income increases.
Table 3
B’s Strategy
Refer to Table 14.3. If both firms follow a maximin strategy, the equilibrium in the
game is ________.
A) (Advertise, Advertise)
B) (Don’t Advertise, Don’t Advertise)
C) (Don’t Advertise, Advertise)
D) (Advertise, Don’t Advertise)
Industry A has two firms that each control 50 percent of the market. Industry B has
three firms, where one firm controls 70 percent of the market and the other two firms
control 15 percent of the market each. According to the HHI, which industry is more
concentrated?
A) Industry A
B) Industry B
C) Both industries are equally concentrated.
D) indeterminate from the given information.
Figure 16.1
Refer to Figure 16.1. The ________ imposed as a result of producing the efficient level
of fertilizer is $250.
A) marginal damage cost
B) total damage
C) marginal private cost
D) tax
A change in the ________ of a good or service leads to a change in ________ that leads
to a ________.
A) supply; demand; change in price
B) demand; quantity demanded; change in supply
C) price; quantity demanded; movement along the demand curve
D) quantity; supply; change in demand
Suppose that the normal rate of return in the inkjet printer industry is 10% and the
return being earned by firms in this industry equals exactly 5%. Which of the following
is likely to follow from this scenario?
A) Firms will collude to keep competition out.
B) New firms will want to enter the industry.
C) Firms will want to leave the industry.
D) The normal rate of return will fall to 5% in the long run.
Which of the following is the correct way to calculate profit?
A) TR – TC
B) TR – TFC
C) TR – TVC
D) TVC – TFC
A theory of taxation that states that ________ is the ability-to-pay principle.
A) citizens should bear tax burdens in line with their ability to pay taxes
B) taxpayers should contribute to the government in proportion to the benefits they
receive from public expenditures
C) taxpayers should contribute to the government in a greater proportion than the
benefits they receive from public expenditures
D) taxpayers should contribute to the government in a smaller proportion than the
benefits they receive from public expenditures
In 2007, ________ crackdowns on illegal immigration, remittances from illegal
immigrants in the United States to Mexico ________.
A) because of; began to fall
B) because of; grew at a faster rate than in prior years
C) despite; continued to rise
D) despite; did not noticeably change
Figure 13.4
Refer to Figure 13.4. The marginal revenue of the sixth pound of burritos is
A) $10.
B) $14.
C) $20.
D) $84.
The Supplemental Security Income program is financed out of ________.
A) private insurance contributions
B) general revenues
C) the income tax
D) a payroll tax
A(n) ________ industry is characterized by strategic behavior.
A) perfectly competitive
B) monopolistic
C) monopolistically competitive
D) oligopolistic
Table 8.1
Refer to Table 8.1. Assume the price of labor (L) is $5 per unit, the price of capital (K)
is $10 per unit, and that firms attempt to minimize costs. The total variable cost of
producing one unit of output is
A) $16.
B) $100.
C) $120.
D) $220.
Investors put up $1,040,000 to construct a building and purchase all equipment for a
new restaurant. The investors expect to earn a minimum return of 10 per cent on their
investment. The restaurant is open 52 weeks per year and serves 900 meals per week.
The fixed costs are spread over the 52 weeks (i.e. prorated weekly). Included in the
fixed costs is the 10% return to the investors and $2,000 in other fixed costs. Variable
costs include $2,000 in weekly wages, and $600 per week in materials, electricity, etc.
The restaurant charges $8 on average per meal.
Total revenue per week is
A) $6,000.
B) $7,200.
C) $8,100.
D) $9,500.
________ is ΔTR/Δq.
A) Marginal cost
B) Marginal revenue
C) Average revenue
D) Economic profit
The formula for present discounted value is ________, where R dollars is to be paid t
years in the future and the agreed upon interest rate is r.
A) R(1 + r)t
B) (1 + r)t/R
C) R/(1 + r)t
D) (1 + r)/Rt
In the product market, changes in technology affect the marginal ________ of a unit of
output. In the labor market, changes in technology affect the marginal ________ of a
unit of labor input.
A) cost; cost
B) revenue; revenue
C) revenue product; cost
D) cost; revenue product
Mitzi’s Pet Salon hires you to determine the company’s status. The data below provides
information on the company’s annual costs and revenues.
Mitzi spends at least 40 hours a week at her place of business. If she closed the salon,
she could work for her competitor and earn $15,000 per year. She also owns the
building that houses the salon and could rent it out for $18,000 per year if she closes her
business. Calculate the economic cost and economic profit for Mitzi’s Pet Salon. Would
an accountant come to the same conclusion about the profitability of this firm? Explain.
Explain how the outcome of the Cournot model is achieved.
How can lack of investment in social capital affect private firms’ profits?
If revenue in the short run is sufficient to offset variable costs but not all fixed costs,
what should the firm do?
Suppose an executive has a choice between two salary compensation packages. One
guarantees him an income of $250,000 a year. The other would give allow him to earn
an extra $50,000 a year if profits rise by 2% but receive a pay cut of $50,000 f they
don”t. Let’s assume that there is a 50% chance that the profits could rise by 2% or more
and a 50% chance that they won”t. Explain why he might accept the $250,000
guaranteed salary. What would have to be true for him to accept the second salary
compensation package?
Why might a nation that has an absolute advantage in the production of a good or a
service still not be able to find a trading partner?
Economists often refer to taxes, subsidies, legal rules, and public auctions as methods
of indirect regulation. Explain what this means and what are its limitations.
Dick has a dog (Spot) that likes to bark at night. Jane, who lives next door to Dick, must
be at work every morning by six o’clock. Suppose that there is a noise ordinance that
requires Dick to keep his dog quiet. Is there any Coase solution to this problem that
does not involve calling the police? Explain.
Is it possible for the average fixed cost curve to have the shape depicted above?
Explain.
Scenario 1
Suppose your professor grades you on ten examinations, all carrying equal weight for
the final grade in the course. Answer the following questions based on this information.
Refer to Scenario 1. If you start the course in such a way that each exam score is better
than your previous average what should happen to your average score? What would
happen to your average if it was below your previous exam score? Explain.
Laura’s Cookie Company faces the following cost schedule for making cookies by the
dozen:
Fill in the blanks above.
What is the difference between a demand schedule and a demand curve?
Explain what social overhead capital is.
What is an oligopoly?
What is the Social Security system?