If the demand for a product decreases and the supply of the same product decreases, the
equilibrium price will decrease.
One reason why McDonald’s charges a single price for its products is that it is difficult
and costly for the company to determine each individual consumer’s willingness to pay.
In the long-run equilibrium, a monopolistically competitive firm earning normal profit
produces the allocatively efficient output level.
The supply curve of a uniquely talented actor or superstar athlete will be perfectly
inelastic.
The Congressional Budget Office estimates that the additional taxes and fees enacted
under the ACA will be enough to pay for the plan and reduce the federal government’s
budget deficit.
Competition in the form of advertising, better customer service, or longer warranties
can also reduce profits by raising costs.
Marginal benefit refers to the additional benefit that your activity provides to you.
If it costs Danitra $225 to create 4 necklaces and $275 to create 5 necklaces, then $50 is
the marginal cost of producing the 5th necklace.
An inferior good is a good for which the quantity demanded decreases as the price
increases, holding everything else constant.
Exempting food purchases from sales tax is consistent with the ability-to-pay principle,
although not necessarily consistent with vertical equity.
If marginal product is equal to average product, then total product is at a maximum.
Protectionism refers to the use of trade barriers to shield domestic firms from foreign
competition.
Local or state offices of the Department of Justice usually set prices for natural
monopolies in their jurisdictions.
In the circular flow model, households supply resources such as labor services in the
factor market.
The Sarbanes-Oxley Act of 2002 requires that CEOs personally certify the accuracy of
financial reports.
If the market price is at equilibrium, the producer surplus is minimized.
The situation in which one party to a transaction takes advantage of knowing more than
the other party to the transaction is known as asymmetric information.
If the market price is at equilibrium, the deadweight loss is maximized.
The value of the price elasticity of supply depends primarily on how quickly firms can
acquire inputs to increase quantity supplied when price increases.
The slope of an isocost line determines the marginal rate of substitution.
In the long-run equilibrium, both the perfectly competitive firm and the
monopolistically competitive firm produce the output at which MR=MC and charge a
price equal to the average total cost of production.
If the market for a product begins as perfectly competitive and then becomes a
monopoly, there will be a reduction in economic efficiency and a deadweight loss.
In most circumstances, employees do not pay taxes on the value of health insurance
their employers provide them.
Because each customer pays according to her willingness to pay, a consumer maximizes
her consumer surplus under first-degree price discrimination.
On average, people in the United States spend a greater percentage of their income on
health care than do people in most other countries.
If consumers believe the price of LCD televisions will decrease in the future, this will
cause the demand for LCD televisions to increase now.
If the price of peaches, a substitute for plums, decreases the demand for plums will
increase.
Entrepreneurs bring together the factors of production to produce goods and services.
A firm’s short-run average total cost curve is parallel to its short-run average variable
cost curve.
Deadweight loss refers to the reduction in economic surplus resulting from a market not
being in competitive equilibrium.
If a country has a comparative advantage in producing a product, it may not have an
absolute advantage in producing that product.
Indirect finance includes the sale by a corporation of stocks or bonds, but does not
include borrowing money from a bank.
In a two-good, two country world, if one country has an absolute advantage in the
production of both goods, it must also have a comparative advantage in the production
of both goods.
Monopolistically competitive firms achieve allocative efficiency but not productive
efficiency.
Differentiating products to suit customers’ tastes is a form of price discrimination.
An entry barrier exists when firms in an industry charge the lowest price possible for
their products.
If marginal costs differ quite substantially from average total costs, then using a
cost-plus pricing schedule will not lead to the profit maximizing price.
When a business is set up as partnership, the owner of the business faces unlimited
liability.
If the firm is producing no output in the short run, then its total costs are zero.
A financial security that represents a promise to repay a fixed amount of funds is a
A) share of stock.
B) coupon.
C) dividend.
D) bond.
Figure 15-16
Figure 15-16 shows the market demand and cost curves facing a natural monopoly.
Refer to figure 15-16. In the absence of any government regulation, the
profit-maximizing owners of this firm will produce ________ units and charge a price
of ________.
A) Q0 units; P0
B) Q1 units; P1
C) Q1 units; P4
D) Q3 units; P3
If, for the last bushel of apples produced and sold by an apple farm marginal revenue
exceeds marginal cost, then in producing that bushel the farm
A) added more to total cost than it added to total revenue.
B) added an equal amount to both total revenue and total cost.
C) added more to total revenue than it added to total cost.
D) maximized its profits or minimized its losses.
A public good is
A) a good that is rivalrous and excludable.
B) good that is nonrivalrous and nonexcludable.
C) a good that is nonrivalrous and excludable.
D) a good that is rivalrous and nonexcludable.
Figure 3-6
Refer to Figure 3-6. The figure above represents the market for canvas tote bags.
Assume that the market price is $35. Which of the following statements is true?
A) There is a surplus that will cause the price to decrease; quantity demanded will then
increase and quantity supplied will decrease until the price equals $25.
B) There is a surplus that will cause the price to decrease; quantity supplied will then
increase and quantity demanded will decrease until the price equals $25.
C) There will be a surplus that will cause the price to decrease; demand will then
increase and supply will decrease until the price equals $25.
D) There is a surplus that will cause the price to increase; quantity demanded will then
decrease and quantity supplied will increase until the price equals $25.
If Abercrombie & Fitch borrows $8 million from a bank to finance the construction of a
new store, this is an example of
A) a stock market transaction.
B) direct finance.
C) a bond market transaction.
D) indirect finance.
Figure 5-8
Consider a chemical plant that discharges toxic fumes over a nearby community. To
reduce the emissions of toxic fumes the firm can install pollution abatement devices.
Figure 5-8 shows the marginal benefit and the marginal cost from reducing the toxic
fumes emissions.
Refer to Figure 5-8. What is the economically efficient level of pollution reduction?
A) 12.5 million tons
B) 9 million tons
C) 8 million tons
D) 0 tons
Figure 15-15
Figure 15-15 shows the cost and demand curves for the Erickson Power Company.
Refer to Figure 15-15. If the government regulates Erickson Power Company so that
the firm can earn a normal profit, the price would be set at ________ and the output
level is ________.
A) P1, Q4
B) P2, Q3
C) P2, Q2
D) P3, Q2
Table 9-6
Production and
Consumption Production
Without Trade With Trade
Denmark and Belize can produce both clocks and hats. Table 9-6 shows the production
and consumption quantities without trade, and the production numbers with trade.
Refer to Table 9-6. All of the following are terms of trade that could possibly benefit
both countries except
A) 1 hat : 2 clocks
B) 1 hat : 4 clocks
C) 1 hat : 5 clocks
D) 1 hat : 8 clocks
The substitution effect of a decrease in the price of movie tickets results in
A) an increase in the quantity demanded of movie tickets.
B) a decrease in the quantity demanded of movie tickets.
C) an increase in the demand for movie tickets.
D) a decrease in the demand for movie tickets.
Sunk costs
A) are costs associated with repairing something you already own.
B) are important for optimal decision making.
C) are costs that have already been paid and cannot be recaptured in any significant
way.
D) are costs that firms sink into marketing.
NAFTA refers to a 1994 agreement that eliminated most tariffs among which countries?
A) Canada, the United Kingdom and Mexico
B) the United States, the United Kingdom and Mexico
C) the United States, Canada and Mexico
D) the United States, Mexico and Cuba
For a firm that can effectively price discriminate, who will be charged a lower price?
A) customers who have an elastic demand for the product
B) customers who have an inelastic demand for the product
C) buyers that are members of the largest market segment
D) buyers that are members of the smallest market segment
Figure 15-17
Refer to Figure 15-17 to answer the following questions.
a. What quantity will this monopoly produce and what price will it charge?
b. Suppose the government decides to regulate this monopoly and imposes a price
ceiling of $25. Now what quantity will the monopoly produce and what price will it
charge?
c. Will every consumer who is willing to pay the ceiling price of $25 be able to buy the
product? Briefly explain.
What does the phrase “internalizing an external cost” mean?
A) limiting the extent to which domestic firms can outsource production
B) prohibiting economic activities that create externalities
C) forcing producers to factor into their production costs the cost of the externalities
created in the production of their output
D) finding a way to address cross-border pollution
A monopolist’s profit maximizing price and output correspond to the point on a graph
A) where average total cost is minimized.
B) where total costs are the smallest relative to price.
C) where marginal revenue equals marginal cost and charging the price on the market
demand curve for that output.
D) where price is as high as possible.
Yield management and price discrimination have enabled firms to increase profits and,
at the same time
A) reduce the cost of production.
B) capture some consumer surplus.
C) reduce transactions costs.
D) transfer some producer surplus to consumers.
Figure 4-2
Refer to Figure 4-2. What area represents the increase in producer surplus when the
market price rises from P1to P2?
A) B + D
B) A + C + E
C) C + E
D) A + B
Which of the following is true of trademarks?
A) A successful trademark is one that becomes a generic name for a product, for
example, “Xerox” has become a generic term for making photocopies.
B) A successful trademark is one that allows consumers to immediately identify the
source or producer of the product.
C) If a firm is granted a trademark, then no other firms can legally produce similar
products for a given period of time.
D) If a firm is granted a trademark, then no other firms can legally sell in the same
geographic area for a given period of time.
How does the owner of a corporation relate to the business?
A) The owners of the business have a separate legal distinction from the business.
B) The owners of the business have no separate legal distinction from the business.
C) The personal assets are part of the corporation’s assets.
D) None of these describe the legal relationship of corporate owners to the business.
Figure 5-13
Figure 5-13 illustrates the market for gasoline before and after the government imposes
a tax to bring about the efficient level of gasoline production.
Refer to Figure 5-13. The market equilibrium price of gasoline is ________ per gallon.
A) $3.00
B) $3.75
C) $4.25
D) $5.00
In addition to covering the costs of unpredictable events, health insurance typically
covers many planned expenses, such as routine checkups, annual physicals, and the cost
of vaccinations. because of this, health insurance
A) discourages overuse of health care services.
B) encourages overuse of health care services.
C) generates an efficient quantity of health care services.
D) is not accepted by most doctors and hospitals.
Scarcity
A) stems from the incompatibility between limited resources and unlimited wants.
B) can be overcome by discovering new resources.
C) can be eliminated by rationing products.
D) is a bigger problem in market economies than in socialist economies.
If you received negative marginal utility from consuming the 4th slice of pizza, then
your total utility from 4 slices of pizza must be less than your total utility from 3 slices
of pizza.
Figure 13-11
Refer to Figure 13-11. The firm represented in the diagram
A) makes zero economic profit.
B) makes zero accounting profit.
C) should exit the industry.
D) should expand its output to take advantage of economies of scale.
A franchise is
A) a firm that buys and operates a brand name business in a new market.
B) a firm with the legal right to sell a good or service in a particular area.
C) a firm with no competitors.
D) a branch of a national company.
We should never assume that an inelastic demand curve is a perfectly inelastic demand
curve because
A) there has never been evidence of a perfectly inelastic demand curve.
B) an inelastic demand curve may be perfectly inelastic at some times but not others.
C) perfectly inelastic demand curves are rare.
D) an inelastic demand curve may be elastic at high prices.
Figure 6-1
Refer to Figure 6-1. A perfectly elastic demand curve is shown in
A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.
Parents who do not have their children immunized and attempt to benefit from other
parents who did have their own children immunized are exhibiting an economic
behavior known as
A) excludability.
B) public rivalry.
C) free riding.
D) internalizing an external cost.
Article Summary
As a part of its 2013 marketing campaign, the Greater Fort Lauderdale Convention &
Visitors Bureau (CVB) set its sights on increasing travel to the region by with
promotions to the lesbian, gay, bisexual and transgender community (LGBT). From
August through November, the CVB has events scheduled across the United States and
globally in an effort to attract a larger share of this travel segment. According to the
CVB, Fort Lauderdale is the state’s largest and most popular diverse gay capital, and
their marketing efforts helped attract 1.2 million LGBT tourists who spent $1.4 billion
in 2012.
Source: Arlene Satchell, “Lauderdale CVB ramps up LGBT summer marketing,” Sun
Sentinel, June 29, 2013.
Refer to the Article Summary. By marketing to the LGBT community, Fort Lauderdale
and the CVB are trying to set the city apart from competing travel destinations. This is
an example of
A) defending a brand name.
B) blocking entry into the market.
C) legally enforcing a trademark.
D) product differentiation.
Which of the following statements describes economists’ attitudes regarding the
influence of social factors on the choices consumers make?
A) Economists formerly believed they were very important but now they believe they
are not important.
B) Economists believe social factors affect consumer choice in markets for public
goods but not in markets for private goods.
C) Liberal economists believe social factors are very important; conservative
economists do not believe social factors have any influence on consumers.
D) Economists traditionally believed they were unimportant, but many economists now
believe social factors are important.
What is the ceteris paribus condition?
Assume that a doctor can earn an additional $20,000 of revenue each year from keeping
his office open for one additional hour per week. What must the additional cost of
keeping the office open this additional hour per week be to make staying open for the
extra hour economically rational?
Suppose you hit a progressive jackpot on a slot machine in a casino in Atlantic City and
are given the choice of the following prizes:
Prize 1: $150,000 to be received right away, with three additional payments of $150,000
to be received each year for the next three years.
Prize 2: $500,000 to be received right away.
If the interest rate is 5 percent, what is the present value of each prize?
Some environmentalists have criticized tradable emissions allowances on the grounds
that they give permit holders a license to pollute. Furthermore, environmentalists argue
that those who sell their permits receive a monetary benefit from their contribution to
polluting the environment. Use economic reasoning to evaluate this criticism.
If the government is most interested in minimizing excess burden of an excise tax,
should it impose the tax on goods that are elastic or on goods that are inelastic?
How does the demand curve for an oligopoly firm differ from the demand curves for
firms in competitive market structures?
What is the difference between a price ceiling and a price floor? Compared to the
competitive equilibrium price, where must price ceilings and price floors be set to have
an effect on the market.
Explain how mandatory seat belt laws may reduce the negative externalities of risky
behavior.
Explain the concept of network externalities.
Behavioral economists examine choices that consumers make that are not economically
rational. Economists generally assume that people are rational; that is, they weigh the
benefits and costs of an action and choose an action only if the benefits outweigh the
costs. Why do consumers not act rationally when the result is that they make
themselves worse off?
What is the marginal productivity theory of income distribution?
The simple trade model demonstrates that countries can expand consumption by
specializing in the production of goods and services in which they have a comparative
advantage. In reality we do not see complete specialization in production. State three
reasons why this is case.
The graph below represents the market for lychee nuts. The equilibrium price is $7.00
per bushel, but the market price is $5.00 per bushel. Identify the areas representing
consumer surplus, producer surplus, and deadweight loss at the equilibrium price of
$7.00 and at the market price of $5.00.
What is the difference between the voting paradox and the Arrow impossibility
theorem?
What is producer surplus? What does producer surplus measure?
One argument in the debate surrounding globalization is about the inequality between
nations. Discuss the major points of the inequality between nations argument and
describe how falling barriers to trade and investment might help reduce the inequality
between nations.
What is a Giffen good?