In the Cournot model, firms take their rivals’ reactions as given.
Input and output markets operate independently and thus should be analyzed as separate
entities.
A retail sales tax is a proportional tax with respect to income.
In long-run equilibrium for a monopolistically competitive firm, economic profit equals
zero and thus the outcome is efficient.
The more homogeneous are consumers’ preferences, the less product variety will be
observed.
The increase in total cost that results from producing one more unit of output is the
average total cost.
Perfectly inelastic demand is represented as a vertical line.
If the domestic price is above the world price of a certain product, the domestic country
will export the product.
The marginal revenue curve for a perfectly competitive firm will be downward sloping.
Economists consider the long run as a period of more than one year.
For a policy to be Pareto efficient, a change in the policy can only make someone better
off if someone else is worse off.
Externalities involve the imposition of costs or benefits on parties outside an activity or
transaction.
Residential structures and inventories are examples of intangible capital.
A command economy is one in which individuals and firms set output targets, incomes
and prices.
Game theory helps enable economists to understand and predict the behavior of
oligopolistic industries with more than two firms.
The rate of inflation is a topic of macroeconomics.
Price elasticity of demand is calculated as the ratio of the change in quantity demanded
to the change in price.
Most economists believe that import-substitution strategies have been quite successful
around the world.
Development usually leads to GDP growth.
According to the World Bank, in 2006 the smallest population group (810 million
people) belonged to countries classified as upper middle-income.
A tax on a good whose demand is perfectly price inelastic will be effective in
discouraging consumption of that good.
When demand is unit elastic, a decrease in price will result in no change in total
revenue.
Disaggregating the distribution of income by race shows that the mean household
income for the top 20% of African-American households was very similar to that of the
top 20% of white households.
When a firm imposes an external social cost, the government should impose a tax
exactly equal to the marginal social cost to ensure that the efficient level of output will
be produced.
The long-run equilibrium for a monopolistically competitive firm is efficient because its
produces where MR = MC.
In general, risk loving individuals experience increasing marginal utility from income.
When all players play their best strategy regardless of what their competitors are doing,
they are following their dominant strategy.
If demand in a perfectly competitive market increases, then an individual firm in that
industry will see its profits fall.
For the Coase Theorem to work, three conditions must be satisfied: the basic rights
must be clearly understood, there must be no impediments to bargaining, and only a few
parties are involved.
Perfectly inelastic demand is represented as a horizontal line.
A graph illustrating how one variable changes over time is a Cartesian coordinate
system.
Both economists and mathematicians have shown there exists at least one set of prices
that will clear all markets in a system simultaneously, known as equilibrium price.
The compilation of data to describe phenomena and facts is known as empirical
economics.
Labor is demanded by firms in an output market.
Households will supply labor as long as the wage they receive is less than the value of
their leisure time.
How total revenue changes when a price changes can be predicted using price elasticity
of demand.
Consider the following game. You pick a card from a deck and each time you select an
ace, you get $260. For all other cards you must pay $13. This game is a fair bet.
Those goods produced by the economic system that are used as inputs in the production
of future goods and services are known as capital.
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 cost per week is
A) $1,600.
B) $2,000.
C) $5,000.
D) $6,600.
In the short run, when a monopolist incurs a loss, it will
A) always shut down.
B) always produce where marginal cost equals marginal revenue.
C) produce as long as total revenue is sufficient to cover variable costs.
D) produce as long as total revenue is sufficient to cover fixed costs.
Define the following four references and name a country that you argue would fall into
each category.
(a) First World
(b) Second World
(c) Third World
(d) Fourth World
If the supply of labor decreases, which of the following events will occur?
A) The wage rate will fall and firms will increase employment up until the point where
MRP equals the new wage rate.
B) The wage rate will fall and firms will decrease employment to the point where MRP
equals the new wage rate.
C) The wage rate will increase and firms will decrease employment to the point where
MRP equals the new wage rate.
D) The wage rate will increase and firms will increase employment up until the point
where MRP equals the new wage rate.
The marginal private cost to a firm of producing the 10th unit of output is $100. The
marginal social cost of the 10th unit of output is $150. The marginal damage cost of the
tenth unit of output is
A) $5.00.
B) $25.00.
C) $50.00.
D) $250.00.
Which of the following is NOT a philosophical issue regarding income redistribution?
A) What is and is not possible?
B) What is fair?
C) What is just?
D) What is the ideal distribution of income?
The biggest single transfer program at the federal level is
A) farm subsidies.
B) unemployment compensation.
C) Social Security.
D) the agricultural support program.
The Wax Works sells 500 candles at a price of $5 per candle. The Wax Works’ total
economic costs for producing 500 candles are $3,000. The Wax Works’ economic profit
is
A) -$3,000.
B) -$500.
C) $2,500.
D) $3,000.
________ marginal returns implies ________ marginal costs.
A) Diminishing; decreasing
B) Increasing; increasing
C) Diminishing; increasing
D) Increasing; constant
Polar Water, a company that delivers bottled water, is considering three investment
opportunities. The expected returns for each of the projects are as follows: buying a
new delivery van, 12%; computer training for its office staff, 9%; and defensive driving
training for its drivers, 8%. If the current interest rate is 7%, the firm should invest in
A) only the purchase of a new delivery van.
B) the purchase of a new delivery van and computer training for its office staff.
C) all of the projects.
D) none of the projects.
According to the theory of comparative advantage, ________ raise(s) productivity by
lowering opportunity costs.
A) trade and specialization
B) investment in capital goods
C) economic growth
D) exchange and consumption
Table 2.1
Refer to Table 2.1. For Pete, the opportunity cost of designing three tattoos is ________
avatar designs.
A) 6
B) 12
C) 24
D) an indeterminate number of
If Google is earning a rate of return greater than the return necessary for the business to
continue operations in the long run, then
A) total costs exceed total revenue.
B) total costs exceed a normal rate of return.
C) the firm’s normal rate of return is zero.
D) the firm is earning an economic profit.
If there are two firms in an industry and each has 50 percent market share, then the
Herfindahl-Hirschman Index equals
A) 2,500.
B) 2,800.
C) 5,000.
D) 6,600.
Table 3.1
Refer to Table 3.1. If the price per pizza is $3, the price will
A) remain constant because the market is in equilibrium.
B) increase because there is an excess supply in the market.
C) increase because there is an excess demand in the market.
D) decrease because there is an excess supply in the market.
If a monopolist earns positive economic profits in the long run,
A) new firms will enter the market.
B) the monopolist expands production.
C) the industry supply curve shifts to the right.
D) the monopolist will not change its behavior.
Related to the Economics in Practice on page 109: Which of the following best explains
why demand is often less elastic in the short run than it is in the long run?
A) When demand is elastic, price increases reduce revenue because a small price
increase will lead to a large decrease in quantity demanded.
B) In the short run, consumers have less access to substitutes.
C) Consumers tend to postpone making purchasing decisions as long as possible.
D) In the short run, prices can change rapidly, but in the long run they are more stable.
Scarce resources give rise to the concept of
A) efficient markets.
B) opportunity costs.
C) laissez-faire.
D) positive economics.
Figure 9.1
Refer to Figure 9.1. If this farmer is maximizing his profits, his TVC is
A) $24.
B) $42.
C) $108.
D) $255.
In the short run marginal cost is positive and increasing at output levels where total
variable cost is ________ at a(n) ________ rate.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
Tom borrowed $80,000 from his parents to open a donut stand. He agrees to pay his
parents a 5% yearly return on the money they lent him. His other yearly fixed costs
equal $16,000. His variable costs equal $60,000. He sold 50,000 dozen donuts during
the year at a price of $3.00 per dozen.
Tom’s profit is
A) $0.
B) $30,000.
C) $50,000.
D) $70,000.
Figure 9.1
Refer to Figure 9.1. If this farmer is maximizing profits, his profit will be
A) -$24.
B) $45.
C) $48.
D) $72.
Second hand cigarette smoke is an example of a(n) ________.
A) economy of scale
B) externality
C) public good
D) government failure
If there are external costs of production not accounted for, then marginal
A) cost equals marginal social cost.
B) cost is less than marginal social cost.
C) cost is greater than marginal social cost.
D) social cost is zero.
Table 11.1
Refer to Table 11.1. If the interest rate is 12.5%, Nashbar Bicycle’s total investment
would be
A) $0.
B) $50,000.
C) $250,000.
D) $550,000.
You are in the market for a used 2010 Toyota Corolla. You know that half of the 2010
Corollas are lemons and half are peaches. If you could be assured that the Corolla you
were buying was a peach, you would be willing to pay up to $12,000. On the other
hand, you would only be willing to pay $4,000 for a lemon. You have no ability to
discern whether any particular Corolla is a lemon or a peach. Sellers of Corollas, on the
other hand, are likely to know whether their particular car is a lemon or a peach.
Suppose sellers of lemons will sell their cars for $3,000 or more and peach sellers will
be willing to sell their cars for $9,000 or more. If you are risk neutral, you are willing to
offer ________ and ________ are willing to sell you their car.
A) $4,000 for a car of unknown quality; lemon owners only
B) $6,000 for a car of unknown quality; lemon owners only
C) $8,000 for a car of unknown quality; lemon owners only
D) $9,000 for a car of unknown quality; both lemon and peach owners
When a nation’s net exports are equal to zero, it has a
A) surplus in trade.
B) shortage in trade.
C) balanced trade.
D) deficit in trade.
If a country has a trade surplus of $40 billion, which of the following can be true?
A) The country’s exports are $160 billion, and its imports are $120 billion.
B) The country’s exports are $110 billion, and its imports are $150 billion.
C) The country’s exports are $120 billion, and its imports are $140 billion.
D) The country’s exports are $140 billion, and its imports are $40 billion.
Figure 6.2
Refer to Figure 6.2. Along budget constraint AC, the opportunity cost of one
gardenburger is
A) 1/4 of a beer.
B) 1 beer.
C) 2 beers.
D) changing as Mr. Lingle moves down his budget constraint.
Figure 3.9
Refer to Figure 3.9. Assume there are only two people in the market for coconuts: Sasha
and Kyle. Along the ________, at a price of $10, quantity demanded would be 10.
A) demand curve for Sasha
B) demand curve for Kyle
C) market demand curve
D) none of the above
________ is calculated by summing the squared market share percentages of all firms
in an industry.
A) The Herfindahl-Hirschman Index
B) The concentration ratio
C) The Cellar-Kefauver Index
D) The antitrust prohibition ratio
The cost minimizing equilibrium condition can be written as
A) MPL = MPK.
B) PL = PK.
C) (MPL)(PL) = (MPK)(PK).
D) MPL/PL = MPK/PK.
The opportunity cost of using resources to produce more of one good instead of more of
another good is its
A) marginal revenue.
B) marginal cost.
C) price.
D) total cost.
Tyler’s wage rises and he chooses to increase the number of hours he supplies to the
labor market. What does this imply about the relative sizes of the substitution effect and
the income effect? Explain.
Oftentimes when a company’s share price is very “high” it will choose to split the stock
price and offer each shareholder one share for each they currently hold. Explain why
companies might do this and what the effect is on shareholder wealth.
Describe the Cournot model.
Suppose that the economy has only two sectors, A and B. Assume that both are initially
in long-run competitive equilibrium. The government releases a report indicating that
the consumption of good A increases an individual’s health. Use graphs (both showing
the market and a representative firm for each sector) to show the impact of the
government report on both sectors of the economy.
Scenario 2
Assume that a poor person has an income of $500. There are only two goods that he can
consume ” food and “all other goods”. Food prices are $2 and “all other goods” are $1.
Assume that the government is considering two possible way to help this person. Plan A
involves providing $100 in cash. Plan B involves providing $100 in food coupons that
can only be spent on food.
What happens to the maximum amount of “all other goods” that this person can buy if
instead he receives the $100 in food coupons? What’s the maximum amount of food he
can buy under this plan?
SCENARIO 1: Consider the following data for the harvest of crabs versus the harvest
of fish off the coast of Virginia in answering the following questions.
Refer to Scenario 1. What is the economic significance of 25 fish captured and 25
crabs captured?
In the short run, when production goes up what typically happens to total variable
costs?
Suppose that the economy has only two sectors, A and B. Assume that both are initially
in long-run competitive equilibrium. Consumer tastes change and good A is no longer
in fashion. Use graphs (both showing the market and a representative firm for each
sector) to show the impact of the change in tastes on both sectors of the economy.
Explain three of the shortcomings of the free-enterprise system.
What three assumptions must hold for the allocation of resources among firms to be
efficient?
Why is the price elasticity of demand generally a negative number?
Why are property rights important in economic development?
The U.S. domestic market for T-shirts is shown below.
The world price of T-shirts is $5.00 and the U.S. can buy all of the T-shirts it wants at
that price. Show the world price on the graph above. Will the U.S. import or export
T-shirts? How many will be traded?
Why isn’t slope as useful as elasticity to measure the responsiveness of one variable to
another?
When is the price of a product demand determined?
What is meant by the term homogeneous products? Give an example.