If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can
produce 30 milk shakes or 16 banana splits in an hour, then Eddie has a comparative
advantage in producing milk shakes.
If Xerox requires individuals who purchase their copiers to also purchase Xerox toner
fluid, then Xerox is engaging in the practice of predatory pricing.
Black and Hispanics poverty rates in the United States are about twice as high as Asian
and white poverty rates.
Accounting costs include explicit and implicit costs.
Most modern economic analysis is positive in nature, but many issues also involve
questions with normative economics.
If one variable declines as the other variable declines, the two variables are negatively
related.
A monopoly firm cannot affect the price therefore it is a price taker.
In long-run equilibrium, a monopolistically competitive firm’s marginal revenue is
equal to its marginal cost.
A product that offers a guarantee is not any more appealing to consumers than a similar
product that does not offer a guarantee as long as the two products are priced the same.
On the “demand side” of a market, consumers indicate what they are willing to buy, in
what quantity and at what price.
An import ban on shrimp increases the price of shrimp, decreases the quantity of
shrimp, and therefore domestic producers will gain at the expense of domestic
consumers.
The benefits of patents encourage firms to undertake expensive research and
development.
It is possible for society to gain by rewarding 20-year patents to companies.
Recall the Application about food and drink pricing during “happy hour” at bars
and restaurants to answer the following question(s).
Recall the Application. In a market subject to monopolistic competition, a restaurant’s
rational response to more elastic demand is to increase its price.
Topics regarding why an economy is in a recession is in the realm of macroeconomics,
while topics concerning long term economic growth is not.
A merger of two firms selling close substitutes may lead to lower prices.
Talking about alternatives is the first step in a process that helps us make better choices
about how we use our resources.
If the market for a good consists of a downward sloping demand curve and a horizontal
supply curve, consumers will pay the whole amount of a newly imposed tax.
Hurricane Andrew caused the price of ice in Florida to decrease in the short run.
The entry of an additional firm into a market decreases the profit per unit of output
because entry decreases the price.
A variable is a measure that can take on different values.
If marginal utility is decreasing consuming an additional unit of a product will cause
total utility to decline.
The market system works by getting each person, motivated by his or her own
self-interest, to produce products for other people.
If you can consume a good without having to pay for it, the good must be nonrival in
consumption.
Firms in monopolistically competitive markets sell identical products.
The gap between average total cost and the average variable cost is always the average
fixed cost.
In a decreasing cost industry, the market price will tend to fall when there is an increase
in demand.
If a firm uses a grim trigger retaliation strategy, all firms could end up with zero
economic profit.
The law of diminishing marginal utility implies that demand curves will be
upward-sloping.
Two goods are complements if an increase in the price of one good leads to an increase
in demand for the other.
The income effect helps explain the shape of a consumer’s demand curve.
Economic profit is total revenue less economic costs.
Firms that can reduce pollution at a low cost will be willing to sell their pollution
permits.
As new firms enter a monopolistically competitive market, existing firms will face a
lower average cost of production because the cost is spread across more firms.
A government policy that keeps the price of gasoline below its equilibrium level will
increase consumer surplus.
The long-run average-cost curve shows how the average cost of production varies when
the firm is perfectly flexible in choosing its inputs.
Environmental regulations increase trade and economic well-being.
Like firms in perfect competition, firms in monopolistic competition will earn zero
economic profit in the long run.
The principle that the cost of something is equal to what is sacrificed to get it is known
as the:
A) marginal principle.
B) principle of opportunity cost.
C) principle of diminishing returns.
D) reality principle.
Maxine has a fixed income per month to spend on goods and services, so in allocating
her limited income over a set of goods, she should purchase the goods that:
A) have the highest utility regardless of price.
B) have the highest marginal utility.
C) provide the most utility per dollar spent.
D) have equal marginal utilities.
According to the substitution effect of labor supply, when the wage rate goes up:
A) it becomes more costly to consume leisure, so people will work more.
B) it becomes less costly to consume leisure, so people will work more.
C) the opportunity cost of enjoying leisure goes down.
D) firms will hire more workers since people are more willing to work.
Refer to Figure 7.3. The total utility from consuming 4 slices of pie is:
A) 8.
B) 2.
C) 15.
D) 17.
Refer to Table 7.6. Pete has $10 to spend. He buys two cookies and four candies. Using
the equimarginal rule which of the following is true?
Table 7.6
A) Pete is maximizing his utility.
B) Pete is not spending the entire $10.
C) Pete could make himself better off by buying less candy and more cookies.
D) Pete could make himself better off by buying less cookies and more candy.
Duopoly pricing, grim trigger strategy, and tit-for-tat all promote cartel pricing by:
A) penalizing the underpricer.
B) making underpricing impossible.
C) increasing the chance of an underpricer being caught by the rest of the cartel.
D) making entry impossible.
Dumping occurs when a firm:
A) charges a higher price to a foreign market than either the price charged in its home
market or the production costs.
B) generates toxic waste when producing export goods and then dumps the waste in the
ocean.
C) stops selling to a foreign market due to excessive tariffs.
D) charges a lower price to a foreign market than either the price charged in its home
market or the production costs.
Refer to Figure 8.7. If six microwave ovens are produced, Micro Oven’s average total
costs are:
A) $116.67.
B) $700.
C) $1200.
D) $200.00.
Firms in a perfectly competitive market:
A) sell a differentiated product.
B) sell homogeneous products.
C) usually have large advertising budgets.
D) try to attract customers away from their competitors.
The best example of an oligopolistic industry is:
A) wheat.
B) restaurants.
C) automobiles.
D) all of the above.
Suppose that the percentage change in supply is 20%, the price elasticity of supply is 2,
and the percentage change in the equilibrium price is 4%. What is the price elasticity of
demand?
A) 0
B) 1
C) 2
D) 3
Profits for the monopolistically competitive firm depicted in Figure 11.1:
Figure 11.1
A) will increase in the long run.
B) will not change in the long run.
C) will decrease in the long run.
D) are impossible to predict in the long run.
According to the Application, a chunk of space debris that enters our atmosphere and
survives an impact into the earth is called a:
A) meteor.
B) meteorite.
C) meteoroid.
D) All of the above are correct.
A key consideration in the government’s decision in the Staples/Office Depot case was
that:
A) Staples charged lower prices in locations that were close to an Office Depot store.
B) Staples charged higher prices in locations that were close to an Office Depot store.
C) Staples and Office Depot had engaged in explicit price fixing.
D) Staples and Office Depot would be a natural monopoly if they were allowed to
merge.
Refer to Table 8.5. The average variable cost of producing five units of output is:
Table 8.5
A) $0.
B) $8.60.
C) $10.
D) $11.60.
Figure 18.3
Refer to Figure 18.3. With free trade, domestic production is:
A) 80.
B) 100.
C) 60.
D) 0.
Suppose that the Surgeon General releases a study suggesting that orange juice
consumption reduces the risk of cancer. As a result of the study, we could predict that
the demand curve for orange juice will ________ and the equilibrium price will
________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Recall the Application. If the decrease in price of illegal drugs is primarily due to a
change in supply, the equilibrium quantity of drugs:
A) will increase.
B) will decrease.
C) will not change.
D) may or may not change.
Figure 8.3 shows a firm’s marginal cost, average total cost, and average variable cost
curves. At Q=100, the total cost is:
A) $2,800.
B) $4,500.
C) $6,300.
D) $7,000.
Table 10.2 contains price, demand, and cost data for the Capri Theater, the only first-run
movie theater in a small town. What is its total profit under the student discount policy?
Table 10.2
A) $450
B) $550
C) $600
D) $650
Suppose that the elasticity of demand for a product is 2.0. What will happen to total
revenue as a firm increases the price?
A) Total revenue will increase.
B) Total revenue will decrease.
C) Total revenue will stay the same.
D) Cannot be determined from the information provided.
The barrier to entry that sustains a natural monopoly is:
A) economies of scale.
B) implicit price fixing agreements.
C) government regulation.
D) patent protection.
Diminishing marginal returns implies that:
A) marginal product is decreasing.
B) marginal product is increasing.
C) marginal product is constant.
D) marginal product may be increasing or decreasing.
Suppose your bank pays you 5% interest per year on your savings account. If prices
increase by 3% per year over that time, approximately how much real value do you gain
by keeping $100 in the bank for a year?
A) $0
B) $2
C) $3
D) $6
Olives are used to produce olive oil. If the price of olives increases:
A) the demand for olive oil increases.
B) the demand for olive oil decreases.
C) the supply of olive oil increases.
D) the supply of olive oil decreases.
A small supply of workers in a particular occupation could be due to:
A) artificial barriers to entry.
B) few people with the required skills.
C) high training costs.
D) all of the above.
Refer to Figure 6.1. If the price of a donut is $ .25, consumer surplus is:
A) $3.50.
B) $3.00.
C) $1.50.
D) $ .00.
Table 15.1 shows the preferred budget in millions for a new sports facility and the
number of thousands of voters in a community who prefer that budget. Tom proposed a
budget of $5 million while Mary proposed a budget of $4 million. Which of the two
candidates will be elected if everyone votes?
A) Tom
B) Mary
C) It will be a tie.
D) The outcome of the election cannot be predicted.
Figure 18.4
Refer to Figure 18.4. With an import ban, what is the equilibrium quantity of artichokes
in Duckland?
A) 85
B) 75
C) 65
D) 30
Which of the following is NOT an example of a monopolistically competitive firm?
A) Farmer Jones’s wheat farm
B) the Post Cereal Company
C) Procter and Gamble, a large consumer products corporation
D) T.J.’s Clothes, a local retail clothing store
When a consumer’s income decreases, that consumer tends to buy more ________.
What are indivisible inputs and what are their implications for economies of scale?
What is an export?
In a perfectly competitive market, what would you expect to happen to the number of
firms and firm profitability in the short run and long run if demand for the product
rises?
Define a “normal good” as it relates to markets.
What causes firms to want to enter a monopolistically competitive market?
How would an increase in prices in retail stores change the real value of the money you
earn as wages?
Explain three ways we can use macroeconomic analysis.
Refer to Figure 13.3. What price-output combination would result for the natural
monopoly if it was unregulated? What price-output combination would result if the
government regulated the natural monopoly using average-cost pricing? How would
profit differ in each situation?
What can a seller do to try to distinguish his product as a high-quality product if
consumers are skeptical?
If a government imposes a tax on the producers of a product, in addition to making the
product more costly and less profitable, the tax will ________.
Increase the level of an activity if its marginal benefit exceeds its marginal cost; reduce
the level of an activity if its marginal cost exceeds its marginal benefit. This is known as
the ________.
Name two factors that will increase the demand for labor, and two factors that will
increase the supply of labor.
How does the introduction of cognition into a consumer’s choice between healthy and
unhealthy food affect marginal utility per dollar and the quantity of healthy and
unhealthy food consumed? Assume utility is maximized.
People who develop new products and production processes increase their profitability
by taking out ________ on their inventions.
Explain why insurance has been beneficial to markets.