Scenario: Alexander and Vanessa
Alexander and Vanessa benefit from scientific research. Alexander’s marginal private
benefit from such research is given by the equation P = 200 ” Q, where Q refers to the
amount of research undertaken and P is the price Alexander is willing to pay for such
research. Vanessa’s marginal private benefit from such research is given by the equation
P = 100 ” Q. The marginal social cost of engaging in such research is constant at $100.
(Scenario: Alexander and Vanessa) Refer to the scenario Alexander and Vanessa. If the
socially optimal level of scientific research is produced and if both Vanessa and
Alexander are truthful in disclosing the marginal private benefits they expect to receive
from this research, what is the price per unit of research that Vanessa is willing to pay?
A) $0
B) $50
C) $100
D) $300
Figure: A Market with a Tax
(Figure: A Market with a Tax) Look at the figure A Market with a Tax. The excise tax
imposed on this good is equal to:
A) P1 ” P2.
B) P1 ” P3
C) P2 ” P3.
D) P1 ” P5.
To maximize profits, a firm in monopolistic competition will likely produce so that
marginal cost:
A) equals average total cost.
B) is greater than marginal revenue.
C) equals marginal revenue.
D) equals price.
When the nations that constitute the Organization of Petroleum Exporting Countries
(OPEC) restrict the supply of oil to increase their profits, the oil market:
A) achieves an efficient outcome because profits increase.
B) achieves an equitable outcome because the nations with oil resources receive the
profits commensurate with that resource.
C) fails because there is no longer an efficient allocation of resources.
D) fails because there is no longer an equitable allocation of resources.
If the income elasticity of demand for a good is positive, the good is said to be:
A) inferior.
B) a substitute.
C) normal.
D) positive.
(Table: Johnson’s Income and Expenditures) Look at the table Johnson’s Income and
Expenditures. For Johnson, magazines are a(n) _____ good.
A) negative
B) inferior
C) normal
D) neutral
A downward-sloping demand curve will ensure that:
A) P = MR.
B) P > MR.
C) P < MR.
D) P = MC.
No individual is willing to pay for the efficient quantity of a public good, because the
marginal benefit to an individual _____ the marginal social benefit.
A) equals
B) exceeds
C) is less than
D) may be equal to or greater than
The efficient rate of emissions occurs when:
A) there is absolutely no damage done to a pristine environment.
B) government forbids all pollution no matter what the cost.
C) the marginal social benefits of pollution exceed the marginal social costs of
pollution.
D) the change in social benefits and the change in social costs due to an additional unit
of emissions are equal.
Economists in general agree that rent controls are:
A) an efficient and equitable way to help low-income families.
B) an inefficient but sometimes effective way to help low-income families.
C) an efficient method of dealing with the shortages caused by price ceilings.
D) the only way to solve the problem of poverty.
If there is a decrease in demand, assuming a positively sloped supply curve and a
negatively sloped demand curve, total surplus:
A) will increase.
B) will decrease.
C) will remain the same.
D) may change, but we can’t tell how.
Table: Pumpkin Market
(Table: Pumpkin Market) There are two consumers, Andy and Ben, in the market for
pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also
shown. The equilibrium price for pumpkins is $8 and the equilibrium quantity is five. If
Andy consumes one more pumpkin and Ben consumes one fewer pumpkin than in
equilibrium, total surplus will _____ by _____.
A) increase; $17
B) increase; $15
C) decrease; $8
D) decrease; $3
Which of the following regarding a warranty is NOT true?
A) It is a form of consumer insurance.
B) Consumers may buy one even if the cost of the warranty is greater than the expected
future claim paid by the manufacturer.
C) It decreases the consumer’s expected utility from an item.
D) It signals to consumers that the goods are of high quality.
If the probability that one person will develop a health problem is greater than that of
another person and if they buy insurance from the same provider, most likely the person
with a higher probability will pay:
A) the same as the other person.
B) more than the person with the lower probability.
C) less than the person with the lower probability.
D) All people, regardless of probabilities, pay the same amount for insurance.
Market demand is found by:
A) adding the individual quantities demanded at each price.
B) adding the individual prices at each quantity demanded.
C) multiplying the individual quantities demanded at each price.
D) multiplying the individual prices at each quantity demanded.
Figure: Long-Run Average Cost
(Figure: Long-Run Average Cost) Look at the figure Long-Run Average Cost. This firm
has _____ in the output region from A to B.
A) constant returns to scale
B) economies of scale
C) diseconomies of scale
D) constant total cost as output increases
Canada, Mexico, and the United States have:
A) joined together and are operating in what is called a closed-trade area with respect to
the European Union.
B) developed a currency similar to the euro.
C) eliminated many trade barriers among themselves.
D) reduced trade among themselves to protect jobs at home.
A perfectly elastic supply curve is:
A) horizontal.
B) downward-sloping.
C) upward-sloping.
D) vertical.
A natural monopoly is one that:
A) monopolizes a natural resource such as a mineral spring.
B) is based on control of something occurring in nature (such as diamonds).
C) has increasing returns to scale over the entire relevant range of output.
D) typically has low fixed costs, making it easy and “natural” for it to shut out
competitors.
Warranties that cover the cost of a repair or replacement will:
A) decrease the consumer’s expected utility from consuming the good.
B) increase the consumer’s expected utility from consuming the good.
C) have no impact on the consumer’s expected utility from consuming the good.
D) reverse the consumer’s diminishing marginal utility.
(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During
the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly
competitive industry. Assume that costs are constant in each interval; that is, the
variable cost of mowing 1 through 10 lawns is $100. His only fixed cost is $1,000 for
the mower. His variable costs include fuel, his time, and mower parts. If the price for
mowing a lawn is $70, how much is Alex’s total revenue at the profit-maximizing
output?
A) $3,500
B) $2,800
C) $2,100
D) $1,800
Which statement is NOT true about the World Trade Organization (WTO)?
A) The WTO provides the framework for complex negotiations involved in major
international trade agreements.
B) The WTO resolves disputes between member countries.
C) The WTO is an international organization.
D) The WTO is a direct enforcer of trade agreements.
Toby operates a small deli downtown. The deli industry is monopolistically
competitive. In the long run, Toby will produce where:
A) marginal revenue equals marginal cost.
B) price equals minimum average total cost.
C) price equals marginal cost.
D) price equals marginal revenue.
Figure: Market Failure
(Figure: Market Failure) Look at the figure Market Failure. Suppose it represents the
demand for and marginal cost per pound of shrimp in the bay. The additional cost of the
shrimp due to the depletion of the common resource is equal to AC. The efficient price
of shrimp is:
A) 0.
B) A.
C) B.
D) C.
Figure: Payoff Matrix for Jake and Zoe
(Figure: Payoff Matrix for Jake and Zoe) Look at the figure Payoff Matrix for Jake and
Zoe, the only producers of slushies in their tourist town. Each week, each decides
whether to price high or price low for the following week. The figure shows the profit
per week earned by their two firms. According to the Nash equilibrium, Jake prices
_____ and Zoe prices _____.
A) high; high
B) high; low
C) low; high
D) low; low
A normative statement deals with:
A) the facts.
B) what was, is, or will be.
C) what ought to be.
D) the scientific method.
One government policy for dealing with natural monopoly is to:
A) impose a price floor to eliminate the deadweight loss.
B) impose a price ceiling to reduce economic profit.
C) break it up into smaller firms.
D) impose fines on the monopolist.