Because they produce where P > MC, we know that monopolistically competitive firms
A) always make a profit in the short run.
B) prevent the efficient use of resources.
C) always make a profit in the long run.
D) produce the economically efficient quantity of output.
Refer to the information provided in Figure 16.1 below to answer the questions that
follow.
Figure 16.1
Refer to Figure 16.1. What is the total damage imposed as a result of producing the
efficient level of fertilizer?
A) $0
B) $250
C) $300
D) $500
A wheat farmer sells wheat in a perfectly competitive market and hires labor in a
perfectly competitive market. The market price of wheat is $2 a bushel, the wage rate is
$10, the farmer employs five workers and the marginal product of the fifth worker is 3
bushels. What would you advise this farmer to do?
A) Do nothing because the wage rate and the marginal product of the last worker hired
are equal.
B) Reduce employment because the wage paid is more than the marginal revenue
product.
C) Increase employment because the wage paid is less than the marginal revenue
product.
D) Reduce the product price so that the wage and marginal revenue product will be
equal.
Figure 18.2
Refer to Figure 18.2. Ultimately, Molly and Pam will be at point ________.
A) A
B) C
C) D
D) The actual point reached will depend upon Molly and Pam’s initial endowments of
wealth, skills, etc., and it is impossible to determine which point will be achieved from
the given information.
The theory of ________ is credited to David Ricardo.
A) supply and demand
B) comparative advantage
C) national trade protection
D) marginal production
Figure 3.15
Refer to Figure 3.15. A movement from Point C to Point B on supply curve S2 would be
caused by a(n)
A) decrease in the price of gardenburgers.
B) increase in the demand for gardenburgers.
C) decrease in the price of mushrooms.
D) decrease in the price of hamburgers, assuming hamburgers are a substitute for pizza.
You win a lottery that pays $50,000 each year for the next 10 years beginning next year.
How much are your winnings worth today?
A) $0
B) $50,000
C) $500,000
D) indeterminate with the given information
At a price of $7, quantity demanded is 50; and at a price of $5, quantity demanded is
70. Since total revenue ________ by the price decrease, demand must be ________.
A) is increased; elastic
B) is decreased; inelastic
C) is unchanged; unit elastic
D) is unchanged; elastic
Relating to the Economics in Practice on page 257: Ethanol subsidies have increased
the supply of corn, and ethanol is a fuel produced from corn. As a result, ________
farm land has increased. Further, supply of ________ has decreased.
A) demand for; corn
B) supply of; other grains
C) demand for; other grains
D) supply of; corn
A software company writes a better operating system for personal computers and earns
very large profits on this operating system. Which of the following is true?
A) The profits this firm earns are a return for an innovation.
B) The profits this firm earns aren’t deserved, as the firm did not take any risks.
C) This firm must not be in a competitive market if it was able to earn a profit.
D) The firm must be a monopoly.
Specialization and trade exploit differences in productivity across workers and
A) only benefit the exporter.
B) only benefit the importer.
C) make everyone better off.
D) make everyone worse off.
You own stock that increases in value by $3,000 but you do not cash in the stock. The
$3,000 is
A) counted as part of economic income but not part of taxable income.
B) counted as both economic and taxable income.
C) counted as taxable income but not economic income.
D) counted as neither taxable nor economic income.
Related to the Economics in Practice on page 179: When considering expanding its
student body, a college should
A) compare the marginal cost of educating an additional student to the tuition that
student pays.
B) compare the average total cost of educating an additional student to the tuition that
student pays.
C) definitely expand because education is very important and should be made available
to as many people as possible.
D) only consider doing so if they have sufficient housing.
If the equilibrium price of gasoline is $4.00 per gallon and the government will not
allow oil companies to charge more than $3.00 per gallon of gasoline, which of the
following will happen?
A) Demand must eventually decrease so that the market will come into equilibrium at a
price of $3.00.
B) Supply must eventually increase so that the market will come into equilibrium at a
price of $3.00.
C) A nonprice rationing system such as ration coupons must be used to ration the
available supply of gasoline.
D) The market will be in equilibrium at a price of $3.00.
Figure 17.1
Refer to Figure 17.1. John has two job offers when he graduates from college. John
views the offers as identical, except for the salary terms. The first offer is at a fixed
annual salary of $50,000. The second offer is at a fixed salary of $20,000 plus a
possible bonus of $60,000. John believes that he has a 50-50 chance of earning the
bonus. If John takes the offer that maximizes his expected utility and is risk averse,
which job offer will he choose?
A) John will take the first offer.
B) John will take the second offer.
C) John is indifferent between the offersboth yield the same expected utility.
D) Indeterminate from the given information.
Table 16.4 shows the situation facing two firms, both of which are polluting. Assume
that each firm emits 5 units of pollution.
Table 16.4
Refer to Table 16.4. Suppose the government wants to reduce the total amount of
pollution from the current level of 10 to 4. To do this, the government caps each firm’s
emissions at 2 units and issues 2 permits to each firm. If firms are not allowed to trade
permits, what is the total cost of the pollution reduction?
A) $24
B) $46
C) $76
D) $115
The table shows the relationship between income and utility for Terri.
Table 17.3
Refer to Table 17.3. From the table, we can see that Terri is ________.
A) risk averse
B) risk loving
C) risk neutral
D) We cannot determine Jane’s attitude toward risk from the table.
Some contend that the outcome of any free market is ultimately inequitable because
A) public goods will be underprovided by the government.
B) some people become rich while others remain very poor.
C) firms are not forced to take external costs into account.
D) periods of unemployment and inflation still occur.
The Herfindahl-Hirschman Index is
A) calculated by summing the squared market share percentages for all firms in the
industry.
B) calculated as the sum of the market shares of the top four firms.
C) calculated as the sum of the market shares for all firms in the industry.
D) not used by the government in considering mergers.
You are the owner and only employee of a company that sets odds for sporting events.
Last year you earned a total revenue of $100,000. Your costs for rent and supplies were
$50,000. To start this business you invested an amount of your own capital that could
pay you a return of $20,000 a year.
A yearly normal rate of return for your company is
A) $20,000.
B) $40,000.
C) $60,000.
D) $100,000.
A firm that is earning positive profits in the short run has an incentive to ________ its
scale of operation in the long run.
A) expand
B) contract
C) not change
D) encourage another firm to expand
Any point on the utility possibilities frontier is ________ because it is only possible to
make one person better off by making the other person worse off.
A) unattainable
B) equitable
C) efficient
D) inefficient
Figure 9.1
Refer to Figure 9.1. If this farmer is maximizing profit, his profit (or loss) is
A) -$24.
B) $48.
C) $72.
D) $156.
Sponsors invest $100,000 in a new deli on the promise that they will earn a return of
10% per year on their investment. The deli sells 52,000 sandwiches per year. The deli’s
fixed costs include the return to investors and $42,000 in other fixed costs. Variable
costs consist of wages ($1,000 per week) plus materials, electricity, etc. ($2,000 per
week). The deli is open 52 weeks per year.
The annual fixed costs of the deli are ________.
A) $10,000
B) $42,000
C) $52,000
D) $156,000
My roommate ________. This is an example of an external benefit.
A) sings (badly) in my presence
B) plays the drums whenever I am home
C) smokes cigars in the kitchen whenever I make dinner
D) cleans up after his dog and keeps it from eating my ferrets
If revenues are greater than total variable costs of production but less than total costs, a
firm
A) earns a profit.
B) suffers a loss.
C) breaks even.
D) shuts down.
Total cost is calculated as
A) the sum of total fixed cost and total variable cost.
B) the product of average total cost and price.
C) the sum of all the firm’s explicit costs.
D) the sum of average fixed cost and average variable cost.
When the demand curve is a downward sloping straight line, the slope of the marginal
revenue curve is
A) always equal to one.
B) the same as the slope of the demand curve.
C) half as steep as the demand curve.
D) twice as steep as the demand curve.
Related to the Economics in Practice on page 39: The results of the survey conducted
by Esther Duflo and Abhijit Banerjee found that in extremely poor societies,
A) household choice plays no role in consumption decisions.
B) all consumption decisions are made by the government.
C) household choice even plays a role in non-food-related consumption decisions.
D) the only consumption decisions in which household choice plays a role is in the
consumption of biological needs such as food.
Figure 3.12
Refer to Figure 3.12 The market is initially in equilibrium at Point A. If demand shifts
from D1 toD2, the equilibrium price will change from ________ and the equilibrium
quantity will change from ________.
A) $4.00 to $3.00; 250 to 350
B) $4.00 to $3.00; 350 to 250
C) $3.00 to $4.00; 250 to 350
D) $3.00 to $4.00; 350 to 250
What is the cost-minimizing equilibrium condition?
Critically evaluate the following statement. “Short-run costs curves must be
downward-sloping because after all labor is increasingly more productive.”
Table 8.4
Refer to Table 8.4. If Scott produces five pairs of shorts, what are his total costs?
Define marginal social cost. Draw a graph for a perfectly competitive firm that creates
an external cost without considering this external cost in its decision making. The graph
should include the firm’s demand curve, marginal cost curve, and marginal social cost
curve. On the graph, indicate the amount this firm will produce to maximize profits and
the efficient level of output. If the government imposes a tax on this firm to force the
firm to internalize the externality, indicate on the graph the correct amount of the tax.
Explain the results of this tax. Explain why this solution may be difficult to implement.
Assume you are working at a department store and you are told by the manager to cut
prices by 20% for all the new women’s sweaters that are currently priced at $50. What
will be the new price of these sweaters? Suppose the manager tells you to raise the
prices back up by 20%. What is the new price of the sweaters? Why is your answer not
the same as the original price of the sweaters? What importance does this have for why
the midpoint formula is used in calculating price elasticity?
Most modern countries have prohibitions on the trading of human organs in the
marketplace. What impact do you believe such laws have had on the availability of
organs for patients that need them? Furthermore, which people are most likely to be
able to obtain the organs that they require and why? Explain the ethical dilemma that is
at work that makes the strict application of basic economic principles difficult to put
into practice in cases like this.
What are the assumptions of the Heckscher-Ohlin theorem?
Even though airfares have been increasing, the revenue earned by airlines has declined.
Based on this statement, what may be concluded about price, cross-price, or income
elasticity of demand?
How do decreasing returns to scale affect the shape of the long-run average cost curve?
Assume that we only have data on total cost when output is equal to zero and no other
cost information at our disposal. How could we possibly know what the fixed costs are
for the firm?
Evaluate the following statement. “The nation of Berundi has an absolute disadvantage
in the production of everything compared to the United States. Therefore, the United
States will have no reason to trade with Berundi”.
The Whatsa Widget Company has a monopoly over the sale of widgets in a small
midwestern town. The firm’s demand, marginal revenue, marginal cost, and average
cost curves are shown below. Find the firm’s profit-maximizing level of output and the
price the firm will charge. Is the firm earning a positive or a negative profit? Show the
firm’s profit (or loss) on the graph.
Explain what a black market is and how it functions. What is a black market generally a
response to?
The matrix below shows the payoff for two advertising strategies for two firms, Firm X
and Firm Y. Does Firm Y have a dominant strategy? Explain.
How do taxes work to reduce a negative externality? Explain in detail.