Table 6-7
Refer to Table 6-7.
a. Using the information in the table, calculate the income elasticity of demand for good
X and characterize the good. Use the midpoint formula.
b. Can you calculate the income elasticity of demand for good Y? If you can, show your
calculation and characterize the good. If you cannot, explain why.
Explain how the listed events (a-d) would affect the following at Hilton Hotels.
i. Marginal cost
ii. Average variable cost
iii. Average fixed cost
iv. Average total cost
a. Hilton decides on an across-the-board 5 percent increase in executive salaries.
b. Hilton decides to eliminate all print advertising.
c. Hilton signs a new contract with the Culinary Workers Union that requires the
company to increase wages for all its kitchen workers.
d. The federal government starts to levy a $5 room tax on all hotel rooms.
After selling 1,000 three-ring binders Tony DiFulvio realizes that the marginal revenue
from selling the last binder was less than the marginal cost. From this we can conclude
that
A) Tony’s business earns a short-run economic profit.
B) Tony should shut down his business temporarily.
C) Tony’s profit fell after selling his 1,000th three-ring binder.
D) Tony’s profit would be greater if he sold an additional three-ring binder.
Suppose a firm uses labor and capital to produce output. The last unit of labor hired has
a marginal product of 12 units of output, and the last unit of capital employed has a
marginal product of 20 units. Use the optimal combination of inputs rule to calculate
the price of capital if the price of labor is $6 per unit. The price of capital is
A) $2.
B) $10.
C) $20.
D) impossible to determine with the information given.
What is a market failure?
A) It refers to the inability of the market to allocate resources efficiently up to the point
where marginal social benefit equals marginal social cost.
B) It refers to the inability of the market to allocate resources efficiently up to the point
where marginal social benefit equals marginal private cost.
C) It refers to a situation where an entire sector of the economy (for example, the airline
industry) collapses because of some unforeseen event.
D) It refers to a breakdown in a market economy because of widespread corruption in
government.
An organization of employees that has the legal right to bargain with employers about
wages and working conditions is called a
A) closed shop.
B) guild.
C) labor union.
D) monopsony.
Figure 12-2
Refer to Figure 12-2. Why is the total revenue curve a ray from the origin?
A) because revenue increases at an increasing rate
B) because revenue increases at a decreasing rate
C) because the firm can sell its product at a constant price
D) because the firm must lower its price to sell more
Adam Smith’s invisible hand refers to
A) the government’s unobtrusive role in ensuring that the economy functions efficiently.
B) property ownership laws and the rule of the court system.
C) the process by which individuals acting in their own self-interest bring about a
market outcome that benefits society as a whole.
D) the laws of nature that influence economics decisions.
Which of the following statements best describes the concept of consumer surplus?
A) “Safeway was having a sale on Dreyer’s ice cream so I bought 3 quarts.”
B) “I was all ready to pay $300 for a new leather jacket that I had seen in Macy’s but I
ended up paying only $180 for the same jacket.”
C) “I paid $130 for a printer last week. This week the same store is selling the same
printer for $110.”
D) “I sold my Blu-ray copy of Ben-Hur for $18 at a garage sale even though I was
willing to sell it for $10.”
Arnold Kim began blogging about Apple products during his fourth year of medical
school. Kim’s Website, MacRumors.com, became so successful that he decided to give
up his medical career and work full time on his Website, despite the nearly $200,000 he
had invested in his education. In making his decision, the $200,000 he spent on his
education
A) should be ignored since it represents a sunk cost.
B) should be considered since it is money he has spent and needs to recoup.
C) should be ignored only if Kim can earn more than $200,000 by running his Website.
D) should be considered since it is money he could have used to invest in his Website.
Figure 2-2
Figure 2-2 above shows the production possibilities frontier for Mendonca, an agrarian
nation that produces two goods, meat and vegetables.
Refer to Figure 2-2. If Mendonca chooses to produce 160 pounds of vegetables, how
much meat can it produce to maximize production?
A) 0 pounds of meat
B) 30 pounds of meat
C) 60 pounds of meat
D) 120 pounds of meat
Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He is
considering setting up his business as a sole proprietorship. What is one advantage to
Jeremy of setting up his business as a sole proprietorship?
A) As a sole proprietor, Jeremy would face limited liability.
B) As a sole proprietor, Jeremy would have the ability to share risk with shareholders.
C) As a sole proprietor, Jeremy would have both ownership and control over the
business.
D) All of the above would be advantages of setting up his business as a sole
proprietorship.
Which of the following statements is false?
A) Corporations can issue stocks and bonds, while proprietorships cannot.
B) Corporations have one owner, while proprietorships have many owners.
C) Corporations face more taxes than do proprietorships.
D) Proprietorships have unlimited liability while corporations have limited liability.
Paying a person a lower wage or excluding a person from an occupation on the basis of
an irrelevant characteristic such as race or gender
A) is economic discrimination.
B) violates federal comparable worth laws.
C) can be explained by negative feedback loops.
D) creates differences in wages that economists call “compensating differentials.”
Which of the following pairs of goods is likely to have a negative cross-price elasticity
of demand?
A) pancakes and syrup
B) hot dogs and hamburgers
C) orange juice and grapefruit juice
D) peanuts and cat food
The demand for gasoline in the short run is
A) elastic because people can easily switch to public transportation.
B) perfectly inelastic because people have no choice but to buy gasoline.
C) unit elastic because people tend to consume a stable amount of gasoline per period.
D) inelastic because there are no good substitutes for gasoline.
One reason why airlines charge business travelers and leisure travelers different prices
is
A) business travelers fly according to schedules that are planned months in advance.
Many leisure travelers buy their tickets at the last minute.
B) business travelers usually travel alone. Leisure travelers often fly with friends and
family members; therefore, they have a more inelastic demand for airline tickets than
business travelers.
C) business travelers fly more often than most leisure travelers. As a result, their
employers are able to bargain with airlines for lower fares than leisure travelers pay.
D) business travelers often have inflexible schedules and have to travel on a particular
day. The opposite is true for leisure travelers.
Successful price discrimination cannot take place if
A) the market is perfectly competitive.
B) the market can be segmented into different buyer groups.
C) customers are not able to resell the product.
D) the demand curve facing the firm is downward sloping.
If the market price is $40, the average revenue of selling five units is
A) $8.
B) $20.
C) $40.
D) $200.
Firms in perfectly competitive industries are unable to control the prices of the products
they sell and earn a profit in the long run. Which of the following is one reason for this?
A) Owners of perfectly competitive firms realize that their short-run profits are
temporary. Therefore, they either sell their businesses or develop other products that
will earn short-run profits.
B) Firms in perfectly competitive industries can use advertising in the short run to
persuade consumers that their products are better than those of other firms. But
eventually consumers realize that all of the firms sell virtually identical products.
C) Firms from other countries are able to produce similar products at lower costs.
D) Firms in these industries sell identical products.
Who controls a sole proprietorship?
A) owner
B) stockholders
C) bondholders
D) employees
Figure 2-4
Figure 2-4 shows various points on three different production possibilities frontiers for
a nation.
Refer to Figure 2-4. Consider the following events:
a. an increase in the unemployment rate
b. general technological advancement
c. a decrease in consumer wealth
Which of the events listed above could cause a movement from X to V?
A) a only
B) a and b only
C) b and c only
D) a, b, and c
Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He is
considering setting up his business as a sole proprietorship. What is one disadvantage to
Jeremy of setting up his business as a sole proprietorship?
A) As a sole proprietor, Jeremy would be taxed twice.
B) As a sole proprietor, Jeremy would not have control of the business.
C) As a sole proprietor, Jeremy would face unlimited liability.
D) As a sole proprietor, Jeremy would be subject to significant rules and regulations.
Studies have shown that drinking one glass of red wine per day may help prevent heart
disease. Assume this is true, and favorable weather has increased the grape harvest of
California vineyards. In the market for red wine, these two developments would
A) increase demand and decrease supply, resulting in an increase in the equilibrium
quantity and a decrease in the equilibrium price of red wine.
B) increase demand and increase supply, resulting in an increase in the equilibrium
quantity and an uncertain effect on the equilibrium price of red wine.
C) increase demand and increase supply, resulting in an increase in the equilibrium
price and an uncertain effect on the equilibrium quantity of red wine.
D) increase demand and increase supply, resulting in an increase in both the equilibrium
price and the equilibrium quantity of red wine.
A firm’s net worth is calculated as
A) the difference between a firm’s revenues and explicit costs.
B) the difference between a firm’s revenues and implicit costs.
C) the difference between a firm’s assets and liabilities.
D) the difference between a firm’s liabilities and outstanding equities.
Giffen goods
A) are theoretical and have never been discovered in the real world.
B) have not existed since prior to the Industrial Revolution.
C) were proven to exist in the 1890s by Sir Robert Giffen.
D) were not shown to actually exist until 2006.
Jill Borts believes that the price elasticity of demand for her economics textbook is
relatively inelastic. She argues “I was told I had to purchase a book written by Hubbard
and O’Brien that is required by my instructor. If I wanted to buy a mystery novel I
would have many authors to choose from. Therefore, the demand for mystery novels is
more elastic than the demand for my textbook.” Is Jill correct?
A) The demand for the textbook is more inelastic, but Jill’s reasoning is incorrect. The
reason the textbook has an inelastic demand is that it is more expensive than any novel.
B) She is correct.
C) She is confused. She should have concluded that the textbook has a more elastic
demand than a novel.
D) She is correct that the textbook has a more inelastic demand, but that is because
most students pay for their textbooks with credit cards. Most people pay for novels and
other books with debit cards.
In recent years, online bookseller Amazon.com has lowered its profits by offering some
of its customers free shipping and building more warehouses to hold its inventories.
Which of the following explains Amazon.com’s actions?
A) Amazon.com feared government regulation if its profits were too high.
B) Amazon.com took these actions to deter entry into its market by new online
booksellers.
C) Amazon.com took these actions to compete more effectively with existing online
booksellers.
D) Amazon.com was forced to take these actions because of the bargaining power of its
suppliers.
A perfectly competitive market is in long-run equilibrium. At present there are 100
identical firms each producing 5,000 units of output. The prevailing market price is $20.
Assume that each firm faces increasing marginal cost. Now suppose there is a sudden
increase in demand for the industry’s product which causes the price of the good to rise
to $24. Which of the following describes the effect of this increase in demand on a
typical firm in the industry?
A) In the short run, the typical firm increases its output and makes an above normal
profit.
B) In the short run, the typical firm’s output remains the same but because of the higher
price, its profit increases.
C) In the short run, the typical firm increases its output but its total cost also rises,
resulting in no change in profit.
D) In the short run, the typical firm increases its output but its total cost also rises.
Hence, the effect on the firm’s profit cannot be determined without more information.
Figure 15-17
Your college decides to offer a psychology course as a MOOC that can be taken by
students anywhere in the world, whether they are actually enrolled in your college or
not. The demand and cost situation for the MOOC is shown in the figure.
Refer to Figure 15-17. The dean of the college argues: “I think the course should be
priced to maximize the profit the college earns, so these funds can be used to pay some
other expenses.” How much profit (or loss) will the college make on the course if it
charges this price?
A) -$2,592,000
B) -$1,080,000
C) $0
D) $450,000
Suppose a price floor on sparkling wine is proposed by the Health Minister of the
country of Vinyardia. What will be the likely effect on the market for sparkling wine in
Vinyardia?
A) Consumer surplus will increase.
B) Producer surplus will increase.
C) Deadweight loss will increase.
D) Market efficiency will increase.
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.
Figure 18-1
Refer to Figure 18-1. Of the tax revenue collected by the government, the portion
borne by consumers is represented by the area
A) B + C.
B) F + G.
C) E + H.
D) B + C + F + G.
If the price of refillable butane lighters was to decrease, then
A) the demand for butane would decrease.
B) the demand for butane would increase.
C) the quantity of butane demanded would increase.
D) the quantity of butane demanded would decrease.
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. If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are
traded, how many clocks will Belize consume?
A) 150
B) 270
C) 930
D) 1,200