Markets in which entry and exit are difficult are known as contestable markets.
Economic income is measured “after-tax.”
The existence of public goods can be a source of market failure.
A U.S. import fee on oil would reduce the domestic quantity of oil supplied.
If we used economic income rather than money income to determine whether or not an
individual is poor, the poverty rate would decrease.
Partial equilibrium analysis is the process of examining the equilibrium conditions for
households and firms combined for more than one but not all individual markets.
The infusion of capital into an industry raises the productivity of the other inputs in that
industry.
Horizontal equity holds that those with greater ability to pay should pay less.
Under the collusion model, the outcome in an oligopoly is the same as pure
competition.
Demand for the product of an industry in perfect competition is assumed to be inelastic.
Marginal damage cost is the difference between marginal social cost and marginal cost.
Consider the following game. You pick a card from a standard 52-card deck and each
time you select an ace, you get $520. For all other cards you must pay $26. This game
is not a fair bet.
For any pair of nations and goods, if each country has an absolute advantage in the
production of one product, it is reasonable to expect that specialization and trade will
not benefit either country.
Performance compensation that is tied to outcomes that are in the employee’s control
will provide employees with the incentive to work hard.
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 many
parties must be involved.
As the distribution of income becomes more equal, the Lorenz curve comes closer to
the 45-degree line.
Externalities always involve the imposition of costs on parties outside an activity or
transaction.
The short-run is a period of less than one year.
The following situation is an example of an export promotion strategy. Guatemala has a
comparative advantage in the production of bananas and, as a result, the Guatemalan
government grants incentives to banana growers to improve their performance in the
international marketplace.
The increase in total cost that results from producing one more unit of output is the
marginal cost.
The present discounted value of a stream of future income decreases as the interest rate
decreases.
In order to calculate the HHI, the government must first define the relevant market.
In 2006, despite having the lowest literacy rates in the world, low-income countries had
lower infant mortality rates than upper middle-income countries.
An increase in labor productivity would cause a rightward shift of the labor demand
curve.
Assuming the properties of normal indifference curves, a consumer will maximize his
utility where his indifference curve is above his budget constraint.
The insurance industry is susceptible to adverse selection problems, but not problems of
moral hazard.
Ration coupons are tickets or coupons that give someone a right to purchase a certain
amount of a product during a specific period of time.
The public choice field in economics views public officials as having a significant
capacity to make inefficient choices and to produce bureaucratic waste.
Demand is more elastic for an item for which few substitutes are available.
For a policy to be Pareto efficient, it must make everyone at least a little better off.
American workers in Iraq earn hazard pay. This is an example of a compensating
differential.
In the presence of market failure, government involvement will not necessarily lead to
efficient outcomes.
Freely functioning markets in the real world may not result in efficient allocations of
resources.
Refer to the Economics in Practice on page 361. Advertisements provide information in
two wayswhat they say and what they omit.
In 2006, low-income countries had the highest infant mortality rates and lowest literacy
rates in the world.
Ronald Coase argued that property rights should always be assigned to the party that is
harmed by the negative externality.
Trade allows the people of a country to produce outside their production possibility
curve.
Price elasticity of demand is calculated as the change in price divided by the change in
quantity demanded.
The rate of economic growth is a topic of microeconomics.
A quota is a tax on imports.
Oligopoly is ________ to analyze because of the interdependence that usually exists
among oligopolistic firms.
A) very easy
B) difficult
C) fairly easy
D) impossible
Social choice involves all of the following EXCEPT
A) deciding what society wants.
B) aggregating over individual preferences.
C) understanding the incentives facing politicians and public servants.
D) consistently efficient decisions through the use of majority rule voting.
Related to the Economics in Practice on page 318: Producers of Honest Tea stop adding
sugar to their tea when the marginal utility to consumers of doing so is
A) positive.
B) negative.
C) zero.
D) Indeterminate from the given information.
Figure 15.6
Refer to Figure 15.6. If Trollio’s T-shirts is producing 50 silk-screened T-shirts and
selling each T-shirt at $16, then in the long run this firm should ________ the selling
price and ________ quantity.
A) increase; decrease
B) decrease; increase
C) increase; increase
D) not change; not change
Figure 9.1
Refer to Figure 9.1. If this farmer is maximizing profits, his total costs will be
A) $11.
B) $66.
C) $90.
D) $132.
A ________ portion of actual world trade patterns results from ________ factor
endowments between countries.
A) significant; different
B) significant; equal
C) small; different
D) negative; different
Figure 2.4
According to Figure 2.4, Point A necessarily represents
A) an unattainable production point.
B) only hybrid cars being produced.
C) the economy’s optimal production point.
D) what society wants.
The Speedy Typesetting Company, a perfectly competitive firm, is currently producing
where P = MC and is earning a normal profit. The firm mainly employs minimum wage
workers and the government just increased the minimum wage from $6.55 to $7.25 per
hour. In the short run, this firm will most likely
A) reduce the amount of output it produces because its cost curves have shifted up and
to the left.
B) continue to produce the same amount of output because only its fixed costs have
increased.
C) produce more units of output to increase revenue to cover the additional fixed costs.
D) shut down because it will no longer be earning a normal profit.
Monopolists differ from perfectly competitive firms
A) on the cost and demand sides of the profit equation.
B) on the cost side of the profit equation alone.
C) on the demand side of the profit equation alone.
D) on neither the cost nor demand sides of the profit equation.
When we inefficiently allocate resources, then there is (are)
A) market failure.
B) external costs or benefits in production.
C) imperfect information in the market.
D) a public good involved.
If a developing economy restricts the amount of money its citizens can invest abroad, it
has a greater chance of ________ by forcing its citizens to invest in their own country.
A) alienating trade partners
B) increasing capital formation
C) slowing down its economy
D) increasing unemployment
A government wants to reduce electricity consumption by 20%. The price elasticity of
demand for electricity is -5. The government must ________ the price of electricity by
________.
A) raise; 4.0%
B) raise; 0.25%
C) raise; 1.25%
D) lower; 0.25%
Figure 6.6
Refer to Figure 6.6. Bill’s budget constraint was originally EF. If his new budget
constraint is CD, then his income
A) increased.
B) decreased.
C) did not change, but the price of black beans decreased.
D) did not change, but the price of black beans increased.
Mechanism design is used to
A) align the interests of two parties in a transaction.
B) give individuals the incentive to reveal the truth about themselves.
C) correct inefficiencies associated with asymmetric information.
D) All of the above are correct.
Related to the Economics in Practice on page 675: When a country imposes a quota,
imports to that country generally ________ and the price of the affected product in that
country generally ________.
A) increase; rises
B) increase; falls
C) decrease; rises
D) decrease; falls
Figure 6.1
Refer to Figure 6.1. Assume Tom is on budget constraint AC and the price of a hot dog
is $2.00. Tom’s monthly income is
A) $40.
B) $60.
C) $80.
D) $100.
Table 19.1
Relating to the Economics in Practice on page 392: Refer to Table 19.1. If income
increases from $20,000 to $30,000, the marginal tax rate is
A) 3%.
B) 15%.
C) 21%.
D) indeterminate from this information.
Samuelson’s theory of public expenditure demonstrates that
A) government is inefficient and will always engage in too much spending.
B) an optimal (or most efficient) level of output exists for every public good.
C) an efficient mix of public goods is produced when local land/housing prices and
taxes come to reflect consumer preferences.
D) through government regulation of private industry, the optimal level of public good
provision is achieved.
Assuming labor is the only variable factor of production, production of a good will
occur
A) as long as the marginal revenue product of labor is positive.
B) if society values a good more than it costs firms to hire the workers to produce the
good.
C) as long as the product’s price is greater than the marginal revenue product of labor.
D) if the marginal cost of a unit of output equals the marginal revenue product of labor.
Figure 8.5
Refer to Figure 8.5. The total fixed costs for Ollie’s Ovens are
A) $0.
B) $250.
C) $300.
D) indeterminate from this information.
A person will continue to pursue an activity until his or her marginal benefit equals his
or her marginal ________ cost.
A) damage
B) social
C) external
D) private
Marginal private cost is the
A) additional cost to society resulting from a consumer consuming one more unit of a
good.
B) additional cost to society resulting from a privately owned firm producing one more
unit of a product.
C) amount that a consumer pays to produce an additional unit of a good.
D) the amount that a consumer pays to consume an additional unit of a particular good.
Assuming no externalities exist, if a good’s price is less than its marginal cost, then the
benefits consumers derive are
A) greater than the cost of resources needed to produce it and less should be produced.
B) greater than the cost of resources needed to produce it and more should be produced.
C) less than the cost of resources needed to produce it and less should be produced.
D) less than the cost of resources needed to produce it and more should be produced.
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. What is the expected value of John’s income for each job offer?
A) $50,000 for the first offer and $80,000 for the second offer
B) $50,000 for the first offer and $50,000 for the second offer
C) $50,000 for the first offer and $30,000 for the second offer
D) $25,000 for the first offer and $50,000 for the second offer
The income elasticity of demand for education is 3.5. Thus, a 4% increase in income
will
A) decrease the quantity of education demanded by 3.5%.
B) decrease the quantity of education demanded by 14%.
C) increase the quantity of education demanded by 4%.
D) increase the quantity of education demanded by 14%.
The specific technology chosen by a profit-maximizing clothing manufacturer depends
on
A) input prices.
B) output prices.
C) demand for the output.
D) supply of the output.
The gap between rich and poor countries
A) has decreased over time because poor countries can more easily devote resources to
capital production.
B) has increased over time because poor countries find it difficult to devote resources to
capital production.
C) has remained constant over time because technological advances can be easily
shared among nations.
D) has remained constant over time because the rate of capital production has remained
constant in rich and poor nations.
In perfect competition, a firm’s ________ curve is horizontal.
A) marginal cost
B) total revenue
C) marginal revenue
D) total cost.
The value of the slope of a society’s production possibility frontier is called its
A) value of diminishing efficiency.
B) marginal rate of substitution.
C) marginal rate of transformation.
D) diminishing opportunity cost of capitalization.
If PX < MCX, society gains by ________ X.
A) producing more
B) producing less
C) lowering the price of
D) increasing the cost of producing
Related to the Economics in Practice: According to the Economics in Practice,
________ of the $10 retail value of a Barbie doll is captured in the United States.
A) none
B) 35 cents
C) $2
D) $8
Figure 8.8
Refer to Figure 8.8. If the market price of soybeans ________, then to maximize profits
this farmer should produce 700 bushels of soybeans.
A) falls to $2
B) falls to $8
C) falls to $9
D) stays at $12
Capital, as economists use the term,
A) is the money the firm spends to hire resources.
B) is money the firm raises from selling stock.
C) refers to the process by which resources are transformed into useful forms.
D) refers to things that have already been produced that are in turn used to produce
other goods and services.
Suppose that video game discs are a normal good. If the income of video game players
increases, you predict that in the market for video games,
A) both equilibrium price and quantity will fall.
B) both equilibrium price and quantity will increase.
C) equilibrium price will increase, and quantity will decrease.
D) equilibrium price will fall, but quantity will increase.
How is a competitive firm’s demand for labor derived when labor is the firm’s only
variable factor of production in the short run?
Compare and contrast the two demand curves depicted in the graph below.
Mary Ellen lives in a large city and earns $100,000 a year. Her sister, Molly, lives in a
small rural community and earns only $20,000 a year. Based on this information, can
you conclude that Mary Ellen is better off than her sister? Explain your answer.
It is common to see convenience stores open 24 hours a day even though many times
late at night or in the early hours of the morning there are very few customers. What can
explain this seemingly odd behavior?
Explain why an employer in a perfectly competitive market will hire more workers
when the marginal revenue product is greater than the wage.
Differentiate between an income effect and a substitution effect.
Figure 9.1
Using Figure 9.1, explain what a firm would do in the short run if the market price of its
product were at P2 and it produced Q2. Is the firm earning an economic profit? An
operating profit? Explain.
What are correct incentives designed to eliminate?
Marginal tax rates and average tax rates are rarely the same. What happens to the
relationship between marginal tax rates and average tax rates as incomes rise in the
highest tax brackets?
Draw a supply and demand diagram showing equilibrium at a price of $10. Next to it
draw a graph of a perfectly competitive firm that is incurring a short-run loss at this
price, but is still producing. Assuming that the industry is a constant-cost industry, use
the diagram to show the long-term adjustment of the industry and the firm if demand
remains constant. Explain the adjustment mechanism.
Assume that a firm pays its workers above the market-clearing wage in a competitive
industry. Explain how this might be a strategy to mitigate the problem of moral hazard?
Explain why a freeway under certain circumstances may not be easily classified as a
pure public good.
Many reporters in the media were critical of the high interest rates that many banks
charged to lenders in the so-called sub-prime market. Using economic reasoning what
was the likely justification for these high interest rates.
If it turned out that labor supply was relatively elastic then who would bear the greater
burden of the payroll tax and why?
How does a firm in monopolistic competition decide whether to operate at a loss or shut
down in the short run?
Mexico has lower wages than the United States. Does this necessarily mean that it will
have a comparative advantage in the production of everything compared to the United
States?
What is the diamond-water paradox?