A Major League Baseball player signs a contract that pays $27 million over 5 years.
The $27 million is the contract’s ________ value.
A) real
B) implicit
C) external
D) nominal
The word “monopolistic” in the label “monopolistic competition” refers to the fact that:
A) there is only one firm producing in the market.
B) firms have no control over the price they charge.
C) each firm produces a slightly different version of the product.
D) none of the above
If a decrease in the price of good X results in a decrease in the quantity of Y demanded:
A) good X and good Y are substitutes.
B) good X and good Y are complements.
C) the cross-price elasticity of demand for good Y is negative.
D) There is not sufficient information to determine the relationship between good X and
good Y.
Suppose that differences in skills explain part of the difference in wages by race. Wage
differences arising from skill differences:
A) may result from past discrimination in access to education.
B) are not attributable to present or past discrimination.
C) will disappear when labor markets are in equilibrium.
D) are always classified as racial discrimination.
Assume the government sets a minimum price for a particular good below the
equilibrium price. How much quantity traded will this lead to?
A) the equilibrium quantity
B) below the equilibrium quantity
C) above the equilibrium quantity
D) There is not sufficient information.
Refer to Figure 12.3. The decision tree shows the payoffs for two firms based on the
strategies they choose. If they agree to collude and hold prices at $10, and both stand by
the agreement, each will earn profits of $5 million. If one firm cheats and the other does
not, the firm that cheats will earn profits of $8 million and the other firm will have
losses of $2 million. If they both cheat and cut prices, they will each earn profits of only
$2 million. In this game the dominant strategy for B is to:
A) cheat.
B) stand by the agreement.
C) cheat only if A cheats.
D) maximize the maximum losses.
If the nominal minimum wage is unchanged while prices rise, then the real minimum
wage:
A) rises.
B) declines.
C) stays the same.
D) is unaffected.
The cross-price elasticity of demand between telephones and ramen noodles is most
likely:
A) positive.
B) negative.
C) zero.
D) greater than one.
Recall the Application. The British Experience with water privatization showed that:
A) a single firm providing water will be profitable, but two firms will not.
B) two or more firms providing water will be profitable, but a single firm will not.
C) it does not matter how many firms provide water, as none will be profitable.
D) it does not matter how many firms provide water, as all will be profitable.
Table 2.3
The principle of diminishing returns first occurs when how many workers are hired?
A) 2
B) 3
C) 4
D) 5
Refer to Figure 8.3. The vertical distance AB represents:
A) total fixed costs.
B) marginal costs.
C) average fixed costs.
D) average total costs.
Suppose a car is completely produced and assembled in Germany and is sold to the
United States. In this example, if the United States restricts the purchase of the car from
Germany, then the country whose overall welfare would be reduced by this policy
would be:
A) the United States.
B) Germany.
C) neither Germany nor the United States.
D) both Germany and the United States.
Additional Application
Late in the day on August 7, 2006 numerous U.S. airlines cut their fares on leisure
travelers. These included American Airlines, Delta, Continental, and Southwest. This
fare cut, which was approximately 4 to 8 percent, occurred during a period of rising fuel
costs and a record number of seats being filled. If costs are up and demand is strong,
why did these airlines reduce their prices on this class of passengers? The explanation is
that they were following the lead of United. United Airlines is the implicit price leader
in this industry and many other carriers watch closely what the leader does and base
their decisions on the leader’s actions. Such behavior is not uncommon in an industry
dominated by a few large firms.
“United Airlines sparks fare war,” August 9, 2006, retrieved November 3, 2006 from
http://money.cnn.com/2006/08/09/news/companies/airfares/index.htm.
In this article on airlines, when the firms experienced an increase in demand, their price
________.
A) increased
B) decreased
C) did not change
D) change was ambiguous
Refer to table 14.2. The buyers assumed chance of getting a lemon will ________ and
hence the willingness to pay for the used boat will ________.
Table 14.2
A) fall; rise
B) rise; fall
C) fall; fall
D) rise; rise
Figure 12.8 depicts an advertising game between two stores. Which of the following
statements is correct?
A) Both stores have a dominant strategy.
B) Neither store has a dominant strategy.
C) Only Store A has a dominant strategy.
D) Only Store B has a dominant strategy.
Joe runs a business and needs to decide how many hours to stay open. Figure 2.4
illustrates his marginal benefit of staying open for each additional hour. Suppose that
we observe Joe staying open 4 hours per day. If he is following the marginal principle,
what must his marginal cost be?
Figure 2.4
A) $16
B) $24
C) $32
D) $40
Both firms depicted in Table 16.1 can benefit if Firm A sells its pollution permit
allowing it to generate 1,000 gallons of wastewater to Firm B for:
Table 16.1
A) a price between $12 and $15.
B) a price between $0 and $6.
C) a price greater than $20.
D) It is not possible for firms to benefit if Firm A sells a permit to Firm B.
Recall the Application. Because the average earnings of the “wireless women” in
Pakistan is three times the average wage rate, then we would expect that in the long run:
A) more entrepreneurs would exit the market.
B) more entrepreneurs would enter the market.
C) the earnings of wireless women would increase.
D) the cost of making a wireless call in Pakistan would increase.
Figure 9.1 shows the cost structure of a firm in a perfectly competitive market. If the
market price is $40 and the firm is currently producing the profit maximizing output
level, its total fixed cost is:
A) $2,800.
B) $5,200.
C) $7,200.
D) $9,000.
A perfectly competitive firm’s marginal cost curve above the minimum of the average
variable cost curve is its:
A) short-run supply curve.
B) average cost schedule.
C) capacity output schedule.
D) total revenue minus total cost schedule.
Since people generally know that celebrities are paid to endorse products, celebrity
endorsements signal to consumers that:
A) the product is likely to be popular.
B) the celebrity loves the product.
C) only rich people can afford the product.
D) all of the above
Refer to Figure 9.5. This farmer’s fixed costs are:
A) $0.
B) $24.
C) $45.
D) indeterminate unless we know the level of output the firm is producing.
Suppose that the Surgeon General releases a study suggesting that steak consumption
increases the risk of cancer. As a result of this study, we would predict that the
equilibrium quantity of steak will ________ and the equilibrium price of steak will
________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Refer to Table 4.1, which shows Flo’s and Rita’s individual supply schedules for frozen
latte-on-a-stick. Assuming Flo and Rita are the only suppliers in the market, what is the
market quantity supplied at a price of $1?
A) 0
B) 1
C) 3
D) 5
Figure 4.3 illustrates the demand for tacos. An increase in the demand for tacos is
represented by the movement from:
A) point a to point b.
B) point c to point b.
C) D2 to D1.
D) D0 to D1.
As we move upward along a linear demand curve, the price elasticity of the demand:
A) increases.
B) decreases.
C) remains the same.
D) increases up to the midpoint and then decreases.
A firm switching from a single price to a price discrimination scheme will ________
the price for the group of consumers with relatively elastic demand and ________ the
price for the group of consumers with relatively inelastic demand.
A) decrease; increase
B) decrease; decrease
C) increase; increase
D) increase; decrease
Recall the Application. If the minimum of average variable cost for switchgrass farmers
is $40 per ton and the current price is $35 per ton, in the long run the switchgrass
farmer will:
A) exit the industry.
B) operate losing money.
C) make a positive economic profit.
D) make a zero economic profit.
According to the Application, ________ has a Web site that provides estimates of
demand elasticities for hundreds of food products for dozens of countries.
A) the U.S. Department of Agriculture
B) the U.S. State Department
C) the United Nations
D) the World Bank
Assume that coffee and tea are substitutes. When the price of coffee increases:
A) the demand for tea decreases.
B) the demand for tea increases.
C) the supply of tea increases.
D) the supply of tea decreases.
A decrease in the supply of musicians ________ the number of musicians employed,
and ________ the wages paid to musicians.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Under a price leadership agreement:
A) one firm is implicitly designated the leader, and the others match the leader’s price.
B) firms form a cartel and charge the monopoly price.
C) firms follow a tit-for-tat strategy.
D) one firm is voted in as the leader, and the others match the leader’s price.
In the market for used boats there are high-quality boats and poor-quality boats.
Potential buyers cannot determine prior to purchase whether the boat is high quality or
low quality. Which of the following statements best describes what is likely to happen
in this market?
A) The price of a used boat will be very close to the value of a high-quality motorcycle,
which will encourage people to sell high-quality boats.
B) The price of a used boat will be between the value of a high-quality and low-quality
boat. This will encourage people to withdraw high-quality boats from the market.
C) The price of a used boat will be very close to the value of a low-quality boat, since
the buyer will not be willing to pay any more than this price given the uncertainly of
what they will get.
D) No used boats will be bought or sold given the uncertainty faced by the buyer.
A monopolistically competitive market is one in which:
A) only one firm sells a product.
B) all firms sell an identical product.
C) many firms sell similar yet slightly different products.
D) firms have no control over the price they charge for their product.
What are some of the roles of government in a market economy?
Provide three examples of price discrimination.
Give an example of an external cost and explain why the outcome is inefficient.
Would consumers benefit more from a tariff or a quota on imports?
If demand elasticity of airline tickets is 3, what percentage change in quantity would the
airlines expect from a 10% increase in price?
Why does a firm in monopolistic competition face a downward sloping demand curve?
Draw a picture to illustrate why total surplus is highest at the competitive equilibrium
price and not at a price below equilibrium. Explain your diagram.
Gloria works for a museum in a large city with many other museums. Her boss
proposes that the museum should raise the price of admission to increase revenues.
Gloria was a good student in her economics principles course. How should she advise
her boss?
Why does the government work to eliminate artificial barriers to entry?
Richard runs a pizza delivery restaurant. List the three basic types of decisions
economics studies and give an example from Richard’s restaurant.
What will make a change in demand cause a large change in price?
Suppose Japanese auto manufacturers voluntarily reduce exports to the U.S. Who will
benefit from a voluntary export restraint? Who will get hurt from a voluntary export
restraint? Explain.
An art museum raises its admission price and ends up with a decrease in its total
revenue. How could you explain this situation to the museum director?
Why is it easier to raise $1 million in voluntary contributions for medical research into
a deadly disease like cancer than it is to raise the same amount for space exploration?
Describe the relationship between marginal cost and average cost.
What determines the size of the deadweight loss of a tax?
To specify terms of exchange and facilitate exchange between strangers, a ________ is
often used.
Farmer Bill grows corn on his 27-acre farm. To increase production, he puts more and
more fertilizer on the corn. What does the marginal principle say will happen?