1) If the government regulates the price that a natural monopolist can charge to be equal
to the firm’s average total cost, the firm will
a.earn zero profits.
b.earn positive profits, causing other firms to enter the industry.
c.earn negative profits, causing the firm to exit the industry.
d.minimize costs in order to lower the price that it charges.
2) When Adam’s income increases, he purchases more tickets to Broadway musicals
than he did before his income increased. For Adam, Broadway musicals are a(n)
a.normal good.
b.inferior good that is not a Giffen good.
c.Giffen good.
d.optimal good.
3) Figure 18-1
On the graph, L represents the quantity of labor and Q represents the quantity of output
per week.
Refer to Figure 18-1. Suppose the firm sells its output for $20 per unit, and it pays
each of its workers $1,250 per week. The firm maximizes profit by hiring
a.3 workers.
b.4 workers.
c.5 workers.
d.6 workers.
4) Giffen goods are
a.normal goods for which the income effect dominates the substitution effect.
b.normal goods for which the substitution effect dominates the income effect.
c.inferior goods for which the income effect dominates the substitution effect.
d.inferior goods for which the substitution effect dominates the income effect.
5) In the majority of cases where there is a natural monopoly in the United States, the
government usually deals with the problem
a.by splitting the natural monopoly into smaller companies.
b.through regulation.
c.by turning the natural monopoly into a public enterprise.
d.by doing nothing.
6) Individual income taxes and social insurance taxes generate the highest tax revenue
for the federal government.
a.True
b.False
7) Andi uses all of her income to purchase books and games. At any two points A and B
on Andi’s budget constraint,
a.Andi is spending all of her income on books and games.
b.Andi is spending one half of her income on books and the other half of her income on
games.
c.the price of books relative to the price of games is different.
d.All of the above are correct.
8) Which of the following is not correct?
a.An example of adverse selection is man who tries to sell his used car without
disclosing that it needs a new transmission.
b.The “invisible hand” of a free market will always fix the problems of adverse
selection and moral hazard.
c.An employer may try to prevent a moral hazard problem by paying her workers an
efficiency wage.
d.One interpretation of gift giving is that it reflects asymmetric information and
signaling.
9) Juanita and Shantala run a business that programs and tests cellular phones. Assume
that Juanita and Shantala can switch between programming and testing cellular phones
at a constant rate. The following table applies.
Juanita’s opportunity cost of programming one cellular phone is testing
a.7.5 cellular phones and Shantala’s opportunity cost of programming one cellular
phone is testing 5/2 cellular phones.
b.2/15 cellular phones and Shantala’s opportunity cost of programming one cellular
phone is testing 5/2 cellular phones.
c.7.5 cellular phones and Shantala’s opportunity cost of programming one cellular
phone is testing 2/5 cellular phones.
d.2/15 cellular phones and Shantala’s opportunity cost of programming one cellular
phone is testing 2/5 cellular phones.
10) A dominant strategy is one that
a.makes every player better off.
b.makes at least one player better off without hurting the competitiveness of any other
player.
c.increases the total payoff for the player.
d.is best for the player, regardless of what strategies other players follow.
11) Games that are played more than once generally
a.lead to outcomes dominated purely by self-interest.
b.lead to outcomes that do not reflect joint rationality.
c.encourage cheating on cartel production quotas.
d.make collusive arrangements easier to enforce.
12) Figure 21-7
Refer to Figure 21-7. Suppose the price of a book is $15, the price of a DVD is $10, the
value of A is 5, and the value of B is 7.5. How much income does the consumer have?
a.$150
b.$100
c.$75
d. $37.50
13) Negative externalities occur when one person’s actions
a.cause another person to lose money in a stock market transaction.
b.cause his or her employer to lose business.
c.reveal his or her preference for foreign-produced goods.
d.adversely affect the well-being of a bystander who is not a party to the action.
14) Suppose that Company A’s railroad cars pass through Farmer B’s corn fields. The
railroad causes an externality to the farmer because the railroad cars emit sparks that
cause $1,500 in damage to the farmer’s crops. There is a special soy-based grease that
the railroad could purchase that would eliminate the damaging sparks. The grease costs
$1,200. Suppose that the farmer has the right to compensation for any damage that his
crops suffer. Assume that there are no transaction costs. Which of the following
characterizes the efficient outcome?
a.The railroad will continue to operate but will pay the farmer $1,500 in damages.
b.The railroad will purchase the grease for $1,200 and pay the farmer nothing because
no crop damage will occur.
c.The farmer will incur $1,500 in damages to his crops.
d.The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage
will occur.
15) Scenario 13-11
Walter builds birdhouses. He spends $5 on the materials for each birdhouse. He can
build one in 30 minutes. He is semi-retired but earns $8 per hour at the local hardware
store. He can sell a birdhouse for $20 each.
The explicit cost for one birdhouse is
a. $4.
b.$5.
c.$8.
d.$9.
16) Which of the following pholitical philosophies would support redistribution of
income that makes society fully egalitarian?
a.Liberals, because they believe in the maximin criterion.
b.Libertarians, because they believe in evaluating the process by which economic
outcomes arise.
c.Utilitarians, because they believe in diminishing marginal utility.
d.None of the above would support completely egalitarian redistribution of income.
17) Major league baseball players get paid more than minor league baseball players
because of
a.compensating differentials.
b.higher levels of educational attainment.
c.greater abilities.
d.All of the above are correct.
18) Which of the following statements is correct?
a.An increase in the supply of other factors, such as capital, will increase the demand
for labor.
b.Labor-saving technology will increase the demand for labor.
c.Labor-augmenting technology will decrease the demand for labor.
d.A decrease in the price of output will increase the demand for labor.