The price elasticity of demand for fresh tomatoes has been estimated to be 2.22. If a
new insecticide and fertilizer treatment yields a 20% increase in the nation’s fresh
tomato crop, how will that affect total revenue from fresh tomatoes, all other things
unchanged?
A) Total revenue will remain unchanged.
B) Total revenue will fall.
C) Total revenue will rise.
D) The information is insufficient to answer the question.
If the production possibility frontier is a straight line:
A) opportunity costs are constant.
B) the firm faces increasing costs.
C) the firm faces decreasing costs.
D) there is no trade-off between the two goods represented.
Figure: The Demand for Bricklayers
(Figure: The Demand for Bricklayers) Look at the figure The Demand for Bricklayers.
If the price for bricks laid in the wall is $0.10 a brick, the marginal product of the
second bricklayer is _____ bricks.
A) 1,500
B) 1,400
C) 1,300
D) 1,200
The percent change in quantity demanded of a good divided by the percent change in
income, all other things unchanged, is the _____ elasticity of demand.
A) price
B) quantity
C) income
D) cross-price
Figure: Production Possibility Frontier Curve for Tealand
(Figure: Production Possibility Frontier
for Tealand) Look at the figure Production Possibility Frontier for Tealand. Tealand can
produce at point E only if the government:
A) eliminates unemployment.
B) raises taxes.
C) permits more immigration.
D) increases the cost of production by decreasing the use of technology.
Denaro pays $8,000 per month in rent to operate a health club in Memphis. He also
pays $17,000 per month in wages, $3,000 per month in food and supplies, and $1,000
per month in insurance. All of his costs of production except his insurance and rent can
change if he makes different decisions about his health club production. Denaro’s
monthly sunk costs equal:
A) $20,000.
B) $11,000.
C) $29,000.
D) $9,000.
Firms in the monopolistically competitive movie industry face excess capacity. This
means that there are _____ movies than the output at which _____ cost is minimized.
A) fewer; marginal
B) more; average total
C) fewer; average total
D) more; marginal
Suppose Eastland College does not have a summer program and could rent out the
campus to various summer sports camps for $100,000. The potential revenue of the
summer camps represents:
A) an implicit cost of capital.
B) an explicit cost.
C) a total cost.
D) a sunk cost.
Scenario: Two Identical Firms
Two identical firms make up an industry in which the market demand curve is
represented by Q = 5,000 ” 4P, where Q is the quantity demanded and P is price per
unit. The marginal cost of producing the good in this industry is constant and equal to
$650. Fixed cost is zero.
(Scenario: Two Identical Firms) Suppose the two firms in the scenario Two Identical
Firms decide to cooperate and collude, resulting in the same amount of production for
each firm. What is the profit-maximizing price and output for the industry?
A) P = $400; Q = 5,000
B) P = $950; Q = 1,200
C) P = $600; Q = 1,500
D) P = $300; Q = 2,000
Equilibrium in the market for peanut butter is disturbed by an increase in the price of
peanuts. Assuming that the supply curve of peanut butter is upward-sloping, producer
surplus in the peanut butter market:
A) will increase.
B) will decrease.
C) will not change.
D) may change, but we cannot determine the change without more information.
The amount by which an additional unit of a factor increases a firm’s _____ during a
period is the _____.
A) total revenue; value of the marginal product
B) total revenue; marginal factor cost
C) total cost; value of marginal product
D) total cost; marginal product
Figure: The Gains from Trade
(Figure: The Gains from Trade) Look at the figure The Gains from Trade. What is the
total surplus in this market when the demand curve is D1 and the market is in
equilibrium?
A) $25.00
B) $31.25
C) $62.50
D) $90.00
(Table: Utility from Burgers and Milkshakes) Look at the table Utility from Burgers and
Milkshakes. David’s marginal utilities for milkshakes and burgers are given in the table.
The price of milkshakes is $2, and the price of burgers is $5. If David’s income is $10,
to maximize his utility, he buys _____ shake(s) and _____ burger(s).
A) 1; 1
B) no; 2
C) 5; no
D) 2; 1
Figure: Good X and Good Y
(Figure: Good X and Good Y) Look at the figure
Good X and Good Y. If we move from point B to point C in the figure, the x-variable
has ______ units and the y-variable has ______ units.
A) decreased by 2; increased by 15
B) increased by 2; decreased by 15
C) decreased by 15; increased by 2
D) increased by 15; decreased by 2
Which of the following is TRUE?
A) All markets should be oligopolies because that is the most efficient market structure.
B) Monopolistic competition results in excess capacity, since in the long run the point
where MR = MC is to the right of the minimum of the ATC curve.
C) In monopolistic competition firms earn large economic profits in the long run.
D) In monopolistic competition firms earn zero economic profits in the long run.
If the quantity of housing supplied in a community is greater than the quantity of houses
demanded, the existing price:
A) is above the market equilibrium price.
B) will rise to clear the market.
C) will either rise or remain unchanged.
D) is below the market equilibrium price.
The burden of a tax on a good is said to fall completely on the consumers if the:
A) price paid by consumers for the good declines by the amount of the tax.
B) price paid by consumers for the good increases by the amount of the tax.
C) price paid by consumers does not change.
D) wages received by workers who produce the good increase by the amount of the tax.
Figure: The Production Possibility Frontiers for Jackson and Tahoe
(Figure: The Production Possibility Frontiers for Jackson and Tahoe) Look at the figure
The Production Possibility Frontiers for Jackson and Tahoe. Jackson has an absolute
advantage in producing:
A) wheat only.
B) cattle only.
C) both wheat and cattle.
D) neither wheat nor cattle.
The circular-flow diagram shows the flow of _____ and the flow of _____.
A) goods and services; factors
B) households; firms
C) money; goods and services
D) factors; money
Paying a fee every time you use the municipal golf course is an example of the _____
principle.
A) benefits
B) ability-to-pay
C) progressive tax
D) regressive tax
Figure: The Profit-Maximizing Output and Price
(Figure: The Profit-Maximizing Output and Price) Look at the figure The
Profit-Maximizing Output and Price. A perfect competitor would produce at a price of
_____ and output of _____ units.
A) $600; 8
B) $200; 8
C) $200; 16
D) $600; 16
(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for
Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each
firm can produce gadgets at a marginal cost of $2 and no fixed cost. Suppose that these
two producers have formed a cartel, agreed to split production of output evenly, and are
maximizing total industry profits. If Margaret decides to cheat on the agreement and
sell 100 more gadgets but Ray continues to sell 200 gadgets, Ray’s profits will be:
A) $1,400.
B) $1,250.
C) $600.
D) $400.
A tariff or quota will _____ prices and _____ the consumption of the protected goods in
the importing country.
A) raise; increase
B) raise; decrease
C) lower; increase
D) lower; decrease
Which program was introduced in 1990 to replace the means-tested program Aid to
Families with Dependent Children?
A) Social Security
B) Medicare
C) food stamps
D) Temporary Assistance to Needy Families
The shape of the marginal cost curve is the mirror image of the shape of the _____
curve.
A) total product
B) average product
C) marginal product
D) average total cost
Figure: The Perfectly Competitive Firm
(Figure: Perfectly Competitive Firm) Look at the figure The Perfectly Competitive
Firm. The figure shows a perfectly competitive firm that faces demand curve d and
maximizes profit. If the market price is $3, the firm will produce _____ units of output
per day.
A) 100
B) 250
C) 300
D) 400
Figure: The Market for Gas Stations
(Figure: The Market for Gas Stations) The figure The Market for Gas Stations shows
curves facing a typical gas station in a large town. The market is characterized by many
firms, differentiated products, easy entry, and easy exit. If the gas station here is typical,
then in the long run, we would expect to observe:
A) a few gas stations leaving the market.
B) new gas stations entering the market.
C) neither entry nor exit.
D) many gas stations leaving the market.
Figure: Water Works
(Figure: Water Works) Look at the figure Water Works, which describes a small town’s
water works, a natural monopoly. If the water works is unregulated and maximizes
profit, how much profit will it earn?
A) $1,600
B) $1,400
C) $1,000
D) $800
Figure: Three Firms That Pollute
(Figure: Three Firms that Pollute) Look at the figure Three Firms That Pollute. If each
company is allowed to emit only 300 tons of pollution per day, which company will be
most adversely affected?
A) firm A
B) firm B
C) firm C
D) They are equally affected.
A _____ program is one for which the recipient qualifies on the basis of _____.
A) social insurance; income
B) means-tested; age
C) means-tested; income
D) social insurance; need
The rising price of gasoline has caused your parents to use public transportation rather
than drive to work. They have also decided to cancel a cross-country trip for a family
reunion. Are there substitution and income effects here? Explain.
A two-year-old child is eating raisins one at a time from a large box. Even though the
child doesn’t understand formal economic theory, he knows when to stop eating because
he is full. Describe how this child has already mastered marginal analysis.
(Table: Utility from Coffee and Comic Books) Look at the table Utility from Coffee and
Comic Books. Your eccentric professor has a daily budget of $40, and he spends it
entirely on coffee and comic books. Each comic book is priced at $8 and each cup of
coffee is priced at $4. To maximize his utility, how many cups of coffee and how many
comic books should he buy? How many total utils will he enjoy?
Suppose the cross-price elasticity of demand for pork with respect to the price of
chicken is equal to +0.4. What does this tell you about the relation between pork and
chicken? What will happen to consumption of pork if the price of chicken falls by 20%?