A firm can invest in one of two projects: the purchase of new delivery vans or the
training of its sales staff in the use of new sales techniques. Both projects cost the same
amount of money. The purchase of new delivery vans is expected to reduce costs by
$10,000 each year for 5 years. The training of the sales staff in the use of a new sales
technique is expected to increase revenues by $10,000 each year for 5 years. Which of
the following is true?
A) Each of these projects would have the same expected rate of return, as they both cost
the same.
B) The purchase of new delivery vans would have the higher expected rate of return, as
it increases revenues whereas the training of sales staff only reduces costs.
C) The training of sales staff would have the higher expected rate of return, as it will
reduce costs for a longer time period than the purchase of new delivery vans will
increase revenues.
D) The expected rates of return for these two projects cannot be compared, as one
project reduces costs and the other increases revenues.
If there are four firms in an industry and each has a 25 percent market share, then the
Herfindahl-Hirschman Index equals
A) 2,500.
B) 2,800.
C) 5,000.
D) 6,600.
Lettuce and spinach are substitutes. Lettuce and tomatoes are complements. Lettuce is a
normal good. During the winter, about 20% of the lettuce crop was destroyed by
flooding.
As a result of the flooding during the winter, you would expect that
A) the price of lettuce would increase, the supply of lettuce would increase, and the
quantity demanded of lettuce would decrease.
B) the supply of lettuce would decrease, the price of lettuce would increase, and the
quantity demanded of lettuce would decrease.
C) the price of lettuce would increase and both the quantity of lettuce supplied and the
quantity of lettuce demanded would increase.
D) the supply of lettuce would decrease, the price of lettuce would increase, and the
demand for lettuce would decrease.
A wheat farmer sells wheat in a perfectly competitive market and hires labor in a
perfectly competitive market. The market price of wheat is $2 a bushel, the wage rate is
$10, the farmer employs five workers and the marginal product of the fifth worker is 10
bushels. What would you advise this farmer to do?
A) Do nothing because the wage rate and the marginal product of the last worker hired
are equal.
B) Reduce employment because the wage paid is less than the marginal revenue
product.
C) Increase employment because the wage paid is less than the marginal revenue
product.
D) Reduce the product price so that the wage and marginal revenue product will be
equal.
If Leonardo is scalping tickets for a World Cup game, he will be successful at selling
the tickets for a profit
A) when prices are too high.
B) only when there is excess supply.
C) any time teams in the World Cup game are popular.
D) when the price set by the World Cup organizers is less than the market equilibrium
price.
Figure 3.11
Refer to Figure 3.11. Assume hamburgers and french fries are complements. An
increase in the price of french fries will cause a movement from
A) Point A to Point B.
B) Point B to Point A.
C) D2 toD1.
D) D1 toD2.
Figure 8.4
Refer to Figure 8.4. The vertical distance AB represents
A) total fixed costs.
B) marginal costs.
C) average fixed costs.
D) average total costs.
By invoking the assumption of ceteris paribus, economists
A) consider the impact of all relevant factors.
B) hold all variables constant when analyzing a model.
C) isolate the impact of one single variable while holding all other variables constant.
D) exclude irrelevant detail when analyzing a model.
Assume Cathy’s Cupcake Company operates in a perfectly competitive market
producing 10,000 cupcakes per day. At this output level, price equals this firm’s
marginal cost. Assuming price exceeds average variable cost, to maximize profits
Cathy’s should
A) make no adjustments as they are already maximizing their profits.
B) increase their output.
C) decrease their output.
D) stop producing since it is earning a loss.
An individual earning $40,000 pays $3,200 in taxes. The marginal tax rate on any
income earned above $40,000 is 20%.
When this person earns $60,000, her tax payment would be
A) $4,000.
B) $7,200.
C) $12,000.
D) indeterminate from this information.
An oligopoly with a dominant price leader will produce a level of output
A) equal to what a monopolist would choose in the same industry.
B) between that which would prevail under competition and that which a monopolist
would choose in the same industry.
C) between that which would prevail under competition and that which a monopolistic
competitor would choose in the same industry.
D) that would prevail under competition.
The measure of a firm’s capital stock is the ________ its plant, equipment, inventories,
and intangible assets.
A) value it paid for
B) depreciable value of
C) current market value of
D) quantity of
Economists often refer to “good deals” as
A) profit opportunities.
B) break-even propositions.
C) efficient market outcomes.
D) those with no opportunity cost.
Table 16.3 shows the situation facing two firms, both of which are polluting. Assume
that each firm emits 5 units of pollution.
Table 16.3
Refer to Table 16.3. Suppose the government wants to reduce the total amount of
pollution from the current level of 10 to 4. To do this, the government caps each firm’s
emissions at 2 units and issues 2 permits to each firm. If firms are allowed to trade
permits, how many permits will be traded between the two firms?
A) A will buy two permits from B.
B) B will buy two permits from A.
C) A will buy one permit from B.
D) B will buy one permit from A.
Figure 8.4
Refer to Figure 8.4. The marginal cost of the third microwave oven is
A) $133.33.
B) $150.
C) $350.
D) indeterminate from this information.
Table 11.2
Refer to Table 11.2. When the interest rate ________, the farmer will investment in all
four projects.
A) is greater than 15%
B) is less than 5%
C) is less than 15%
D) is greater than 5%
Hector has $1,000 a month to spend on clothing (c) and food (f). The price of clothing
is $50 and the price of food is $20. What is the equation for Hector’s budget constraint?
A) c + f < $1,000
B) $50 × c + $20 × f ≥ $1,000
C) ($50 × c) / ($20 × f) = $1,000
D) $50 × c + $20 × f = $1,000
Figure 4.5
Refer to Figure 4.5. At the world price of $15 per CD-Rom drive, the United States
imports ________ million CD-Rom drives.
A) 3
B) 6
C) 9
D) 12
The Latin phrase ceteris paribus means that when a relationship between two variables
is being studied,
A) both are treated as unpredictable.
B) neither of those two variables is allowed to change.
C) all other variables are held fixed.
D) we recognize that some factors are unknown.
Figure 20.3
Refer to Figure 20.3. The domestic price of shoes is $80. After trade the price of a pair
of shoes is $60. After trade this country will ________ 300 pairs of shoes.
A) buy
B) sell
C) import
D) export
The population in developing countries grows at a rate of ________% a year.
A) -0.8
B) 5
C) 7
D) 0
If the government taxes a coal company by an amount equal to the damages of each
marginal ton of coal, then the coal company’s marginal social cost curve is the same as
the marginal ________ curve.
A) damage cost
B) cost
C) private cost
D) benefit
Figure 18.4
Refer to Figure 18.4. The third fifth of families earned ________% of income in
Outland.
A) 12
B) 23
C) 25
D) 35
________ protect property rights.
A) Taxes and subsidies
B) Bargaining and negotiation
C) Injunctions and liability rules
D) Rivalry and excludability
Figure 9.7
Refer to Figure 9.7. The firm’s shut down point is at a price of
A) $5.
B) $6.
C) $7.
D) $8.
If an economy begins to use its resources less efficiently, it will move
A) to a point closer to its ppf.
B) to a point farther away from its ppf.
C) from a point along its ppf to a point outside its ppf.
D) from one point to another point along its ppf.
Life insurance companies require that prospective policy holders have a medical
checkup before the companies will sell the policy because of a(n) ________ problem in
which the insured could be ________ than expected.
A) moral hazard; healthy and live longer
B) moral hazard; unhealthy and die sooner
C) adverse selection; healthy and live longer
D) adverse selection; unhealthy and die sooner
In order to discourage consumers from consuming sugary soft drinks, the government is
considering placing a tax on sugary soft drink sales. Which of the following statements
is true?
A) Given the numerous alternatives, consumers’ demand for sugary soft drinks is
relatively elastic, and the tax will likely work to discourage sugary soft drink
consumption.
B) The tax on sugary soft drinks will likely raise considerable revenue, but it will be
unlikely to reduce the consumption of sugary soft drinks by consumers.
C) The tax on sugary soft drinks will likely increase the demand for sugar-free soft
drinks.
D) Both A and C are true.
Figure 8.6
Refer to Figure 8.6. Curve ________ is Outdoor Equipment’s average total cost curve.
A) 1
B) 2
C) 3
D) None of the above is correct.
Individuals usually behave so as to ________ their utility.
A) minimize
B) equalize
C) maximize
D) forego
When the price of oysters decreases 25%, quantity demanded is unchanged. The price
elasticity of demand for oysters is
A) perfectly inelastic.
B) elastic.
C) inelastic.
D) unitary elastic.
Figure 6.16
Refer to Figure 6.16. The highest indifference curve depicted is the one on which point
D lies. Why is Jason NOT maximizing his utility at point D?
A) He cannot afford point D.
B) His marginal utility per dollar spent on the last sandwich is greater than his marginal
utility per dollar spent on his last hot dog.
C) His marginal utility per dollar spent on the last sandwich is less than his marginal
utility per dollar spent on his last hot dog.
D) He is maximizing his utility at point D.
________ is(are) an example of selling externality rights.
A) Auctioning the right to buy a car each year
B) Direct regulation of externalities
C) Having the damaged party avoid the damage
D) Government imposed taxes and subsidies
If a firm could increase profits by hiring less labor and more capital, then
A) the last dollar spent on labor must yield a smaller increase in output than the last
dollar spent on capital.
B) the last dollar spent on labor must yield a larger increase in output than the last
dollar spent on capital.
C) the price of labor exceeds the price of capital.
D) the optimal production technique must be capital intensive.
If a firm shuts down in the short run, will it have zero costs or not? Explain.
Explain how a distorting tax can improve efficiency when there are already present
other taxes that distort decisions as well.
Table 13.1
Using Table 13.1 calculate the total revenue of this firm at each price and quantity
demanded. Explain why total revenue eventually declines.
Why would a firm continue to pollute even when it is fined (taxed) for doing so?
How does one determine whether demand is elastic, inelastic, or unit elastic?
Prove that marginal cost is actually the slope of the total variable cost curve.
Which part of the world is often classified as the “Fourth World” and why?
Draw a graph showing a line with a positive slope. Draw a graph showing a line with a
negative slope. Explain what the shape of these lines implies about the relationship
between the variable on the x-axis and the variable on the y-axis?
A firm is employing capital and labor such that the marginal product of capital is 30 and
the marginal product of labor is 10. If the price of a unit of capital is $50 and the price
of a unit of labor is $10, is the firm minimizing its costs? If not, can you recommend a
change for the firm to make in its relative amounts of labor and capital used? Explain.
Comment on the following statement: “The demand facing a firm in perfect competition
is less elastic than the demand facing a firm in monopolistic competition.”
What is the relationship between total variable cost and marginal cost? Explain.
SCENARIO 1: Consider the following data for the harvest of crabs versus the harvest
of fish off the coast of Virginia in answering the following questions.
Refer to Scenario 1. Graph the production possibilities frontier and calculate the
average opportunity cost of any of the first fifteen crabs produced.
If an adult plays tic-tac-toe with another adult typically the result is that neither player
wins. However, when adults play small children they are usually successful in beating
them. How is it that there could be Nash equilibrium in the first case and not the
second?