Acid rain is an example of a positive externality.
Average total cost and average variable cost are minimized at the same level of output.
Capital stock is the current market value of all of the shares of stock a company has.
It is because firms consciously try to balance social costs and benefits that efficiency
conditions of perfect competition come about.
When demand is elastic, an increase in price will result in a decrease in total revenue.
Output in a Cournot duopoly is at a level between that in perfect competition and
monopolistic competition.
In the labor market, the income and substitution effects work in the same direction.
A society’s production possibility frontier is bowed in from the origin due to specialized
resources.
The voting paradox demonstrates how majority-rule voting leads to consistent results.
Consumer surplus describes a situation in which there is excess quantity supplied.
In imperfect competition, competition takes place on fewer dimensions than in perfect
competition.
Microfinance is aimed at introducing entrepreneurs among the very poorest parts of the
developing world to the capital market.
Inferior goods will experience increasing demand when incomes increase.
If after we change an allocation we can demonstrate that the value of the gains is less
than the value of the losses, then we say the change is potentially efficient.
If the assumptions of competitive market theory hold, the market system would lead to
one and only one point on the utility possibilities frontier.
If there are no externalities, producing where price is greater than marginal cost is
inefficient because for every unit produced, consumers derive benefits that are less than
the cost of the resources needed to produce it.
The best combination of inputs at one level of production may not be best at other
levels.
Economic income is measured “before-tax.”
The following situation is an example of an import substitution strategy. Costa Rica has
a comparative advantage in the production of coffee and, as a result, the Costa Rican
government grants incentives to coffee planters to improve their performance in the
international marketplace.
Governments will likely achieve the optimal level of public goods, but not the correct
amount of control over externalities.
A command economy eliminates markets.
An income tax leads to double taxation on saving only if consumption is the measure to
gauge a person’s ability to pay.
When a firm retains earnings for investment purposes, it is effectively saving on behalf
of its shareholders.
If a group has a negative elasticity of labor supply (above some income level), then
continued increases in wages will result in decreases in the quantity of labor supplied.
A monopolistically competitive firm maximizes profit by producing where demand
equals marginal cost.
Poverty rates among the elderly have fallen in the past few decades.
A command economy is one in which a central government sets output targets, incomes
and prices.
In general, the demand curve facing the monopolistically competitive firm is less elastic
than the demand curve facing the monopoly.
A quota on corn benefits domestic producers of corn.
Evidence generally suggests that oligopolies generate technological advances.
If the assumptions of competitive market theory hold, the market system would lead to
an efficient outcome.
If iPods and iTunes are complements, then a decrease in the price of iPods will result in
a decrease in the demand for iTunes.
Collectively owned resources tend to be underused since no one has an incentive use
them optimally.
A society’s production possibility frontier is bowed out from the origin because some
resources are better suited for producing one good as opposed to the other.
A market where there is only one buyer for a good or service is called a monopoly.
Price is the coordinating mechanism in a planned economy.
Cross-price elasticity of demand measures the response in the
A) price of a good to a change in the quantity of another good demanded.
B) income of consumers to the change in the price of goods.
C) quantity of one good demanded when the quantity demanded of another good
changes.
D) quantity of one good demanded to a change in the price of another good.
If the exchange rate between the United States and Mexico changes from $1 = 8 pesos
to
$1 = 9 pesos, then, ceteris paribus, the price of American goods in Mexico
A) will remain the same.
B) will increase.
C) could either increase or decrease.
D) will decrease.
Figure 2.6
Refer to Figure 2.6. A shift from ppf1 to ppf2 may be caused by
A) an increase in inflation.
B) an increased desire for consumer goods.
C) a change in consumer tastes.
D) an improvement in technology.
As production increases, it is most likely that the marginal damage costs
A) remain constant.
B) increase.
C) decrease.
D) decrease or increase.
Universal health coverage, lemon laws, and dealer warranties are all examples of tools
used to reduce
A) moral hazard.
B) risk premiums.
C) market efficiency.
D) adverse selection.
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. If shoes are a normal good and income in this country falls, then we
would expect
A) the number of pairs of shoes imported into this country to increase.
B) the number of pairs of shoes imported into this country to decrease.
C) the number of pairs of shoes exported from this country to increase.
D) the number of pairs of shoes exported from this country to decrease.
Related to the Economics in Practice on page 717: According to the World Bank, of the
following countries, which one has the lowest controls on corruption?
A) Germany
B) India
C) China
D) Nigeria
The case for product differentiation does NOT include the fact that
A) products that satisfy a real demand survive.
B) standards of living rise with product innovation.
C) new products satisfy people with different preferences.
D) it wastes society’s scarce resources.
Figure 6.4
Refer to Figure 6.4. Bill’s budget constraint is AC. If the black bean price increases,
Bill’s budget constraint will be
A) 0D.
B) AB.
C) AC.
D) AD.
If the government wishes to encourage firms to internalize externalities, they should
________ activities resulting in negative externalities and ________ activities resulting
in positive externalities
A) tax; subsidize
B) subsidize; tax
C) ban; generate
D) place an injunction against; tax
We consider ________ LEAST likely to be a firm in an imperfectly competitive
industry.
A) a McDonalds in Houston, Texas
B) HawaiianTel Telephone Company
C) a corn farmer in Ohio
D) the only locally owned and operated bank in Portland, Oregon
Table 8.2
Refer to Table 8.2. If Danica produces three pairs of earrings, her total variable costs are
A) $13.33.
B) $70.
C) $87.50.
D) $112.25.
Figure 15.4
Refer to Figure 15.4. If the Hand Made Shirt Shop is monopolistically competitive,
what is the maximum level of fixed cost that would lead to the firm continuing to
operate in the short run?
A) $100
B) $1150
C) $1250
D) The firm would continue to operate regardless of the level of fixed costs.
Figure 8.9
Refer to Figure 8.9. At the market price of $18 per bale, if this farmer produces the
profit maximizing level of hay, the total revenue would be
A) $1,200.
B) $2,800.
C) $5,600.
D) $6,300.
One reason to require licensing of attorneys is that
A) legal services involve substantial externalities.
B) legal services are very expensive.
C) legal services are a public good.
D) consumers of legal services lack perfect information.
If firms in a monopolistically competitive industry are earning economic profits, then in
the long run new firms producing close substitutes will ________ the industry, and this
will continue until economic profits are ________.
A) enter; enhanced
B) enter; eliminated
C) exit; eliminated
D) exit; enhanced
If your tuition is $5,000 this semester, your books cost $600, you can only work 20
rather than 40 hours per week during the 15 weeks you are taking classes and you make
$15 per hour, and your room and board is $3000 this semester (same as if not attending
college), then your opportunity cost of attending college this semester is
A) $5,600.
B) $5,900.
C) $10,100.
D) $11,600.
In the short run a firm’s lowest cost level of output is the minimum point on its
________ cost curve.
A) average total
B) total variable
C) average fixed
D) marginal
Table 20.3
Refer to Table 20.3. If the exchange rate is $1 = 2 euros, then
A) the United States will import both peas and carrots.
B) France will import both peas and carrots.
C) the United States will import peas and France will import carrots.
D) France will import peas.
Figure 14.7
Refer to Figure 14.7. Six firms that produce chewing gum form a cartel. The cartel
faces the market demand curve given by D. To maximize profits, the cartel should
produce ________ packs of chewing gum and the price should be ________.
A) 12,000; $.25
B) 12,000; $.40
C) 14,000; $.30
D) 16,000; $.35
For a monopolist, marginal revenue ________ price.
A) always equals
B) is less than
C) is greater than
D) is first greater than and then less than
If the most someone is willing to pay for ticket to see their favorite team is $100 and the
market price of the ticket is $35, then this buyer will get consumer surplus of
A) 1 ticket.
B) $35.
C) $65.
D) $100.
Adam Smiths’s four principles of taxation taken from the Wealth of Nations
“The rich should contribute to the public expense not only in proportion to their
revenue,” Smith believed, “but something more than in that proportion.”
“the tax which each individual is bound to pay ought to be certain and not arbitrary” and
“clear and plain”–that is, transparent to everyone.
“ought to be levied at the time, or in the manner, in which it is most convenient for the
contributor to pay it.”
“both to take out and keep out of the pockets of the people as little as possible over and
above what it brings into the public treasury of a state.”
Using Adam Smith’s four principles of taxation above evaluate the local sales tax
system based on each criteria.
Figure 9.7
Refer to Figure 9.7. If MR = $5, then in the long run,
A) the firm will increase its price and output.
B) the firm will exit the industry.
C) new firms will enter the industry, and the current firms will expand production.
D) firms will increase their output so that their average fixed cost per unit falls.
Fixed costs
A) do NOT exist in the long run.
B) depend on a firm’s level of output.
C) are zero if a firm produces no output.
D) are total costs minus average variable costs.
Characteristics of economic development include all of the following EXCEPT
A) improvements in basic education.
B) an increase in the standard of living.
C) a decrease in the percentage of the labor force in urban areas.
D) an increase in life expectancy.
In an oligopolistic industry, the price firms charge and the quantity they produce would
be the same as if the industry were a monopoly if
A) the market is contestable.
B) the oligopolists behave as Cournot assumed.
C) one of the oligopolists acts as a dominant firm price leader.
D) the oligopolists collude.
Consider an output beyond the minimum point of a firm’s short run average total cost
curve. At this level of output, the firm can use its ________ input at a lower average
cost but only by using its ________ input at a higher average cost.
A) fixed capital; variable labor
B) variable labor; fixed capital
C) variable capital; fixed labor
D) fixed labor; variable capital
When Hurricane Katrina hit Louisiana in 2005, approximately half of the sugar cane
crop was destroyed. Ceteris paribus
A) the demand for sugar decreased, and the price of sugar decreased.
B) the supply of sugar decreased, and the price of sugar increased.
C) the supply of sugar decreased, and the price of sugar decreased.
D) the demand for sugar increased, and the price of sugar increased.
If the price ceiling is set below the equilibrium price,
A) quantity demanded will equal quantity supplied.
B) there will be a surplus.
C) there will be a shortage.
D) demand will be less than supply.
Explain how a model can be useful even if it is not realistic.
Lisa has an income of $250 per week, which she spends entirely on milk and eggs. The
price of milk is $2 per gallon and the price of a dozen eggs is $1. What is the
opportunity cost of a gallon of milk? If the price of a dozen eggs rises to $1.50, what
happens to the opportunity cost of a gallon of milk?
Using the Figure above for Australia and New Zealand determine which country has the
comparative advantage in the production of cotton and which the comparative
advantage in the production of wheat.
Using the graph below explain why the elasticity of demand will be greater between
$15 and $9 as opposed to between $9 and $4. Hint: You do not need to perform any
calculations to prove that this is true.
Scenario 1
Two men live alone on an isolated island. To survive they must undertake a few basic
economic activities like water carrying, fishing, cooking and shelter construction and
maintenance. The first man is young, strong, and educated. He is also faster, better, and
more productive at everything. He has an absolute advantage in all activities. The
second man is old, weak, and uneducated. He has an absolute disadvantage in all
economic activities. In some activities the difference between the two is great; in others
it is small.
Based on Scenario 1 above critically evaluate the following statement. “Because of
the productivity differential between the two men we can conclude that the young man
has a comparative advantage in the production of everything over the older man.
While increases in population are often seen as a problem by some observers can you
think of a way in which an increase in population can be a positive factor?
When total utility is at its maximum what must be the value of marginal utility?
Figure 12.1
Use Figure 12.1 to answer the following question. Assume that this industry is currently
enjoying normal economic profit and for whatever reason there is an increase in
demand for the goods produced by this industry. Using general equilibrium analysis
explain what will happen both in this industry and in industry Y which is perceived by
consumers as being a product that is a substitute for product X.
Critically evaluate the following statement. The lack of information of product quality
is a market failure that can only be addressed by government.
In economic terminology, what is the meaning of investment?
Comment on the following statement. “Monopolistically competitive firms will still
produce in the short run even if the demand curve is below their average variable cost
curve because the firms still maintain a degree of market power.”
Comment on the following statement. “Once general equilibrium is achieved this will
result in a long-run equilibrium as well.”
List two things that can cause economic growth to occur.
List four forms of property income.
Name two conditions that can cause a capital asset to depreciate.
Billy’s income elasticity of demand for ground beef is -0.5 and his income elasticity of
demand for pork chops is 1.2. Is ground beef a normal or inferior good? Explain. What
about pork chops?
Which demographic groups have the highest poverty rates?
What is a commitment device?
Explain why some small start-up companies choose not to pay dividends even though
they make very large profits. Why might investors still be happy with this arrangement?