TEST BANK FOR Principles of Microeconomics 10th Edition by Gregory Mankiw
TABLE OF CONTENTS Chapter 1: Ten Principles of Economics Chapter 2: Thinking Like an Economist Chapter 3: Interdependence and the Gains from Trade Chapter 4: The Market Forces of Supply and Demand Chapter 6: Supply, Demand, and Government Policies Chapter 7: Consumers, Producers, and the Efficiency of Markets Chapter 8: Application: The Costs of Taxation Chapter 9: Application: International Trade Chapter 10: Externalities Chapter 11: Public Goods and Common Resources Chapter 12: The Economics of Healthcare Chapter 13: The Design of the Tax System Chapter 14: The Costs of Production Chapter 15: Firms in Competitive Markets Chapter 16: Monopoly Chapter 17: Monopolistic Competition Chapter 18: Oligopoly
Chapter 19: The Markets for the Factors of Production Chapter 20: Earnings and Discrimination Chapter 21: Income Inequality and Poverty Chapter 22: The Theory of Consumer Choice Chapter 23: Frontiers of Microeconomics Chapter 24: Appendix: How Economists Use Data
Chapter 1: Ten Principles of Economics Indicate the answer choice that best completes the statement or answers the question. 1. Resources are a. scarce for households but plentiful for economies. b. plentiful for households but scarce for economies. c. scarce for households and scarce for economies. d. plentiful for households and plentiful for economies. 2. Fundamentally, economics deals with a. scarcity. b. money. c. poverty. d. banking. 3. The overriding reason why households and societies face many decisions is that a. resources are scarce. b. goods and services are not scarce. c. incomes fluctuate with business cycles. d. people, by nature, tend to disagree. 4. The phenomenon of scarcity stems from the fact that a. most economies' production methods are not very good. b. in most economies, wealthy people consume disproportionate quantities of goods and services. c. governments restrict production of too many goods and services. d. resources are limited. 5. In most societies, resources are allocated by a. a single central planner. b. a small number of central planners. c. those firms that use resources to provide goods and services. d. the combined actions of millions of households and firms. 6. Coal is considered to be a nonrenewable energy source. Which of the following statements is correct? a. Coal is an unlimited resource. b. Coal is a scarce resource. c. Coal is a nonscarce resource. d. Coal is not a resource. 7. Economics is the study of how society manages its a. limited wants and unlimited resources. b. unlimited wants and unlimited resources. c. limited wants and limited resources. d. unlimited wants and limited resources. 8. What term refers to the idea that society has limited resources and therefore cannot produce all the goods and services .
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Ch 01: Ten Principles of Economics people wish to have? a. inefficiency b. inequality c. scarcity d. market failure 9. The adage, "There ain't no such thing as a free lunch," means a. even people who receive TANF benefits have to pay for food. b. the cost of living is always increasing. c. people face tradeoffs. d. all costs are included in the price of a product. 10. Which of the following statements best represents the principle of the adage, "There ain't no such thing as a free lunch"? a. Diego can attend the concert only by carpooling with siblings. b. Justin leaves wallet at home and misses lunch. c. Zehra must repair the bike tire before riding it to school. d. Dani must decide between going to Florida or Brazil for spring break. 11. Suppose that you plan your activities for a hot summer day. You would like to go to the local swimming pool and see the latest blockbuster movie. However, the only available ticket is for the same time that the pool is open. So you can only choose one activity. This illustrates the basic principle that a. people respond to incentives. b. rational people think at the margin. c. people face tradeoffs. d. improvements in efficiency sometimes come at the expense of equality. 12. While pollution regulations yield the benefit of a cleaner environment and the improved health that comes with it, the regulations come at the cost of reducing the incomes of the regulated firms' owners, workers, and customers. This statement illustrates the principle that a. trade can make everyone better off. b. rational people think at the margin. c. people face tradeoffs. d. people respond to incentives. 13. When society requires that firms reduce pollution, there is a. a tradeoff because of reduced incomes to the firms' owners and workers. b. a tradeoff only if some firms are forced to close. c. no tradeoff, since the cost of reducing pollution falls only on the firms affected by the requirements. d. no tradeoff, since everyone benefits from reduced pollution. 14. Efficiency means that a. society is conserving resources in order to save them for the future. b. society's goods and services are distributed equally among society's members. c. society's goods and services are distributed fairly, though not necessarily equally, among society's members. .
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Ch 01: Ten Principles of Economics d. society is getting the most it can from its scarce resources. 15. The property of society getting the most it can from its scarce resources is called a. efficiency. b. equality. c. externality. d. productivity. 16. Efficiency a. and equality both refer to how much a society can produce with its resources. b. and equality both refer to how fairly the benefits from using resources are distributed between members of a society. c. refers to how much a society can produce with its resources. Equality refers to how evenly the benefits from using resources are distributed among members of society. d. refers to how evenly the benefits from using resources are distributed between members of society. Equality refers to how much a society can produce with its resources. 17. The terms equality and efficiency are similar in that they both refer to benefits to society. However, they are different in that a. equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources. b. equality refers to maximizing benefits from scarce resources and efficiency refers to uniform distribution of those benefits. c. equality refers to everyone facing identical tradeoffs and efficiency refers to the opportunity cost of the benefits. d. equality refers to the opportunity cost of the benefits and efficiency refers to everyone facing identical tradeoffs. 18. When society gets the most it can from its scarce resources, then the outcome is called a. equitable. b. efficient. c. normal. d. marginal. 19. A typical society strives to get the most it can from its scarce resources. At the same time, the society attempts to distribute the benefits of those resources to the members of the society in a fair manner. However, redistributing income from rich to poor reduces the reward for working hard. Therefore, society faces a tradeoff between a. guns and butter. b. efficiency and equality. c. inflation and unemployment. d. work and leisure. 20. Which of the following is true? a. Efficiency refers to the size of the economic pie; equality refers to how the pie is divided. b. Government policies usually improve upon both equality and efficiency. c. As long as the economic pie continually gets larger, no one will have to go hungry. .
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Ch 01: Ten Principles of Economics d. Efficiency and equality can both be achieved if the economic pie is cut into equal pieces. 21. When the government redistributes income from individuals in the top one percent of income to individuals in the lowest income decile, a. efficiency is improved, but equality is not. b. individuals with both high levels of income and low levels of income benefit directly. c. people work less and produce fewer goods and services. d. the government collects more revenue in total. 22. When the government implements programs such as progressive income tax rates, which of the following is likely to occur? a. Equality is increased and efficiency is increased. b. Equality is increased and efficiency is decreased. c. Equality is decreased and efficiency is increased. d. Equality is decreased and efficiency is decreased. 23. Senator Jackson argues that replacing the federal income tax with a national sales tax would increase the level of output. Senator Feldman objects that this policy would benefit individuals in the top one percent of income at the expense of individuals in the lowest income category. a. Both senators' arguments are primarily about equality. b. Both senators' arguments are primarily about efficiency. c. Senator Jackson's argument is primarily about equality, while Senator Feldman's argument is primarily about efficiency. d. Senator Jackson's argument is primarily about efficiency, while Senator Feldman's argument is primarily about equality. 24. Suppose the government taxes the wealthy at a higher rate than it taxes low-income individuals and then develops programs to redistribute the tax revenue from the wealthy to low-income individuals. This redistribution of wealth a. is more efficient and more equal for society. b. is more efficient but less equal for society. c. is more equal but less efficient for society. d. is less equal and less efficient for society. 25. The opportunity cost of an item is a. the number of hours needed to earn money to buy the item. b. what you give up to get that item. c. usually less than the dollar value of the item. d. the dollar value of the item. 26. Suppose that you have received $300 as a birthday gift. You can spend it today or you can put the money in a bank account for a year and earn 5 percent interest. The opportunity cost of spending the money today, in terms of what you could have after one year, is a. $0. b. $15. c. $305. .
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Ch 01: Ten Principles of Economics d. $315. 27. When computing the opportunity cost of attending a concert you should include a. the price you pay for the ticket and the value of your time. b. the price you pay for the ticket, but not the value of your time. c. the value of your time, but not the price you pay for the ticket. d. neither the price of the ticket nor the value of your time. 28. Mina decides to spend three hours working overtime rather than going to the park with friends. Because Mina earns $20 per hour for overtime work, Mina's opportunity cost of working is a. the $60 earned by working. b. the $60 minus the enjoyment Mina would have received from going to the park. c. the enjoyment Mina would have received by going to the park. d. nothing, since Mina would have received less than $60 worth of enjoyment from going to the park. 29. Liyam considers going to college. Currently, the costs of tuition is $21,000, room and board $11,000, and books cost $1,800. Not going to college, Liyam will earn $16,000 working in a store and spend $7,200 on room and board. Liyam's cost of going to college is a. $33,800. b. $42,600. c. $49,800. d. $57,000. 30. For which of the following individuals would the opportunity cost of going to college be highest? a. A promising young mathematician who will command a high salary once they earn their college degree b. A student with average grades who has never held a job c. A famous, highly paid actor who wants to take time away from show business to finish college and earn a degree d. A student who is the best player on their college basketball team, but who lacks the skills necessary to play professional basketball 31. Chloe's college raises the cost of room and board per semester. This increase raises Chloe's opportunity cost of attending college a. even if the amount Chloe would have to pay for room and board if Chloe didn't attend college rose by the same amount. An increase in opportunity cost reduces Chloe's incentive to attend college. b. even if the amount Chloe would have to pay for room and board if Chloe didn't attend college rose by the same amount. An increase in opportunity cost increases Chloe's incentive to attend college. c. only if the amount Chloe would have to pay for room and board if Chloe didn't attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost reduces Chloe's incentive to attend college. d. only if the amount Chloe would have to pay for room and board if Chloe didn't attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost increases Chloe's incentive to attend college. 32. Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus parking lot. How would this affect your opportunity cost of attending college? .
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Ch 01: Ten Principles of Economics a. The cost of the parking permit is not part of the opportunity cost of attending college if you would not have to pay for parking otherwise. b. The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking otherwise. c. Only half of the cost of the parking permit is part of the opportunity cost of attending college. d. The cost of the parking permit is not part of the opportunity cost of attending college under any circumstances. 33. Elena decides how to spend a $100 birthday gift between four choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally, Elena decides on Option B. The opportunity cost of this decision is a. the value of the option Elena would have chosen had Option B not been available. b. the value to Elena of Options A, C, and D combined. c. the average of the values to Elena of Options A, C, and D. d. $100. 34. You have driven 800 miles on a vacation and then you notice that you are only 15 miles from an attraction you hadn't known about, but would really like to see. In computing the opportunity cost of visiting this attraction you had not planned to visit, you should include a. both the cost of driving the first 800 miles and the next 15 miles. b. the cost of driving the first 800 miles, but not the cost of driving the next 15 miles. c. the cost of driving the next 15 miles, but not the cost of driving the first 800 miles. d. neither the cost of driving the first 800 miles nor the cost of driving the next 15 miles. 35. A rational decision maker a. ignores marginal changes and focuses instead on "the big picture." b. ignores the likely effects of government policies while making choices. c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that action. d. takes an action only if the combined benefits of that action and previous actions exceed the combined costs of that action and previous actions. 36. Making rational decisions at the margin means that people a. make those decisions that do not impose a marginal cost. b. evaluate how easily a decision can be reversed if problems arise. c. compare the marginal costs and marginal benefits of each decision. d. always calculate the dollar costs for each decision. 37. People are willing to pay more for a diamond than for a bottle of water because a. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of water. b. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water. c. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices. d. water prices are held artificially low by governments, since water is necessary for life. 38. The marginal benefit Sabrina gets from purchasing a third pair of gloves is a. the same as the total benefit from purchasing three pairs of gloves. .
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Ch 01: Ten Principles of Economics b. more than the marginal cost of purchasing the third pair of gloves. c. the total benefit from purchasing three pairs of gloves minus the total benefit from purchasing two pairs of gloves. d. the total benefit from purchasing four pairs of gloves minus the total benefit from purchasing three pairs of gloves. 39. After much consideration, you have chosen Ireland over Spain for your Study Abroad program next year. However, the deadline for your final decision is still months away and you may reverse this decision. Which of the following events could prompt you to reverse this decision? a. The marginal benefit of going to Spain increases. b. The marginal cost of going to Spain increases. c. The marginal benefit of going to Ireland increases. d. The marginal cost of going to Ireland decreases. 40. A hair stylist who cuts and colors hair for 50 clients per week and earns a profit is expanding to serve more clients. Is this a good business decision? a. Yes, because cutting hair is profitable. b. No, because it is very hard to sell more services. c. It depends on the marginal cost of serving more clients and the marginal revenue earned from serving more clients. d. It depends on the average cost of serving more clients and the average revenue earned from serving more clients. 41. Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline should a. sell the ticket because the marginal benefit exceeds the marginal cost. b. sell the ticket because the marginal benefit exceeds the average cost. c. not sell the ticket because the marginal benefit is less than the marginal cost. d. not sell the ticket because the marginal benefit is less than the average cost. 42. Suppose the cost of flying a 100-seat plane for an airline is $50,000 and there are 10 empty seats on a flight. The marginal cost of flying a passenger is a. $50. b. $500. c. $50,000. d. This cannot be determined from the information given. 43. Savion is restoring a car and has already spent $4,000 on the restoration. Savion expects to be able to sell the car for $5,800 but needs to do an additional $2,400 of work to make the car worth $5,800 to potential buyers. Savion could also sell the car now, without completing the additional work, for $3,800. What should Savion do? a. Sell the car now for $3,800. b. Keep the car since it wouldn’t be rational to spend $6,400 restoring a car and then sell it for only $5,800. c. Complete the additional work and sell the car for $5,800. d. It does not matter which action Savion takes since the outcome will be the same either way. 44. Acme Home Builders, Inc., has built 24 houses so far this year at a total cost to the company of $4.80 million. If the .
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Ch 01: Ten Principles of Economics company builds a 25th house, its total cost will increase to $5.05 million. Which of the following statements is correct? a. For the first 24 houses, the average cost per house was $205,000. b. The marginal cost of the 25th house, if it is built, will equal $250,000. c. If the company can sell the 25th house for at least $202,000, then it should build it. d. The company should never build the 25th house because this increases its total cost. 45. Suppose the cost of operating a 75-room hotel for a night is $6,000 and there are five empty rooms for tonight. If the marginal cost of operating one room for one night is $40, the hotel manager should rent one of the empty rooms only if a customer is willing to pay a. more than $40; because the average benefit will exceed the marginal cost. b. more than $40; because the marginal benefit will exceed the marginal cost. c. more than $80; because the average benefit will exceed the marginal cost. d. more than $80; because the marginal benefit will exceed the marginal cost. 46. A bagel shop sells fresh-baked bagels from 5 a.m. until 7 p.m. every day. The shop does not sell day-old bagels, so all unsold bagels are thrown away at 7 p.m. each day. The cost of making and selling a dozen bagels is $1.00; there are no costs associated with throwing bagels away. If the manager has eight dozen bagels left at 6:30 p.m. on a particular day, which of the following alternatives is most attractive? a. Lower the price of the remaining bagels, even if the price falls below $1.00 per dozen. b. Lower the price of the remaining bagels, but under no circumstances should the price fall below $1.00 per dozen. c. Throw the bagels away and produce eight fewer dozen bagels tomorrow. d. Starting tomorrow, lower the price on all bagels so they will all be sold earlier in the day. 47. Yvette buys and sells real estate. Two weeks ago, Yvette paid $300,000 for a house on Pine Street, intending to spend $50,000 on repairs and then sell the house for $400,000. Last week, the city government announced a plan to build a new landfill on Pine Street just down the street from the house Yvette purchased. As a result of the city's announced plan, Yvette is weighing two alternatives: Go ahead with the $50,000 in repairs and then sell the house for $290,000, or forgo the repairs and sell the house as it is for $250,000. Yvette most likely will a. keep the house and live in it. b. go ahead with the $50,000 in repairs and sell the house for $290,000. c. forgo the repairs and sell the house as it is for $250,000. d. move the house from Pine Street to a more desirable location, regardless of the cost of doing so. 48. You are considering staying in college another semester so that you can complete a major in economics. In deciding whether or not to stay you should a. compare the total cost of your education to the total benefits of your education. b. compare the total cost of your education to the benefits of staying one more semester. c. compare the cost of staying one more semester to the benefits of staying one more semester. d. compare the total benefits of your education to the cost of staying one more semester. 49. You go to the movieplex where movies ordinarily cost $9. You are intending to see a movie for which you have a $3off coupon good for only that movie at that time. However, when you get there you see a friend who asks if you would rather see a new release. Both movies start and end at the same time. If you decide to see the new release with your friend, what is your opportunity cost? a. The amount you value the first movie + $3 .
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Ch 01: Ten Principles of Economics b. The amount you value the first movie + $9 c. $3 d. $9 50. Max and Maddy charge people to park on their lawn while attending a nearby craft fair. At the current price of $10, seven people park on their lawn. If they raise the price to $15, they know that only five people will want to park on their lawn. Whether they have seven or five cars parked on their lawn does not affect their costs. From this information it follows that a. they should leave the price at $10. b. it does not matter if they charge $10 or $15. c. they would do better charging $15 than $10. d. they should raise the price even more. 51. Your professor who loves teaching economics has been offered another position in the corporate world that would increase income by 25 percent. Still the professor has decided to continue teaching. This decision would not change unless the marginal a. cost of teaching increased. b. benefit of teaching increased. c. cost of a corporate job increased. d. benefit of a corporate job decreased. 52. Your management professor accepted an offer of a corporate job with a 30 percent pay increase because the marginal a. cost of leaving was greater than the marginal benefit. b. benefit of leaving was greater than the marginal cost. c. benefit of teaching was greater than the marginal cost. d. benefit of teaching was negative. 53. Suppose the state of Wyoming passes a law that increases the tax on cigarettes. As a result, smokers who live in Wyoming start purchasing their cigarettes in surrounding states. Which of the following principles does this best illustrate? a. People respond to incentives. b. Rational people think at the margin. c. Trade can make everyone better off. d. Markets are usually a good way to organize economic activity. 54. Which of the following statements exemplifies a principle of individual decision making? a. Trade can make everyone better off. b. Governments can sometimes improve market outcomes. c. The cost of something is what you give up to get it. d. Prices rise when the government prints too much money. 55. Which of the following is not an example of a group responding to an incentive? a. Students attend class because of an attendance policy that reduces their grade for absences. b. Consumers buy more of a product when it is on sale at a reduced price. c. Universities offer fewer online classes when they generate more revenue at the same cost than traditional .
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Ch 01: Ten Principles of Economics classes. d. Employees work harder to earn higher commissions. 56. Timothy decides to spend four hours playing video games rather than attending classes. Timothy 's opportunity cost of playing games is a. the value of the knowledge Timothy would have received by attending classes. b. income Timothy could have earned working a job for those four hours. c. the value of time playing video games minus the value of attending classes. d. nothing, since Timothy valued playing video games more than attending classes. 57. Which of the following industries has a marginal cost that is close to zero? a. Automobile b. Aircraft c. Software d. Furniture 58. Which is the most accurate statement about trade? a. Trade can make every nation better off. b. Trade makes some nations better off and others worse off. c. Trading for a good can make a nation better off only if the nation cannot produce that good itself. d. Trade helps rich nations and hurts poor nations. 59. Which of the following statements about trade is false? a. Trade increases competition. b. With trade, one country must win and one country must lose. c. Bulgaria can benefit, potentially, from trade with any other country. d. Trade allows people to buy a greater variety of goods and services at lower cost. 60. If the United States decides to trade with Yemen, we know that a. Yemen will benefit, but trade with a less developed country could not benefit the United States. b. it will not benefit Yemen because workers in the United States are more productive. c. Yemen and the United States can both benefit. d. it will not benefit either country because their cultural differences are too vast. 61. Dee is an accomplished actress and a homeowner who pays a landscaper to maintain her lawn rather than do it herself. Dee has determined that she can earn more in the hour it would take her to work on her lawn than she must pay her landscaper. This scenario is an example of which principle of economics? a. Trade can make everyone better off. b. Markets are usually a good way to organize economic activity. c. Governments can sometimes improve market outcomes. d. Prices rise when the government prints too much money. 62. Dale is a guitar teacher and Terrence is a tile layer. If Dale teaches Terrence's daughter to play the guitar in exchange for Terrence tiling Dale's kitchen floor, a. only Dale is made better off by trade. .
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Ch 01: Ten Principles of Economics b. only Terrence is made better off by trade. c. both Dale and Terrence are made better off by trade. d. neither Dale nor Terrence are made better off by trade. 63. Trade between countries tends to a. reduce both competition and specialization. b. reduce competition and increase specialization. c. increase competition and reduce specialization. d. increase both competition and specialization. 64. Trade a. allows specialization, which increases costs. b. allows specialization, which reduces costs. c. reduces specialization, which increases costs. d. reduces specialization, which reduces costs. 65. Central planning refers to a. markets guiding economic activity. Today many countries that had this system have abandoned it. b. markets guiding economic activity. Today many countries that did not have this system have implemented it. c. government guiding economic activity. Today many countries that had this system have abandoned it. d. government guiding economic activity. Today many countries that did not have this system have implemented it. 66. The basic principles of economics suggest that a. markets are seldom, if ever, a good way to organize economic activity. b. government should become involved in markets when trade between countries is involved. c. government should become involved in markets when those markets fail to produce efficient or fair outcomes. d. government should never become involved in markets. 67. Communist countries worked under the premise that a. people, when left on their own without government intervention, will find the best use of available resources. b. central planners were in the best position to determine the allocation of scarce resources in the economy. c. households and firms, guided by an "invisible hand," could achieve the most efficient allocation of scarce resources. d. allowing the market forces of supply and demand to operate with no government intervention would achieve the most efficient allocation of scarce resources. 68. Prior to the collapse of communism, communist countries worked on the premise that economic well-being could be best attained by a. a market economy. b. a strong reliance on prices and individuals' self-interests. c. a system of large privately owned firms. d. the actions of government central planners. .
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Ch 01: Ten Principles of Economics 69. Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations? a. There is no such thing as a free lunch. b. People buy more when prices are high than when prices are low. c. No matter how much people earn, they tend to spend more than they earn. d. Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes. 70. The famous observation that households and firms interacting in markets act as if they are guided by an "invisible hand" that leads them to desirable market outcomes comes from whose 1776 book? a. David Ricardo b. Thorstein Veblen c. John Maynard Keynes d. Adam Smith 71. The "invisible hand" refers to a. how central planners made economic decisions. b. how the decisions of households and firms lead to desirable market outcomes. c. the control that large firms have over the economy. d. government regulations without which the economy would be less efficient. 72. The "invisible hands" ability to coordinate the decisions of the firms and households in the economy can be hindered by a. government actions that distort prices. b. increased competition in markets. c. enforcement of property rights. d. too much attention paid to efficiency. 73. In a market economy, who makes the decisions that guide most economic activity? a. Firms only b. Households only c. Firms and households d. Government 74. In a market economy, economic activity is guided by a. the government. b. public-interest groups. c. central planners. d. self-interest and prices. 75. Which of the following statements does not apply to a market economy? a. Firms decide whom to hire and what to produce. b. The "invisible hand" usually maximizes the income of society as a whole. c. Households decide which firms to work for and what to buy with their incomes. d. Government policies are the primary forces that guide the decisions of firms and households. .
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Ch 01: Ten Principles of Economics 76. Prices direct economic activity in a market economy by a. influencing the actions of buyers and sellers. b. reducing scarcity of the goods and services produced. c. reducing opportunity cost of goods and services produced. d. allocating goods and services in the most equitable way. 77. If the government were to intervene in a market economy and fix the price of visiting a health care provider below the market price, then we would expect, relative to the market outcome, a. an increase in the number of visits people want to make and an increase in the number of visits health care providers want to provide. b. an increase in the number of visits people want to make and a decrease in the number of visits health care providers want to provide. c. a decrease in the number of visits people want to make and an increase in the number of visits health care providers want to provide. d. a decrease in the number of visits people want to make and a decrease in the number of visits health care providers want to provide. 78. If the government were to intervene and set a wage for unskilled labor above the market wage, then we would expect, relative to the market outcome, a. an increase in the number of unskilled jobs available. b. a decrease in the number of unskilled jobs available. c. a decrease in the number of workers wanting unskilled jobs. d. an increase in the number of businesses using unskilled workers. 79. When the government prevents prices from adjusting naturally to supply and demand, it a. equates the amount buyers want to buy with the amount sellers want to sell. b. adversely affects the allocation of resources. c. improves equality and efficiency. d. improves efficiency but reduces equality. 80. The ability of an individual to own and exercise control over scarce resources is called a. market failure. b. property rights. c. externality. d. market power. 81. The term used to describe a situation in which markets do not allocate resources efficiently is a. economic meltdown. b. market failure. c. equilibrium. d. the effect of the invisible hand. 82. The term market failure refers to a. a situation in which the market on its own fails to allocate resources efficiently. b. an unsuccessful advertising campaign which reduces demand for a product. .
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Ch 01: Ten Principles of Economics c. a situation in which competition among firms becomes ruthless. d. a firm that is forced out of business because of losses. 83. Which of the following do economists not generally regard as a legitimate reason for the government to intervene in a market? a. To promote efficiency b. To promote equality c. To enforce property rights d. To protect an industry from foreign competition 84. Thousands of people develop lung cancer from second-hand exposure to cigarette smoke. This is an example of a. a market failure caused by an externality. b. a market failure caused by market power. c. a market failure caused by equality. d. no market failure. 85. If an externality is present in a market, economic efficiency may be enhanced by a. government intervention. b. a decrease in foreign competition. c. fewer market participants. d. weaker property rights. 86. Which of the following is an example of an externality? a. Mia purchases a new dress. b. Antonio's dog barks loudly during the night, waking the neighborhood. c. Harold sells a book to Sydney, who reads the book and then gives it to Zyavonta as a gift. d. Gloria watches a scary movie. 87. The willingness of citizens to pay for vaccinations does not include the benefit society receives from having vaccinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens is known as a. productivity. b. an externality. c. market power. d. property rights. 88. Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is intended to reduce a. efficiency. b. equality. c. externalities. d. productivity. 89. Which of these activities will most likely impose an external cost? a. An athlete works out at a gym. .
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Ch 01: Ten Principles of Economics b. A postal worker smokes a cigarette in a crowded break room. c. A young father pushes his baby in a stroller. d. A construction worker eats a hotdog during their lunch break. 90. Which of these activities will most likely result in an external benefit? a. A college student buys a deck of cards to play solitaire in her dorm room. b. A group of neighbors plant a flower garden on the vacant lot next to their houses. c. An executive purchases a book to read on a business trip. d. A ten-year-old spending a $100 allowance to buy new Nike shoes. 91. Market power refers to the a. power of a single person or small group to influence market prices. b. ability of a person or small group to successfully market new products. c. power of the government to regulate a market. d. importance of a certain market in relation to the overall economy. 92. Which of the following firms is likely to have the greatest market power? a. A utility company b. A farmer c. A grocery store d. A local electronics retailer 93. Productivity is defined as the a. amount of goods and services produced from each unit of labor input. b. number of workers required to produce a given amount of goods and services. c. amount of labor that can be saved by replacing workers with machines. d. actual amount of effort workers put into an hour of working time. 94. The primary determinant of a country's standard of living is a. the country's ability to prevail over foreign competition. b. the country's ability to produce goods and services. c. the total supply of money in the economy. d. the average age of the country's labor force. 95. The slow growth of U.S. incomes during the 1970s and 1980s can best be explained by a. unstable economic conditions in Eastern Europe. b. increased competition from abroad. c. a decline in the rate of increase in U.S. productivity. d. a strong U.S. dollar abroad, hurting U.S. exports. 96. Suppose that in Brazil total annual output is worth $600 million and people work 30 million hours. In Peru, total annual output is worth $800 million and people work 50 million hours. Productivity is higher a. in Brazil. Most variation in the standard of living across countries is due to differences in productivity. b. in Brazil. Differences in productivity explain very little of the variation in the standard of living across countries. .
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Ch 01: Ten Principles of Economics c. in Peru. Most variation in the standard of living across countries is due to differences in productivity. d. in Peru. Differences in productivity explain very little of the variation in the standard of living across countries. 97. In a particular country in 1998, the average worker needed to work 25 hours to produce 40 units of output. In that same country in 2008, the average worker needed to work 40 hours to produce 68 units of output. In that country, the productivity of the average worker a. decreased by 1.7 percent between 1998 and 2008. b. remained unchanged between 1998 and 2008. c. increased by 4.75 percent between 1998 and 2008. d. increased by 6.25 percent between 1998 and 2008. 98. A worker in Vietnam can earn $6 per day making cotton cloth on a hand loom. A worker in the United States can earn $85 per day making cotton cloth with a mechanical loom. What is the likely explanation for the difference in wages? a. U.S. textile workers belong to a union, whereas Vietnamese textile workers do not belong to a union. b. There is little demand for cotton cloth in Vietnam and great demand in the United States. c. Labor is more productive making cotton cloth with a mechanical loom than with a hand loom. d. Vietnam has a low-wage policy to make its textile industry more competitive in world markets. 99. To improve living standards, policymakers should a. impose restrictions on foreign competition. b. formulate policies designed to increase productivity. c. impose tougher immigration policies. d. provide tax breaks for the middle class. 100. An increase in the overall level of prices in an economy is referred to as a. the income effect. b. inflation. c. deflation. d. the substitution effect. 101. Large or persistent inflation is almost always caused by a. excessive government spending. b. excessive growth in the quantity of money. c. foreign competition. d. higher-than-normal levels of productivity. 102. In the short run, which of the following rates of growth in the money supply is likely to lead to the lowest level of unemployment in the economy? a. 3 percent per year b. 5 percent per year c. 7 percent per year d. 9 percent per year 103. In the short run, an increase in the money supply is likely to lead to .
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Ch 01: Ten Principles of Economics a. lower unemployment and lower inflation. b. lower unemployment and higher inflation. c. higher unemployment and lower inflation. d. higher unemployment and higher inflation. 104. Suppose the Federal Reserve announces that it will be making a change to a key interest rate to increase the money supply. This is likely because a. the Federal Reserve is worried about inflation. b. the Federal Reserve is worried about unemployment. c. the Federal Reserve is hoping to reduce the demand for goods and services. d. the Federal Reserve is worried that the economy is growing too quickly. 105. Which of the following is the most correct statement about the relationship between inflation and unemployment? a. In the short run, falling inflation is associated with falling unemployment. b. In the short run, falling inflation is associated with rising unemployment. c. In the long run, falling inflation is associated with falling unemployment. d. In the long run, falling inflation is associated with rising unemployment. 106. Which of the following is an important cause of inflation in an economy? a. Increases in productivity in the economy b. The influence of positive externalities on the economy c. Lack of property rights in the economy d. Growth in the quantity of money in the economy 107. Which of the following claims is consistent with the views of mainstream economists? a. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will temporarily fall. b. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will temporarily rise. c. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will permanently fall. d. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will permanently rise. 108. For a very long time the country of Zeeland has had an inflation rate of 9 percent. Suddenly its inflation rate drops to 3 percent. The drop in the inflation rate a. could be due to slower money supply growth. We would expect unemployment to be higher. b. could be due to slower money supply growth. We would expect unemployment to be lower. c. could be due to higher money supply growth. We would expect unemployment to be higher. d. could be due to higher money supply growth. We would expect unemployment to be lower. 109. For a number of years country A had inflation of 3 percent but for the last five years has had inflation of 6 percent. Country B had inflation of 4 percent for many years, but very recently inflation unexpectedly rose to 9 percent. Other things the same, in which of the countries would the higher inflation rate be more likely to reduce unemployment? a. both country A and country B .
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Ch 01: Ten Principles of Economics b. neither country A nor country B c. country A but not country B d. country B but not country A 110. During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high levels of inflation. A likely explanation of these facts is that a. the United Kingdom has a better education system than Turkey. b. the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey. c. workers in Turkey are more productive than workers in the United Kingdom. d. there are more instances of market power in Turkey than in the United Kingdom. 111. In the short run, which of the following is not correct? a. Increasing the money supply increases the demand for goods and services. b. Increasing the money supply encourages firms to hire more workers. c. Lowering the money supply leads to a higher level of unemployment. d. Policies that encourage higher employment will also induce a lower rate of inflation. 112. The business cycle is the a. relationship between unemployment and inflation. b. irregular fluctuations in economic activity. c. positive relationship between the quantity of money in an economy and inflation. d. predictable changes in economic activity due to changes in government spending and taxes. 113. Both the production of goods and services and the unemployment rate are used to measure a. the business cycle. b. productivity. c. the interest rate. d. inflation.
Indicate whether the statement is true or false. 114. Scarcity means that there is less of a good or resource available than people wish to have. a. True b. False 115. Economics is the study of how evenly goods and services are distributed within society. a. True b. False 116. Economics is the study of how society allocates its unlimited resources. a. True b. False 117. Because resources are scarce, a society cannot give all individuals the standard of living to which each aspires. a. True .
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Ch 01: Ten Principles of Economics b. False 118. Equality means distributing society’s resources in the most efficient manner. a. True b. False 119. Economists study how people make decisions. a. True b. False 120. With careful planning, we can usually get something that we like without having to give up something else that we like. a. True b. False 121. Choosing not to attend a concert so that you can study for your exam is an example of a tradeoff. a. True b. False 122. The classic tradeoff between “guns and butter” states that when a society spends more on national defense, it has less to spend on consumer goods to raise the standard of living. a. True b. False 123. Efficiency means everyone in the economy should receive an equal share of the goods and services produced. a. True b. False 124. Equality refers to how the pie is divided, and efficiency refers to the size of the economic pie. a. True b. False 125. Government policies that improve equality usually increase efficiency at the same time. a. True b. False 126. Using income tax revenue to fund the welfare system illustrates the conflict between efficiency and equality. a. True b. False 127. An individual deciding how to allocate their limited time is dealing with both scarcity and trade-offs. a. True b. False 128. The cost of an action is measured in terms of foregone opportunities. a. True .
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Ch 01: Ten Principles of Economics b. False 129. Tuition is the single-largest cost of attending college for most students. a. True b. False 130. If wages for accountants rose, then accountants’ leisure time would have a lower opportunity cost. a. True b. False 131. A marginal change is a small incremental adjustment to an existing plan of action. a. True b. False 132. An increase in the marginal cost of an activity necessarily means that people will no longer engage in any of that activity. a. True b. False 133. If the average cost of transporting a passenger on the train from Chicago to St. Louis is $75, it would be irrational for the railroad to allow any passenger to ride for less than $75. a. True b. False 134. The fact that people are willing to pay much more for a diamond, which is not needed for survival, than they are willing to pay for a cup of water, which is needed for survival, is an example of irrational behavior. a. True b. False 135. A rational decision maker takes an action if and only if the marginal cost exceeds the marginal benefit. a. True b. False 136. Suppose one county in Missouri decides it wants to reduce alcohol consumption, so the county passes a law that raises the price of a bottle of beer by $1. As a result, people drive to other counties to drink alcohol, which results in an increase in drunk driving. This illustrates the principle that people respond to incentives. a. True b. False 137. A tax on gasoline is an incentive that encourages people to drive smaller and more fuel-efficient cars. a. True b. False 138. To say people respond to incentives means that people may alter their decisions when the costs and benefits of an action change. a. True .
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Ch 01: Ten Principles of Economics b. False 139. One of the effects of gas prices rising from about $2 to about $4 per gallon was airlines ordering new, fuel-efficient aircraft. a. True b. False 140. Trade allows each person to specialize in the activities they do best, thus increasing each individual's productivity. a. True b. False 141. Trade with any nation can be mutually beneficial. a. True b. False 142. Trade can make everyone better off except in the case where one person is better at doing everything. a. True b. False 143. The invisible hand ensures that economic prosperity is distributed equally. a. True b. False 144. A market economy cannot produce a socially desirable outcome because individuals are motivated by their own selfish interests. a. True b. False 145. Communist countries worked on the premise that government officials were in the best position to allocate the economy’s scarce resources. a. True b. False 146. The government can potentially improve market outcomes if market inequalities or market failure exists. a. True b. False 147. One way that governments can improve market outcomes is to ensure that individuals are able to own and exercise control over their scarce resources. a. True b. False 148. Market failure refers to a situation in which the market does not allocate resources efficiently. a. True b. False .
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Ch 01: Ten Principles of Economics 149. Market power and externalities are two possible causes of market failure. a. True b. False 150. Market failure occurs when no individual has the ability to substantially influence market prices. a. True b. False 151. Productivity is defined as the quantity of goods and services produced from each unit of labor input. a. True b. False 152. Inflation is the primary determinant of a country's living standards. a. True b. False 153. Inflation increases the value of money. a. True b. False 154. Inflation measures the increase in the quantity of goods and services produced from each hour of a worker’s time. a. True b. False 155. The goal of President Obama’s stimulus package and increased government spending following the deep economic downturn in 2008 and 2009 was to reduce inflation. a. True b. False 156. Variations in the standard of living across countries is due almost entirely to differences in each nation’s total output of goods and services. a. True b. False 157. In the short-run, society faces a tradeoff between inflation and unemployment. a. True b. False 158. In the long run the primary effect of increasing the quantity of money is higher prices. a. True b. False 159. The business cycle refers to fluctuations in economic activity such as employment and production. a. True b. False .
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Ch 01: Ten Principles of Economics 160. The opportunity cost of working one hour is the sum of the values you would have received from all other activities you could have done in that hour. a. True b. False 161. The opportunity cost of working out for one hour is the value of the next-best activity that you could have done in that hour. a. True b. False 162. Inflation and unemployment both increase as the money supply increases. a. True b. False 163. A rational decision maker takes an action if and only if the marginal benefit exceeds the marginal cost. a. True b. False 164. The "invisible hand" influences market behavior through trade. a. True b. False
165. Economics is the study of ______ . 166. The term ______ refers to the size of the economic pie, and the term ______ refers to how the pie is divided. 167. Explain how government policies that redistribute income from the rich to the poor might reduce efficiency. 168. Scenario 1-1 You have the afternoon free. You have a choice between going to the movies with a friend or studying economics for three hours. If you go to the movies, you will spend $8.00 on a ticket and $4.50 on popcorn. If you choose to study economics for three hours, you will raise your exam grade by 10 points. Refer to Scenario 1-1. What is your opportunity cost of going to the movies? 169. Scenario 1-1 You have the afternoon free. You have a choice between going to the movies with a friend or studying economics for three hours. If you go to the movies, you will spend $8.00 on a ticket and $4.50 on popcorn. If you choose to study economics for three hours, you will raise your exam grade by 10 points. Refer to Scenario 1-1. What is your opportunity cost of studying economics? 170. Scenario 1-2 Suppose that you have a choice between going to the movies with a friend for two hours or working at your job. If you go to the movies, you will spend $7 on a ticket and $5 on popcorn. If you choose to work, you will earn $10 an hour. Refer to Scenario 1-2. What is your opportunity cost of going to the movies? .
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Ch 01: Ten Principles of Economics 171. Scenario 1-2 Suppose that you have a choice between going to the movies with a friend for two hours or working at your job. If you go to the movies, you will spend $7 on a ticket and $5 on popcorn. If you choose to work, you will earn $10 an hour. Refer to Scenario 1-2. What is your opportunity cost of working? 172. Debbie quits her job, which pays $30,000 a year, to finish her college degree. Her annual college expenses are $10,000 for tuition, $2,000 for books, and $700 for food. What is her opportunity cost of attending college for the year? 173. Zack quits a consulting firm, which pays $40,000 a year, to enroll in a two-year graduate program. Zack's annual school expenses are $30,000 for tuition, $2,000 for books, and $600 for food. What is Zack's opportunity cost of attending the two-year graduate program? 174. Give an example of a trade-off faced by society. 175. Scenario 1-3 It costs a company $35,000 to produce 700 graphing calculators. The company’s cost will be $35,070 if it produces an additional graphing calculator. The company is currently producing 700 graphing calculators. Refer to Scenario 1-3. What is the company’s average cost? 176. Scenario 1-3 It costs a company $35,000 to produce 700 graphing calculators. The company’s cost will be $35,070 if it produces an additional graphing calculator. The company is currently producing 700 graphing calculators. Refer to Scenario 1-3. What is the company’s marginal cost? 177. Scenario 1-3 It costs a company $35,000 to produce 700 graphing calculators. The company’s cost will be $35,070 if it produces an additional graphing calculator. The company is currently producing 700 graphing calculators. Refer to Scenario 1-3. A customer is willing to pay $60 for the 701th calculator. Should the company produce and sell it? Explain. 178. Scenario 1-3 It costs a company $35,000 to produce 700 graphing calculators. The company’s cost will be $35,070 if it produces an additional graphing calculator. The company is currently producing 700 graphing calculators. Refer to Scenario 1-3. What is the minimum price the company will charge for the 701th calculator? 179. Scenario 1-4 You have the afternoon free. You have a choice between going to the movies with a friend or studying economics for three hours. If you go to the movies, you will spend $12.00 on a ticket and $4.75 on popcorn. If you choose to study economics for three hours, you will raise your exam grade by 15 points. Refer to Scenario 1-4. What is your opportunity cost of going to the movies? 180. Scenario 1-4 You have the afternoon free. You have a choice between going to the movies with a friend or studying economics for three hours. If you go to the movies, you will spend $12.00 on a ticket and $4.75 on popcorn. If you choose to study economics for three hours, you will raise your exam grade by 15 points. Refer to Scenario 1-4. What is your opportunity cost of studying economics? 181. What is another word for “marginal”? .
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Ch 01: Ten Principles of Economics 182. The term ______ refers to a small incremental adjustment to an existing plan of action. 183. Scenario 1-5 Suppose that you have a choice between going to the movies with a friend for three hours or working at your job. If you go to the movies, you will spend $12 on a ticket and $6 on popcorn. If you choose to work, you will earn $10 an hour. Refer to Scenario 1-5. What is your opportunity cost of going to the movies? 184. Scenario 1-5 Suppose that you have a choice between going to the movies with a friend for three hours or working at your job. If you go to the movies, you will spend $12 on a ticket and $6 on popcorn. If you choose to work, you will earn $10 an hour. Refer to Scenario 1-5. What is your opportunity cost of working? 185. Scenario 1-6 It costs a company $30,000 to produce 600 heart rate monitors. The company’s cost will be $30,070 if it produces an additional heart rate monitor. The company is currently producing 600 heart rate monitors. Refer to Scenario 1-6. What is the company’s average cost? 186. Scenario 1-6 It costs a company $30,000 to produce 600 heart rate monitors. The company’s cost will be $30,070 if it produces an additional heart rate monitor. The company is currently producing 600 heart rate monitors. Refer to Scenario 1-6. What is the company’s marginal cost? 187. Scenario 1-6 It costs a company $30,000 to produce 600 heart rate monitors. The company’s cost will be $30,070 if it produces an additional heart rate monitor. The company is currently producing 600 heart rate monitors. Refer to Scenario 1-6. A customer is willing to pay $60 for the 601st heart rate monitor. Should the company produce and sell it? Explain. 188. Scenario 1-6 It costs a company $30,000 to produce 600 heart rate monitors. The company’s cost will be $30,070 if it produces an additional heart rate monitor. The company is currently producing 600 heart rate monitors. Refer to Scenario 1-6. What is the minimum price that would induce this company to produce the 601st heart rate monitor? 189. Tracy quits her job, which pays $25,000 a year, to finish her college degree. Her annual college expenses are $12,000 for tuition and fees and $1,000 for books. What is her opportunity cost of attending college for the year? 190. Melinda quits her job at a bank, which pays $30,000 a year, to enroll in a two-year graduate program. Her annual school expenses are $22,000 for tuition and fees and $2,000 for books. What is her opportunity cost of attending the twoyear graduate program? 191. What does the term “marginal change” mean? 192. Rational people make decisions “at the margin” by comparing ______. .
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Ch 01: Ten Principles of Economics 193. In a centrally-planned economy, economic activity is guided by ______. 194. Explain how trade with other countries is beneficial. 195. What are the two basic types of economies? 196. What is the main difference between a centrally planned economy and a market economy? 197. Invisible hand is a term used by the economist ______ to describe how the decisions of households and firms lead to desirable market outcomes. 198. Economists use the term ______ to refer to a situation in which the market on its own fails to produce an efficient allocation of resources. 199. What are the two possible causes of market failure? 200. Explain the concept of externality and give an example. 201. What are the two reasons for the government to intervene in a market? 202. What does the “invisible hand” refers to? 203. Invisible hand is a term used by the economist ______ in his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations. 204. What do prices reflect in a market economy? 205. Explain the concept of market failure. 206. Economists use the term ______ to refer to the ability of a single person (or a small group) to have a substantial influence on market prices. 207. Give an example of government intervention that is intended to reduce an externality. 208. Give an example of government intervention that is intended to improve equality. 209. Economists use the term ______ to refer to an increase in the overall level of prices in the economy. 210. In the short run, an increase in the money supply is likely to lead to ______ inflation and ______ unemployment. 211. Economists use the term ______ to refer to fluctuations in economic activity, such as employment and production. 212. Consider two countries, Muria and Zenya. In Muria total annual output is worth $800 million and people work 40 million hours. In Zenya total annual output is worth $900 million and people work 50 million hours. In which country is productivity higher? 213. Suppose that in Germany total annual output is worth $600 million and people work 40 million hours. In France total annual output is worth $700 million and people work 50 million hours. In which country do people enjoy a higher standard of living? 214. What are the two short-run effects of increasing the quantity of nation’s money? .
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Ch 01: Ten Principles of Economics 215. How does the study of economics depend upon the phenomenon of scarcity? 216. One tradeoff society faces is between efficiency and equality. Define each term. If the U.S. government redistributes income from the rich to the poor, explain how this action affects equality as well as efficiency in the economy. 217. Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost of coming to class today? 218. With the understanding that people respond to incentives, outline the possible outcome for teachers if the K-12 school year is extended to 11 months per year instead of the existing 9 months per year. 219. Under what conditions might government intervention in a market economy improve the economy’s performance? 220. Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run.
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Ch 01: Ten Principles of Economics Answer Key 1. c 2. a 3. a 4. d 5. d 6. b 7. d 8. c 9. c 10. d 11. c 12. c 13. a 14. d 15. a 16. c 17. a 18. b 19. b 20. a 21. c 22. b 23. d 24. c 25. b .
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Ch 01: Ten Principles of Economics 26. d 27. a 28. c 29. b 30. c 31. c 32. b 33. a 34. c 35. c 36. c 37. b 38. c 39. a 40. c 41. a 42. d 43. a 44. b 45. b 46. a 47. c 48. c 49. a 50. c 51. a .
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Ch 01: Ten Principles of Economics 52. b 53. a 54. c 55. c 56. a 57. c 58. a 59. b 60. c 61. a 62. c 63. d 64. b 65. c 66. c 67. b 68. d 69. d 70. d 71. b 72. a 73. c 74. d 75. d 76. a .
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Ch 01: Ten Principles of Economics 77. b 78. b 79. b 80. b 81. b 82. a 83. d 84. a 85. a 86. b 87. b 88. c 89. b 90. b 91. a 92. a 93. a 94. b 95. c 96. a 97. d 98. c 99. b 100. b 101. b 102. d .
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Ch 01: Ten Principles of Economics 103. b 104. b 105. b 106. d 107. a 108. a 109. d 110. b 111. d 112. b 113. a 114. True 115. False 116. False 117. True 118. False 119. True 120. False 121. True 122. True 123. False 124. True 125. False 126. True 127. True .
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Ch 01: Ten Principles of Economics 128. True 129. False 130. False 131. True 132. False 133. False 134. False 135. False 136. True 137. True 138. True 139. True 140. True 141. True 142. False 143. False 144. False 145. True 146. True 147. True 148. True 149. True 150. False 151. True 152. False 153. False .
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Ch 01: Ten Principles of Economics 154. False 155. False 156. False 157. True 158. True 159. True 160. False 161. True 162. False 163. True 164. False 165. how society manages its scarce resources. 166. efficiency; equality 167. They reduce the reward for working hard. As a result, people work less and produce fewer goods and services. 168. $12.50 and 10 points on your exam grade 169. The enjoyment you would have received from going to the movies with your friend. 170. $32 171. The enjoyment you would have received from going to the movies with your friend. 172. $42,000 173. $144,000 174. Efficiency and equality; a clean environment and a high level of income; guns and butter (national defense and consumer goods) 175. $50 176. $70 177. No, because the marginal cost ($70) is less than the marginal benefit ($60). 178. $70 .
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Ch 01: Ten Principles of Economics 179. $16.75 and 15 points on your exam grade 180. The enjoyment you would have received from going to the movies with your friend. 181. incremental; additional 182. Marginal change 183. $48 184. The enjoyment you would have received from going to the movies with your friend. 185. $50 186. $70 187. No, because the marginal cost ($70) exceeds the marginal benefit ($60). 188. $70 189. $38,000 190. $108,000 191. A small incremental adjustment to a plan of action 192. marginal costs and marginal benefits 193. the government 194. Trade allows countries to specialize in what they do best, which increases total output. 195. Centrally planned economies and market economies 196. In a market economy, decisions are guided by prices and individual self-interest. In a centrally planned economy, economic activity is guided by the government. 197. Adam Smith 198. market failure 199. Externality and market power 200. The impact of one person’s actions on the well-being of a bystander; pollution 201. To promote efficiency and equality 202. How the decisions of self-interested households and firms lead to desirable market outcomes. 203. Adam Smith .
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Ch 01: Ten Principles of Economics 204. The value of a good to society and the cost to society of making the good 205. Market failure is a situation in which the market on its own fails to produce an efficient allocation of resources. 206. market power 207. Laws that restrict the smoking of cigarettes in public places 208. The income tax; the welfare system 209. Inflation 210. higher; lower 211. business cycle 212. In Muria 213. In Germany. Almost all variation in the standard of living across countries is due to differences in productivity. 214. Higher inflation and lower unemployment 215. Because economics is the study of how society allocates its scarce resources, if there were no scarcity, there would be no need for economics. Everyone could have all the goods and services they wanted. No one would have to make decisions based on tradeoffs, because there would be no opportunity cost associated with the decision. (It is difficult to conceive of a situation where time is not scarce, however). 216. Efficiency is the property of society getting the most it can from its scarce resources. Equality is defined as the property of distributing economic prosperity evenly among the members of society. Often, these two goals conflict. When the government redistributes income from the rich to the poor, it reduces the reward for working hard. Fewer goods and services are produced and the economic pie gets smaller. When the government tries to cut the economic pie into more equal slices, the pie gets smaller. Policies aimed at achieving a more equal distribution of economic well-being, such as the welfare system, try to help those members of society who are most in need. The individual income tax asks the financially successful to contribute more than others to support the government. 217. Whatever must be given up to obtain some item it its opportunity cost. Basically, this would be a person's second choice. The opportunity cost of a person attending college is the value of the best alternative use of that person's time, as well as the additional costs the person incurs by making the choice to attend college. For most students this would be the income the student gives up by not working plus the cost of tuition and books, and any other costs they incur by attending college that they would not incur if they chose not to attend college. A student's opportunity cost of coming to class was the value of the best opportunity the student gave up. (For most students, that seems to be sleep.) 218. The concept of working longer per year would be perceived by many teachers as a definite increase in the cost of teaching. Even with additional compensation, many teachers look at summers off as a major benefit of the education profession. If this benefit were eliminated or diminished, some teachers may perceive that the marginal cost of teaching would now be greater than the marginal benefit and would choose to leave teaching. 219. If there is a market failure, such as an externality or monopoly, government regulation might improve the well-being of society by promoting efficiency. If the distribution of income or wealth is considered to be unfair by society, government intervention might achieve a more equal distribution of economic well-being. .
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Ch 01: Ten Principles of Economics 220. To lower inflation, the government may choose to reduce the money supply in the economy. When the money supply is reduced, prices don't adjust immediately. Lower spending, combined with prices that are too high, reduces sales and causes workers to be laid off. Hence, the lower price level is associated with higher unemployment.
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Ch 02: Thinking Like an Economist
Indicate the answer choice that best completes the statement or answers the question. 1. How are economists not like mathematicians, physicists, and biologists? a. They use models to represent the real world. b. They try to address their subject with a scientist's objectivity. c. They devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories. d. They cannot run lab experiments in the same way that other scientists can. 2. Which of the following steps does an economist not take when studying the economy? a. Devise theories b. Collect data c. Analyze data d. Publish theories before testing them 3. Suppose an economist develops a theory that higher food prices arise from higher gas prices. According to the scientific method, which of the following is the economist's next step? a. Collect and analyze data b. Go to a laboratory and generate data to test the theory c. Publish the theory without testing it d. Consult with other economists to see if they agree with the theory 4. The use of theory and observation is more difficult in economics than in sciences such as physics due to the difficulty in a. performing an experiment in an economic system. b. applying mathematical methods to economic analysis. c. analyzing available data. d. formulating theories about economic events. 5. Instead of conducting laboratory experiments to generate data to test their theories, economists often a. ask winners of the Nobel Prize in Economics to evaluate their theories. b. argue that data is impossible to collect in economics. c. gather data from historical episodes of economic change. d. assume that data would support their theories. 6. Economists make assumptions to a. mimic the methodologies employed by other scientists. b. minimize the number of experiments that yield no useful data. c. minimize the likelihood that some aspect of the problem at hand is being overlooked. d. focus their thinking on the essence of the problem at hand. 7. The art in scientific thinking—whether in chemistry, economics, or biology—is a. the design and implementation of laboratory experiments. b. knowing when to stop collecting data and when to start analyzing the data. c. deciding which assumptions to make. d. being able to mathematically model natural phenomena. .
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Ch 02: Thinking Like an Economist 8. Which of the following statements about models is correct? a. The more details a model includes, the better the model. b. Models assume away irrelevant details. c. Models cannot be used to explain how the economy functions. d. Models cannot be used to make predictions. 9. A circular-flow diagram is a model that a. helps to explain how consumers and the government interact with one another. b. explains how countries trade with each other. c. incorporates all aspects of the real economy. d. helps to explain how the economy is organized. 10. In the simple circular-flow diagram, the participants in the economy are a. firms and government. b. households and firms. c. households and government. d. households, firms, and government. 11. In the circular-flow diagram, which of the following is not a factor of production? a. Labor b. Land c. Capital d. Money 12. Another term for factors of production is a. inputs. b. output. c. goods. d. services. 13. Which of the following is an example of a capital input? a. A computer b. A share of stock c. An hour of a worker's time d. $50,000 14. In the simple circular-flow diagram, which of the following is not true. a. Households own the factors of production. b. Households buy all the goods and services that firms produce. c. Land, labor, and capital flow from households to firms. d. Firms own the factors of production. 15. In the circular-flow diagram, in the markets for a. goods and services, households and firms are both sellers. .
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Ch 02: Thinking Like an Economist b. goods and services, households are buyers and firms are sellers. c. the factors of production, households are buyers and firms are sellers. d. the factors of production, households and firms are both buyers. 16. In the markets for goods and services in the circular-flow diagram, a. households provide firms with savings for investment. b. households provide firms with labor, land, and capital. c. firms provide households with output. d. firms provide households with profit. 17. Which of the following transactions does not take place in the markets for factors of production in the circular-flow diagram? a. A landowner leases land to a farmer b. A farmer hires a teenager to help with harvest c. A construction company rents trucks for its business d. A woman buys corn for dinner 18. The outer loop of the circular-flow diagram represents the flow of dollars in the economy. Which of the following is not measured in dollars and therefore does not appear on the outer loop? a. Wages b. Income c. Capital d. Rent 19. In the circular-flow diagram, a. profit flows from households to firms. b. labor flows from households to firms. c. services flow from households to firms. d. goods flow from households to firms. 20. In the circular-flow diagram, which of the following items flows from households to firms through the markets for goods and services? a. Goods and services b. Dollars paid to land, labor, and capital c. Dollars spent on goods and services d. Wages, rent, and profit 21. In the simple-circular flow diagram, the flow of money from the firms to the markets for factors of production is called a. spending. b. revenue. c. income. d. wages, rent, and profit. 22. According to the circular-flow diagram, if Jalyssa is a worker who delivers flowers for Happy Day Flower Company, .
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Ch 02: Thinking Like an Economist she participates a. in the markets for factors of production exchanging labor for income. b. in the markets for factors of production exchanging flowers for revenue. c. in the markets for goods and services exchanging flowers for wages, rent, and profit. d. in the markets for goods and services exchanging labor for income. 23. Figure 2-1
Refer to Figure 2-1. Which arrow represents the flow of goods and services? a. A b. B c. C d. D 24. Figure 2-1
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-1. Morgan buys a refrigerator for his new home. To which of the arrows does this transaction directly contribute? a. A only b. A and B c. C only d. C and D 25. Figure 2-2
Refer to Figure 2-2. If boxes A and B represent households and firms, then boxes C and D of this circular-flow diagram represent a. government and foreigners. .
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Ch 02: Thinking Like an Economist b. consumers and producers. c. the markets for goods and services and the markets for financial assets. d. the markets for goods and services and the markets for factors of production. 26. Figure 2-2
Refer to Figure 2-2. Devin works as an attorney for a corporation and is paid a salary in exchange for the legal services he performs. If Devin's income is represented by a flow of dollars from Box D to Box B of this circular-flow diagram, then the revenue earned by a firm selling its product is represented by a flow of dollars a. from Box A to Box C. b. from Box C to Box A. c. from Box B to Box C. d. from Box C to Box B. 27. When constructing a production possibilities frontier, which of the following assumptions is not made? a. The economy produces only two goods or two types of goods. b. Firms produce goods using factors of production. c. The technology available to firms is given. d. The quantities of the factors of production that are available are increasing over the relevant time period. 28. Where can an economy not produce? a. Inside its production possibilities frontier b. On its production possibilities frontier c. Outside its production possibilities frontier d. At the endpoints of its production possibilities frontier 29. An economy's production of two goods is efficient if a. all members of society consume equal portions of the goods. .
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Ch 02: Thinking Like an Economist b. the goods are produced using only some of society's available resources. c. it is impossible to produce more of one good without producing less of the other. d. the opportunity cost of producing more of one good is zero. 30. Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that a. the nation is producing beyond its capacity, so inflation will occur. b. the nation is not using all available resources or is using inferior technology or both. c. the nation is producing an efficient combination of goods. d. there will be a large opportunity cost if the nation tries to increase production of any good. 31. The production possibilities frontier provides an illustration of the principle that a. trade can make everyone better off. b. governments can sometimes improve market outcomes. c. people face trade-offs. d. people respond to incentives. 32. The bowed-outward shape of the production possibilities frontier can be explained by the fact that a. all resources are scarce. b. economic growth is always occurring. c. the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing. d. the only way to get more of one good is to get less of the other. 33. Table 2-1 Production Possibilities Tennis Rackets Tennis Balls 100 8,000 200 6,500 300 ?
Refer to Table 2-1. If the production possibilities frontier is bowed outward, then which of the following could be the maximum number of tennis balls produced when 300 tennis rackets are produced? a. 6,000. b. 5,500. c. 5,000. d. 4,500. 34. Suppose an economy produces two goods, food and machines. This economy always operates on its production possibilities frontier. Last year, it produced 1,000 units of food and 47 machines. This year, it experienced a technological advance in its machine-making industry. As a result, this year, the society wants to produce 1,050 units of food and 47 machines. Which of the following statements is correct? a. Because the technological advance occurred in the machine-making industry, it will not be possible to increase food production without reducing machine production below 47. .
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Ch 02: Thinking Like an Economist b. Because the technological advance occurred in the machine-making industry, increases in output can only occur in the machine industry. c. In order to increase food production in these circumstances without reducing machine production, the economy must reduce inefficiencies. d. The technological advance reduced the amount of resources needed to produce 47 machines, so these resources could be used to produce more food. 35. Table 2-2 Footville's Production Possibilities Shoes Socks 800 0 600 400 400 700 200 900 0 1,000
Refer to Table 2-2. What is the opportunity cost to Footville of increasing the production of shoes from 400 to 600? a. 400 socks b. 300 socks c. 200 socks d. 100 socks 36. Table 2-2 Footville's Production Possibilities Shoes Socks 800 0 600 400 400 700 200 900 0 1,000
Refer to Table 2-2. Which of the following statements is correct? a. The opportunity cost of an additional 200 shoes is constant at 200 socks. b. The opportunity cost of an additional 200 shoes is constant at 300 socks. c. Footville's production possibilities frontier is a straight, downward-sloping line. d. The opportunity cost of an additional 200 shoes increases as more shoes are produced. 37. Figure 2-3
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-3. If this economy devotes all of its resources to the production of dryers, then it will produce a. 0 dryers and 100 washers. b. 60 dryers and 50 washers. c. 80 dryers and 0 washers. d. 80 dryers and 50 washers. 38. Figure 2-3
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-3. It is not possible for this economy to produce at point a. A. b. B. c. C. d. D. 39. Figure 2-3
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-3. This economy cannot currently produce 70 washers and 70 dryers because a. it is not using all of its resources. b. it is not using the most efficient production process. c. it does not have the resources and technology to produce that level of output. d. consumers don't want that many washers and dryers. 40. Figure 2-3
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-3. Suppose this economy is producing at point D. Which of the following statements would best explain this situation? a. The economy has insufficient resources to produce at a more desirable point. b. The economy's available technology prevents it from producing at a more desirable point. c. There is widespread unemployment in the economy. d. The economy is experiencing economic growth. 41. Figure 2-3
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-3. Efficient production is represented by which point(s)? a. A, B b. A, B, and D c. A, B, and C d. C 42. Figure 2-3
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-3. The opportunity cost of obtaining 40 additional dryers by moving from point D to point C is a. 0 washers. b. 20 washers. c. 40 washers. d. impossible to calculate because the economy cannot move from point D to point C. 43. Figure 2-4 Graph (a)
.
Graph (b)
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Ch 02: Thinking Like an Economist
Refer to Figure 2-4, Graph (a). Production at point K is a. possible and efficient. b. possible but inefficient. c. impossible but efficient. d. impossible and inefficient. 44. Figure 2-4 Graph (a)
.
Graph (b)
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Ch 02: Thinking Like an Economist
Refer to Figure 2-4, Graph (a). Production is a. possible at points J, K, L, and M, but efficient only at points J, L, and M. b. possible at points J, K, L, and M, but efficient only at point K. c. possible at points J, L, M, and N, but efficient only at points J, L, and M. d. possible at points J, L, M, and N, but efficient only at point N. 45. Figure 2-4 Graph (a)
.
Graph (b)
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Ch 02: Thinking Like an Economist
Refer to Figure 2-4, Graph (a). The movement from point M to point K could be caused by a. an advance in production technology. b. an improvement in efficiency. c. economic growth. d. unemployment. 46. Figure 2-4 Graph (a)
.
Graph (b)
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Ch 02: Thinking Like an Economist
Refer to Figure 2-4, Graph (a) and Graph (b). A shift of the economy's production possibilities frontier from Graph (a) to Graph (b) could be caused by a. unemployment. b. an improvement in donut production technology. c. an improvement in coffee production technology. d. an improvement in both donut and coffee production technology. 47. Figure 2-4 Graph (a)
.
Graph (b)
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Ch 02: Thinking Like an Economist
Refer to Figure 2-4, Graph (a) and Graph (b). Which of the following is not a result of the shift of the economy's production possibilities frontier from Graph (a) to Graph (b)? a. The trade-off between the production of donuts and coffee changes. b. The opportunity cost of a cup of coffee is higher at all levels of coffee production. c. Production of four donuts and two cups of coffee becomes possible. d. Production of one donut and four cups of coffee becomes efficient. 48. Figure 2-5
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-5. Which of the following events would explain the shift of the production possibilities frontier from A to B? a. The economy's citizens developed an enhanced taste for books. b. The economy experienced a technological advance in the production of books. c. More capital became available in the economy. d. More labor became available in the economy. 49. Table 2-3 Production Possibilities Corn Wheat (Bushels) (Bushels) 2,000 0 1,600 700 1,200 1,300 800 1,800 400 2,200 0 2,500
Refer to Table 2-3. What is the opportunity cost of increasing the production of corn from 400 bushels to 800 bushels? a. 200 bushels of wheat b. 400 bushels of wheat c. 600 bushels of wheat .
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Ch 02: Thinking Like an Economist d. 800 bushels of wheat 50. Table 2-3 Production Possibilities Corn Wheat (Bushels) (Bushels) 2,000 0 1,600 700 1,200 1,300 800 1,800 400 2,200 0 2,500
Refer to Table 2-3. Based on the values in the table, the production possibilities frontier is a. bowed outward indicating increasing opportunity costs. b. bowed outward indicating decreasing opportunity costs. c. a straight line indicating constant opportunity costs. d. bowed inward indicating increasing opportunity costs. 51. Table 2-3 Production Possibilities Corn Wheat (Bushels) (Bushels) 2,000 0 1,600 700 1,200 1,300 800 1,800 400 2,200 0 2,500
Refer to Table 2-3. Which of the following combinations of corn and wheat is not currently attainable but would be attainable if there was an improvement in overall production technology? a. 1,600 bushels of corn and 300 bushels of wheat b. 1,200 bushels of corn and 800 bushels of wheat c. 1,000 bushels of corn and 2,200 bushels of wheat d. 400 bushels of corn and 1,800 bushels of wheat 52. Figure 2-6
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-6. Consider the production possibilities frontier for an economy that produces only sofas and cars. The opportunity cost of each car is a. the slope of the production possibilities frontier, or 2/3 of a sofa. b. the reciprocal of the slope of the production possibilities frontier, or 3/2 sofas. c. the reciprocal of the slope of the production possibilities frontier, or 2/3 of a sofa. d. the slope of the production possibilities frontier, or 3/2 sofas. 53. Figure 2-6
.
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Refer to Figure 2-6. Consider the production possibilities frontier for an economy that produces only sofas and cars. When society moves from point A to point B, a. the opportunity cost is the same as when society moves from point B to point C. b. it is giving up cars to get sofas. c. the opportunity cost is increasing. d. it moves from an inefficient point to an efficient point. 54. Microeconomics is the study of a. how money affects the economy. b. how individual households and firms make decisions. c. how government affects the economy. d. how the economy as a whole works. 55. Which of the following would likely be studied by a microeconomist rather than a macroeconomist? a. The effect of foreign direct investment on economic growth b. The effect of a sales tax on the cigarette industry c. The effect of an investment tax credit on the economy's capital stock d. The effect of a war on government spending 56. Which of the following areas of study typifies macroeconomics as opposed to microeconomics? a. The effects of rent control on the availability of housing in New York City b. The economic impact of tornadoes on cities and towns in Oklahoma .
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Ch 02: Thinking Like an Economist c. How tariffs on shoes affect the shoe industry d. The effect on the economy of changes in the nation's unemployment rate 57. Which of the following statements is correct about the roles of economists? a. Economists are best viewed as policy advisers. b. Economists are best viewed as scientists. c. In trying to explain the world, economists are policy advisers; in trying to improve the world, they are scientists. d. In trying to explain the world, economists are scientists; in trying to improve the world, they are policy advisers. 58. Positive statements are a. prescriptive. b. claims about how the world should be. c. claims about how the world is. d. made by economists speaking as policy advisers. 59. When recommending specific policies to undertake, economists make a. claims about how the world is. b. descriptive statements. c. normative statements. d. positive statements. 60. Which of the following is an example of a positive, as opposed to a normative, statement? a. Decreasing inflation should be a top priority since inflation is more harmful to the economy than unemployment. b. Welfare payments should be increased because they lead to a better world for everyone. c. Prices rise when the government prints too much money. d. When public policies are evaluated, the benefits to the economy of improved equality should be considered more important than the costs of reduced efficiency. 61. Which of the following is an example of a normative, as opposed to a positive, statement? a. Universal healthcare would be good for U.S. citizens. b. An increase in the cigarette tax would cause a decrease in the number of smokers. c. A decrease in the minimum wage would decrease unemployment. d. A law requiring the federal government to balance its budget would increase economic growth. 62. Duties of the Council of Economic Advisers include a. advising the president and writing the annual Economic Report of the President. b. implementing the president's tax policies. c. managing of the nation's money supply. d. managing the Social Security program. 63. Economists at which of the following government offices help formulate spending plans and regulatory policies? a. Office of Management and Budget .
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Ch 02: Thinking Like an Economist b. Department of the Treasury c. Congressional Budget Office d. The Federal Reserve 64. Economists at the Department of the Treasury a. design U.S. currency and coins. b. provide Congress with the annual budget. c. enforce the U.S. antitrust laws. d. provide advice on tax policy to the President. 65. Analysis of data on workers and those looking for work is conducted by economists at the a. Office of Management and Budget. b. Department of Labor. c. Congressional Budget Office. d. Department of the Treasury. 66. Economists at the Department of Justice a. track the behavior of the nation's money supply. b. advise Congress on economic matters. c. help enforce the nation's antitrust laws. d. prepare the federal budget. 67. Some, but not all, government economists are employed within the administrative branch of government. Which of the following government agencies employ economists outside of the administrative branch? a. The Department of Labor b. The Department of the Treasury c. The Congressional Budget Office d. The Council of Economic Advisers 68. Economists sometimes give conflicting advice because a. graduate students in economics are encouraged to argue with each other. b. economists have different values and scientific judgments. c. economists acting as scientists do not like to agree with economists acting as policy advisers. d. economics is more of a belief system than a science. 69. Sometimes economists disagree because their scientific judgments differ. Which of the following instances best reflects this source of disagreement? a. One economist believes everyone should pay the same percentage of their income in taxes; another economist believes that wealthier citizens should pay a higher percentage of their income in taxes. b. One economist believes that manufacturing firms should face greater regulation to preserve the environment; another economist believes the government should not intervene in free markets. c. One economist believes that equality should be valued over efficiency in policy decisions; another economist believes that efficiency should be valued over equality in policy decisions. d. One economist believes the government should tax a household's income; another economist believes the government should tax a household's consumption because it will cause households to save more. .
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Ch 02: Thinking Like an Economist 70. Emily and Betsey are economists. Emily thinks that the wealthiest 10 percent of the U.S. population should be taxed a rate higher than the rest of society because they can better afford it. Betsey thinks that everyone should be taxed at the same rate because that is the fairest scenario and the wealthy should not be penalized for their success. In this example, Emily and Betsey a. disagree about the validity of a positive theory. b. have different normative views about tax policy. c. must both be incorrect because tax policy is never that simple. d. disagree because they have access to contradicting positive statements. 71. Eva wants to create a graph containing the prices of concert tickets and the corresponding quantities of concert tickets demanded by customers. She should use a a. pie chart. b. bar graph. c. time-series graph. d. coordinate system. 72. The x-coordinate of an ordered pair specifies the a. diagonal location of the point. b. vertical location of the point. c. horizontal location of the point. d. quadrant location in which the point is located. 73. In the ordered pair (20, 30), 20 is the a. the x-coordinate and the vertical location of the point. b. the y-coordinate and the horizontal location of the point. c. the y-coordinate and the vertical location of the point. d. the x-coordinate and the horizontal location of the point. 74. The point where both x and y are zero is known as the a. origin. b. null. c. zero coordinate. d. center. 75. When two variables have a positive correlation, a. they tend to move in opposite directions. b. they tend to move in the same direction. c. one variable will move while the other remains constant. d. the variables' values are never negative. 76. Figure 2-7
.
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Refer to Figure 2-7. The graph shown is known as a a. time-series graph. b. bar graph. c. scatterplot. d. pie chart. 77. Figure 2-7
.
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Refer to Figure 2-7. Taking cause and effect into account, which of the following interpretations would be most reasonable regarding the relationship between coffee and hours without sleep? a. The less coffee a person drinks per day, the more time he can go without sleep. b. There is no relationship between how much coffee per day a person drinks and how long he can go without sleep. c. The more coffee a person drinks per day, the more time he can go without sleep. d. The more coffee a person drinks per day, the less time he can go without sleep. 78. When two variables move in opposite directions, the curve relating them is a. upward sloping, and we say the variables are positively related. b. upward sloping, and we say the variables are negatively related. c. downward sloping, and we say the variables are positively related. d. downward sloping, and we say the variables are negatively related. 79. When a relevant variable that is not named on either axis changes, a. there will be a movement along the curve. b. the curve will rotate clockwise. c. the curve will be unaffected since only the variables on the axis affect the curve. d. the curve will shift. 80. Suppose price is measured along the vertical axis on a graph. When price changes, there will be a a. rotation of the curve. b. shift of the curve. c. movement along the curve. .
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Ch 02: Thinking Like an Economist d. change in the slope of the curve. 81. Figure 2-8
Refer to Figure 2-8. The movement from point A to point B is a. a shift of the demand curve. b. an indication of a change in preferences for grapes. c. a movement along the demand curve. d. an indication of an increase in income. 82. Figure 2-8
.
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Refer to Figure 2-8. The slope of the curve between points A and B is a. -5. b. -1/5. c. 1/5. d. 5. 83. Which of the following is correct? a. A horizontal line has an infinite slope, and a vertical line has a zero slope. b. A horizontal line has a slope of 1, and a vertical line has a slope of −1. c. A horizontal line has a zero slope, and a vertical line has an infinite slope. d. A horizontal line has a slope of −1, and a vertical line has a slope of 1. 84. The slope of a line that passes through the points (20, 30) and (40, 14) is a. -5/4. b. -4/5. c. 4/5. d. 5/4. 85. In the early 19th century, the Russian government sent doctors to southern Russian villages to provide assistance during a cholera epidemic. The villagers noticed that wherever doctors appeared, people died. Therefore, many doctors were chased away from villages, and some were even killed. This reaction to the correlation between doctors and deaths is most likely a problem of a. omitted variables. b. reverse causality. .
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Ch 02: Thinking Like an Economist c. government propaganda. d. medical incompetence. 86. Figure 2-9 Commuter Rail Passengers by Frequency of Service
Refer to Figure 2-9. Which of the following conclusions should not be drawn from observing this graph? a. There is a positive correlation between the frequency of service and the number of passengers. b. When there are five stops per hour, there are approximately 200 passengers. c. More stops per hour is associated with more passengers per hour. d. No other factors besides the frequency of service affect the number of passengers.
Indicate whether the statement is true or false. 87. Economists try to address their subject with a scientist’s objectivity. a. True b. False 88. Economists devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories. a. True b. False 89. The scientific method is the dispassionate development and testing of theories about how the world works. .
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Ch 02: Thinking Like an Economist a. True b. False 90. The scientific method can be applied to the study of economics. a. True b. False 91. While the scientific method is applicable to studying natural sciences, it is not applicable to studying a nation’s economy. a. True b. False 92. For economists, conducting experiments is often difficult and sometimes impossible. a. True b. False 93. Economists usually have to make do with whatever data the world happens to give them. a. True b. False 94. It is difficult for economists to make observations and develop theories, but it is easy for economists to run experiments to generate data to test their theories. a. True b. False 95. Since economists cannot use natural experiments offered by history, they must use carefully constructed laboratory experiments instead. a. True b. False 96. Historical episodes are not valuable to economists. a. True b. False 97. Historical episodes allow economists to illustrate and evaluate current economic theories. a. True b. False 98. Good assumptions simplify a problem without substantially affecting the answer. a. True b. False 99. Assumptions can simplify the complex world and make it easier to understand. a. True b. False .
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Ch 02: Thinking Like an Economist 100. Economists often find it worthwhile to make assumptions that do not necessarily describe the real world. a. True b. False 101. Economists use one standard set of assumptions to answer all economic questions. a. True b. False 102. Economic models are most often composed of diagrams and equations. a. True b. False 103. Economic models omit many details to allow us to see what is truly important. a. True b. False 104. Economic models can help us understand reality only when they include all details of the economy. a. True b. False 105. An economic model can accurately explain how the economy is organized because it is designed to include, to the extent possible, all features of the real world. a. True b. False 106. All scientific models, including economic models, simplify reality in order to improve our understanding of it. a. True b. False 107. The circular-flow diagram explains, in general terms, how the economy is organized and how participants in the economy interact with one another. a. True b. False 108. A circular-flow diagram is a visual model of the economy. a. True b. False 109. The circular flow model is not used anymore because it fails to perfectly replicate real world situations. a. True b. False 110. In the circular-flow diagram, households and firms are the decision makers. a. True b. False .
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Ch 02: Thinking Like an Economist 111. In the circular-flow diagram, firms produce goods and services using the factors of production. a. True b. False 112. In the circular-flow diagram, factors of production are the goods and services produced by firms. a. True b. False 113. In the circular-flow diagram, factors of production include land, labor, and capital. a. True b. False 114. In the circular-flow diagram, firms own the factors of production and use them to produce goods and services. a. True b. False 115. In the circular-flow diagram, firms consume all the goods and services that they produce. a. True b. False 116. In the circular-flow diagram, the two types of markets in which households and firms interact are the markets for goods and services and the markets for factors of production. a. True b. False 117. In the markets for goods and services in the circular-flow diagram, households are buyers and firms are sellers. a. True b. False 118. In the markets for the factors of production in the circular-flow diagram, households are buyers and firms are sellers. a. True b. False 119. In the circular-flow diagram, one loop represents the flow of goods, services, and factors of production, and the other loop represents the corresponding flow of dollars. a. True b. False 120. In the circular-flow diagram, one loop represents the flow of goods and services, and the other loop represents the flow of factors of production. a. True b. False 121. In the circular-flow diagram, payments for labor, land, and capital flow from firms to households through the markets for the factors of production. a. True .
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Ch 02: Thinking Like an Economist b. False 122. The production possibilities frontier is a graph that shows the various combinations of outputs that the economy can possibly produce given the available factors of production and the available production technology. a. True b. False 123. Figure 2-10
Refer to Figure 2-10. If this economy uses all its resources in the dishwasher industry, it produces 35 dishwashers and no doghouses. a. True b. False 124. Figure 2-10
Refer to Figure 2-10. It is possible for this economy to produce 75 doghouses. a. True .
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Ch 02: Thinking Like an Economist b. False 125. Figure 2-10
Refer to Figure 2-10. It is possible for this economy to produce 30 doghouses and 20 dishwashers. a. True b. False 126. Figure 2-10
Refer to Figure 2-10. It is possible for this economy to produce 45 doghouses and 30 dishwashers. a. True b. False 127. Figure 2-10
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-10. When this economy produces 30 doghouses and 25 dishwashers there is full employment. a. True b. False 128. Figure 2-10
Refer to Figure 2-10. This economy fully employs its resources when it produces 35 dishwashers and zero doghouses. a. True b. False 129. Figure 2-10
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-10. Given the technology available for manufacturing doghouses and dishwashers, this economy does not have enough of the factors of production to support the level of output represented by point C. a. True b. False 130. Figure 2-10
Refer to Figure 2-10. Points A, B, and D represent feasible outcomes for this economy. a. True b. False 131. Figure 2-10
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-10. Points B and C represent infeasible outcomes for this economy. a. True b. False 132. Figure 2-10
Refer to Figure 2-10. Points A, B, and D represent efficient outcomes for this economy. a. True b. False 133. Figure 2-10
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-10. Point B represents an inefficient outcome for this economy. a. True b. False 134. Figure 2-10
Refer to Figure 2-10. Unemployment could cause this economy to produce at point B. a. True b. False 135. Figure 2-10
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-10. The opportunity cost of moving from point A to point D is 10 dishwashers. a. True b. False 136. Figure 2-10
Refer to Figure 2-10. The opportunity cost of moving from point B to point D is 15 doghouses. a. True b. False 137. Figure 2-10
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-10. The opportunity cost of moving from point B to point A is zero. a. True b. False 138. Figure 2-10
Refer to Figure 2-10. The opportunity cost of an additional doghouse increases as more doghouses are produced. a. True b. False 139. Figure 2-11
.
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Refer to Figure 2-11. Point B represents an inefficient outcome for this economy. a. True b. False 140. Figure 2-11
.
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Refer to Figure 2-11. The opportunity cost of moving from point A to point B is zero. a. True b. False 141. Figure 2-11
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-11. The opportunity cost of producing an additional pair of shoes increases as more shoes are produced. a. True b. False 142. Figure 2-11
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-11. This economy fully employs its resources when it produces 4000 shoes and zero t-shirts. a. True b. False 143. Figure 2-11
.
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Refer to Figure 2-11. It is possible for this economy to produce 1000 shoes. a. True b. False 144. With the resources it has, an economy can produce at any point on or outside the production possibilities frontier, but it cannot produce at points inside the frontier. a. True b. False 145. Points inside the production possibilities frontier represent feasible levels of production. a. True b. False 146. Points inside the production possibilities frontier represent inefficient levels of production. a. True b. False 147. Points on the production possibilities frontier represent efficient levels of production. a. True b. False 148. Points outside the production possibilities frontier represent infeasible levels of production. a. True b. False .
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Ch 02: Thinking Like an Economist 149. If a major union goes on strike, then the country would be operating inside its production possibilities frontier. a. True b. False 150. An outcome is said to be efficient if an economy is getting all it can from the scarce resources it has available. a. True b. False 151. An outcome is said to be efficient if an economy is conserving the largest possible quantity of its scarce resources while still meeting the basic needs of society. a. True b. False 152. A production point is said to be efficient if there is no way for the economy to produce more of one good without producing less of another. a. True b. False 153. If an economy can produce more of one good without giving up any of another good, then the economy’s current production point is inefficient. a. True b. False 154. Unemployment causes production levels to be inefficient. a. True b. False 155. The opportunity cost of something is what you give up to get it. a. True b. False 156. The production possibilities frontier shows the opportunity cost of one good as measured in terms of the other good. a. True b. False 157. When a production possibilities frontier is bowed outward, the opportunity cost of one good in terms of the other is constant. a. True b. False 158. When a production possibilities frontier is bowed outward, the opportunity cost of one good in terms of the other depends on how much of each good is being produced. a. True b. False 159. When a production possibilities frontier is bowed outward, the opportunity cost of the first good in terms of the .
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Ch 02: Thinking Like an Economist second good increases as more of the second good is produced. a. True b. False 160. When a production possibilities frontier is bowed outward, the opportunity cost of the second good in terms of the first good increases as more of the second good is produced. a. True b. False 161. A production possibilities frontier has a bowed shape if the opportunity cost is constant at all levels of output. a. True b. False 162. Economists believe that production possibilities frontiers rarely have a bowed shape. a. True b. False 163. A production possibilities frontier will be bowed outward if some of the economy’s resources are better suited to producing one good than another. a. True b. False 164. The trade-off between the production of one good and the production of another good can change over time because of technological advances. a. True b. False 165. A technological advance in the production of the first good increases the opportunity cost of the first good in terms of the second good. a. True b. False 166. While the production possibilities frontier is a useful model, it cannot be used to illustrate economic growth. a. True b. False 167. Economic growth causes a production possibilities frontier to shift outward. a. True b. False 168. If new government regulations designed to protect wetlands remove very productive farmland from production, then the production possibilities frontier will shift inward. a. True b. False 169. Production possibilities frontiers can be used to illustrate scarcity, trade-offs, opportunity cost, efficiency, unemployment, technological advances, and economic growth. .
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Ch 02: Thinking Like an Economist a. True b. False 170. Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. a. True b. False 171. Macroeconomics is the study of economy-wide phenomena. a. True b. False 172. The effects of borrowing by the federal government would be studied by a microeconomist rather than a macroeconomist. a. True b. False 173. The effects of foreign competition on the U.S. textile industry would be studied by a microeconomist rather than a macroeconomist. a. True b. False 174. A macroeconomist, rather than a microeconomist, would study the effects on a market from two firms merging. a. True b. False 175. Microeconomics and macroeconomics are closely intertwined. a. True b. False 176. When economists are trying to explain the world, they are scientists, and when they are trying to help improve the world, they are policy advisers. a. True b. False 177. Economists acting as scientists make positive statements, while economists acting as policy advisers make normative statements. a. True b. False 178. Normative statements describe how the world is, while positive statements prescribe how the world should be. a. True b. False 179. Positive statements are descriptive, while normative statements are prescriptive. a. True b. False .
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Ch 02: Thinking Like an Economist 180. Positive statements can be evaluated using data alone, but normative statements cannot. a. True b. False 181. Evaluating normative statements involves values as well as facts. a. True b. False 182. "Society would be better off if the welfare system were abolished" is a normative statement, not a positive statement. a. True b. False 183. "Other things equal, an increase in supply causes a decrease in price" is a normative statement, not a positive statement. a. True b. False 184. "Minimum wage laws result in unemployment” is a normative statement, while “The minimum wage should be higher” is a positive statement. a. True b. False 185. “The US should not restrict employers from outsourcing work to foreign countries” is a normative statement. a. True b. False 186. Trade-offs are involved in most policy decisions. a. True b. False 187. Since 1946, the president of the United States has received guidance from the Council of Economic Advisers. a. True b. False 188. The Council of Economic Advisers consists of thirty members and a staff of several dozen economists. a. True b. False 189. The duties of the Council of Economic Advisers are to advise the president of the United States and to determine U.S. monetary policy. a. True b. False 190. The Council of Economic Advisers’ Economic Report of the President discusses recent developments in the economy and presents the council’s analysis of current policy issues. .
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Ch 02: Thinking Like an Economist a. True b. False 191. The President counts among his economic advisors the Congressional Budget Office. a. True b. False 192. Economists at the U.S. Department of the Treasury help design U.S. coins and paper money. a. True b. False 193. Economists at the U.S. Department of Justice help enforce the nation’s antitrust laws. a. True b. False 194. Economists work both inside and outside the administrative branch of the U.S. government. a. True b. False 195. The Congressional Budget Office, which is staffed by economists, provides Congress with independent evaluations of policy proposals. a. True b. False 196. There is only one explanation for why economists give conflicting advice on policy issues, and it is that they have different values about what policy should try to accomplish. a. True b. False 197. Economists may disagree about the validity of alternative positive theories about how the world works. a. True b. False 198. Different values are not a reason for disagreement among economists. a. True b. False 199. In surveys of professional economists, fourteen propositions were endorsed by an overwhelming majority of respondents. a. True b. False 200. Because almost all economists oppose policies that restrict trade among nations, policymakers do not restrict imports of certain goods. a. True b. False .
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Ch 02: Thinking Like an Economist 201. According to John Maynard Keynes, an economist must possess a rare combination of skills including being a mathematician, historian, statesman, and philosopher. a. True b. False 202. In economics, graphs serve two purposes: they offer a way to visually express ideas, and they provide a way of finding and interpreting patterns when analyzing economic data. a. True b. False 203. Examples of graphs of a single variable include pie charts, bar graphs, and time-series graphs. a. True b. False 204. A pie chart is a way to display information regarding two variables. a. True b. False 205. In the ordered pair (10,30), 10 is the y-coordinate and 30 is the z-coordinate. a. True b. False 206. In the ordered pair (10,30), 10 is the horizontal location of the point and 30 is the vertical location of the point. a. True b. False 207. Two variables that have a positive correlation move in the same direction. a. True b. False 208. Two variables that have a negative correlation move in opposite directions. a. True b. False 209. When two variables move in opposite directions, the curve relating them is upward sloping, and we say the variables are positively related. a. True b. False 210. When two variables move in the same direction, the curve relating them is downward sloping, and we say the variables are negatively related. a. True b. False 211. When a variable that is named on an axis of a graph changes, the curve shifts. .
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Ch 02: Thinking Like an Economist a. True b. False 212. When a variable that is not named on either axis of a graph changes, we read the change as a movement along the curve. a. True b. False 213. The concept of slope can be used to answer questions about how much one variable responds to changes in another variable. a. True b. False 214. The slope of a line is equal to the change in the x-variable divided by the change in the y-variable. a. True b. False 215. The slope of an upward-sloping line is positive, and the slope of a downward-sloping line is negative. a. True b. False 216. The slope of a horizontal line is infinite, and the slope of a vertical line is zero. a. True b. False 217. The slope of a line is the ratio of the vertical distance covered to the horizontal distance covered along the line. a. True b. False 218. If a line passes through the points (20,5) and (10,10), then the slope of the line is 1/2. a. True b. False 219. If a line passes through the points (20,5) and (10,10), then the slope of the line is -2. a. True b. False 220. Changes in one variable on a graph might be caused by the other variable on the graph or by a third omitted variable. a. True b. False 221. Deciding that A causes B when in fact B causes A is a mistake called omitted variable bias. a. True b. False 222. The broken window fallacy states that when a window breaks and someone spends money to repair it, they have .
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Ch 02: Thinking Like an Economist created new economic activity that would not have otherwise taken place. a. True b. False
223. Like biologists and physicists, economists use the dispassionate development and testing of how the world works known as the 224. As a substitute for laboratory experiments, economists use evidence available through history’s 225. Figure 2-12
Refer to Figure 2-12. What is the name of the model depicted in the figure? 226. Figure 2-12
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-12. What do the ovals represent in the figure? 227. Figure 2-12
Refer to Figure 2-12. What do the rectangles represent in the figure? 228. Figure 2-12 .
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Ch 02: Thinking Like an Economist
Refer to Figure 2-12. What do the outer arrows represent in the figure? 229. Figure 2-12
Refer to Figure 2-12. What do the inner arrows represent in the figure? 230. Figure 2-12 .
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Ch 02: Thinking Like an Economist
Refer to Figure 2-12. What does the arrow going from oval A to rectangle 2 represent in the figure? 231. Figure 2-12
Refer to Figure 2-12. What does the arrow going from oval B to rectangle 2 represent in the figure? 232. Figure 2-12 .
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Ch 02: Thinking Like an Economist
Refer to Figure 2-12. What are two elements not included in this figure that could be included in a more complex model? 233. Suppose a war in the Middle East interrupts the flow of crude oil and oil prices skyrocket around the world. For economists, this historical episode serves as a 234. Just like other scientific models, economic models simplify reality using 235. The three main factors of production, or categories of inputs, used by firms to produce goods and services are 236. In the circular flow diagram, who owns the factors of production and consumes all of the goods and services produced? 237. In the circular flow diagram, when Brian provides labor through the markets for factors of production to ABC Company, the flow of money he receives in exchange is called 238. In the markets for goods and services in the circular flow diagram, households act as 239. In the circular flow diagram, when Daphne purchases a new mobile phone, she participates in the markets for 240. What you must give up to get something else is called the 241. Figure 2-13
.
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Ch 02: Thinking Like an Economist
Consider the production possibilities curve for a country that can produce sweaters, apples (in bushels), or a combination of the two.
Refer to Figure 2-13. The bowed outward shape of the production possibilities curve indicates that opportunity cost of apples in terms of sweaters is 242. Figure 2-13
Consider the production possibilities curve for a country that can produce sweaters, apples (in bushels), or a combination of the two.
Refer to Figure 2-13. Which point(s) on the graph is(are) efficient production possibilities? 243. Figure 2-13
.
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Ch 02: Thinking Like an Economist
Consider the production possibilities curve for a country that can produce sweaters, apples (in bushels), or a combination of the two.
Refer to Figure 2-13. Which point(s) on the graph show unemployment of resources? 244. Figure 2-13
Consider the production possibilities curve for a country that can produce sweaters, apples (in bushels), or a combination of the two.
Refer to Figure 2-13. Which point(s) on the graph is(are) unattainable given current resources and technology? 245. Figure 2-13
.
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Ch 02: Thinking Like an Economist
Consider the production possibilities curve for a country that can produce sweaters, apples (in bushels), or a combination of the two.
Refer to Figure 2-13. What is the opportunity cost of moving from point T to point R? 246. Figure 2-13
Consider the production possibilities curve for a country that can produce sweaters, apples (in bushels), or a combination of the two.
Refer to Figure 2-13. What is the opportunity cost of moving from point R to point Q? 247. Figure 2-14
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-14. Consider the production possibilities frontier for an economy that produces only sofas and cars. As the economy moves from point A to point D, is the opportunity cost of cars increasing, constant, or decreasing? 248. Figure 2-14
Refer to Figure 2-14. Consider the production possibilities frontier for an economy that produces only sofas and cars. The opportunity cost of one sofa is 249. Figure 2-14
.
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Refer to Figure 2-14. Consider the production possibilities frontier for an economy that produces only sofas and cars. The opportunity cost of one car is 250. Table 2-4 Mobile Phones 0 200 500 900 1400 2000
Pizzas 10,000 8,000 6,000 4,000 2,000 0
Refer to Table 2-4. Consider the production possibilities table for an economy that produces only mobile phones and pizzas. What is the opportunity cost of increasing production of mobile phones from 200 to 500? 251. Table 2-4 Mobile Phones 0 200 500 900 1400 2000
Pizzas 10,000 8,000 6,000 4,000 2,000 0
Refer to Table 2-4. Consider the production possibilities table for an economy that produces only mobile phones and pizzas. What is the opportunity cost of increasing production of pizzas from 4,000 to 6,000? 252. Table 2-4 Mobile Phones 0 200 500 .
Pizzas 10,000 8,000 6,000 Page 64
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Ch 02: Thinking Like an Economist 900 1400 2000
4,000 2,000 0
Refer to Table 2-4. Consider the production possibilities table for an economy that produces only mobile phones and pizzas. Describe the shape of the production possibilities frontier. 253. Who would be more likely to study the effects of government spending on the unemployment rate, a macroeconomist or a microeconomist? 254. Who would be more likely to study the effects of foreign competition on the accounting industry, a macroeconomist or a microeconomist? 255. Who would be more likely to study the effects of rent control on housing in New York City, a macroeconomist or a microeconomist? 256. Who would be more likely to study the inflation rate in the United States, a macroeconomist or a microeconomist? 257. When economists are trying to explain the world, they are scientists. When they are trying to improve it, they are 258. What type of statement is a descriptive statement about how the world is? 259. What type of statement is a prescriptive statement about how the world ought to be? 260. Which type of statement - positive or normative - can be evaluated by analyzing data alone? 261. Is the following a positive or normative statement? The federal minimum wage is lower than many state minimum wages. 262. Is the following a positive or normative statement? The Federal Reserve should set an inflation target and employ policies to meet the target. 263. Is the following a positive or normative statement? The United States government should mandate that every citizen purchases health insurance. 264. Is the following a positive or normative statement? The unemployment rate in Nevada is higher than the unemployment rate in New York. 265. Since 1946, the president of the United States has received guidance from a group comprised of three members and a staff of a few dozen economists known as the 266. Economists at which administrative department help formulate spending plans and regulatory policies? 267. Economists at which administrative department help design tax policy? 268. Economists at which administrative department analyze data on workers and those looking for work to help formulate labor-market policies? 269. Economists at which administrative department help enforce the nation’s antitrust laws? .
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Ch 02: Thinking Like an Economist 270. The institution that sets the nation’s monetary policy is called the 271. When economists disagree about whether the government should tax a household’s income or its consumption, they are expressing a difference in 272. When economists disagree about whether a policy is fair, they are expressing a difference in 273. Most economists agree that a large federal budget deficit has what type of effect on the economy? 274. Figure 2-15
Refer to Figure 2-15. What are the coordinates of point C? 275. Figure 2-15
Refer to Figure 2-15. What is the x-coordinate of point R? 276. Figure 2-15 .
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Ch 02: Thinking Like an Economist
Refer to Figure 2-15. How are price and quantity related in this graph? 277. Figure 2-15
Refer to Figure 2-15. What is the slope of the line with points A, B, and C? 278. Figure 2-15
.
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Refer to Figure 2-15. Is a move from point A to point B considered a shift of the curve or a movement along the curve? 279. Figure 2-15
Refer to Figure 2-15. Is a move from point A to point R considered a shift of the curve or a movement along the curve? 280. Figure 2-15
.
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Ch 02: Thinking Like an Economist
Refer to Figure 2-15. Given that price is measured on the vertical axis, quantity is measured on the horizontal axis, and that the curves are downward-sloping, what type of curves are depicted here? 281. Using the outline below, draw a circular-flow diagram representing the interactions between households and firms in a simple economy. Explain briefly the various parts of the diagram.
282. The prairie dog has always been considered a problem for American cattle ranchers. They dig holes that cattle and horses can step in, and they eat grass necessary for cattle. Recently, ranchers have discovered that there is a demand for prairie dogs as pets. In some areas, prairie dogs can sell for as high as $150 each. Cattlemen are now fencing off prairie dog towns on their land so these towns will not be disturbed by their cattle. Draw a rancher’s production possibilities frontier showing increasing opportunity cost of cattle production in terms of prairie dog production. Using a separate graph for each situation, show what would happen to the initial production possibilities frontier in each of the following situations: The outcome is efficient, with ranchers choosing to produce equal numbers of cattle and a. prairie dogs. As a protest against the government introducing the gray wolf back into the wild in their b. state, ranchers decide to withhold 25 percent of the available grassland for grazing. .
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Ch 02: Thinking Like an Economist c. d. e.
The price of prairie dogs increases to $200 each, so ranchers decide to allot additional land for prairie dogs. The government grants new leases to ranchers, giving them 10,000 new acres of grassland each for grazing. A drought destroys most of the available grass for grazing of cattle, but not for prairie dogs since they also eat plant roots.
283. Draw a production possibilities frontier showing increasing opportunity cost of hammers in terms of horseshoes. a. On the graph, identify the area of feasible outcomes and the area of infeasible outcomes. b. On the graph, label a point that is efficient and a point that is inefficient. On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource c. needed to make both horseshoes and hammers, on this economy. On a second graph, illustrate the effect of a new computerized assembly line in the d. production of hammers on this economy. 284. Identify each of the following topics as being part of microeconomics or macroeconomics: a. the impact of a change in consumer income on the purchase of luxury automobiles b. the effect of a change in the price of Coke on the purchase of Pepsi c. the impact of a war in the Middle East on the rate of inflation in the United States d. factors influencing the rate of economic growth e. factors influencing the demand for tractors f. the impact of tax policy on national saving g. the effect of pollution taxes on the U.S. copper industry h. the degree of competition in the cable television industry i. the effect of a balanced-budget amendment on economic stability j. the impact of deregulation on the savings and loan industry 285. Which of the following statements are positive and which are normative? a. The minimum wage creates unemployment among young and unskilled workers. b. The minimum wage ought to be abolished. If the price of a product in a market decreases, then, other things equal, quantity demanded will c. increase. d. A little bit of inflation is worse for society than a little bit of unemployment. e. There is a tradeoff between inflation and unemployment in the short run. If consumer income increases, then, other things equal, the demand for automobiles will f. increase. g. The U.S. income distribution is not fair. h. U.S. workers deserve more liberal unemployment benefits. i. If interest rates increase, then investment will decrease. j. If welfare benefits were reduced, then the country would be better off. 286. Use the following graph to answer the following questions. a. How would point J be represented as an ordered pair? b. What type of curve is this? c. Does this curve show a positive or negative correlation between price and quantity? d. Compute the slope of D1 between points J and L. e. What is the slope of D1 between points L and N? Why would you not have to calculate this answer? f. What is it called if we move from D1 to D2? g. How do you know that the slope of D2 is the same as the slope of D1? .
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Ch 02: Thinking Like an Economist
.
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Ch 02: Thinking Like an Economist Answer Key 1. d 2. d 3. a 4. a 5. c 6. d 7. c 8. b 9. d 10. b 11. d 12. a 13. a 14. d 15. b 16. c 17. d 18. c 19. b 20. c 21. d 22. a 23. b 24. b 25. d .
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Ch 02: Thinking Like an Economist 26. b 27. d 28. c 29. c 30. b 31. c 32. c 33. d 34. d 35. b 36. d 37. c 38. c 39. c 40. c 41. a 42. d 43. b 44. a 45. d 46. b 47. d 48. b 49. b 50. a 51. c .
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Ch 02: Thinking Like an Economist 52. d 53. a 54. b 55. b 56. d 57. d 58. c 59. c 60. c 61. a 62. a 63. a 64. d 65. b 66. c 67. c 68. b 69. d 70. b 71. d 72. c 73. d 74. a 75. b 76. c .
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Ch 02: Thinking Like an Economist 77. c 78. d 79. d 80. c 81. c 82. a 83. c 84. b 85. b 86. d 87. True 88. True 89. True 90. True 91. False 92. True 93. True 94. False 95. False 96. False 97. True 98. True 99. True 100. True 101. False 102. True .
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Ch 02: Thinking Like an Economist 103. True 104. False 105. False 106. True 107. True 108. True 109. False 110. True 111. True 112. False 113. True 114. False 115. False 116. True 117. True 118. False 119. True 120. False 121. True 122. True 123. True 124. False 125. True 126. False 127. False .
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Ch 02: Thinking Like an Economist 128. True 129. True 130. True 131. False 132. False 133. True 134. True 135. True 136. False 137. True 138. True 139. False 140. False 141. True 142. True 143. True 144. False 145. True 146. True 147. True 148. True 149. True 150. True 151. False 152. True 153. True .
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Ch 02: Thinking Like an Economist 154. True 155. True 156. True 157. False 158. True 159. False 160. True 161. False 162. False 163. True 164. True 165. True 166. False 167. True 168. True 169. True 170. True 171. True 172. False 173. True 174. False 175. True 176. True 177. True 178. False .
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Ch 02: Thinking Like an Economist 179. True 180. True 181. True 182. True 183. False 184. False 185. True 186. True 187. True 188. False 189. False 190. True 191. False 192. False 193. True 194. True 195. True 196. False 197. True 198. False 199. True 200. False 201. True 202. True 203. True 204. False .
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Ch 02: Thinking Like an Economist 205. False 206. True 207. True 208. True 209. False 210. False 211. False 212. False 213. True 214. False 215. True 216. False 217. True 218. False 219. False 220. True 221. False 222. True 223. scientific method. 224. natural experiments. 225. Circular Flow Model 226. Market for Goods and Services Market for Factors of Production 227. Firms Households 228. flow of dollars .
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Ch 02: Thinking Like an Economist 229. flow of inputs and outputs 230. goods and services bought 231. income 232. government international trade 233. natural experiment. 234. assumptions. 235. land, labor, and capital. 236. households 237. income. 238. buyers. 239. goods and services. 240. opportunity cost. 241. increasing. 242. Q, R, U, and V 243. T and W 244. S and X 245. zero 246. 80 bushels of apples 247. constant 248. 2/3 of a car. 249. 3/2 sofas. 250. 2,000 pizzas. 251. 400 mobile phones. 252. bowed outward 253. macroeconomist .
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Ch 02: Thinking Like an Economist 254. microeconomist 255. microeconomist 256. macroeconomist 257. policy advisers. 258. positive statement 259. normative statement 260. positive 261. positive 262. normative 263. normative 264. positive 265. Council of Economic Advisers 266. Office of Management and Budget 267. Department of the Treasury 268. Department of Labor 269. Department of Justice 270. Federal Reserve. 271. scientific judgment. 272. values. 273. adverse 274. (60,3) 275. 20 276. negatively correlated 277. -0.1 278. movement along the curve 279. shift of the curve .
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Ch 02: Thinking Like an Economist 280. demand curves
281.
This diagram should duplicate the essential characteristics of the diagram in the text, with an explanation of the meaning of each flow and each market. It is important that the student understands that the inner loop represents the flow of real goods and services and that the outer loop represents the corresponding flow of payments.
282. (a)
(b)
(c)
(d)
.
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(e)
283. (a-c)
.
(d)
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284. a, b, e, g, h, and j are microeconomic topics. c, d, f, and i are macroeconomic topics. 285. a, c, e, f, and i are positive statements. b, d, g, h, and j are normative statements. 286. a. (20,24) b. a demand curve c. a negative correlation between price and quantity d. -8/20 or -2/5 e. -2/5; because the slope of a straight line is constant f. an increase in demand. g. because the 2 lines are parallel
.
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Ch 03: Interdependence and the Gains from Trade
Indicate the answer choice that best completes the statement or answers the question. 1. When economists point out that you and millions of other people are interdependent, they are referring to the fact that we all a. rely upon the government to provide us with the basic necessities of life. b. rely upon one another for the goods and services we consume. c. have similar tastes and abilities. d. are concerned about one another’s well-being. 2. Ryan produces hair clips and earrings. Celia also produces hair clips and earrings, but Ryan is better at producing both goods. In this case, trade could a. benefit both Celia and Ryan. b. benefit Celia, but not Ryan. c. benefit Ryan, but not Celia. d. benefit neither Celia nor Ryan. 3. The production possibilities frontier illustrates a. the combinations of output that an economy should produce. b. the combinations of output that an economy should consume. c. the combinations of output that an economy can produce. d. the combinations of output that an economy wants to produce. 4. A production possibilities frontier is bowed outward when a. the more resources the economy uses to produce one good, the fewer resources it has available to produce the other good. b. an economy is self-sufficient instead of interdependent and engaged in trade. c. the rate of trade-off between the two goods being produced is constant. d. the rate of trade-off between the two goods being produced depends on how much of each good is being produced. 5. Leon and Serena like to wear sweaters and enjoy delicious food. The gains from trade between Leon and Serena are most obvious in which of the following cases? a. Leon is very good at knitting sweaters and at cooking tasty food, but Serena’s skills in both of these activities are very poor. b. Leon and Serena both are very good at cooking tasty food, but neither has the necessary skills to knit a sweater. c. Leon’s cooking and knitting skills are very poor, and Serena’s cooking and knitting skills are also very poor. d. Leon's only skill is knitting nice sweaters, and Serena's only skill is cooking delicious food. 6. A professor spends 10 hours per day giving lectures and writing papers. For the professor, a graph that shows their various possible mixes of output (lectures given per day and papers written per day) is called their a. line of tastes. b. trade-off curve. c. production possibilities frontier. d. consumption possibilities frontier. .
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Ch 03: Interdependence and the Gains from Trade 7. Suppose there are only two people in the world. Each person’s production possibilities frontier also represents their consumption possibilities when a. neither person faces trade-off. b. the frontiers are straight lines. c. the frontiers are bowed out. d. they choose not to trade with one another. 8. The most obvious benefit of specialization and trade is that they allow us to a. work more hours per week than we otherwise would be able to work. b. consume more goods than we otherwise would be able to consume. c. spend more money on goods that are beneficial to society, and less money on goods that are harmful to society. d. consume more goods by forcing people in other countries to consume fewer goods. 9. As a student, Jordyn spends 40 hours per week writing term papers and completing homework assignments. On one axis of Jordyn's production possibilities frontier (PPF) is measured the number of term papers written per week. On the other axis is measured the number of homework assignments completed per week. The PPF is a straight line if a. Jordyn faces no trade-off between writing term papers and completing homework assignments. b. Jordyn can switch between writing term papers and completing homework assignments at a constant rate. c. the rate at which Jordyn can switch between homework assignments and term papers depends on the number of homework assignments completed and on the number of term papers written. d. professors require that Jordyn spends equal time on term papers and homework assignments. 10. For a self-sufficient producer, the production possibilities frontier a. is the same as the consumption possibilities frontier. b. is greater than the consumption possibilities frontier. c. is less than the consumption possibilities frontier. d. is always a straight line. 11. Table 3-1 Assume that John and Jane can switch between producing bread and wine at a constant rate. Labor Hours Needed to Make 1 Bottle of Wine Loaf of Bread Jane 2 1.5 John 3 1
Refer to Table 3-1. Assume that John and Jane each work 24 hours. What happens to total production if instead of each person spending 12 hours producing each good, Jane spends 21 hours producing wine and 3 hours producing bread and John spends 3 hours producing wine and 21 hours producing bread? a. The total production of bread and wine each rise. b. The total production of bread rises and the total production of wine falls. c. The total production of bread falls and the total production of wine rises. .
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Ch 03: Interdependence and the Gains from Trade d. The total production of bread and wine each fall. 12. Table 3-2
England France
Hours Needed to Make 1 Unit of Cheese Wine 1 4 5 2
Number of Units Produced in 40 Hours Cheese Wine 40 10 8 20
Refer to Table 3-2. Assume that England and France each has 40 labor hours available. If each country divides its time equally between the production of cheese and wine, then total production is a. 8 units of cheese and 10 units of wine. b. 24 units of cheese and 15 units of wine. c. 40 units of cheese and 20 units of wine. d. 48 units of cheese and 30 units of wine. 13. Table 3-2
England France
Hours Needed to Make 1 Unit of Cheese Wine 1 4 5 2
Number of Units Produced in 40 Hours Cheese Wine 40 10 8 20
Refer to Table 3-2. Which of the following combinations of cheese and wine could France produce in 40 hours? a. 2 units of cheese and 20 units of wine b. 4 units of cheese and 15 units of wine c. 6 units of cheese and 5 units of wine d. 8 units of cheese and 20 units of wine 14. Table 3-3 Assume that Aruba and Iceland can switch between producing coolers and producing radios at a constant rate. Labor Hours Needed to Make 1 Cooler Radio Aruba 2 5 Iceland 1 4
Refer to Table 3-3. Which of the following represents Aruba's production possibilities frontier when 100 labor hours are available? .
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Ch 03: Interdependence and the Gains from Trade a.
b.
c.
d.
15. Table 3-3 .
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Ch 03: Interdependence and the Gains from Trade Assume that Aruba and Iceland can switch between producing coolers and producing radios at a constant rate. Labor Hours Needed to Make 1 Cooler Radio Aruba 2 5 Iceland 1 4
Refer to Table 3-3. Assume that Aruba and Iceland each has 80 labor hours available. If each country divides its time equally between the production of coolers and radios, then total production is a. 28 coolers and 50 radios. b. 30 coolers and 9 radios. c. 60 coolers and 18 radios. d. 120 coolers and 36 radios. 16. Table 3-4 Assume that Zimbabwe and Portugal can switch between producing toothbrushes and producing hairbrushes at a constant rate. Machine Minutes Needed to Make 1 Toothbrush Hairbrush Zimbabwe 3 10 Portugal 5 6
Refer to Table 3-4. Which of the following represents Zimbabwe's and Portugal's production possibilities frontiers when each country has 60 minutes of machine time available? a.
b.
.
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Ch 03: Interdependence and the Gains from Trade
c.
d.
17. Table 3-4 Assume that Zimbabwe and Portugal can switch between producing toothbrushes and producing hairbrushes at a constant rate. Machine Minutes Needed to Make 1 Toothbrush Hairbrush Zimbabwe 3 10 Portugal 5 6
.
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Ch 03: Interdependence and the Gains from Trade Refer to Table 3-4. Assume that Zimbabwe and Portugal each has 180 machine minutes available. If each country divides its time equally between the production of toothbrushes and hairbrushes, then total production is a. 24 toothbrushes and 12 hairbrushes. b. 48 toothbrushes and 24 hairbrushes. c. 96 toothbrushes and 48 hairbrushes. d. 720 toothbrushes and 1440 hairbrushes. 18. Table 3-4 Assume that Zimbabwe and Portugal can switch between producing toothbrushes and producing hairbrushes at a constant rate. Machine Minutes Needed to Make 1 Toothbrush Hairbrush Zimbabwe 3 10 Portugal 5 6
Refer to Table 3-4. Which of the following combinations of toothbrushes and hairbrushes could Zimbabwe not produce in 120 minutes? a. 5 toothbrushes and 11 hairbrushes b. 10 toothbrushes and 9 hairbrushes c. 20 toothbrushes and 6 hairbrushes d. 30 toothbrushes and 3 hairbrushes 19. Table 3-5 Assume that England and Spain can switch between producing cheese and producing bread at a constant rate. Labor Hours Needed Number of Units to Make 1 Unit of Produced in 24 Hours Cheese Bread Cheese Bread England 2 3 12 8 Spain 3 6 8 4
Refer to Table 3-5. Which of the following combinations of cheese and bread could Spain produce in 24 hours? a. 4 units of cheese and 3 units of bread b. 6 units of cheese and 1 units of bread c. 7 units of cheese and 1.5 units of bread d. 3 units of cheese and 3 units of bread 20. Table 3-6 Assume that Max and Min can switch between producing mittens and producing hats at a constant rate. .
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Max Min
Labor Hours Needed to Make 1 unit of Mitten Hat 2 6 2 4
Quantity Produced in 36 Hours Mitten Hat 18 6 18 9
Refer to Table 3-6. Which of the following points would not be on Max’s production possibilities frontier, based on a 36hour production period? a. (18 mittens, 0 hats) b. (12 mittens, 2 hats) c. (6 mittens, 4 hats) d. (2 mittens, 6 hats) 21. Table 3-7 Barb and Jim run a business that sets up and tests computers. Assume that Barb and Jim can switch between setting up and testing computers at a constant rate. The following table applies. Minutes Needed to Number of Computers Set Up or Tested in a 40-Hour Week Set Up 1 Test 1 Computers Set Computers Computer Computer Up Tested Barb 48 ? 50 40 Jim 30 40 80 60
Refer to Table 3-7. The number of minutes needed by Barb to test a computer is a. 36. b. 48. c. 60. d. 64. 22. Table 3-7 Barb and Jim run a business that sets up and tests computers. Assume that Barb and Jim can switch between setting up and testing computers at a constant rate. The following table applies. Minutes Needed to Number of Computers Set Up or Tested in a 40-Hour Week Set Up 1 Test 1 Computers Set Computers Computer Computer Up Tested Barb 48 ? 50 40 Jim 30 40 80 60
.
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Refer to Table 3-7. Which of the following points would not be on Barb's production possibilities frontier, based on a 40hour week? a. (0 computers set up, 40 computers tested) b. (8 computers set up, 32 computers tested) c. (25 computers set up, 20 computers tested) d. (30 computers set up, 16 computers tested) 23. Table 3-8 Production Possibilities Blankets Coats 8 600 12 ? 16 200
Refer to Table 3-8. If the production possibilities frontier is bowed outward, then which of the following could represent the number of coats produced when 12 blankets are produced? a. 200 b. 300 c. 400 d. 500 24. Table 3-8 Production Possibilities Blankets Coats 8 600 12 ? 16 200
Refer to Table 3-8. If the production possibilities frontier is a straight line, then which of the following could represent the number of coats produced when 12 blankets are produced? a. 200 b. 300 c. 400 d. 500 25. Table 3-9 Summary of the Gains from Trade Alice .
Betty Page 9
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Ch 03: Interdependence and the Gains from Trade Pitchers of Lemonade Pizzas Pitchers of Lemonades Pizzas Without Trade Production and Consumption
200
100
180
180
With Trade Production Trade Consumption
400 Gives 193 a
0 Gets 110 b
0 Gets 193 c
300 Gives 110 d
Gains from Trade
e
f
g
h
Refer to Table 3-9. The values in the table represent the amounts of lemonade and pizzas that Alice and Betty can produce in one week without and with specialization and trade. What are Alice and Betty's gains from specialization and trade? a. Alice gains 7 pitchers of lemonade and 10 pizzas, while Betty gains 13 pitchers of lemonade and 10 pizzas. b. Alice gains 200 pitchers of lemonade and 100 pizzas, while Betty gains 180 pitchers of lemonade and 180 pizzas. c. Alice gains 207 pitchers of lemonade and 110 pizzas, while Betty gains 193 pitchers of lemonade and 190 pizzas. d. Alice gains 400 pitchers of lemonade and 0 pizzas, while Betty gains 0 pitchers of lemonade and 300 pizzas. 26. Figure 3-1 Graph (a)
.
Graph (b)
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Refer to Figure 3-1. The rate of trade-off between producing chairs and producing couches is constant in a. Graph (a) only. b. Graph (b) only. c. both Graph (a) and graph (b). d. neither Graph (a) nor Graph (b). 27. Figure 3-1 Graph (a)
.
Graph (b)
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Refer to Figure 3-1. The rate of trade-off between producing chairs and producing couches depends on how many chairs and couches are being produced in a. Graph (a) only. b. Graph (b) only. c. both Graph (a) and Graph (b). d. neither Graph (a) nor Graph (b). 28. Figure 3-2
.
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Refer to Figure 3-2. The fact that the line slopes downward reflects the fact that a. for Brazil, it is more costly to produce peanuts than it is to produce cashews. b. Brazil will produce more peanuts and fewer cashews as time goes by. c. Brazil faces a trade-off between producing peanuts and producing cashews. d. Brazil should specialize in producing cashews. 29. Figure 3-2
.
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Refer to Figure 3-2. If the production possibilities frontier shown is for 24 hours of production, then how long does it take Brazil to make one pound of peanuts? a. 1/10 hour b. 1/3 hour c. 3 hours d. 10 hours 30. Figure 3-2
.
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Refer to Figure 3-2. If the production possibilities frontier shown is for 24 hours of production, then how long does it take Brazil to make one pound of cashews? a. 1/10 hour b. 1/3 hour c. 3 hours d. 10 hours 31. Figure 3-2
.
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Refer to Figure 3-2. If the production possibilities frontier shown is for two months of production, then which of the following combinations of peanuts and cashews could Brazil produce in two months? a. 7 pounds of peanuts and 135 pounds of cashews b. 5 pounds of peanuts and 150 pounds of cashews c. 2 pounds of peanuts and 240 pounds of cashews d. 3 pounds of peanuts and 150 pounds of cashews 32. Figure 3-3
.
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Refer to Figure 3-3. Dina must work 0.25 hour to produce each taco. Dina's production possibilities frontier is based on how many hours of work? a. 40 hours b. 100 hours c. 400 hours d. 1600 hours 33. Figure 3-3
.
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Refer to Figure 3-3. If the production possibilities frontier shown for Arturo is for 100 hours of production, then how long does it take Arturo to make one burrito? a. 1/4 hour b. 1/3 hour c. 3 hours d. 4 hours 34. Figure 3-3
.
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Refer to Figure 3-3. If Arturo and Dina both spend all of their time producing tacos, then total production is a. 400 tacos and 0 burritos. b. 400 tacos and 250 burritos. c. 800 tacos and 0 burritos. d. 800 tacos and 500 burritos. 35. Figure 3-3
.
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Refer to Figure 3-3. If Arturo and Dina each divides his/her time equally between the production of tacos and burritos, then total production is a. 200 tacos and 150 burritos. b. 400 tacos and 250 burritos. c. 400 tacos and 300 burritos. d. 800 tacos and 500 burritos. 36. Figure 3-3
.
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Ch 03: Interdependence and the Gains from Trade
Refer to Figure 3-3. Arturo’s opportunity cost of one burrito is a. 3/4 taco and Dina’s opportunity cost of one burrito is 1/2 taco. b. 3/4 taco and Dina’s opportunity cost of one burrito is 2 tacos. c. 4/3 tacos and Dina’s opportunity cost of one burrito is 1/2 taco. d. 4/3 tacos and Dina’s opportunity cost of one burrito is 2 tacos. 37. Figure 3-4
.
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Ch 03: Interdependence and the Gains from Trade
Refer to Figure 3-4. Both Alice and Betty a. face a constant trade-off between producing pitchers of lemonade and pizzas. b. can produce more pizzas than pitchers of lemonade if they devote all of their time to pizza production. c. would benefit from specializing in lemonade production. d. would benefit from specializing in pizza production. 38. Figure 3-4
.
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Refer to Figure 3-4. Specializing only in lemonade, Alice can produce a. 200 pitchers per day. b. 300 pitchers per day. c. 400 pitchers per day. d. 450 pitchers per day. 39. Figure 3-4
.
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Refer to Figure 3-4. If point A represents Alice’s production and point B represents Betty’s production, a. Alice produces 200 pitchers of lemonade and 100 pizzas, while Betty produces 180 pitchers of lemonade and 180 pizzas. b. Alice produces 180 pitchers of lemonade and 180 pizzas, while Betty produces 200 pitchers of lemonade and 100 pizzas. c. Alice produces 100 pitchers of lemonade and 200 pizzas, while Betty produces 180 pitchers of lemonade and 180 pizzas. d. Only Alice can benefit from specialization and trade. 40. Figure 3-4
.
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Refer to Figure 3-4. If point A represents Alice’s current production and point B represents Betty’s current production, under what circumstances can both Alice and Betty benefit from specialization and trade? a. Alice produces more pizzas and Betty produces more lemonade. b. Alice produces more lemonade and Betty produces more pizzas. c. Both Alice and Betty produce only pizzas. d. There are no circumstances under which both Alice and Betty can benefit from specialization and trade. 41. Assume for the United States that the opportunity cost of each airplane is 50 cars. Which of these pairs of points could be on the United States' production possibilities frontier? a. (200 airplanes, 5,000 cars) and (150 airplanes, 4,000 cars) b. (200 airplanes, 12,500 cars) and (150 airplanes, 15,000 cars) c. (300 airplanes, 15,000 cars) and (200 airplanes, 25,000 cars) d. (300 airplanes, 25,000 cars) and (200 airplanes, 40,000 cars) 42. What must be given up to obtain an item is called a. out-of-pocket cost. b. comparative worth. c. opportunity cost. d. absolute value. 43. A farmer has the ability to grow either corn or cotton or some combination of the two. Given no other information, it follows that the farmer’s opportunity cost of a bushel of corn multiplied by their opportunity cost of a bushel of cotton .
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Ch 03: Interdependence and the Gains from Trade a. is equal to 0. b. is between 0 and 1. c. is equal to 1. d. is greater than 1. 44. If Korea is capable of producing either shoes or soccer balls or some combination of the two, then a. Korea should specialize in the product in which it has an absolute advantage. b. it would be impossible for Korea to have an absolute advantage over another country in both products. c. it would be difficult for Korea to benefit from trade with another country if Korea is efficient in the production of both goods. d. Korea’s opportunity cost of shoes is the inverse of its opportunity cost of soccer balls. 45. Ken and Traci are two woodworkers who both make tables and chairs. In one month, Ken can make 3 tables or 18 chairs, whereas Traci can make 8 tables or 24 chairs. Given this, we know that the opportunity cost of 1 chair is a. 1/6 table for Ken and 1/3 table for Traci. b. 1/6 table for Ken and 3 tables for Traci. c. 6 tables for Ken and 1/3 table for Traci. d. 6 tables for Ken and 3 tables for Traci. 46. Absolute advantage is found by comparing different producers' a. opportunity costs. b. payments to land, labor, and capital. c. input requirements per unit of output. d. locational and logistical circumstances. 47. The producer that requires a smaller quantity of inputs to produce a certain amount of a good, relative to the quantities of inputs required by other producers to produce the same amount of that good, a. has a low opportunity cost of producing that good, relative to the opportunity costs of other producers. b. has a comparative advantage in the production of that good. c. has an absolute advantage in the production of that good. d. should be the only producer of that good. 48. If Shawn can produce more donuts in one day than Sue can produce in one day, then a. Shawn has a comparative advantage in the production of donuts. b. Sue has a comparative advantage in the production of donuts. c. Shawn has an absolute advantage in the production of donuts. d. Sue has an absolute advantage in the production of donuts. 49. Suppose Jim and Tom can both produce two goods: baseball bats and hockey sticks. Which of the following is not possible? a. Jim has an absolute advantage in the production of baseball bats and in the production of hockey sticks. b. Jim has an absolute advantage in the production of baseball bats and a comparative advantage in the production of hockey sticks. c. Jim has an absolute advantage in the production of hockey sticks and a comparative advantage in the production of baseball bats. .
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Ch 03: Interdependence and the Gains from Trade d. Jim has a comparative advantage in the production of baseball bats and in the production of hockey sticks. 50. If Iowa’s opportunity cost of corn is lower than Oklahoma’s opportunity cost of corn, then a. Iowa has a comparative advantage in the production of corn. b. Iowa has an absolute advantage in the production of corn. c. Iowa should import corn from Oklahoma. d. Oklahoma should produce just enough corn to satisfy its own residents’ demands. 51. Which of the following statements about comparative advantage is not true? a. Comparative advantage is determined by which person or group of persons can produce a given quantity of a good using the fewest resources. b. The principle of comparative advantage applies to countries as well as to individuals. c. Economists use the principle of comparative advantage to emphasize the potential benefits of free trade. d. A country may have a comparative advantage in producing a good, even though it lacks an absolute advantage in producing that good. 52. The principle of comparative advantage does not provide answers to certain questions. One of those questions is a. Do specialization and trade benefit more than one party to a trade? b. Is it absolute advantage or comparative advantage that really matters? c. How are the gains from trade shared among the parties to a trade? d. Is it possible for specialization and trade to increase total output of traded goods? 53. Which of the following is not correct? a. The producer who requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. b. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X. c. The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good. d. The gains from specialization and trade are based not on comparative advantage but on absolute advantage. 54. Total output in an economy increases when each person specializes because a. there is less competition for the same resources. b. each person spends more time producing that product in which they have a comparative advantage. c. a wider variety of products will be produced within each country due to specialization. d. government necessarily plays a larger role in the economy due to specialization. 55. Suppose that a worker in Radioland can produce either 4 radios or 1 television per year, and a worker in Teeveeland can produce either 2 radios or 4 televisions per year. Each nation has 100 workers. Also, suppose that each country completely specializes in producing the good in which it has a comparative advantage. If Radioland trades 100 radios to Teeveeland in exchange for 100 televisions each year, then each country's maximum consumption of new radios and televisions per year will be a. 100 radios, 300 televisions in Radioland and 300 radios, 100 televisions in Teeveeland. b. 300 radios, 100 televisions in Radioland and 100 radios, 300 televisions in Teeveeland. c. 200 radios, 100 televisions in Radioland and 100 radios, 200 televisions in Teeveeland. .
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Ch 03: Interdependence and the Gains from Trade d. 300 radios, 100 televisions in Radioland and 100 radios, 400 televisions in Teeveeland. 56. Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker in Oatland can grow either 5 bushels of corn or 50 bushels of oats per year. There are 20 workers in Cornland and 20 workers in Oatland. If the two countries do not trade, Cornland will produce and consume 400 bushels of corn and 100 bushels of oats, while Oatland will produce and consume 60 bushels of corn and 400 bushels of oats. If each country made the decision to specialize in producing the good in which it has a comparative advantage, then the combined yearly output of the two countries would increase by a. 280 bushels of corn and 450 bushels of oats. b. 340 bushels of corn and 500 bushels of oats. c. 360 bushels of corn and 520 bushels of oats. d. 360 bushels of corn and 640 bushels of oats. 57. Suppose that a worker in Caninia can produce either 2 blankets or 8 meals per day, and a worker in Felinia can produce either 5 blankets or 1 meal per day. Each nation has 10 workers. For many years, the two countries traded, each completely specializing according to their respective comparative advantages. Now war has broken out between them and all trade has stopped. Without trade, Caninia produces and consumes 10 blankets and 40 meals per day and Felinia produces and consumes 25 blankets and 5 meals per day. The war has caused the combined daily output of the two countries to decline by a. 15 blankets and 35 meals. b. 25 blankets and 40 meals. c. 35 blankets and 45 meals. d. 50 blankets and 80 meals. 58. The gains from trade are a. evident in economic models, but seldom observed in the real world. b. evident in the real world, but impossible to capture in economic models. c. a result of more efficient resource allocation than would be observed in the absence of trade. d. based on the principle of absolute advantage. 59. Trade can make everybody better off because it a. increases cooperation among nations. b. allows people to specialize according to comparative advantage. c. requires some workers in an economy to be retrained. d. reduces competition among domestic companies. 60. Table 3-10 Assume that Brad and Theresa can switch between producing wheat and producing beef at a constant rate. Minutes Needed to Make 1 Bushel of Wheat Pound of Beef Brad 10 12 Theresa 6 10
Refer to Table 3-10. What is Brad’s opportunity cost of producing one pound of beef? .
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Ch 03: Interdependence and the Gains from Trade a. 5/6 bushel of wheat b. 6/5 bushels of wheat c. 3/5 bushels of wheat d. 5/3 bushels of wheat 61. Table 3-11 Assume that Jamaica and Norway can switch between producing coolers and producing radios at a constant rate. Output Produced in One Day Coolers Radios Jamaica 12 6 Norway 24 3
Refer to Table 3-11. Jamaica's opportunity cost of one cooler is a. 0.5 radios, and Norway's opportunity cost of one cooler is 0.125 radios. b. 0.5 radios, and Norway's opportunity cost of one cooler is 8 radios. c. 2 radios, and Norway's opportunity cost of one cooler is 0.125 radios. d. 2 radios, and Norway's opportunity cost of one cooler is 8 radios. 62. Table 3-11 Assume that Jamaica and Norway can switch between producing coolers and producing radios at a constant rate. Output Produced in One Day Coolers Radios Jamaica 12 6 Norway 24 3
Refer to Table 3-11. Assume that Jamaica and Norway each has 4 days available for production. Originally, each country divided its time equally between the production of coolers and radios. Now, each country spends all its time producing the good in which it has a comparative advantage. As a result, the total output of coolers increased by a. 12. b. 24. c. 36. d. 48. 63. Table 3-11 Assume that Jamaica and Norway can switch between producing coolers and producing radios at a constant rate. Output Produced in One Day Coolers Radios Jamaica 12 6 .
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Ch 03: Interdependence and the Gains from Trade Norway
24
3
Refer to Table 3-11. Assume that Jamaica and Norway each has 4 days available for production. Originally, each country divided its time equally between the production of coolers and radios. Now, each country spends all its time producing the good in which it has a comparative advantage. As a result, the total output of radios increased by a. 3. b. 6. c. 9. d. 12. 64. Table 3-11 Assume that Jamaica and Norway can switch between producing coolers and producing radios at a constant rate. Output Produced in One Day Coolers Radios Jamaica 12 6 Norway 24 3
Refer to Table 3-11. At which of the following prices would both Jamaica and Norway gain from trade with each other? a. 1 radio for 1 cooler b. 1 radio for 4 coolers c. 1 radio for 10 coolers d. 1 radio for 15 coolers 65. Table 3-11 Assume that Jamaica and Norway can switch between producing coolers and producing radios at a constant rate. Output Produced in One Day Coolers Radios Jamaica 12 6 Norway 24 3
Refer to Table 3-11. Jamaica and Norway would not be able to gain from trade if Norway's opportunity cost of one radio changed to a. 0 coolers. b. 1 cooler. c. 2 coolers. d. Jamaica and Norway can always gain from trade regardless of their opportunity costs. 66. Figure 3-5 .
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Ch 03: Interdependence and the Gains from Trade
Refer to Figure 3-5. Suppose Peru decides to increase its production of emeralds by 2. What is the opportunity cost of this decision? a. 30 rubies b. 40 rubies c. 60 rubies d. 120 rubies 67. Table 3-12 Assume that Indonesia and India can switch between producing rice and bananas at a constant rate. Labor Hours Needed Unit of Number of Units to Make 1 Produced in 40 Hours Rice Bananas Rice Bananas Indonesia 2 5 20 8 India 4 2 10 20
Refer to Table 3-12. Indonesia’s opportunity cost of producing bananas is a. 2.5 units of rice. This is higher than India’s opportunity cost of producing bananas. b. 2.5 units of rice. This is lower than India’s opportunity cost of producing bananas. c. 2/5 units of rice. This is higher than India’s opportunity cost of producing bananas. d. 2/5 units of rice. This is lower than India’s opportunity cost of producing bananas. .
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Ch 03: Interdependence and the Gains from Trade 68. Goods produced abroad and sold domestically are called a. exports. b. imports. c. exchange rates. d. opportunity costs. 69. Trade between countries a. allows each country to consume at a point outside its production possibilities frontier. b. limits a country’s ability to produce goods and services on its own. c. must benefit both countries equally; otherwise, trade is not mutually beneficial. d. can best be understood by examining the countries’ absolute advantages. 70. When a country has a comparative advantage in producing a certain good, a. the country should import that good. b. the country should produce just enough of that good for its own consumption. c. the country’s opportunity cost of that good is high relative to other countries’ opportunity costs of that same good. d. then specializing in the production of that good and trading for other goods could allow that country to consume at a point beyond its production possibilities frontier. 71. Suppose the United States has a comparative advantage over Mexico in producing pork. The principle of comparative advantage asserts that a. in order to consume beyond its PPF, the United States should produce more pork than what it requires and export some of it to Mexico. b. in order to consume beyond its PPF, the United States should produce a moderate quantity of pork and import the remainder of what it requires from Mexico. c. in order to consume beyond its PPF, the United States should refrain altogether from producing pork and import all of what it requires from Mexico. d. Mexico has nothing to gain from importing United States pork. 72. A popular celebrity that is paid highly for their time should probably not mow their own lawn because a. their opportunity cost of mowing their lawn is higher than the cost of paying someone to mow it for them. b. they have a comparative advantage in mowing their lawn relative to a landscaping service. c. they have an absolute advantage in mowing their lawn relative to a landscaping service. d. they might sprain their ankle.
Indicate whether the statement is true or false. 73. In most countries today, many goods and services consumed are imported from abroad, and many goods and services produced are exported to foreign customers. a. True b. False 74. Interdependence among individuals and interdependence among nations are both based on the gains from trade. a. True .
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Ch 03: Interdependence and the Gains from Trade b. False 75. If a person chooses self-sufficiency, then they can only consume what they produce. a. True b. False 76. If Wrex can produce more math problems per hour and more book reports per hour than Maxine can, then Wrex cannot gain from trading math problems and book reports with Maxine. a. True b. False 77. Assume a farmer has the ability to produce corn and/or beans. Whenever the farmer spends 1 hour less producing corn and 1 hour more producing beans, they reduce output of corn by 2 bushels and raise output of beans by 3 bushels. In view of these assumptions, the farmer’s production possibilities frontier is bowed out. a. True b. False 78. To produce 100 bushels of wheat, Farmer A requires fewer inputs than does Farmer B. We can conclude that Farmer A has an absolute advantage over Farmer B in producing wheat. a. True b. False 79. It is possible for the U.S. to gain from trade with Germany even if it takes U.S. workers fewer hours to produce every good than it takes German workers. a. True b. False 80. A production possibilities frontier is a graph that shows the combination of outputs that an economy should produce. a. True b. False 81. Production possibilities frontiers cannot be used to illustrate trade-offs. a. True b. False 82. The production possibilities frontier shows the trade-offs that the producer faces but does not identify the choice the producer will make. a. True b. False 83. An economy can produce at any point on or inside its production possibilities frontier, but it cannot produce at points outside its production possibilities frontier. a. True b. False 84. An assumption of the production possibilities frontier model is that technology is fixed. a. True .
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Ch 03: Interdependence and the Gains from Trade b. False 85. Trade allows a country to consume outside its production possibilities frontier. a. True b. False 86. Opportunity cost refers to how many inputs a producer requires to produce a good. a. True b. False 87. Opportunity cost measures the trade-off between two goods that each producer faces. a. True b. False 88. For a country producing two goods, the opportunity cost of one good will be the inverse of the opportunity cost of the other good. a. True b. False 89. Henry can make a bird house in 3 hours and he can make a bird feeder in 1 hour. The opportunity cost to Henry of making a bird house is 1/3 bird feeder. a. True b. False 90. In one month, Moira can knit 2 sweaters or 4 scarves. In one month, Tori can knit 1 sweater or 3 scarves. Moira’s opportunity cost of knitting scarves is lower than Tori’s opportunity cost of knitting scarves. a. True b. False 91. Suppose that in one hour Dewey can produce either 10 bushels of corn or 20 yards of cloth. Dewey’s opportunity cost of producing one bushel of corn is 1/2 yard of cloth. a. True b. False 92. Jake can complete an oil change in 45 minutes and write a poem in 90 minutes. Ming-la can complete an oil change in 30 minutes and write a poem in 90 minutes. Jake's opportunity cost of writing a poem is lower than Ming-la's opportunity cost of writing a poem. a. True b. False 93. Harry is a computer company executive, earning $200 per hour managing the company and promoting its products. His daughter Quinn is a high school student, earning $6 per hour helping her grandmother on the farm. Harry's computer is broken. He can repair it himself in one hour. Quinn can repair it in 10 hours. Harry’s opportunity cost of repairing the computer is lower than Quinn’s. a. True b. False .
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Ch 03: Interdependence and the Gains from Trade 94. If one producer has the absolute advantage in the production of all goods, then that same producer will have the comparative advantage in the production of all goods as well. a. True b. False 95. If a country has the comparative advantage in producing a product, then that country must also have the absolute advantage in producing that product. a. True b. False 96. In an economy consisting of two people producing two goods, it is possible for one person to have the absolute advantage and the comparative advantage in both goods. a. True b. False 97. If one producer is able to produce a good at a lower opportunity cost than some other producer, then the producer with the lower opportunity cost is said to have an absolute advantage in the production of that good. a. True b. False 98. Unless two people who are producing two goods have exactly the same opportunity costs, then one person will have a comparative advantage in one good, and the other person will have a comparative advantage in the other good. a. True b. False 99. When there are two people and each is capable of producing two goods, it is possible for one person to have a comparative advantage over the other in both goods. a. True b. False 100. Zora can produce 4 quilts in a week and produce 1 corporate website in a week. Lou can produce 9 quilts in a week and produce 2 corporate websites in a week. Zora has the comparative advantage in quilts and the absolute advantage in neither good, while Lou has the comparative advantage in corporate websites and the absolute advantage in both goods. a. True b. False 101. Timmy can edit 2 pages in one minute and type 80 words in one minute. Olivia can edit 1 page in one minute and type 100 words in one minute. Timmy has an absolute advantage and a comparative advantage in editing, while Olivia has an absolute advantage and a comparative advantage in typing. a. True b. False 102. Suppose Hank and Tony can both produce corn. If Hank’s opportunity cost of producing a bushel of corn is 2 bushels of soybeans and Tony’s opportunity cost of producing a bushel of corn is 3 bushels of soybeans, then Hank has the comparative advantage in the production of corn. a. True b. False .
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Ch 03: Interdependence and the Gains from Trade 103. It takes Anne 3 hours to make a pie and 4 hours to make a shirt. It takes Mary 2 hours to make a pie and 5 hours to make a shirt. Anne should specialize in making shirts and Mary should specialize in making pies, and they should trade. a. True b. False 104. In one month, Moira can knit 2 sweaters or 4 scarves. In one month, Tori can knit 1 sweater or 3 scarves. Together, they could produce more output in total if Moira knits only sweaters and Tori knits only scarves. a. True b. False 105. Ellie and Brendan both produce apple pies and vanilla ice cream. If Ellie’s opportunity cost of one apple pie is 1/2 gallon of ice cream and Brendan’s opportunity cost of one apple pie is 1/4 gallon of ice cream, Ellie has a comparative advantage in the production of ice cream. a. True b. False 106. The principle of comparative advantage states that, regardless of the price at which trade takes place, everyone will benefit from trade if they specialize in the production of the good for which they have a comparative advantage. a. True b. False 107. The gains from specialization and trade are based on absolute advantage. a. True b. False 108. Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage. a. True b. False 109. Two countries can achieve gains from trade even if one country has an absolute advantage in the production of both goods. a. True b. False 110. It takes Ross 6 hours to produce a bushel of corn and 2 hours to wash and polish a car. It takes Courtney 6 hours to produce a bushel of corn and 1 hour to wash and polish a car. Courtney and Ross cannot gain from specialization and trade, since it takes each of them 6 hours to produce 1 bushel of corn. a. True b. False 111. Fred trades 2 tomatoes to Barney in exchange for 1 pumpkin. Fred and Barney both gain from the exchange. We can conclude that, for Barney, the opportunity cost of producing 1 pumpkin is greater than 2 tomatoes. a. True b. False .
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Ch 03: Interdependence and the Gains from Trade 112. Differences in opportunity cost allow for gains from trade. a. True b. False 113. As long as two people have different opportunity costs, each can gain from trade with the other, since trade allows each person to obtain a good at a price lower than their opportunity cost. a. True b. False 114. Trade allows a person to obtain goods at prices that are less than that person's opportunity cost because each person specializes in the activity for which they have the lower opportunity cost. a. True b. False 115. Specialization and trade can make everyone better off if a person can obtain goods at prices that are less than that person's opportunity cost. a. True b. False 116. When each person specializes in producing the good in which they have a comparative advantage, each person can gain from trade but total production in the economy is unchanged. a. True b. False 117. For both parties to gain from trade, the price at which they trade must lie exactly in the middle of the two opportunity costs. a. True b. False 118. For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs. a. True b. False 119. Ellie and Brendan both produce apple pies and vanilla ice cream. If Ellie’s opportunity cost of one apple pie is 1/2 gallon of ice cream and Brendan’s opportunity cost of one apple pie is 1/4 gallon of ice cream, a mutually advantageous trade can be struck at a price of one apple pie for 1/3 gallon of ice cream. a. True b. False 120. Adam Smith was the author of the 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations. a. True b. False 121. David Ricardo was the author of the 1817 book, Principles of Political Economy and Taxation. a. True b. False .
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Ch 03: Interdependence and the Gains from Trade 122. Adam Smith wrote that a person should never attempt to make at home what it will cost him more to make than to buy. a. True b. False 123. Adam Smith developed the theory of comparative advantage as we know it today. a. True b. False 124. If US workers can produce everything in less time than Mexican workers, it is not possible for the US to gain from trade with Mexico. a. True b. False 125. Goods produced abroad and sold domestically are called exports and goods produced domestically and sold abroad are called imports. a. True b. False 126. International trade may make some individuals in a nation better off, while other individuals are made worse off. a. True b. False 127. For international trade to benefit a country, it must benefit all citizens of that country. a. True b. False 128. Some countries win in international trade, while other countries lose. a. True b. False 129. If a country has a lower opportunity cost than its potential trading partner, the country should decide to be selfsufficient. a. True b. False 130. International trade can make some individuals within a country worse off, even as it makes the country as a whole better off. a. True b. False 131. Trade allows all countries to achieve greater prosperity. a. True b. False 132. The production possibilities frontier (PPF) depicts the combinations of goods that provides society with the maximum possible benefit. .
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Ch 03: Interdependence and the Gains from Trade a. True b. False 133. The production possibilities frontier (PPF) illustrates the combinations of goods that society can consume when trading with other producers. a. True b. False 134. Whenever a country has an absolute advantage in the production of a good, that implies that the country should specialize in the production of that good. a. True b. False 135. Trade between nations is based on absolute advantage, which occurs when a country has a lower opportunity cost of producing a good. a. True b. False 136. If a country has a higher opportunity cost to produce a good, that means that this country can never possess a comparative advantage in the production of any good. a. True b. False 137. Trade can only benefit a nation if that nation has an absolute advantage in the production of that good. a. True b. False 138. Trade does not benefit a nation if that nation has a comparative advantage in the production of that good. a. True b. False 139. When it is said that trade between nations can make both sides of the trade better off, this means that all citizens in each nation will benefit. a. True b. False 140. Whenever a nation is producing on its PPF, that nation will be using all of its available resources. a. True b. False 141. A country can have a comparative advantage in the production of a good, even if it does not have an absolute advantage in the production of that good. a. True b. False
.
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Ch 03: Interdependence and the Gains from Trade 142. Suppose that Venezuela produces beef and oil and it can switch production between each at a constant rate. If the most beef it can produce is 300 million pounds and the most oil it can produce is 50 million barrels, then what is the opportunity cost of a pound of beef and what is the opportunity cost of a barrel of oil? 143. Charlotte can produce pork and beans and can switch between producing them at a constant rate. If it takes Charlotte 10 hours to produce a pound of pork and 5 hours to produce a pound of beans, what is Charlotte's opportunity cost of pork and what is opportunity cost of beans? 144. Figure 3-6 The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time. Greg’s Production Possibilities
Catherine’s Production Possibilities
Refer to Figure 3-6. What is Greg’s opportunity cost of producing ice cream? Explain how you derived your answer. 145. Figure 3-6 The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time. Greg’s Production Possibilities
.
Catherine’s Production Possibilities
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Ch 03: Interdependence and the Gains from Trade Refer to Figure 3-6. What is Greg’s opportunity cost of producing cake? Explain how you derived your answer. 146. Figure 3-6 The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time. Greg’s Production Possibilities
Catherine’s Production Possibilities
Refer to Figure 3-6. What is Catherine’s opportunity cost of producing ice cream? Explain how you derived your answer. 147. Figure 3-6 The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time. Greg’s Production Possibilities
Catherine’s Production Possibilities
Refer to Figure 3-6. What is Catherine’s opportunity cost of producing cake? Explain how you derived your answer. 148. Figure 3-6 The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time. .
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Ch 03: Interdependence and the Gains from Trade Greg’s Production Possibilities
Catherine’s Production Possibilities
Refer to Figure 3-6. Which if any good(s) does Greg have an absolute advantage producing? 149. Figure 3-6 The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time. Greg’s Production Possibilities
Catherine’s Production Possibilities
Refer to Figure 3-6. Which if any good(s) does Catherine have an absolute advantage producing? 150. Figure 3-6 The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time. Greg’s Production Possibilities
.
Catherine’s Production Possibilities
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Ch 03: Interdependence and the Gains from Trade
Refer to Figure 3-6. Is it possible for Greg and Catherine to gain from trade? Defend your answer. 151. Under what conditions is an economy’s production possibilities frontier also its consumption possibilities frontier? 152. What does a production possibilities frontier represent? 153. What does a consumption possibilities frontier represent? 154. Define absolute advantage. 155. Define comparative advantage. 156. Jennifer takes 2 hours to make a loaf of bread and 1 hour to make a dozen cookies. Janet takes 3 hours to make a loaf of bread and 3/4 hours to make a dozen cookies. Who, if either, has an absolute advantage baking bread? Who, if either, has an absolute advantage making cookies? 157. Frank can make 20 hot dogs an hour or 10 pints of potato salad an hour. Earnest can make 30 hot dogs an hour or 20 pints of potato salad an hour. Who has the comparative advantage making hot dogs and who has the comparative advantage making potato salad? 158. Scenario 3-1 In country A a worker who works 40 hours can produce 200 pounds of rice or 100 pounds of broccoli. In country B a worker who works 40 hours can produce 160 pounds of rice or 120 pounds of broccoli. Refer to Scenario 3-1. Which country, if either, has an absolute advantage producing rice? Defend your answer. 159. Scenario 3-1 In country A a worker who works 40 hours can produce 200 pounds of rice or 100 pounds of broccoli. In country B a worker who works 40 hours can produce 160 pounds of rice or 120 pounds of broccoli. Refer to Scenario 3-1. Which country, if either, has an absolute advantage producing broccoli? Defend your answer. 160. Scenario 3-1 .
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Ch 03: Interdependence and the Gains from Trade In country A a worker who works 40 hours can produce 200 pounds of rice or 100 pounds of broccoli. In country B a worker who works 40 hours can produce 160 pounds of rice or 120 pounds of broccoli. Refer to Scenario 3-1. Which country, if either, has a comparative advantage producing rice? Defend your answer using the numbers given. 161. Scenario 3-1 In country A a worker who works 40 hours can produce 200 pounds of rice or 100 pounds of broccoli. In country B a worker who works 40 hours can produce 160 pounds of rice or 120 pounds of broccoli. Refer to Scenario 3-1. Which country, if either, has a comparative advantage producing broccoli? Defend your answer using the numbers given. 162. Scenario 3-1 In country A a worker who works 40 hours can produce 200 pounds of rice or 100 pounds of broccoli. In country B a worker who works 40 hours can produce 160 pounds of rice or 120 pounds of broccoli. Refer to Scenario 3-1. Give a range of prices in terms of pounds of rice per pound of broccoli at which the two countries would be both be willing to trade. 163. Scenario 3-1 In country A a worker who works 40 hours can produce 200 pounds of rice or 100 pounds of broccoli. In country B a worker who works 40 hours can produce 160 pounds of rice or 120 pounds of broccoli. Mark can produce 24 footballs or 48 basketballs in 8 hours. Maria can produce 64 basketballs in 8 hours. In order to have a comparative advantage producing basketballs, the number of footballs Maria can produce in 8 hours has to be less than _____. 164. Scenario 3-1 In country A a worker who works 40 hours can produce 200 pounds of rice or 100 pounds of broccoli. In country B a worker who works 40 hours can produce 160 pounds of rice or 120 pounds of broccoli. It takes Heather 1 hour to change the oil in the car and 20 minutes to do the dishes. It takes Zach 1.5 hours to change the oil in the car. For Zach to have a comparative advantage changing the oil it must take him more than ______ minutes to do the dishes. 165. Scenario 3-1 In country A a worker who works 40 hours can produce 200 pounds of rice or 100 pounds of broccoli. In country B a worker who works 40 hours can produce 160 pounds of rice or 120 pounds of broccoli. Tom’s opportunity cost of mowing a lawn is 2 loads of laundry. Jen’s opportunity cost of mowing a lawn is 1.5 loads of laundry. What is the range of prices for mowing a lawn at which Tom and Jen could both benefit from trade? 166. Scenario 3-1 In country A a worker who works 40 hours can produce 200 pounds of rice or 100 pounds of broccoli. In country B a worker who works 40 hours can produce 160 pounds of rice or 120 pounds of broccoli. Sally can make 8 cups of soup per hour or 20 crackers per hour. Harry can make 10 cups of soup per hour or 30 crackers per hour. Can Sally and Harry gain from trade? If so, what is the range of prices of crackers for soup at which they would .
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Ch 03: Interdependence and the Gains from Trade both find trade advantageous? 167. Economists use the term ______ to refer to the ability to produce a good using fewer inputs than another producer. 168. Economists use the term ______ to refer to the ability to produce a good at a lower opportunity cost than another producer. 169. The gains from specialization and trade are based on ______ advantage. 170. Table 3-13
Russia England
Minutes Needed to Make 1 Quantity Produced in 4 Hours Compass Radio Compass Radio 30 15 8 16 20 5 12 48
Refer to Table 3-13. What is Russia’s opportunity cost of one compass? 171. Table 3-13
Russia England
Minutes Needed to Make 1 Quantity Produced in 4 Hours Compass Radio Compass Radio 30 15 8 16 20 5 12 48
Refer to Table 3-13. What is Russia’s opportunity cost of one radio? 172. Table 3-13
Russia England
Minutes Needed to Make 1 Quantity Produced in 4 Hours Compass Radio Compass Radio 30 15 8 16 20 5 12 48
Refer to Table 3-13. What is England’s opportunity cost of one compass? 173. Table 3-13
Russia England
.
Minutes Needed to Make 1 Quantity Produced in 4 Hours Compass Radio Compass Radio 30 15 8 16 20 5 12 48
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Ch 03: Interdependence and the Gains from Trade Refer to Table 3-13. What is England’s opportunity cost of one radio? 174. Table 3-13
Russia England
Minutes Needed to Make 1 Quantity Produced in 4 Hours Compass Radio Compass Radio 30 15 8 16 20 5 12 48
Refer to Table 3-13. Which country has an absolute advantage in producing compasses? 175. Table 3-13
Russia England
Minutes Needed to Make 1 Quantity Produced in 4 Hours Compass Radio Compass Radio 30 15 8 16 20 5 12 48
Refer to Table 3-13. Which country has an absolute advantage in producing radios? 176. Table 3-13
Russia England
Minutes Needed to Make 1 Quantity Produced in 4 Hours Compass Radio Compass Radio 30 15 8 16 20 5 12 48
Refer to Table 3-13. Which country has a comparative advantage in producing compasses? 177. Table 3-13
Russia England
Minutes Needed to Make 1 Quantity Produced in 4 Hours Compass Radio Compass Radio 30 15 8 16 20 5 12 48
Refer to Table 3-13. Which country has a comparative advantage in producing radios? 178. Table 3-13 Minutes Needed to Make 1 Quantity Produced in 4 Hours Compass Radio Compass Radio .
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Ch 03: Interdependence and the Gains from Trade Russia England
30 20
15 5
8 12
16 48
Refer to Table 3-13. If the two countries decide to trade with each other, which country should specialize in producing compasses? 179. Table 3-13
Russia England
Minutes Needed to Make 1 Quantity Produced in 4 Hours Compass Radio Compass Radio 30 15 8 16 20 5 12 48
Refer to Table 3-13. If the two countries decide to trade with each other, which country should specialize in producing radios? 180. Table 3-13
Russia England
Minutes Needed to Make 1 Quantity Produced in 4 Hours Compass Radio Compass Radio 30 15 8 16 20 5 12 48
Refer to Table 3-13. If the two countries specialize and trade with each other, which country will import compasses? 181. Table 3-13
Russia England
Minutes Needed to Make 1 Quantity Produced in 4 Hours Compass Radio Compass Radio 30 15 8 16 20 5 12 48
Refer to Table 3-13. If the two countries specialize and trade with each other, which country will import radios? 182. Figure 3-7 Mary’s Production Possibilities Frontier Kate’s Production Possibilities Frontier
.
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Ch 03: Interdependence and the Gains from Trade
Refer to Figure 3-7. What is Mary’s opportunity cost of one muffin? 183. Figure 3-7 Mary’s Production Possibilities Frontier Kate’s Production Possibilities Frontier
Refer to Figure 3-7. What is Mary’s opportunity cost of one cookie? 184. Figure 3-7 Mary’s Production Possibilities Frontier Kate’s Production Possibilities Frontier
.
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Ch 03: Interdependence and the Gains from Trade
Refer to Figure 3-7. What is Kate’s opportunity cost of one muffin? 185. Figure 3-7 Mary’s Production Possibilities Frontier Kate’s Production Possibilities Frontier
Refer to Figure 3-7. What is Kate’s opportunity cost of one cookie? 186. Figure 3-7 Mary’s Production Possibilities Frontier Kate’s Production Possibilities Frontier
.
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Ch 03: Interdependence and the Gains from Trade
Refer to Figure 3-7. Who has a comparative advantage in making cookies? 187. Figure 3-7 Mary’s Production Possibilities Frontier Kate’s Production Possibilities Frontier
Refer to Figure 3-7. Who has a comparative advantage in making muffins? 188. Figure 3-7 Mary’s Production Possibilities Frontier Kate’s Production Possibilities Frontier
.
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Ch 03: Interdependence and the Gains from Trade
Refer to Figure 3-7. If Mary and Kate trade foods with each other, who will trade away muffins in exchange for cookies? 189. Country A and country B both produce shirts and shorts. Country B has an absolute advantage producing both shirts and shorts. Is there any condition under which the two countries could gain from trade? 190. With eight hours of work Elmer can produce 20 pounds of carrots or 15 pounds of peas. With eight hours Bugs can produce 10 pounds of carrots or 7.5 pounds of peas. Can Elmer and Bugs gain from trade? Defend your answer. 191. If the U.S. could produce 5 televisions per hour of labor and China could produce 3 televisions per hour of labor, would it necessarily follow that the U.S. should specialize in television production? Explain your answer using the concepts of comparative and or absolute advantage. 192. Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why? 193. The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers. Alpha’s Production Possibilities Frontier
.
Omega’s Production Possibilities Frontier
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Ch 03: Interdependence and the Gains from Trade a. b. c. d.
Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A. If these countries choose not to trade, what would be the total world production of popcorn and peanuts? Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By specializing, what is the total world production of each product now? If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B.
194. Julia can fix a meal in 1 hour, and her opportunity cost of one hour is $50. Jacque can fix the same kind of meal in 2 hours, and his opportunity cost of one hour is $20. Will both Julia and Jacque be better off if she pays him $45 per meal to fix her meals? Explain. 195. Gary and Diane must prepare a presentation for their marketing class. As part of their presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the required calculation and 10 hours to prepare the slides. It would take Diane 12 hours to do the calculations and 20 hours to prepare the slides. How much time would it take the two to complete the project if they divide the calculations a. equally and the slides equally? How much time would it take the two to complete the project if they use comparative b. advantage and specialize in calculating or preparing slides? If Diane and Gary have the same opportunity cost of $5 per hour, is there a better solution than c. for each to specialize in calculating or preparing slides?
.
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Ch 03: Interdependence and the Gains from Trade Answer Key 1. b 2. a 3. c 4. d 5. d 6. c 7. d 8. b 9. b 10. a 11. a 12. b 13. c 14. c 15. c 16. d 17. b 18. a 19. b 20. d 21. c 22. b 23. d 24. c 25. a .
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Ch 03: Interdependence and the Gains from Trade 26. b 27. a 28. c 29. c 30. a 31. d 32. b 33. b 34. c 35. b 36. d 37. a 38. c 39. a 40. b 41. b 42. c 43. c 44. d 45. a 46. c 47. c 48. c 49. d 50. a 51. a .
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Ch 03: Interdependence and the Gains from Trade 52. c 53. d 54. b 55. b 56. b 57. a 58. c 59. b 60. b 61. a 62. b 63. b 64. b 65. c 66. c 67. a 68. b 69. a 70. d 71. a 72. a 73. True 74. True 75. True 76. False .
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Ch 03: Interdependence and the Gains from Trade 77. False 78. True 79. True 80. False 81. False 82. True 83. True 84. True 85. True 86. False 87. True 88. True 89. False 90. False 91. False 92. True 93. False 94. False 95. False 96. False 97. False 98. True 99. False 100. False 101. True 102. True .
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Ch 03: Interdependence and the Gains from Trade 103. True 104. True 105. True 106. False 107. False 108. True 109. True 110. False 111. False 112. True 113. True 114. True 115. True 116. False 117. False 118. True 119. True 120. True 121. True 122. True 123. False 124. False 125. False 126. True 127. False .
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Ch 03: Interdependence and the Gains from Trade 128. False 129. False 130. True 131. True 132. False 133. False 134. False 135. False 136. False 137. False 138. False 139. False 140. True 141. True 142. The opportunity cost of a pound of beef is 50 barrels of oil/300 = 1/6 barrels of oil. The opportunity cost of a barrel of oil is 300 pounds of beef/50 = 6 pounds of beef. 143. The opportunity cost of pork is 10 pounds of beans/5 = 2 pounds of beans. The opportunity cost of beans is 5 pounds of pork/10 pounds of pork = 1/2 pound of pork. 144. It takes Greg 1 hour to produce a quart of ice cream and 2 hours to produce a cake. So, the opportunity cost of producing a quart of ice cream is 1/2 cake. 145. It takes Greg 2 hours to produce a cake and 1 hour to produce a quart of ice cream. So, the opportunity cost of producing a cake is 2 quarts of ice cream. 146. It takes Catherine 8/5 of an hour (96 minutes) to produce a quart of ice cream and 4 hours (240 minutes) to produce a cake. So, her opportunity cost of a quart of ice cream is 96/240 = 2/5 cakes. 147. It takes Catherine 4 hours (240 minutes) to produce a cake and 8/5 of an hour (96 minutes) to produce a quart of ice cream. So, her opportunity cost of cake is 240/96 = 5/2 = 2.5 quarts of ice cream. 148. Greg has an absolute advantage in both the production of ice cream and cake. 149. Catherine does not have an absolute advantage in the production of either good. 150. Yes. Greg has a comparative advantage producing cake because he has a lower opportunity cost. Catherine has a .
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Ch 03: Interdependence and the Gains from Trade comparative advantage producing ice cream because she has a lower opportunity cost. 151. When the economy is self-sufficient; when there is no trade 152. The combinations of output that an economy can produce. 153. The combinations of output that an economy can consume. 154. Absolute advantage means a producer can produce a good using fewer inputs than another producer. 155. Comparative advantage means a producer can produce a good at a lower opportunity cost than another producer. 156. Jennifer has an absolute advantage baking bread. Janet has an absolute advantage baking cookies. 157. Frank has the comparative advantage making hot dogs and Earnest has the comparative advantage making potato salad. 158. Country A has an absolute advantage producing rice because it produces more in 40 hours than country B. 159. Country B has an absolute advantage producing broccoli because it produces more in 40 hours than country A. 160. Country A has a comparative advantage producing rice because its opportunity cost is 1/2 of a pound of broccoli and Country B’s opportunity cost is 3/4 of a pound of broccoli. 161. Country B has a comparative advantage producing broccoli because its opportunity cost is 4/3 units of rice and Country A’s opportunity cost is 2 units of rice. 162. Any price which is less than 2 pounds of rice per pound of broccoli but greater than 4/3 pound of rice per pound of broccoli. 163. 32. 164. 30 165. Less than 2 loads of laundry but greater than 1.5 loads of laundry. 166. Yes. More than 2.5 crackers per cup of soup but less than 3 crackers per cup of soup. 167. absolute advantage 168. comparative advantage 169. comparative 170. 2 radios. 171. 0.5 compass. 172. 4 radios. 173. 0.25 compass. .
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Ch 03: Interdependence and the Gains from Trade 174. England. 175. England. 176. Russia. 177. England. 178. Russia. 179. England. 180. England. 181. Russia. 182. 2 cookies 183. 0.5 muffin 184. 4 cookies 185. 0.25 muffin 186. Kate 187. Mary 188. Because Mary has a comparative advantage in making muffins, she will make muffins and exchange them for cookies that Kate makes. 189. Yes, if each has a comparative advantage producing one of the goods. 190. No, their opportunity costs are the same so neither has a comparative advantage. 191. No. Although the U.S. has an absolute advantage, it might not have a comparative advantage. 192. Absolute advantage refers to productivity, as in the producer who can produce a product at a lower cost in terms of the resources used in production. Comparative advantage refers to the producer who can produce a product at a lower opportunity cost. Comparative advantage is the principle upon which trade patterns are based. Comparative advantage is based on opportunity cost, and opportunity cost measures the real cost to an individual or country of producing a particular product. Opportunity cost is therefore the information necessary for an individual or nation to determine whether to produce a good or buy it from someone else. 193. Alpha’s Production Possibilities Frontier
.
Omega’s Production Possibilities Frontier
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Ch 03: Interdependence and the Gains from Trade
a. b. c.
d.
Alpha would be producing 125 units of peanuts and 75 units of popcorn (point A on its production possibilities frontier) and Omega would be producing 50 units of peanuts and 150 units of popcorn (point A on its production possibilities frontier). The total world production of peanuts would be 175 units and the total world production of popcorn would be 225 units. The total world production of peanuts would now be 250 units and the total world production of popcorn would now be 300 units. Alpha would be producing 250 units of peanuts and would trade 100 of them to Omega, leaving Alpha with 150 units of peanuts. Alpha would then receive 100 units of popcorn from Omega. Omega would be producing 300 units of popcorn and would trade 100 of them to Alpha, leaving Omega with 200 units of popcorn. Omega would then receive 100 units of peanuts from Alpha.
194. Since Julia's opportunity cost of preparing a meal is $50, and Jacque's opportunity cost of preparing a meal is $40, each of them will be better off by $5 per meal if this arrangement is made. 195. a. b.
c.
.
If both tasks are divided equally, it will take 11 hours for the calculations and 15 hours for the writing, for a total of 26 hours. If Diane specializes in calculating and Gary specializes in preparing slides, it will take 22 hours to complete the project. If Diane specializes in calculating, her opportunity cost will be $60; hence, Diane would be better off if she paid Gary any amount less than $60 to do the calculating. Since Gary's opportunity cost of doing the calculations is only $50, he would be better off if Diane paid him between $50 and $60 dollars to do the calculations. In this case, the total time spent on the project would be 20 hours.
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Ch 04: The Market Forces of Supply and Demand
Indicate the answer choice that best completes the statement or answers the question. 1. A group of buyers and sellers of a particular good or service is called a. a coalition. b. an economy. c. a market. d. a competition. 2. Which of the following is not an example of a market? a. A small town has only one seller of electricity. b. In the United States, a sick person cannot legally purchase a kidney. c. In Florida, there are many buyers and sellers of key lime pie. d. The availability of Internet shopping has expanded the clothing choices for buyers who do not live near large cities. 3. A competitive market is a market in which a. an auctioneer helps set prices and arrange sales. b. there are only a few sellers. c. the forces of supply and demand do not apply. d. no individual buyer or seller has any significant impact on the market price. 4. Assume Lianna buys coffee beans in a competitive market. It follows that a. Lianna has a limited number of sellers from which to buy coffee beans. b. whenever buying coffee beans, Lianna will negotiate with sellers. c. even buying a large quantity of coffee beans, Lianna cannot influence the price. d. Lianna might have trouble finding coffee beans at the local store. 5. If a seller in a competitive market chooses to charge more than the going price, then a. the sellers' profits must increase. b. the owners of the raw materials used in production would raise the prices for the raw materials. c. other sellers would also raise their prices. d. buyers will make purchases from other sellers. 6. Which of the following is not a characteristic of a perfectly competitive market? a. Different sellers sell identical products. b. There are many sellers. c. Sellers must accept the price the market determines. d. There is no free entry or exit. 7. An example of a perfectly competitive market would be the a. cable TV market. b. soybean market. c. breakfast cereal market. d. shampoo market. .
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Ch 04: The Market Forces of Supply and Demand 8. A monopoly is a market with one a. seller, and that seller is a price taker. b. seller, and that seller sets the price. c. buyer, and that buyer is a price taker. d. buyer, and that buyer sets the price. 9. The quantity demanded of a good is the amount that buyers are a. willing to purchase. b. willing and able to purchase. c. willing, able, and need to purchase. d. able to purchase. 10. An increase in the price of a good will a. increase demand. b. decrease demand. c. increase quantity demanded. d. decrease quantity demanded. 11. Figure 4-1
Refer to Figure 4-1. The movement from point A to point B on the graph shows a. a decrease in demand. b. an increase in demand. c. a decrease in quantity demanded. .
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Ch 04: The Market Forces of Supply and Demand d. an increase in quantity demanded. 12. Figure 4-1
Refer to Figure 4-1. The movement from point A to point B on the graph is caused by a. an increase in price. b. a decrease in price. c. a decrease in the price of a substitute good. d. an increase in income. 13. Figure 4-1
.
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-1. It is apparent from the figure that the a. good is inferior. b. demand for the good decreases as income increases. c. demand for the good conforms to the law of demand. d. good is a normal good. 14. Which of the following demonstrates the law of demand? a. After getting a raise at work, Rashad's consumption of pretzels at $1.50 per pretzel increased. b. Iyana buys fewer muffins at $0.75 per muffin than at $1 per muffin, other things equal. c. Jayden buys more donuts at $0.25 per donut than at $0.50 per donut, other things equal. d. Kendra buys fewer Snickers at $0.60 per Snickers after the price of Milky Ways falls to $0.50 per Milky Way. 15. The law of demand states that, other things equal, when the price of a good a. falls, the demand for the good rises. b. rises, the quantity demanded of the good rises. c. rises, the demand for the good falls. d. falls, the quantity demanded of the good rises. 16. Table 4-1 Price (Dollars per unit) 10 .
Quantity Demanded (Units) 100 Page 4
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Ch 04: The Market Forces of Supply and Demand 20
Q1
Refer to Table 4-1. If the law of demand applies to this good, then Q1 could be a. 0. b. 100. c. 200. d. 400. 17. Suppose that when the price of a 16 oz. to-go cup of gourmet coffee is $4.25, students purchase 750 cups per day. If the price decreases to $3.75 per cup, which of the following is the most likely outcome? a. Students would purchase fewer than 750 cups per day. b. Students would continue to purchase 750 cups per day. c. Students would purchase more than 750 cups per day. d. We do not have enough information to answer this question. 18. A demand schedule is a table that shows the relationship between a. quantity demanded and quantity supplied. b. income and quantity demanded. c. price and quantity demanded. d. price and income. 19. Which of the following is not held constant in a demand schedule? a. Income b. Tastes c. Price d. Expectations 20. The line that relates the price of a good and the quantity demanded of that good is called the demand a. schedule, and it usually slopes upward. b. schedule, and it usually slopes downward. c. curve, and it usually slopes upward. d. curve, and it usually slopes downward. 21. When we move along a given demand curve, a. only price is held constant. b. income and price are held constant. c. all nonprice determinants of demand are held constant. d. all determinants of quantity demanded are held constant. 22. If something happens to alter the quantity demanded at any given price, then a. the demand curve becomes steeper. b. the demand curve becomes flatter. .
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Ch 04: The Market Forces of Supply and Demand c. the demand curve shifts. d. we move along the demand curve. 23. The market demand curve a. is found by vertically adding the individual demand curves. b. slopes upward. c. represents the sum of the prices that all the buyers are willing to pay for a given quantity of the good. d. represents the sum of the quantities demanded by all the buyers at each price of the good. 24. Table 4-2 Price Quantity Demanded (Units) (Dollars per unit) Bert Ernie Grover Oscar 0.00 20 16 6 8 0.50 18 12 4 6 1.00 14 10 2 5 1.50 12 8 0 4 2.00 6 6 0 2 2.50 0 4 0 0
Refer to Table 4-2. If these are the only four buyers in the market, then the market quantity demanded at a price of $1 is a. 4 units. b. 7.75 units. c. 14 units. d. 31 units. 25. Table 4-2 Price Quantity Demanded (Units) (Dollars per unit) Bert Ernie Grover Oscar 0.00 20 16 6 8 0.50 18 12 4 6 1.00 14 10 2 5 1.50 12 8 0 4 2.00 6 6 0 2 2.50 0 4 0 0
Refer to Table 4-2. If these are the only four buyers in the market, then when the price increases from $1.00 to $1.50, the market quantity demanded .
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Ch 04: The Market Forces of Supply and Demand a. decreases by 1.75 units. b. increases by 2 units. c. decreases by 7 units. d. decreases by 24 units. 26. Figure 4-2 Consumer 1
Consumer 2
Refer to Figure 4-2. If these are the only two consumers in the market, then the market quantity demanded at a price of $15 is a. 0 units. b. 10 units. c. 15 units. d. 25 units. 27. Which of the following changes would not shift the demand curve for a good or service? a. A change in income. b. A change in the price of the good or service. c. A change in expectations about the future price of the good or service. d. A change in the price of a related good or service. 28. Which of the following events would cause a movement upward and to the left along the demand curve for olives? .
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Ch 04: The Market Forces of Supply and Demand a. The number of people who purchase olives decreases. b. Consumer income decreases, and olives are a normal good. c. The price of pickles decreases, and pickles are a substitute for olives. d. The price of olives rises. 29. Which of the following is not a determinant of the demand for a particular good? a. The prices of related goods b. Income c. Tastes d. The prices of the inputs used to produce the good 30. If the demand for a good falls when income falls, then the good is called a. a normal good. b. a regular good. c. an ordinary good. d. an inferior good. 31. You lose your job and, as a result, you buy fewer iTunes music downloads. This shows that you consider iTunes music downloads to be a. a substitute good. b. an inferior good. c. a normal good. d. a complementary good. 32. Pizza is a normal good if the demand a. for pizza rises when income rises. b. for pizza rises when the price of pizza falls. c. curve for pizza slopes upward. d. curve for pizza shifts to the right when the price of burritos rises, assuming pizza and burritos are substitutes. 33. Which of the following would shift the demand curve for gasoline to the right? a. A decrease in the price of gasoline b. An increase in consumer income, assuming gasoline is a normal good c. An increase in the price of cars, a complement for gasoline d. A decrease in the expected future price of gasoline 34. If a decrease in income increases the demand for a good, then the good is a. a substitute good. b. a complementary good. c. a normal good. d. an inferior good. 35. Currently you purchase ten frozen pizzas per month. You will graduate from college in December, and you will start a new job in January. You have no plans to purchase frozen pizzas in January. For you, frozen pizzas are a. a substitute good. .
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Ch 04: The Market Forces of Supply and Demand b. a normal good. c. an inferior good. d. a complementary good. 36. Soup is an inferior good if the demand a. for soup falls when the price of a substitute for soup rises. b. for soup rises when the price of soup falls. c. curve for soup slopes upward. d. for soup falls when income rises. 37. Two goods are substitutes when a decrease in the price of one good a. decreases the demand for the other good. b. decreases the quantity demanded of the other good. c. increases the demand for the other good. d. increases the quantity demanded of the other good. 38. Suppose that a decrease in the price of good X results in fewer units of good Y being demanded. This implies that X and Y are a. complementary goods. b. normal goods. c. inferior goods. d. substitute goods. 39. A likely example of substitute goods for most people would be a. peanut butter and jelly. b. tennis balls and tennis rackets. c. televisions and subscriptions to cable television services. d. pencils and pens. 40. If muffins and bagels are substitutes, a higher price for bagels would result in a. an increase in the demand for bagels. b. a decrease in the demand for bagels. c. an increase in the demand for muffins. d. a decrease in the demand for muffins. 41. Two goods are complements when a decrease in the price of one good a. decreases the quantity demanded of the other good. b. decreases the demand for the other good. c. increases the quantity demanded of the other good. d. increases the demand for the other good. 42. A likely example of complementary goods for most people would be a. butter and margarine. b. lawnmowers and automobiles. .
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Ch 04: The Market Forces of Supply and Demand c. chips and salsa. d. cola and lemonade. 43. Suppose you like to make, from scratch, pies filled with bananas and vanilla pudding. You notice that the price of bananas has increased. As a result, your demand for vanilla pudding would a. decrease. b. increase. c. be unaffected. d. change, but you don't know how without more information. 44. When the quantity demanded has increased at every price, it might be because a. the number of buyers in the market has decreased. b. income has increased, and the good is an inferior good. c. the costs incurred by sellers producing the good have decreased. d. the price of a complementary good has decreased. 45. Suppose scientists provide evidence that people who drink energy drinks are more likely to have a heart attack than people who do not drink energy drinks. We would expect to see a. no change in the demand for energy drinks. b. a decrease in the demand for energy drinks. c. an increase in the demand for energy drinks. d. a decrease in the supply of energy drinks. 46. Expecting to earn a higher income next month, Miguel may choose to a. save more now and spend less on goods and services. b. save less now and spend more on goods and services. c. decrease current demand for goods and services. d. move along the current demand curve for goods and services. 47. What will happen in the market for shotgun-shell ammunition now if buyers expect higher shotgun-shell prices in the near future? a. The demand for shotgun-shell ammunition will increase. b. The demand for shotgun-shell ammunition will decrease. c. The demand for shotgun-shell ammunition will be unaffected. d. The supply of shotgun-shell ammunition will increase. 48. If the number of buyers in a market decreases, then a. demand will increase. b. demand will decrease. c. supply will increase. d. supply will decrease. 49. Warrensburg is a small college town in Missouri. At the end of August each year, the market demand for fast food in Warrensburg a. increases. .
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Ch 04: The Market Forces of Supply and Demand b. decreases. c. remains constant, but we observe a movement downward and to the right along the demand curve. d. remains constant, but we observe a movement upward and to the left along the demand curve. 50. Figure 4-3
Refer to Figure 4-3. The shift from Da to Db is called a. an increase in demand. b. a decrease in demand. c. a decrease in quantity demanded. d. an increase in quantity demanded. 51. Figure 4-3
.
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-3. The shift from Da to Db in the market for potato chips could be caused by a. a decrease in the price of potato chips. b. a decrease in income, assuming that potato chips are a normal good. c. an announcement by the FDA that potato chips cause cancer. d. an increase in the price of pretzels. 52. Figure 4-3
.
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-3. The shift from Db to Da in the market for potato chips could be caused by a. a decrease in the price of potato chips. b. a decrease in income, assuming that potato chips are a normal good. c. an announcement by the FDA that potato chips lower cholesterol. d. an increase in the price of pretzels. 53. The quantity supplied of a good is the amount that a. buyers are willing and able to purchase. b. sellers are able to produce. c. buyers and sellers agree will be brought to market. d. sellers are willing and able to sell. 54. A decrease in the price of a good will a. increase supply. b. decrease supply. c. increase quantity supplied. d. decrease quantity supplied. 55. The law of supply states that, other things equal, when the price of a good a. falls, the supply of the good rises. b. rises, the quantity supplied of the good rises. c. rises, the supply of the good falls. d. falls, the quantity supplied of the good rises. .
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Ch 04: The Market Forces of Supply and Demand 56. Which of the following demonstrates the law of supply? a. When leather became more expensive, belt producers decreased their supply of belts. b. When car production technology improved, car producers increased their supply of cars. c. When sweater producers expected sweater prices to rise in the near future, they decreased their current supply of sweaters. d. When ketchup prices rose, ketchup sellers increased their quantity supplied of ketchup. 57. Table 4-3 Price (Dollars per unit) 10
Quantity Supplied (Units) 100
20
Q1
Refer to Table 4-3. If the law of supply applies to this good, then Q1 could be a. 0. b. 50. c. 100. d. 150. 58. A supply schedule is a table that shows the relationship between a. price and quantity supplied. b. input costs and quantity supplied. c. quantity demanded and quantity supplied. d. profit and quantity supplied. 59. Which of the following is not held constant in a supply schedule? a. Production technology b. The price of the good c. The prices of inputs d. Expectations 60. Figure 4-4
.
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-4. The movement from point A to point B on the graph is called a. a decrease in supply. b. an increase in supply. c. an increase in the quantity supplied. d. a decrease in the quantity supplied. 61. Figure 4-4
.
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-4. The movement from point A to point B on the graph is caused by a. a decrease in the price of the good. b. an increase in the price of the good. c. an advance in production technology. d. a decrease in input prices. 62. The line that relates the price of a good and the quantity supplied of that good is called the supply a. schedule, and it usually slopes upward. b. schedule, and it usually slopes downward. c. curve, and it usually slopes upward. d. curve, and it usually slopes downward. 63. When we move along a given supply curve, a. only price is held constant. b. technology and price are held constant. c. all nonprice determinants of supply are held constant. d. all determinants of quantity supplied are held constant. 64. If something happens to alter the quantity supplied at any given price, then a. we move along the supply curve. b. the supply curve shifts. c. the supply curve becomes steeper. d. the supply curve becomes flatter. .
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Ch 04: The Market Forces of Supply and Demand 65. Which of the following changes would not shift the supply curve for a good or service? a. A change in production technology b. A change in the price of the good or service c. A change in expectations about the future price of the good or service d. A change in input prices 66. Which of the following events would cause a movement upward and to the right along the supply curve for mangos? a. The number of sellers of mangos increases. b. There is an advance in technology that reduces the cost of producing mangos. c. The price of fertilizer decreases, and fertilizer is an input in the production of mangos. d. The price of mangos rises. 67. The market supply curve a. is found by vertically adding the individual supply curves. b. slopes downward. c. represents the sum of the prices that all the sellers are willing to accept for a given quantity of the good. d. represents the sum of the quantities supplied by all the sellers at each price of the good. 68. Suppose there are six bait and tackle shops that sell worms in a lakeside resort town in Minnesota. If we add the respective quantities that each shop would produce and sell at each of the six bait and tackle shops when the price of worms is $2 per bucket, $2.50 per bucket, and $3 per bucket, and so forth, we have found the a. market demand curve. b. market supply curve. c. equilibrium curve. d. surplus or shortage depending on market conditions. 69. Table 4-4 Price Quantity Supplied (Units) (Dollars per unit) Firm A Firm B Firm C Firm D 0 0 0 0 0 2 2 3 4 5 4 4 6 8 10 6 6 9 12 15 8 8 12 14 20 10 10 15 16 25
Refer to Table 4-4. If these are the only four sellers in the market, then the market quantity supplied at a price of $4 is a. 4 units. b. 7.5 units. c. 10 units. d. 28 units. .
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Ch 04: The Market Forces of Supply and Demand 70. Table 4-4 Price Quantity Supplied (Units) (Dollars per unit) Firm A Firm B Firm C Firm D 0 0 0 0 0 2 2 3 4 5 4 4 6 8 10 6 6 9 12 15 8 8 12 14 20 10 10 15 16 25
Refer to Table 4-4. If these are the only four sellers in the market, then when the price increases from $6 to $8, the market quantity supplied a. increases by 0.5 units. b. increases by 12 units. c. decreases by 4 units. d. increases by 2 units. 71. Figure 4-5 Firm A
.
Firm B
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-5. If these are the only two sellers in the market, then the market quantity supplied at a price of $4 is a. 6 units. b. 7 units. c. 8 units. d. 14 units. 72. Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal government increases the minimum wage by $1.00 per hour, then it is likely that the a. demand for bicycle assembly workers will increase. b. supply of bicycles will shift to the right. c. supply of bicycles will shift to the left. d. firm must increase output to maintain profit levels. 73. Which of the following would shift the supply of Green Bay Packers football jerseys to the left? a. The Green Bay Packers make it to the Super Bowl. b. The price of the jerseys increases by $15. c. The technology of sewing machines used to make the jerseys improves. d. The cost of the fabric used to make the jerseys increases. 74. Suppose an increase in the price of rubber coincides with an advance in the technology of tire production. As a result of these two events, the demand for tires a. decreases, and the supply of tires increases. b. is unaffected, and the supply of tires decreases. c. is unaffected, and the supply of tires increases. d. is unaffected, and the supply of tires could increase, decrease, or stay the same. 75. An improvement in production technology will shift the a. supply curve to the right. b. supply curve to the left. c. demand curve to the right. d. demand curve to the left. 76. Ashley bakes bread and sells it at the local farmer's market. If Ashley purchases a new convection oven that reduces the costs of baking bread, a. the supply of Ashley's bread will increase. b. the supply of Ashley's bread will decrease. c. the demand for Ashley's bread will increase. d. the demand for Ashley's bread will decrease. 77. Today, producers changed their expectations about the future. This change a. can cause a movement along the supply curve. b. can affect future supply, but not today's supply. c. can affect today's supply. .
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Ch 04: The Market Forces of Supply and Demand d. cannot affect either today's supply or future supply. 78. A baker recently has come to expect higher prices for bread in the near future. We would expect a. the baker to supply more bread now than they were supplying previously. b. the baker to supply less bread now than they were supplying previously. c. the demand for bread to fall. d. no change in the baker's current supply of bread; instead, future supply will be affected. 79. If the number of sellers in a market increases, then the a. demand in that market will increase. b. supply in that market will increase. c. supply in that market will decrease. d. demand in that market will decrease. 80. Which of the following events could cause an increase in the supply of ceiling fans? a. The number of sellers of ceiling fans increases. b. There is an increase in the price of air conditioners, and consumers regard air conditioners and ceiling fans as substitutes. c. There is an increase in the price of the motor that powers ceiling fans. d. The average temperature rises over time. 81. Figure 4-6
Refer to Figure 4-6. The shift from S to S' is called a. a decrease in supply. .
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Ch 04: The Market Forces of Supply and Demand b. a decrease in quantity supplied. c. an increase in supply. d. an increase in quantity supplied. 82. Figure 4-6
Refer to Figure 4-6. The shift from S to S' could be caused by an a. increase in the price of the good. b. improvement in production technology. c. increase in income. d. increase in input prices. 83. Figure 4-6
.
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-6. The shift from S' to S in the market for chocolate cake could be caused by a. a decrease in the number of commercial bakers. b. an improvement in oven technology. c. a decrease in the price of butter. d. a decrease in the price of chocolate cake. 84. At the equilibrium price, the quantity of the good that buyers are willing and able to buy a. is greater than the quantity that sellers are willing and able to sell. b. exactly equals the quantity that sellers are willing and able to sell. c. is less than the quantity that sellers are willing and able to sell. d. could be greater or less than the quantity that sellers are willing and able to sell. 85. Equilibrium quantity must decrease when demand a. increases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease. b. increases and supply does not change, when demand does not change and supply increases, and when both demand and supply decrease. c. decreases and supply does not change, when demand does not change and supply increases, and when both demand and supply decrease. d. decreases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease. 86. Equilibrium price must decrease when demand a. increases and supply does not change, when demand does not change and supply decreases, and when demand .
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Ch 04: The Market Forces of Supply and Demand decreases and supply increases simultaneously. b. increases and supply does not change, when demand does not change and supply decreases, and when demand increases and supply decreases simultaneously. c. decreases and supply does not change, when demand does not change and supply increases, and when demand decreases and supply increases simultaneously. d. decreases and supply does not change, when demand does not change and supply increases, and when demand increases and supply decreases simultaneously. 87. If the demand for a product increases, then we would expect equilibrium price a. to increase and equilibrium quantity to decrease. b. to decrease and equilibrium quantity to increase. c. and equilibrium quantity both to increase. d. and equilibrium quantity both to decrease. 88. If the supply of a product increases, then we would expect equilibrium price a. to increase and equilibrium quantity to decrease. b. to decrease and equilibrium quantity to increase. c. and equilibrium quantity to both increase. d. and equilibrium quantity to both decrease. 89. Suppose that demand for a good increases and, at the same time, supply of the good decreases. What would happen in the market for the good? a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. b. Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous. c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. d. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. 90. Table 4-5 Price Quantity Supplied (Cases of water) (Dollars per case) Alpine Springs Brook Mountain Cascade Waters Dew Good 0.00 0 0 0 0 3.00 100 40 60 100 6.00 200 80 120 200 9.00 300 120 180 300
Refer to Table 4-5. If the four suppliers listed are the only suppliers in this market and the market demand schedule is: Price (Dollars per case) 0.00 3.00 6.00 9.00 .
Quantity Demanded (Cases of water) 1200 900 600 300 Page 23
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Ch 04: The Market Forces of Supply and Demand The equilibrium price and quantity are a. $0.00 and 1200 cases. b. $3.00 and 300 cases. c. $6.00 and 600 cases. d. $9.00 and 600 cases. 91. Table 4-5 Price Quantity Supplied (Cases of water) (Dollars per case) Alpine Springs Brook Mountain Cascade Waters Dew Good 0.00 0 0 0 0 3.00 100 40 60 100 6.00 200 80 120 200 9.00 300 120 180 300
Refer to Table 4-5. If the four suppliers listed are the only suppliers in this market and the market quantity demanded is 300 cases when the price is $3.00, which of the following statements is correct? a. The market is in equilibrium at a price of $3.00. b. There is a surplus of 100 cases at a price of $3.00. c. There is a shortage of 100 cases at a price of $3.00. d. There is a shortage of 50 cases at a price of $3.00. 92. If a surplus exists in a market, then we know that the actual price is a. above the equilibrium price, and quantity supplied is greater than quantity demanded. b. above the equilibrium price, and quantity demanded is greater than quantity supplied. c. below the equilibrium price, and quantity demanded is greater than quantity supplied. d. below the equilibrium price, and quantity supplied is greater than quantity demanded. 93. Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a a. shortage to exist and the market price of roses to increase. b. shortage to exist and the market price of roses to decrease. c. surplus to exist and the market price of roses to increase. d. surplus to exist and the market price of roses to decrease. 94. The current price of blue jeans is $30 per pair, but the equilibrium price of blue jeans is $25 per pair. As a result, which of the following statements is not true? a. The quantity supplied of blue jeans exceeds the quantity demanded of blue jeans at the $30 price. b. The equilibrium quantity of blue jeans exceeds the quantity demanded at the $30 price. c. There is a surplus of blue jeans at the $30 price. d. There is a shortage of blue jeans at the $30 price. 95. Table 4-6 .
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Ch 04: The Market Forces of Supply and Demand Price (Dollars per unit) 10 8 6 4 2
Quantity Demanded (Units) 10 20 30 40 50
Quantity Supplied (Units) 60 45 30 15 0
Refer to Table 4-6. The equilibrium price and quantity, respectively, are a. $2 and 50 units. b. $6 and 30 units. c. $6 and 60 units. d. $12 and 30 units. 96. Table 4-6 Price (Dollars per unit) 10 8 6 4 2
Quantity Demanded (Units) 10 20 30 40 50
Quantity Supplied (Units) 60 45 30 15 0
Refer to Table 4-6. If the price were $8, a a. shortage of 20 units would exist, and price would tend to rise. b. surplus of 25 units would exist, and price would tend to fall. c. shortage of 25 units would exist, and price would tend to rise. d. surplus of 45 units would exist, and price would tend to fall. 97. Figure 4-7
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-7. Equilibrium price and quantity are, respectively, a. $15 and 200 units. b. $25 and 600 units. c. $25 and 400 units. d. $35 and 200 units. 98. Figure 4-7
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Refer to Figure 4-7. At a price of $35, there would be a a. shortage of 400 units. b. surplus of 200 units. c. surplus of 400 units. d. surplus of 600 units. 99. Figure 4-7
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Refer to Figure 4-7. At what price would there be an excess supply of 200 units of the good? a. $15 b. $20 c. $30 d. $35 100. Which of the following would not increase in response to a decrease in the price of ironing boards? a. The quantity of irons demanded at each possible price of irons b. The equilibrium quantity of irons c. The equilibrium price of irons d. The quantity of irons supplied at each possible price of irons 101. Suppose there is a flood in St. Louis, Missouri, that destroys several beer bottling facilities. Which of the following would not be a direct result of this event? a. Sellers would not be able to produce and sell as much as before at each relevant price. b. The supply would decrease. c. Buyers would not be willing to buy as much as before at each relevant price. d. The equilibrium price would rise. 102. Suppose the number of buyers in a market increases and a technological advancement occurs also. What would we expect to happen in the market? a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. b. Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous. c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. .
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Ch 04: The Market Forces of Supply and Demand d. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. 103. Suppose the income of buyers in a market for an inferior good decreases and a technological advancement occurs also. What would we expect to happen in the market? a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. b. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. d. Equilibrium quantity and price would increase. 104. What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean pickers fell and the price of tea fell? a. Price would fall, and the effect on quantity would be ambiguous. b. Price would rise, and the effect on quantity would be ambiguous. c. Quantity would fall, and the effect on price would be ambiguous. d. Quantity would rise, and the effect on price would be ambiguous. 105. Which of the following events would cause both the equilibrium price and equilibrium quantity of number two grade potatoes to increase if number two grade potatoes are an inferior good? a. An increase in consumer income b. A decrease in consumer income c. Greater government restrictions on agricultural chemicals d. Fewer government restrictions on agricultural chemicals 106. Beef is a normal good. You observe that both the equilibrium price and quantity of beef have fallen over time. Which of the following explanations would be most consistent with this observation? a. Consumers have experienced an increase in income, and beef-production technology has improved. b. The price of chicken has risen, and the price of steak sauce has fallen. c. New medical evidence has been released that indicates a negative correlation between a person's beef consumption and life expectancy. d. The demand curve for beef must be positively sloped. 107. Which of the following events would unambiguously cause a decrease in the equilibrium price of cotton shirts? a. An increase in the price of wool shirts and a decrease in the price of raw cotton b. A decrease in the price of wool shirts and a decrease in the price of raw cotton c. An increase in the price of wool shirts and an increase in the price of raw cotton d. A decrease in the price of wool shirts and an increase in the price of raw cotton 108. Which of the following events would cause the price of oranges to fall? a. There is a shortage of oranges. b. The FDA announces that bananas cause strokes, and oranges and bananas are substitutes. c. The price of land throughout Florida decreases, and Florida produces a significant proportion of the nation's oranges. d. At the current price, quantity demanded is greater than quantity supplied. 109. What would happen to the equilibrium price and quantity of lattés if consumers' incomes rise and lattés are a normal .
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Ch 04: The Market Forces of Supply and Demand good? a. Both the equilibrium price and quantity would increase. b. Both the equilibrium price and quantity would decrease. c. The equilibrium price would increase, and the equilibrium quantity would decrease. d. The equilibrium price would decrease, and the equilibrium quantity would increase. 110. If consumers often purchase muffins to eat while they drink their lattés at local coffee shops, what would happen to the equilibrium price and quantity of lattés if the price of muffins rises? a. Both the equilibrium price and quantity would increase. b. Both the equilibrium price and quantity would decrease. c. The equilibrium price would increase, and the equilibrium quantity would decrease. d. The equilibrium price would decrease, and the equilibrium quantity would increase. 111. If scientists discover that steamed milk, which is used to make lattés, prevents heart attacks, what would happen to the equilibrium price and quantity of lattés? a. Both the equilibrium price and quantity would increase. b. Both the equilibrium price and quantity would decrease. c. The equilibrium price would increase, and the equilibrium quantity would decrease. d. The equilibrium price would decrease, and the equilibrium quantity would increase. 112. What would happen to the equilibrium price and quantity of lattés if the cost of producing steamed milk, which is used to make lattés, rises? a. Both the equilibrium price and quantity would increase. b. Both the equilibrium price and quantity would decrease. c. The equilibrium price would increase, and the equilibrium quantity would decrease. d. The equilibrium price would decrease, and the equilibrium quantity would increase. 113. What would happen to the equilibrium price and quantity of lattés if coffee shops began using a machine that reduced the amount of labor necessary to produce them? a. Both the equilibrium price and quantity would increase. b. Both the equilibrium price and quantity would decrease. c. The equilibrium price would increase, and the equilibrium quantity would decrease. d. The equilibrium price would decrease, and the equilibrium quantity would increase. 114. What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises, the price of steel rises, public transportation becomes cheaper and more comfortable, and auto-workers negotiate higher wages? a. Price will fall, and the effect on quantity is ambiguous. b. Price will rise, and the effect on quantity is ambiguous. c. Quantity will fall, and the effect on price is ambiguous. d. Quantity will rise, and the effect on price is ambiguous. 115. Figure 4-8
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-8. All else equal, an increase in the income of buyers who consider turkey to be an inferior good would cause a move from a. Da to Db. b. Db to Da. c. x to y. d. y to x. 116. Figure 4-8
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Refer to Figure 4-8. All else equal, the premature deaths of thousands of turkeys would cause a move from a. Da to Db. b. Db to Da. c. x to y. d. y to x. 117. Figure 4-9
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-9. All else equal, an increase in the use of laptop computers for note-taking would cause a move from a. x to y. b. y to x. c. Sa to Sb. d. Sb to Sa. 118. Figure 4-9
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Refer to Figure 4-9. All else equal, an increase in the price of the pulp used in the paper production process would cause a move from a. x to y. b. y to x. c. Sa to Sb. d. Sb to Sa. 119. Figure 4-10
.
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Refer to Figure 4-10. Which of the following movements would illustrate the effect in the market for golf balls due to an increase in green fees? a. Point A to Point B b. Point C to Point B c. Point C to Point D d. Point A to Point D 120. Figure 4-10
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Refer to Figure 4-10. Which of the following movements would illustrate the effect in the market for swimming lessons of an increase in the incomes of parents with school-aged children? a. Point A to Point B b. Point C to Point B c. Point C to Point D d. Point A to Point D 121. Figure 4-10
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Refer to Figure 4-10. Which of the following movements would illustrate the effect in the market for bullet-proof vests of an increase in the price of Kevlar, the material used to make the vests? a. Point A to Point B b. Point C to Point B c. Point C to Point D d. Point A to Point D 122. Figure 4-10
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Refer to Figure 4-10. Which of the following movements would illustrate the effect in the market for chocolate chip cookies of an improved high-speed mixer that allows bakers to produce cookies in less time? a. Point A to Point B b. Point C to Point B c. Point C to Point D d. Point A to Point D 123. Who gets scarce resources in a market economy? a. The government b. Whoever the government decides gets them c. Whoever wants them d. Whoever is willing and able to pay the price 124. Suppose the United States had a short-term shortage of farmers. Which market mechanisms would adjust to remove the shortage? a. The government would provide tax incentives to encourage people to become farmers. b. The government would subsidize the production of food. c. The prices of food and the wages of farmers would adjust. d. There are no market mechanisms to remove the shortage.
Indicate whether the statement is true or false. 125. Prices allocate a market economy’s scarce resources. a. True .
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Ch 04: The Market Forces of Supply and Demand b. False 126. In a market economy, supply and demand determine both the quantity of each good produced and the price at which it is sold. a. True b. False 127. A market is a group of buyers and sellers of a particular good or service. a. True b. False 128. Sellers as a group determine the demand for a product, and buyers as a group determine the supply of a product. a. True b. False 129. A yard sale is an example of a market. a. True b. False 130. A newspaper’s classified ads are an example of a market. a. True b. False 131. Most markets in the economy are highly competitive. a. True b. False 132. In a competitive market, the quantity of each good produced and the price at which it is sold are not determined by any single buyer or seller. a. True b. False 133. In a competitive market, there are so few buyers and so few sellers that each has a significant impact on the market price. a. True b. False 134. In a perfectly competitive market, the goods offered for sale are all exactly the same. a. True b. False 135. In a perfectly competitive market, buyers and sellers are price setters. a. True b. False 136. All goods and services are sold in perfectly competitive markets. .
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Ch 04: The Market Forces of Supply and Demand a. True b. False 137. If a good or service has only one seller, then the seller is called a monopoly. a. True b. False 138. Monopolists are price takers. a. True b. False 139. Local cable television companies frequently are monopolists. a. True b. False 140. The quantity demanded of a product is the amount that buyers are willing and able to purchase at a particular price. a. True b. False 141. The law of demand is true for most goods in the economy. a. True b. False 142. The law of demand states that, other things equal, when the price of a good rises, the quantity demanded of the good rises, and when the price falls, the quantity demanded falls. a. True b. False 143. The law of demand states that, other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises. a. True b. False 144. Individual demand curves are summed horizontally to obtain the market demand curve. a. True b. False 145. Individual demand curves are summed vertically to obtain the market demand curve. a. True b. False 146. The market demand curve shows how the total quantity demanded of a good varies as the income of buyers varies, while all the other factors that affect how much consumers want to buy are held constant. a. True b. False .
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Ch 04: The Market Forces of Supply and Demand 147. The demand curve is the upward-sloping line relating price and quantity demanded. a. True b. False 148. If something happens to alter the quantity demanded at any given price, then the demand curve shifts. a. True b. False 149. A movement upward and to the left along a given demand curve is called a decrease in demand. a. True b. False 150. An increase in demand shifts the demand curve to the left. a. True b. False 151. A decrease in demand shifts the demand curve to the left. a. True b. False 152. A decrease in the price of a product and an increase in the number of buyers in the market affect the demand curve in the same general way. a. True b. False 153. If a determinant of demand other than price changes, the demand curve shifts. a. True b. False 154. Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on television are all policies aimed at shifting the demand curve for cigarettes to the right. a. True b. False 155. An increase in the price of pizza will shift the demand curve for pizza to the left. a. True b. False 156. If the demand for a good falls when income falls, then the good is called an inferior good. a. True b. False 157. When Mario's income decreases, he buys more pasta. For Mario, pasta is a normal good. a. True b. False .
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Ch 04: The Market Forces of Supply and Demand 158. A decrease in income will shift the demand curve for an inferior good to the right. a. True b. False 159. An increase in the price of a substitute good will shift the demand curve for a good to the right. a. True b. False 160. If orange juice and apple juice are substitutes, an increase in the price of orange juice will shift the demand curve for apple juice to the right. a. True b. False 161. If orange juice and apple juice are substitutes, an increase in the price of orange juice will shift the demand curve for apple juice to the left. a. True b. False 162. Baseballs and baseball bats are substitute goods. a. True b. False 163. A decrease in the price of a complement will shift the demand curve for a good to the left. a. True b. False 164. When an increase in the price of one good lowers the demand for another good, the two goods are called complements. a. True b. False 165. Cocoa and marshmallows are complements, so a decrease in the price of cocoa will cause an increase in the demand for marshmallows. a. True b. False 166. If baked potatoes and sour cream are complements, then an increase in the price of sour cream decreases the demand for baked potatoes. a. True b. False 167. A decrease in the price of baseball bats will decrease the demand for baseballs. a. True b. False 168. Most studies have found that tobacco and marijuana are complements rather than substitutes. .
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Ch 04: The Market Forces of Supply and Demand a. True b. False 169. Most studies have found that tobacco and marijuana are substitutes rather than complements. a. True b. False 170. If a person expects the price of pumpkins to increase next month, then that person’s current demand for pumpkins will increase. a. True b. False 171. The quantity supplied of a good or service is the amount that sellers are willing and able to sell at a particular price. a. True b. False 172. Price cannot fall so low that some sellers choose to supply a quantity of zero. a. True b. False 173. When the price of a good is high, selling the good is profitable, and so the quantity supplied is large. a. True b. False 174. When the price of a good is low, selling the good is profitable, and so the quantity supplied is large. a. True b. False 175. The law of supply states that, other things equal, when the price of a good rises, the quantity supplied of the good falls. a. True b. False 176. The law of supply states that, other things equal, when the price of a good falls, the quantity supplied falls as well. a. True b. False 177. A movement along a supply curve is called a change in supply, while a shift of the supply curve is called a change in quantity supplied. a. True b. False 178. An increase in the price of a product and an increase in the number of sellers in the market affect the supply curve in the same general way. a. True b. False .
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Ch 04: The Market Forces of Supply and Demand 179. If a higher price means a greater quantity supplied, then the supply curve slopes upward. a. True b. False 180. If something happens to alter the quantity supplied at any given price, then we move along the fixed supply curve to a new quantity supplied. a. True b. False 181. A decrease in supply shifts the supply curve to the left. a. True b. False 182. Whenever a determinant of supply other than price changes, the supply curve shifts. a. True b. False 183. A decrease in the price of pizza will shift the supply curve for pizza to the left. a. True b. False 184. If the producers of canned green beans expect the price of canned green beans to increase in the future due to an increase in demand, they may put some of their current production into storage and supply less in the market today. a. True b. False 185. A decrease in the price of sugar will shift the supply curve for cookies to the right. a. True b. False 186. Individual supply curves are summed vertically to obtain the market supply curve. a. True b. False 187. The market supply curve shows how the total quantity supplied of a good varies as input prices vary, holding constant all the other factors that influence producers’ decisions about how much to sell. a. True b. False 188. A reduction in an input price will cause a change in quantity supplied but not a change in supply. a. True b. False 189. An increase in the price of ink will shift the supply curve for pens to the left. a. True .
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Ch 04: The Market Forces of Supply and Demand b. False 190. If there is an improvement in the technology used to produce a good, then the supply curve for that good will shift to the left. a. True b. False 191. Advances in production technology typically reduce firms’ costs, which increases the quantity supplied at each price. a. True b. False 192. If a company making frozen orange juice expects the price of its product to be higher next month, it will supply more to the market this month. a. True b. False 193. When a seller expects the price of its product to decrease in the future, the seller's supply curve shifts left now. a. True b. False 194. Supply and demand together determine the price and quantity of a good sold in a market. a. True b. False 195. A market’s equilibrium is the point at which the supply and demand curves intersect. a. True b. False 196. At the equilibrium price, quantity demanded is equal to quantity supplied. a. True b. False 197. The equilibrium price is the same as the market-clearing price. a. True b. False 198. At the equilibrium price, buyers have bought all they want to buy, but sellers have not sold all they want to sell. a. True b. False 199. The actions of buyers and sellers naturally move markets toward equilibrium. a. True b. False 200. When the market price is above the equilibrium price, the quantity of the good demanded exceeds the quantity supplied. .
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Ch 04: The Market Forces of Supply and Demand a. True b. False 201. When the market price is above the equilibrium price, suppliers are unable to sell all they want to sell. a. True b. False 202. In a market, the price of any good adjusts until quantity demanded equals quantity supplied. a. True b. False 203. A surplus is the same as an excess demand. a. True b. False 204. Sellers respond to a surplus by cutting their prices. a. True b. False 205. Price will rise to eliminate a surplus. a. True b. False 206. When quantity supplied exceeds quantity demanded at the current market price, the market has a surplus, and market price will likely rise in the future to eliminate the surplus. a. True b. False 207. When the market price is below the equilibrium price, the quantity of the good demanded exceeds the quantity supplied. a. True b. False 208. When the market price is below the equilibrium price, suppliers are unable to sell all they want to sell. a. True b. False 209. A shortage is the same as an excess demand. a. True b. False 210. Sellers respond to a shortage by cutting their prices. a. True b. False 211. Price will rise to eliminate a shortage. .
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Ch 04: The Market Forces of Supply and Demand a. True b. False 212. When quantity demanded exceeds quantity supplied at the current market price, the market has a shortage, and market price will likely rise in the future to eliminate the shortage. a. True b. False 213. Surpluses drive price up, while shortages drive price down. a. True b. False 214. A shortage will occur at any price below equilibrium price, and a surplus will occur at any price above equilibrium price. a. True b. False 215. When a supply curve or a demand curve shifts, the equilibrium price and equilibrium quantity change. a. True b. False 216. Demand refers to the amount buyers wish to buy, whereas the quantity demanded refers to the position of the demand curve. a. True b. False 217. Supply refers to the position of the supply curve, whereas the quantity supplied refers to the amount suppliers wish to sell. a. True b. False 218. It is not possible for demand and supply to shift at the same time. a. True b. False 219. A decrease in demand will cause a decrease in price, which will cause a decrease in supply. a. True b. False 220. An increase in demand will cause an increase in price, which will cause an increase in quantity supplied. a. True b. False 221. An increase in supply will cause a decrease in price, which will cause an increase in demand. a. True b. False .
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Ch 04: The Market Forces of Supply and Demand 222. A decrease in supply will cause an increase in price, which will cause a decrease in quantity demanded. a. True b. False 223. If the demand for movies increases at the same time as the movie industry adopts labor-saving technology for producing movies, the equilibrium price for movies will increase, but the effect on the equilibrium quantity of movies is ambiguous. a. True b. False 224. Suppose the demand for calendars increases in November. At the same time, the price of the ink used in the production of calendars increases. In the market for calendars, the equilibrium price rises, but the effect on the equilibrium quantity is ambiguous. a. True b. False 225. Suppose the demand for calendars increases in November. At the same time, the price of the ink used in the production of calendars increases. In the market for calendars, if the size of the shift of the demand curve is larger than the size of the shift of the supply curve, then the equilibrium quantity rises. a. True b. False 226. A decrease in the price of blueberries will decrease both the equilibrium price and quantity in the market for blueberry muffins. a. True b. False 227. A decrease in the price of peanut butter will increase both the equilibrium price and quantity in the market for jelly. a. True b. False 228. An increase in the price of blue pens will increase both the equilibrium price and quantity in the market for black pens. a. True b. False 229. An increase in the price of cotton will increase the equilibrium price and decrease the equilibrium quantity in the market for cotton t-shirts. a. True b. False 230. A decrease in the price of creamer will increase the equilibrium price and decrease the equilibrium quantity in the market for coffee. a. True b. False .
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Ch 04: The Market Forces of Supply and Demand 231. An increase in the price of maple syrup will decrease both the equilibrium price and quantity in the market for pancakes. a. True b. False 232. In a market economy, prices are the signals that guide the allocation of scarce resources. a. True b. False
233. A group of buyers and sellers of a particular good or service is called a 234. Since individual buyers and individual sellers in a competitive market have no influence on the market price, what do we call the buyers and sellers in a competitive market? 235. Table 4-7 The table below shows the quantities demanded of milk per month by four families at various prices. Price of Gallon of The Berman The Johnson The Harris The Patel Family Milk Family Family Family $3.00 9 15 12 14 $4.00 8 12 10 10 $5.00 7 9 8 6 Refer to Table 4-14. If $6.00 6 6 6 2 the four families listed are the only demanders in this market and the price of a gallon of milk is $4.00, what is the market quantity demanded? 236. Table 4-7 The table below shows the quantities demanded of milk per month by four families at various prices. Price of Gallon of The Berman The Johnson The Harris The Patel Family Milk Family Family Family $3.00 9 15 12 14 $4.00 8 12 10 10 $5.00 7 9 8 6 Refer to Table 4-14. If $6.00 6 6 6 2 the four families listed are the only demanders in this market and the price of a gallon of milk increases from $4.00 to $5.00, what is the change in the market quantity demanded? 237. Figure 4-11
.
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-28. Using the points on the figure, describe the change that would occur if consumer incomes increase and this is an inferior good. 238. Figure 4-11
Refer to Figure 4-28. Using the points on the figure, describe the change that would occur if the price of a substitute for this good becomes more expensive. 239. Figure 4-11
.
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Refer to Figure 4-28. Using the points on the figure, describe the change that would occur if the price of this good increases. 240. Figure 4-11
Refer to Figure 4-28. Using the points on the figure, describe the change that would occur if a news report stated that the price of this good was expected to increase next week. 241. Studies show that lower cigarette prices are associated with greater use of marijuana; therefore, tobacco and marijuana are 242. Figure 4-12
.
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Refer to Figure 4-29. If the price increases from $5 to $6, how does the quantity demanded change? 243. Figure 4-12
Refer to Figure 4-29. The movement from S1 to S2 is a 244. According to the law of demand, when price increases the quantity demanded of a good 245. Does a change in the price in a market result in a shift of the demand curve or in a movement along the demand curve? 246. If income rises in the market for an inferior good, will the demand curve for the inferior good shift to the right or to the left? 247. If income rises in the market for a normal good, will the demand curve for the normal good shift to the right or to the left? 248. Suppose goods A and B are substitutes. If the price of good A increases, will the demand for good B increase or .
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Ch 04: The Market Forces of Supply and Demand decrease? 249. Suppose goods A and B are complements. If the price of good A increases, will the demand for good B increase or decrease? 250. Suppose consumers expect the price of a good to be higher in the future than it is today. Would the current demand for the good increase or decrease? 251. Suppose the number of buyers in a market decreases. As a result, would the demand curve in this market shift to the right or to the left? 252. Table 4-8 The following table shows the number of cases of water each seller is willing to sell at the prices listed. Price per case Alpine Springs Brook Mountain Cascade Waters Dew Good $0.00 0 cases 0 cases 0 cases 0 cases $3.00 100 cases 40 cases 60 cases 100 cases $6.00 200 cases 80 cases 120 cases 200 cases $9.00 300 cases 120 cases 180 cases 300 cases
Refer to Table 4-15. If all four suppliers operate in this market, what is the market quantity supplied when the price is $6.00 per case? 253. Table 4-8 The following table shows the number of cases of water each seller is willing to sell at the prices listed. Price per case Alpine Springs Brook Mountain Cascade Waters Dew Good $0.00 0 cases 0 cases 0 cases 0 cases $3.00 100 cases 40 cases 60 cases 100 cases $6.00 200 cases 80 cases 120 cases 200 cases $9.00 300 cases 120 cases 180 cases 300 cases
Refer to Table 4-15. If only Brook Mountain and Cascade Waters operate in this market, what is the market quantity supplied when the price is $3.00 per case? 254. Table 4-8 The following table shows the number of cases of water each seller is willing to sell at the prices listed. Price per case Alpine Springs Brook Mountain Cascade Waters Dew Good $0.00 0 cases 0 cases 0 cases 0 cases $3.00 100 cases 40 cases 60 cases 100 cases $6.00 200 cases 80 cases 120 cases 200 cases $9.00 300 cases 120 cases 180 cases 300 cases
Refer to Table 4-15. Assuming these are the only four suppliers in this market, the function for market supply can be written as QS= .
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Ch 04: The Market Forces of Supply and Demand 255. Table 4-8 The following table shows the number of cases of water each seller is willing to sell at the prices listed. Price per case Alpine Springs Brook Mountain Cascade Waters Dew Good $0.00 0 cases 0 cases 0 cases 0 cases $3.00 100 cases 40 cases 60 cases 100 cases $6.00 200 cases 80 cases 120 cases 200 cases $9.00 300 cases 120 cases 180 cases 300 cases
Refer to Table 4-15. Assuming these are the only four suppliers in this market and the function for market demand is QD=1000-100P, where QD is the quantity demanded and P is the price, what is the equilibrium price? 256. Table 4-8 The following table shows the number of cases of water each seller is willing to sell at the prices listed. Price per case Alpine Springs Brook Mountain Cascade Waters Dew Good $0.00 0 cases 0 cases 0 cases 0 cases $3.00 100 cases 40 cases 60 cases 100 cases $6.00 200 cases 80 cases 120 cases 200 cases $9.00 300 cases 120 cases 180 cases 300 cases
Refer to Table 4-15. Assuming these are the only four suppliers in this market and the function for market demand is QD=1000-100P, where QD is the quantity demanded and P is the price, what is the equilibrium quantity? 257. Table 4-8 The following table shows the number of cases of water each seller is willing to sell at the prices listed. Price per case Alpine Springs Brook Mountain Cascade Waters Dew Good $0.00 0 cases 0 cases 0 cases 0 cases $3.00 100 cases 40 cases 60 cases 100 cases $6.00 200 cases 80 cases 120 cases 200 cases $9.00 300 cases 120 cases 180 cases 300 cases
Refer to Table 4-15. Assume these are the only four suppliers in this market and the function for market demand is QD=1000-100P, where QD is the quantity demanded and P is the price. If the price is $6 per case, is there a shortage or surplus, and how large is the shortage or surplus? 258. Figure 4-13
.
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-30. In this market for iPhones, the technology improves while all other factors remain constant. Which curve(s) shift(s) and in which direction? 259. Figure 4-13
Refer to Figure 4-30. In this market for iPhones, the technology improves while all other factors remain constant. Explain the change(s) in the equilibrium price and quantity. 260. Figure 4-13
.
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-30. In this market for tablet computers, more suppliers enter the market and the price of laptops, a substitute good, increases, while all other factors remain constant. Which curve(s) shift(s) and in which direction? 261. Figure 4-13
Refer to Figure 4-30. In this market for tablet computers, more suppliers enter the market and the price of laptops, a substitute good, increases, while all other factors remain constant. Explain the change(s) in the equilibrium price and quantity. 262. If corn is an input into the production of ethanol, will a decrease in the price of corn increase the supply of ethanol or decrease the supply of ethanol? 263. Suppose researchers discover a new, lower cost method of producing calculators. As a result, will the supply of calculators increase or decrease? 264. Figure 4-14 Consider the market for 2-packs of light bulbs below.
.
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-31. What are the values of the equilibrium price and quantity? 265. Figure 4-14 Consider the market for 2-packs of light bulbs below.
Refer to Figure 4-31. At a price of $3, is there a shortage or surplus, and how large is the shortage/surplus? 266. Figure 4-14 Consider the market for 2-packs of light bulbs below.
.
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Ch 04: The Market Forces of Supply and Demand
Refer to Figure 4-31. At a price of $6, is there a shortage or surplus, and how large is the shortage/surplus? 267. Figure 4-14 Consider the market for 2-packs of light bulbs below.
Refer to Figure 4-31. Suppose there is an improvement in technology in this market and the price of lamps, a complementary good, increases. What changes do you predict in the equilibrium price and quantity? 268. Table 4-9 The following table shows the supply and demand schedules in a market.
Price ($) 0 2 4 6 8 10 .
Quantity Demanded (units) 50 40 30 20 10 0
Quantity Supplied (units) 0 15 30 45 60 75 Page 58
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Ch 04: The Market Forces of Supply and Demand
Refer to Table 4-16. What is the equilibrium price in this market? 269. Table 4-9 The following table shows the supply and demand schedules in a market.
Price ($) 0 2 4 6 8 10
Quantity Demanded (units) 50 40 30 20 10 0
Quantity Supplied (units) 0 15 30 45 60 75
Refer to Table 4-16. What is the equilibrium quantity in this market? 270. Table 4-9 The following table shows the supply and demand schedules in a market.
Price ($) 0 2 4 6 8 10
Quantity Demanded (units) 50 40 30 20 10 0
Quantity Supplied (units) 0 15 30 45 60 75
Refer to Table 4-16. At a price of $2, will there be a surplus or shortage of units in this market? 271. Table 4-9 The following table shows the supply and demand schedules in a market.
Price ($) 0 2 4 6 .
Quantity Demanded (units) 50 40 30 20
Quantity Supplied (units) 0 15 30 45 Page 59
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Ch 04: The Market Forces of Supply and Demand 8 10
10 0
60 75
Refer to Table 4-16. At a price of $8, how large of a surplus will there be in this market? 272. Table 4-9 The following table shows the supply and demand schedules in a market.
Price ($) 0 2 4 6 8 10
Quantity Demanded (units) 50 40 30 20 10 0
Quantity Supplied (units) 0 15 30 45 60 75
Refer to Table 4-16. If the supply curve shifts to the right, will the price in this market rise or fall? 273. Scenario 4-1 Suppose the demand schedule in a market can be represented by the equation QD = 500 - 10P, where QD is the quantity demanded and P is the price. Also, suppose the supply schedule can be represented by the equation QS = 200 + 10P, where QS is the quantity supplied. Refer to Scenario 4-1. What is the equilibrium price in this market? 274. Scenario 4-1 Suppose the demand schedule in a market can be represented by the equation QD = 500 - 10P, where QD is the quantity demanded and P is the price. Also, suppose the supply schedule can be represented by the equation QS = 200 + 10P, where QS is the quantity supplied. Refer to Scenario 4-1. What is the equilibrium quantity in this market? 275. Scenario 4-1 Suppose the demand schedule in a market can be represented by the equation QD = 500 - 10P, where QD is the quantity demanded and P is the price. Also, suppose the supply schedule can be represented by the equation QS = 200 + 10P, where QS is the quantity supplied. Refer to Scenario 4-1. Suppose the price is currently equal to 10 in this market. Is there a shortage or surplus in this market, and how large is the shortage/surplus? 276. Scenario 4-1 Suppose the demand schedule in a market can be represented by the equation QD = 500 - 10P, where QD is the quantity .
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Ch 04: The Market Forces of Supply and Demand demanded and P is the price. Also, suppose the supply schedule can be represented by the equation QS = 200 + 10P, where QS is the quantity supplied. Refer to Scenario 4-1. Suppose the price is currently equal to 18 in this market. Is there a shortage or surplus in this market, and how large is the shortage/surplus? 277. Scenario 4-1 Suppose the demand schedule in a market can be represented by the equation QD = 500 - 10P, where QD is the quantity demanded and P is the price. Also, suppose the supply schedule can be represented by the equation QS = 200 + 10P, where QS is the quantity supplied. Refer to Scenario 4-1. Suppose the supply curve shifts to QS = 300 + 10P. What is the new equilibrium price and quantity in this market? 278. Suppose the supply and demand of corn both increase. As a result, what will happen to the equilibrium price and equilibrium quantity in the market? 279. If the supply of tennis balls, a complement to tennis racquets, decreases, what will happen to the equilibrium price of tennis balls and to the equilibrium price of tennis racquets? 280. If the supply of pencils, a substitute for pens, increases, what will happen to the equilibrium price of pencils and to the equilibrium price of pens? 281. If the price of steel, an input into the production of automobiles, rises, and at the same time the price of gasoline rises, what will happen to the equilibrium price and quantity of automobiles? 282. If the demand for a good increases at the same time as the supply of the same good decreases, what will happen to the equilibrium price and quantity of the good? 283. What is the difference between a "change in demand" and a "change in quantity demanded?" Graph your answer. For each of the following changes, determine whether there will be a change in quantity b. demanded or a change in demand. i. a change in the price of a related good ii. a change in tastes iii. a change in the number of buyers iv. a change in price v. a change in consumer expectations vi. a change in income a.
284. a. b.
.
What is the difference between a "change in supply" and a "change in quantity supplied?" Graph your answer. For each of the following changes, determine whether there will be a change in quantity supplied or a change in supply. i. a change in input costs ii a change in producer expectations iii. a change in price Page 61
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Ch 04: The Market Forces of Supply and Demand iv. a change in technology v. a change in the number of sellers 285. Given the table below, graph the demand and supply curves for flashlights. Make certain to label the equilibrium price and equilibrium quantity.
a.
Price $5 $4 $3 $2 $1 b. c. d.
Quantity Demanded Per Month 6,000 8,000 10,000 12,000 14,000
Quantity Supplied Per Month 10,000 8,000 6,000 4,000 2,000
What is the equilibrium price and the equilibrium quantity? Suppose the price is currently $5. What problem would exist in the market? What would you expect to happen to price? Show this on your graph. Suppose the price is currently $2. What problem would exist in the market? What would you expect to happen to price? Show this on your graph.
286. Fill in the table below, showing whether equilibrium price and equilibrium quantity go up, go down, stay the same, or change ambiguously. No Change in Supply
An Increase in Supply
A Decrease in Supply
No Change in Demand An Increase in Demand A Decrease in Demand
287. Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of the following would have on demand or supply. Also show how equilibrium price and equilibrium quantity would change. a. Winter starts, and the weather turns sharply colder. b. The price of tea, a substitute for hot chocolate, falls. c. The price of cocoa beans decreases. d. The price of whipped cream falls. e. A better method of harvesting cocoa beans is introduced. f. The Surgeon General of the U.S. announces that hot chocolate cures acne. g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise. Consumer income falls because of a recession, and hot chocolate is considered a normal h. good. i. Producers expect the price of hot chocolate to increase next month. j. Currently, the price of hot chocolate is $0.50 per cup above equilibrium.
.
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Ch 04: The Market Forces of Supply and Demand Answer Key 1. c 2. b 3. d 4. c 5. d 6. d 7. b 8. b 9. b 10. d 11. d 12. b 13. c 14. c 15. d 16. a 17. c 18. c 19. c 20. d 21. c 22. c 23. d 24. d 25. c .
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Ch 04: The Market Forces of Supply and Demand 26. a 27. b 28. d 29. d 30. a 31. c 32. a 33. b 34. d 35. c 36. d 37. a 38. d 39. d 40. c 41. d 42. c 43. a 44. d 45. b 46. b 47. a 48. b 49. a 50. a 51. d .
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Ch 04: The Market Forces of Supply and Demand 52. b 53. d 54. d 55. b 56. d 57. d 58. a 59. b 60. c 61. b 62. c 63. c 64. b 65. b 66. d 67. d 68. b 69. d 70. b 71. d 72. c 73. d 74. d 75. a 76. a .
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Ch 04: The Market Forces of Supply and Demand 77. c 78. b 79. b 80. a 81. c 82. b 83. a 84. b 85. d 86. c 87. c 88. b 89. b 90. c 91. a 92. a 93. d 94. d 95. b 96. b 97. c 98. c 99. c 100. d 101. c 102. d .
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Ch 04: The Market Forces of Supply and Demand 103. b 104. a 105. b 106. c 107. b 108. c 109. a 110. b 111. a 112. c 113. d 114. c 115. a 116. c 117. b 118. d 119. b 120. d 121. c 122. a 123. d 124. c 125. True 126. True 127. True .
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Ch 04: The Market Forces of Supply and Demand 128. False 129. True 130. True 131. True 132. True 133. False 134. True 135. False 136. False 137. True 138. False 139. True 140. True 141. True 142. False 143. True 144. True 145. False 146. False 147. False 148. True 149. False 150. False 151. True 152. False 153. True .
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Ch 04: The Market Forces of Supply and Demand 154. False 155. False 156. False 157. False 158. True 159. True 160. True 161. False 162. False 163. False 164. True 165. True 166. True 167. False 168. True 169. False 170. True 171. True 172. False 173. True 174. False 175. False 176. True 177. False 178. False .
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Ch 04: The Market Forces of Supply and Demand 179. True 180. False 181. True 182. True 183. False 184. True 185. True 186. False 187. False 188. False 189. True 190. False 191. True 192. False 193. False 194. True 195. True 196. True 197. True 198. False 199. True 200. False 201. True 202. True 203. False 204. True .
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Ch 04: The Market Forces of Supply and Demand 205. False 206. False 207. True 208. False 209. True 210. False 211. True 212. True 213. False 214. True 215. True 216. False 217. True 218. False 219. False 220. True 221. False 222. True 223. False 224. True 225. True 226. False 227. True 228. True 229. True .
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Ch 04: The Market Forces of Supply and Demand 230. False 231. True 232. True 233. market. 234. Price takers 235. 40 gallons 236. decreases by 10 gallons 237. C to A 238. A to C 239. B to A 240. A to C 241. complements. 242. decreases by 5 243. decrease in supply. 244. decreases. 245. A movement along the demand curve 246. The demand curve will shift to the left. 247. The demand curve will shift to the right. 248. The demand for good B will increase. 249. The demand for good B will decrease. 250. The current demand will increase. 251. The demand curve will shift to the left. 252. 600 cases 253. 100 cases 254. 100P 255. $5.00 per case .
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Ch 04: The Market Forces of Supply and Demand 256. 500 cases 257. There is a surplus of 200 cases. 258. Supply shifts to the right. 259. Equilibrium price decreases and quantity increases. 260. Demand shifts right and supply shifts right. 261. Equilibrium price is ambiguous and quantity increases. 262. The supply of ethanol will increase. 263. The supply of calculators will increase. 264. $4 and 200 265. There is a shortage of 100. 266. There is a surplus of 200. 267. Equilibrium price decreases and quantity is ambiguous. 268. $4 269. 30 units 270. Shortage 271. 50 units 272. The price will fall. 273. P = 15 274. Q = 350 275. There is a shortage of 100 units. 276. There is a surplus of 60 units. 277. The new equilibrium is P = 10 and Q = 400. 278. The equilibrium quantity will increase. The change in the equilibrium price is ambiguous. 279. The equilibrium price of tennis ball will rise. The equilibrium price of tennis racquets will fall. 280. The equilibrium price of pencils will fall. The equilibrium price of pens will fall. .
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Ch 04: The Market Forces of Supply and Demand 281. The equilibrium quantity will fall. The change in the equilibrium price is ambiguous. 282. The equilibrium price will rise. The change in the equilibrium quantity is ambiguous. 283. a. b.
A change in demand refers to a shift of the demand curve. A change in quantity demanded refers to a movement along a fixed demand curve. A change in price causes a change in quantity demanded. All of the other changes listed shift the demand curve.
A change in quantity demanded
A change in demand
284. a. b.
A change in supply refers to a shift of the supply curve. A change in quantity supplied refers to a movement along a fixed supply curve. A change in price causes a change in quantity supplied. All of the other changes listed shift the supply curve.
A change in quantity supplied
A change in supply
285. .
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Ch 04: The Market Forces of Supply and Demand
a.
b.
The equilibrium price (Pe) is $4 and the equilibrium quantity (Qe) is 8,000. A surplus of 4,000 flashlights would be the problem in the market, and we would expect the price to fall. A shortage of 8,000 flashlights would be the problem in the market, and we would expect the price to rise.
c. d. 286.
No Change in Demand An Increase in Demand A Decrease in Demand
No Change in Supply P same Q same P up Q up P down Q down
An Increase in Supply P down Q up P ambiguous Q up P down Q ambiguous
287. (a)
(b)
(c)
(d)
.
A Decrease in Supply P up Q down P up Q ambiguous P ambiguous Q down
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Ch 04: The Market Forces of Supply and Demand
(e)
(f)
(g)
(h)
(i)
(j)
.
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Ch 04: The Market Forces of Supply and Demand
In (j), a price above equilibrium will affect both quantity demanded and quantity supplied and will cause a surplus in the market. It will not cause either demand or supply to shift.
.
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Ch 05: Elasticity and Its Application
Indicate the answer choice that best completes the statement or answers the question. 1. The price elasticity of demand measures a. buyers' responsiveness to a change in the price of a good. b. the extent to which demand increases as additional buyers enter the market. c. how much more of a good consumers will demand when incomes rise. d. the movement along a supply curve when there is a change in demand. 2. Demand is said to be price elastic if a. the price of the good responds substantially to changes in demand. b. demand shifts substantially when income or the expected future price of the good changes. c. buyers do not respond much to changes in the price of the good. d. buyers respond substantially to changes in the price of the good. 3. Demand is said to be inelastic if a. buyers respond substantially to changes in the price of the good. b. demand shifts only slightly when the price of the good changes. c. the quantity demanded changes only slightly when the price of the good changes. d. the price of the good responds only slightly to changes in demand. 4. Which of the following is not a determinant of the price elasticity of demand for a good? a. The time horizon b. The steepness or flatness of the supply curve for the good c. The definition of the market for the good d. The availability of substitutes for the good 5. Goods with many close substitutes tend to have a. more elastic demands. b. less elastic demands. c. price elasticities of demand that are unit elastic. d. income elasticities of demand that are negative. 6. For a good that is a luxury, demand a. tends to be inelastic. b. tends to be elastic. c. has unit elasticity. d. cannot be represented by a demand curve in the usual way. 7. A good will have a more inelastic demand, the a. greater the availability of close substitutes. b. broader the definition of the market. c. longer the period of time. d. more it is regarded as a luxury. 8. If the price of natural gas rises, when is the price elasticity of demand likely to be the highest? .
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Ch 05: Elasticity and Its Application a. Immediately after the price increase b. One month after the price increase c. Three months after the price increase d. One year after the price increase 9. If the price of walnuts rises, many people would switch from consuming walnuts to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of a. the availability of close substitutes in determining the price elasticity of demand. b. a necessity versus a luxury in determining the price elasticity of demand. c. the definition of a market in determining the price elasticity of demand. d. the time horizon in determining the price elasticity of demand. 10. The demand for grape-flavored Hubba Bubba bubble gum is likely a. inelastic because there are many close substitutes for grape-flavored Hubba Bubba. b. elastic because there are many close substitutes for grape-flavored Hubba Bubba. c. inelastic because the market is broadly defined. d. elastic because the market is broadly defined. 11. Which of the following is likely to have the most price elastic demand? a. Clothing b. Blue jeans c. Tommy Hilfiger jeans d. Pants 12. Which of the following is likely to have the most price inelastic demand? a. Mint-flavored toothpaste b. Toothpaste c. Colgate mint-flavored toothpaste d. A generic mint-flavored toothpaste 13. When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price falls to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for candy bars is a. inelastic. b. elastic. c. unit elastic. d. perfectly inelastic. 14. Suppose the price of a bag of frozen chicken nuggets decreases from $6.50 to $5.75 and, as a result, the quantity of bags demanded increases from 600 to 800. Using the midpoint method, the price elasticity of demand for frozen chicken nuggets in the given price range is a. 0.35. b. 0.43. c. 2.33. .
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Ch 05: Elasticity and Its Application d. 2.89. 15. Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.75. Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded? a. A 7.5 percent increase in the price of the good b. A 13.33 percent increase in the price of the good c. An increase in the price of the good from $7.50 to $10 d. An increase in the price of the good from $10 to $17.50 16. Table 5-1 Good A B
Price Elasticity of Demand 1.9 0.8
Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-1? a. A is a luxury, and B is a necessity. b. A is a good after an increase in income, and B is that same good after a decrease in income. c. A has fewer substitutes than B. d. A is a good immediately after a price increase, and B is that same good three years after the price increase.
17. If the price elasticity of demand for a good is 2.0, then a 10 percent increase in price results in a a. 0.2 percent decrease in the quantity demanded. b. 5 percent decrease in the quantity demanded. c. 20 percent decrease in the quantity demanded. d. 40 percent decrease in the quantity demanded. 18. For a particular good, a 2 percent increase in price causes a 12 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. There are no close substitutes for this good. b. The good is a luxury. c. The market for the good is broadly defined. d. The relevant time horizon is short. 19. If a 15% increase in price for a good results in a 20 percent decrease in quantity demanded, the price elasticity of demand is a. 0.75. b. 1.25. c. 1.33. d. 1.60. 20. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing .
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Ch 05: Elasticity and Its Application smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by a. 30 percent. b. 40 percent. c. 80 percent. d. 250 percent. 21. Table 5-2 Price Quantity Demanded (Dollars per unit) (Units) 250 0 200 30 150 70 100 110 50 150 0 190
Refer to Table 5-2. Using the midpoint method, if the price falls from $200 to $150, the absolute value of the price elasticity of demand is a. 5.3. b. 2.8. c. 0.8. d. 0.36. 22. Table 5-2 Price Quantity Demanded (Dollars per unit) (Units) 250 0 200 30 150 70 100 110 50 150 0 190
Refer to Table 5-2. Using the midpoint method, if the price falls from $200 to $150, the price elasticity of demand is a. zero. b. unit elastic. c. inelastic. d. elastic. 23. Figure 5-1 .
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Ch 05: Elasticity and Its Application
Refer to Figure 5-1. Between point A and point B, price elasticity of demand is equal to a. 0.33. b. 0.67. c. 1.5. d. 2.67. 24. Figure 5-1
.
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Ch 05: Elasticity and Its Application
Refer to Figure 5-1. Between point A and point B on the graph, demand is a. perfectly elastic. b. inelastic. c. unit elastic. d. elastic, but not perfectly elastic. 25. Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the a. steeper the demand curve will be. b. flatter the demand curve will be. c. further to the right the demand curve will sit. d. closer to the vertical axis the demand curve will sit. 26. Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result, a. the equilibrium quantity decreases, and the equilibrium price is unchanged. b. the equilibrium price increases, and the equilibrium quantity is unchanged. c. the equilibrium quantity and the equilibrium price both are unchanged. d. buyers' total expenditure on the good is unchanged. 27. When small changes in price lead to infinite changes in quantity demanded, demand is perfectly a. elastic, and the demand curve will be horizontal. b. inelastic, and the demand curve will be horizontal. c. elastic, and the demand curve will be vertical. .
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Ch 05: Elasticity and Its Application d. inelastic, and the demand curve will be vertical. 28. Marcus says that he would smoke one pack of cigarettes each day regardless of the price. If he is telling the truth, Marcus's a. demand for cigarettes is perfectly inelastic. b. price elasticity of demand for cigarettes is infinite. c. income elasticity of demand for cigarettes is 0. d. demand for cigarettes is unit elastic. 29. Jerome will spend exactly $25 each month on new apps for the mobile device, regardless of the price of apps. Jerome's demand for apps is a. perfectly elastic. b. unit elastic. c. perfectly inelastic. d. somewhat inelastic, but not perfectly inelastic. 30. Which of the following could be the price elasticity of demand for a good for which a decrease in price would increase total revenue? a. 0 b. 0.4 c. 1 d. 4 31. When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, the price elasticity of demand for good A is a. 1.50, and an increase in price will result in an increase in total revenue for good A. b. 1.50, and an increase in price will result in a decrease in total revenue for good A. c. 0.67, and an increase in price will result in an increase in total revenue for good A. d. 0.67, and an increase in price will result in a decrease in total revenue for good A. 32. Skip's Sealcoating Service increased its total monthly revenue from $12,000 to $13,500 when it raised the price of driveway repairs from $600 to $750. The price elasticity of demand for Skip's Sealcoating Service is a. 0.11. b. 0.47. c. 1.12. d. 2.11. 33. You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends reducing the price of a day pass. You realize that a. the mayor thinks demand is elastic, and the city manager thinks demand is inelastic. b. both the mayor and the city manager think that demand is elastic. c. both the mayor and the city manager think that demand is inelastic. d. the mayor thinks demand is inelastic, and the city manager thinks demand is elastic. .
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Ch 05: Elasticity and Its Application 34. If the demand for donuts is elastic, then a decrease in the price of donuts will a. increase total revenue of donut sellers. b. decrease total revenue of donut sellers. c. not change total revenue of donut sellers. d. There is not enough information to answer this question. 35. Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the money she needs. Your mother is paying for all of the ingredients. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade is elastic, what is your advice to her? a. Leave the price at 25 cents and be patient. b. Raise the price to increase total revenue. c. Lower the price to increase total revenue. d. There isn't enough information given to answer this question. 36. Figure 5-2
Refer to Figure 5-2. The section of the demand curve from A to B represents the a. elastic section of the demand curve. b. inelastic section of the demand curve. c. unit elastic section of the demand curve. d. perfectly elastic section of the demand curve. 37. Figure 5-2
.
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Refer to Figure 5-2. If the price decreases in the region of the demand curve between points A and B, we can expect total revenue to a. increase. b. stay the same. c. decrease. d. first decrease, then increase until total revenue is maximized. 38. Figure 5-3
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Refer to Figure 5-3. Using the midpoint method, between prices of $20 and $30, price elasticity of demand is about a. 0.33. b. 0.4. c. 1.33. d. 3. 39. Figure 5-3
.
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Refer to Figure 5-3. The maximum value of total revenue corresponds to a price of a. $20. b. $50. c. $70. d. $100. 40. Figure 5-3
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Refer to Figure 5-3. At a price of $70 per unit, sellers' total revenue equals a. $700. b. $1,050. c. $1,250. d. $1,400. 41. Figure 5-4
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Refer to Figure 5-4. If rectangle D is larger than rectangle A, then which of the following is not correct? a. Demand is elastic between prices P1 and P2. b. A decrease in price from P2 to P1 will cause an increase in total revenue. c. The magnitude of the percentage change in price between P1 and P2 is smaller than the magnitude of the corresponding percent change in quantity demanded. d. An increase in price from P1 to P2 will cause an increase in total revenue. 42. Figure 5-4
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Refer to Figure 5-4. Total revenue when the price is P1 is represented by a. areas B + D. b. areas A + B. c. areas C + D. d. area D. 43. Figure 5-5
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Refer to Figure 5-5. Using the midpoint method, the price elasticity of demand between point X and point Y is a. 0.4. b. 1. c. 2. d. 2.5. 44. Figure 5-5
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Refer to Figure 5-5. If the price decreased from $36 to $12, total revenue would a. increase by $4,800, and demand is elastic between points X and Z. b. increase by $7,200, and demand is elastic between points X and Z. c. decrease by $4,800, and demand is inelastic between points X and Z. d. decrease by $7,200, and demand is inelastic between points X and Z. 45. Income elasticity of demand measures how a. the quantity demanded changes as consumer income changes. b. consumer purchasing power is affected by a change in the price of a good. c. the price of a good is affected when there is a change in consumer income. d. many units of a good a consumer can buy given a certain income level. 46. For which of the following goods is the income elasticity of demand likely highest? a. Water b. Diamonds c. Hamburgers d. Housing 47. For which of the following goods is the income elasticity of demand likely lowest? a. Water b. Sapphire pendant necklaces c. Filet mignon steaks d. Fresh fruit .
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Ch 05: Elasticity and Its Application 48. Table 5-3 Income (Dollars) 30,000 40,000
Quantity of Good X Purchased 2 6
Quantity of Good Y Purchased 20 10
Refer to Table 5-3. Using the midpoint method, the income elasticity of demand for good Y is a. 2.33, and good Y is a normal good. b. −2.33, and good Y is an inferior good. c. −0.43, and good Y is a normal good. d. −0.43, and good Y is an inferior good. 49. Last year, Maria made $54,000 and bought five purses. This year, Maria makes $60,000 and purchased seven purses. Holding other factors constant and using the midpoint method, it follows that Maria's income elasticity of demand is about a. 0.32, and Maria regards purses as inferior goods. b. 0.32, and Maria regards purses as normal goods. c. 3.17, and Maria regards purses as inferior goods. d. 3.17, and Maria regards purses as normal goods. 50. You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate prefers other food and now buys fewer Ramen noodles. When looking at income elasticity of demand for Ramen noodles, yours would a. be negative, and your roommate's would be positive. b. be positive, and your roommate's would be negative. c. be zero, and your roommate's would approach infinity. d. approach infinity, and your roommate's would be zero. 51. Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is a. negative, and the good is an inferior good. b. negative, and the good is a normal good. c. positive, and the good is a normal good. d. positive, and the good is an inferior good. 52. When her income increased from $10,000 to $20,000, Heather's consumption of macaroni decreased from 10 pounds to 5 pounds and her consumption of soy-burgers increased from 2 pounds to 4 pounds. Using the midpoint method, we can conclude that for Heather, macaroni a. and soy-burgers are both normal goods with income elasticities equal to 1. b. is an inferior good and soy-burgers are normal goods; both have income elasticities of 1. c. is an inferior good with an income elasticity of -1 and soy-burgers are normal goods with an income elasticity of 1. d. and soy-burgers are both inferior goods with income elasticities equal to -1. .
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Ch 05: Elasticity and Its Application 53. Cross-price elasticity of demand measures how a. the price of one good changes in response to a change in the price of another good. b. the quantity demanded of one good changes in response to a change in the quantity demanded of another good. c. the quantity demanded of one good changes in response to a change in the price of another good. d. strongly normal or inferior a good is. 54. If the cross-price elasticity of two goods is negative, then the two goods are a. necessities. b. complements. c. normal goods. d. inferior goods. 55. For which pairs of goods is the cross-price elasticity most likely to be positive? a. Peanut butter and jelly b. Bicycle frames and bicycle tires c. Pens and pencils d. Digital college textbooks and iPhones 56. Suppose that when the price of good X increases from $800 to $850, the quantity demanded of good Y increases from 65 to 70. Using the midpoint method, the cross-price elasticity of demand is about a. −1.2, and X and Y are complements. b. −0.1, and X and Y are complements. c. 0.1, and X and Y are substitutes. d. 1.2, and X and Y are substitutes. 57. Suppose the cross-price elasticity of demand between peanut butter and jelly is −2.50. This implies that a 20 percent increase in the price of peanut butter will cause the quantity of jelly purchased to a. fall by 8 percent. b. fall by 50 percent. c. rise by 8 percent. d. rise by 50 percent. 58. Scenario 5-1 Suppose the demand function for good X is given by: Qdx = 15 − 0.5Px − 0.8Py where Qdx is the quantity demanded of good X, Px is the price of good X, and Py is the price of good Y, which is related to good X. Refer to Scenario 5-1. Using the midpoint method, if the price of good X is constant at $10 and the price of good Y decreases from $10 to $8, the cross-price elasticity of demand is about a. 0.57, and X and Y are substitutes. b. −0.22, and X and Y are complements. c. −0.80, and X and Y are complements. d. −2.57, and X and Y are complements.
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Ch 05: Elasticity and Its Application 59. The price elasticity of supply measures how much a. the quantity supplied responds to changes in input prices. b. the quantity supplied responds to changes in the price of the good. c. the price of the good responds to changes in supply. d. sellers respond to changes in technology. 60. A key determinant of the price elasticity of supply is the a. time horizon. b. income of consumers. c. price elasticity of demand. d. importance of the good in a consumer’s budget. 61. The supply of a good will be more elastic, the a. more the good is considered a luxury. b. broader is the definition of the market for the good. c. larger the number of close substitutes for the good. d. longer the time period being considered. 62. Suppose that two supply curves pass through the same point. One is steep, and the other is flat. Which of the following statements is correct? a. The flatter supply curve represents a supply that is inelastic relative to the supply represented by the steeper supply curve. b. The steeper supply curve represents a supply that is inelastic relative to the supply represented by the flatter supply curve. c. Given two prices with which to calculate the price elasticity of supply, that elasticity would be the same for both curves. d. A decrease in demand will increase total revenue if the steeper supply curve is relevant, while a decrease in demand will decrease total revenue if the flatter supply curve is relevant. 63. If the price elasticity of supply is 1.5, and a price increase led to a 1.8 percent increase in quantity supplied, then the price increase is about a. 0.67 percent. b. 0.83 percent. c. 1.20 percent. d. 2.70 percent. 64. If the price elasticity of supply is 1.2, and price increased by 5 percent, quantity supplied would a. increase by 4.2 percent. b. increase by 6 percent. c. decrease by 4.2 percent. d. decrease by 6 percent. 65. If a 25 percent change in price results in a 40 percent change in quantity supplied, then the price elasticity of supply is about a. 0.63, and supply is elastic. .
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Ch 05: Elasticity and Its Application b. 0.63, and supply is inelastic. c. 1.60, and supply is elastic. d. 1.60, and supply is inelastic. 66. Suppose the price elasticity of supply for cheese is 0.6 in the short run and 1.4 in the long run. If an increase in the demand for cheese causes the price of cheese to increase by 15 percent, then the quantity supplied of cheese will increase by a. 0.4 percent in the short run and 4.6 percent in the long run. b. 1.7 percent in the short run and 0.7 percent in the long run. c. 9 percent in the short run and 21 percent in the long run. d. 25 percent in the short run and 10.7 percent in the long run. 67. Table 5-4
Price Quantity Supplied
Supply Curve A $1.00 $2.00 500 600
Supply Curve B $1.00 $3.00 600 900
Supply Curve C $2.00 $5.00 400 700
Refer to Table 5-4. Using the midpoint method, which of the three supply curves represents the least elastic supply? a. Supply curve A b. Supply curve B c. Supply curve C d. All three supply curves have the same elasticity. 68. A manufacturer produces 400 units when the market price is $10 per unit and produces 600 units when the market price is $12 per unit. Using the midpoint method, for this range of prices, the price elasticity of supply is about a. 0.45. b. 2.0. c. 2.2. d. 200. 69. In January, the price of dark chocolate candy bars was $2.00, and Willy's Chocolate Factory produced 80 pounds. In February, the price of dark chocolate candy bars was $2.50, and Willy's produced 110 pounds. In March, the price of dark chocolate candy bars was $3.00, and Willy's produced 140 pounds. Using the midpoint method, the price elasticity of supply of Willy's dark chocolate candy bars was about a. 0.70 when the price increased from $2.00 to $2.50 and 0.76 when the price increased from $2.50 to $3.00. b. 0.88 when the price increased from $2.00 to $2.50 and 1.08 when the price increased from $2.50 to $3.00. c. 1.42 when the price increased from $2.00 to $2.50 and 1.32 when the price increased from $2.50 to $3.00. d. 1.50 when the price increased from $2.00 to $2.50 and 1.18 when the price increased from $2.50 to $3.00. 70. Figure 5-6
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Refer to Figure 5-6. Along which of these segments of the supply curve is supply least elastic? a. GH b. CD c. AC d. AB 71. Figure 5-6
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Refer to Figure 5-6. Using the midpoint method, what is the price elasticity of supply between points A and B? a. 2.33 b. 1.0 c. 0.43 d. 0.1 72. Figure 5-7
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Refer to Figure 5-7. Using the midpoint method, what is the price elasticity of supply between point B and point C? a. 1.44 b. 1.29 c. 0.96 d. 0.69 73. Figure 5-7
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Refer to Figure 5-7. If, holding the supply curve fixed, there were an increase in demand that caused the equilibrium price to increase from $6 to $7, then sellers' total revenue would a. increase. b. decrease. c. remain unchanged. d. The effect on total revenue cannot be determined from the given information. 74. Which of the following statements is valid when the market supply curve is vertical? a. Market quantity supplied does not change when the price changes. b. Supply is perfectly elastic. c. An increase in market demand will increase the equilibrium quantity. d. An increase in market demand will not increase the equilibrium price. 75. A decrease in supply will cause the largest increase in price when a. both supply and demand are inelastic. b. both supply and demand are elastic. c. demand is elastic and supply is inelastic. d. demand is inelastic and supply is elastic. 76. Suppose researchers at the University of Wisconsin discover a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will a. raise both price and total revenues. b. lower both price and total revenues. c. raise price and lower total revenues. .
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Ch 05: Elasticity and Its Application d. lower price and raise total revenues. 77. Scenario 5-2 The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10 percent. Refer to Scenario 5-2. The equilibrium price will a. increase in both the aged cheddar cheese and bread markets. b. increase in the aged cheddar cheese market and decrease in the bread market. c. decrease in the aged cheddar cheese market and increase in the bread market. d. decrease in both the aged cheddar cheese and bread markets. 78. Scenario 5-2 The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10 percent. Refer to Scenario 5-2. The equilibrium quantity will a. increase in both the aged cheddar cheese and bread markets. b. increase in the aged cheddar cheese market and decrease in the bread market. c. decrease in the aged cheddar cheese market and increase in the bread market. d. decrease in both the aged cheddar cheese and bread markets. 79. Scenario 5-2 The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10 percent. Refer to Scenario 5-2. The change in equilibrium price will be a. greater in the aged cheddar cheese market than in the bread market. b. greater in the bread market than in the aged cheddar cheese market. c. the same in the aged cheddar cheese and bread markets. d. unknown without more information. 80. Scenario 5-2 The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10 percent. Refer to Scenario 5-2. The change in equilibrium quantity will be a. greater in the aged cheddar cheese market than in the bread market. b. greater in the bread market than in the aged cheddar cheese market. c. the same in the aged cheddar cheese and bread markets. d. unknown without more information. 81. Scenario 5-2 The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal .
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Ch 05: Elasticity and Its Application goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10 percent. Refer to Scenario 5-2. Total consumer spending on aged cheddar cheese will a. increase, and total consumer spending on bread will increase. b. increase, and total consumer spending on bread will decrease. c. decrease, and total consumer spending on bread will increase. d. decrease, and total consumer spending on bread will decrease. 82. Which of the following was not a reason OPEC failed to keep the price of oil high? a. Over the long run, producers of oil outside of OPEC responded to higher prices by increasing oil exploration and by building new extraction capacity. b. Consumers responded to higher prices with greater conservation. c. Consumers replaced old inefficient cars with newer efficient ones. d. The agreement OPEC members signed allowed each country to produce as much oil as each wanted. 83. Which of the following statements is not correct concerning government attempts to reduce the flow of illegal drugs into the country? Drug interdiction a. raises prices and total revenue in the drug market. b. can increase drug-related crime. c. shifts the demand curve for drugs to the left. d. shifts the supply curve of drugs to the left. 84. Which of the following statements about agriculture in the United States is correct? a. From the 1950s to today, agricultural output has approximately doubled. b. Because technological improvements increase the supply of a product for which demand is inelastic, an individual farmer would be better off not adopting the new technology. c. Increasing the supply of agricultural products typically benefits consumers but harms farmers as a group. d. Technological improvements typically increase both supply and revenue for individual farmers. 85. Which of the following statements is not correct? a. Advocates for drug-interdiction policies that reduce the supply of illegal drugs argue that the demand for illegal drugs may be more responsive in the long run than in the short run. b. The demand for illegal drugs is price inelastic. c. Drug interdiction efforts that reduce the supply of illegal drugs may increase drug-related crimes. d. The quantity of illegal drugs demanded is very responsive to changes in price.
Indicate whether the statement is true or false. 86. Measures of elasticity enhance our ability to study the magnitudes of changes in quantities in response to changes in prices or income. a. True b. False 87. Elasticity measures how responsive quantity is to changes in price. a. True .
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Ch 05: Elasticity and Its Application b. False 88. The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price. a. True b. False 89. The price elasticity of demand is defined as the percentage change in price divided by the percentage change in quantity demanded. a. True b. False 90. The demand for bread is likely to be more elastic than the demand for solid-gold bread plates. a. True b. False 91. In general, demand curves for necessities tend to be price elastic. a. True b. False 92. In general, demand curves for luxuries tend to be price elastic. a. True b. False 93. Goods with close substitutes tend to have more elastic demands than do goods without close substitutes. a. True b. False 94. The demand for Rice Krispies is more elastic than the demand for cereal in general. a. True b. False 95. The demand for soap is more elastic than the demand for Dove soap. a. True b. False 96. Necessities tend to have inelastic demands, whereas luxuries tend to have elastic demands. a. True b. False 97. The demand for desserts tends to be more inelastic than the demand for red velvet cake. a. True b. False 98. Demand is inelastic if the price elasticity of demand is greater than 1. a. True .
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Ch 05: Elasticity and Its Application b. False 99. Demand for a good is said to be inelastic if the quantity demanded increases substantially when the price falls by a small amount. a. True b. False 100. Demand for a good is said to be inelastic if the quantity demanded increases slightly when the price falls by a large amount. a. True b. False 101. The demand for gasoline will respond more to a change in price over a period of five weeks than over a period of five years. a. True b. False 102. Even the demand for a necessity such as gasoline will respond to a change in price, especially over a longer time horizon. a. True b. False 103. Suppose that when the price rises by 20% for a particular good, the quantity demanded of that good falls by 10%. The price elasticity of demand for this good is equal to 2.0. a. True b. False 104. Suppose that when the price rises by 10% for a particular good, the quantity demanded of that good falls by 20%. The price elasticity of demand for this good is equal to 2.0. a. True b. False 105. If the price of calculators increases by 15% and the quantity demanded per week falls by 45% as a result, then the price elasticity of demand is 3. a. True b. False 106. If we observe that when the price of chocolate increases by 10%, quantity demanded falls by 5%, then the demand for chocolate is price inelastic. a. True b. False 107. If we observe that when the price of chocolate decreases by 10%, quantity demanded increases by 25%, then the demand for chocolate is price elastic. a. True b. False .
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Ch 05: Elasticity and Its Application 108. The flatter the demand curve that passes through a given point, the more inelastic the demand. a. True b. False 109. The flatter the demand curve that passes through a given point, the more elastic the demand. a. True b. False 110. A linear, downward-sloping demand curve has a constant elasticity but a changing slope. a. True b. False 111. Price elasticity of demand along a linear, downward-sloping demand curve increases as price falls. a. True b. False 112. Price elasticity of demand along a linear, downward-sloping demand curve decreases as price falls. a. True b. False 113. The midpoint method is used to calculate elasticity between two points because it gives the same answer regardless of the direction of the change. a. True b. False 114. An advantage of using the midpoint method to calculate the price elasticity of demand is that it uses the metric system. a. True b. False 115. If demand is perfectly elastic, the demand curve is horizontal, and the price elasticity of demand equals 1. a. True b. False 116. If demand is perfectly inelastic, the demand curve is vertical, and the price elasticity of demand equals 0. a. True b. False 117. If the price elasticity of demand is equal to 0, then demand is unit elastic. a. True b. False 118. If the price elasticity of demand is equal to 1, then demand is unit elastic. a. True b. False .
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Ch 05: Elasticity and Its Application 119. If we observe that when the price of chocolate increases by 10%, total revenue increases by 10%, then the demand for chocolate is unit price elastic. a. True b. False 120. Along the elastic portion of a linear demand curve, total revenue rises as price rises. a. True b. False 121. If a firm is facing elastic demand, then the firm should decrease price to increase revenue. a. True b. False 122. If a firm is facing inelastic demand, then the firm should decrease price to increase revenue. a. True b. False 123. When demand is inelastic, a decrease in price increases total revenue. a. True b. False 124. The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income. a. True b. False 125. The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price. a. True b. False 126. Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities of demand. a. True b. False 127. If the income elasticity of demand for a good is negative, then the good must be an inferior good. a. True b. False 128. If we observe that when consumers’ incomes rise by 10%, the quantity demanded of ice cream increases by 5%, then ice cream is an inferior good. a. True b. False 129. If the cross-price elasticity of demand for two goods is negative, then the two goods are substitutes. .
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Ch 05: Elasticity and Its Application a. True b. False 130. If the cross-price elasticity of demand for two goods is negative, then the two goods are complements. a. True b. False 131. Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes. a. True b. False 132. Cross-price elasticity is used to determine whether goods are inferior or normal goods. a. True b. False 133. Cross-price elasticity is used to determine whether goods are substitutes or complements. a. True b. False 134. The cross-price elasticity of garlic salt and onion salt is -2, which indicates that garlic salt and onion salt are substitutes. a. True b. False 135. The cross-price elasticity of demand for bacon and eggs likely would be negative because bacon and eggs are complements for many people. a. True b. False 136. Supply and demand both tend to be more elastic in the long run and more inelastic in the short run. a. True b. False 137. Price elasticity of supply measures how much the quantity supplied responds to changes in the price. a. True b. False 138. If the price elasticity of supply is 2 and the quantity supplied decreases by 6%, then the price must have decreased by 3%. a. True b. False 139. Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price and elastic if the quantity supplied responds only slightly to price. a. True .
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Ch 05: Elasticity and Its Application b. False 140. Supply tends to be more elastic in the short run and more inelastic in the long run. a. True b. False 141. When the price of knee braces increased by 25 percent, the Brace Yourself Company increased its quantity supplied of knee braces per week by 75 percent. BYC's price elasticity of supply of knee braces is 0.33. a. True b. False 142. If a supply curve is horizontal, then supply is said to be perfectly elastic, and the price elasticity of supply approaches infinity. a. True b. False 143. If we observe that when the price of ice cream rises by 10%, ice cream manufacturers increase the quantity supplied of ice cream by 20%, then the price elasticity of supply is 2. a. True b. False 144. If a t-shirt manufacturer supplies 1,000 t-shirts per week when the price of t-shirts is $10 and supplies 1,200 t-shirts per week when the price of t-shirts is $12, the price elasticity of supply is 2. a. True b. False 145. A government program that reduces land under cultivation hurts farmers but helps consumers. a. True b. False 146. A government program that pays farmers not to plant corn on part of their land can help farmers not only through the subsidy payments to farmers who participate in the program but also by raising the market price of corn. a. True b. False 147. A discovery that increases wheat yields per acre hurts farmers by increasing supply and lowering their total revenues. a. True b. False 148. A discovery that increases wheat yields per acre helps farmers by increasing both supply and total revenues. a. True b. False 149. OPEC failed to maintain a high price of oil in the long run, partly because both the supply of oil and the demand for oil are more elastic in the long run than in the short run. a. True .
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Ch 05: Elasticity and Its Application b. False 150. The OPEC oil cartel has difficulty maintaining high prices in the long run because the supply of oil is more inelastic in the long run than in the short run. a. True b. False 151. Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because the demand for drugs is inelastic. a. True b. False 152. Drug interdiction, which reduces the supply of drugs, will likely be a less effective policy than educating consumers to reduce their demand for drugs because the drug interdiction policy will lower drug prices and reduce the quantity of drugs demanded. a. True b. False 153. A “Just Say No” drug education policy that successfully educates consumers to reduce their demand for drugs will lower drug prices and reduce the quantity of drugs demanded. a. True b. False 154. Necessities tend to have elastic demands, whereas luxuries tend to have inelastic demands. a. True b. False 155. Demand is elastic if the price elasticity of demand is greater than 1. a. True b. False 156. If we observe that when the price of chocolate candy bars increases by 10%, quantity demanded decreases total by 10%, then the demand for chocolate candy bars is unit price elastic. a. True b. False 157. If a firm that produces honey is facing elastic demand, then the firm would decrease price to increase revenue. a. True b. False 158. Normal goods have positive income elasticities of demand, while inferior goods have negative income elasticities of demand. a. True b. False 159. If we observe that when a consumer's income rises by 10%, the quantity demanded of chocolate candy bars increases by 15%, then chocolate candy bars are a normal good for that consumer. .
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Ch 05: Elasticity and Its Application a. True b. False 160. If the cross-price elasticity of demand for two goods is negative, then the two goods are substitutes. a. True b. False 161. If the price elasticity of supply is 0.5 and the quantity supplied decreases by 6%, then the price must have decreased by 3%. a. True b. False 162. Helen's Honey Hut supplies 20 jars of honey per week when the price of honey is $6 per jar and supplies 30 jars per week when the price of is $8 per jar, so the price elasticity of supply over this price range is 1.4. a. True b. False 163. A government program that reduces land under cultivation can help farmers by raising prices but hurts consumers. a. True b. False
164. The measure of how willing consumers are to buy less of a good as its price rises is called 165. Suppose that good X has few close substitutes and that good Y has many close substitutes. Which good would you expect to have more price elastic demand? 166. Suppose that good X has few close substitutes and that good Y has many close substitutes. Which good would you expect to have more price inelastic demand? 167. Suppose that good X is a luxury and that good Y is a necessity. Which good would you expect to have more price inelastic demand? 168. Suppose that good X is a luxury and that good Y is a necessity. Which good would you expect to have more price elastic demand? 169. For which of the following goods would demand be most price elastic: a car, a sedan, a Honda sedan, a Honda Accord, a black Honda Accord? 170. Suppose the price of natural gas, a typical fuel for heating homes, rises in January in Alaska. Would you expect the price elasticity of demand for natural gas to more inelastic immediately after the price increase or at some point in the future? 171. Suppose the price of gas increases by 20%. Will demand be more elastic if consumers have 3 weeks or 3 years to adjust to this price change? 172. Table 5-5 .
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Ch 05: Elasticity and Its Application Price $0 $2 $4 $6 $8
Quantity Demanded 50 40 30 20 10
Refer to Table 5-12. Using the midpoint method, what is the price elasticity of demand between $2 and $4? 173. Table 5-5 Price $0 $2 $4 $6 $8
Quantity Demanded 50 40 30 20 10
Refer to Table 5-12. Using the midpoint method, what is the price elasticity of demand between $6 and $8? 174. Table 5-5 Price $0 $2 $4 $6 $8
Quantity Demanded 50 40 30 20 10
Refer to Table 5-12. Between which two quantities listed is demand most inelastic? 175. Table 5-5 Price $0 $2 $4 $6 $8
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Quantity Demanded 50 40 30 20 10
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Ch 05: Elasticity and Its Application Refer to Table 5-12. Between which two quantities listed is demand most elastic? 176. Table 5-5 Price $0 $2 $4 $6 $8
Quantity Demanded 50 40 30 20 10
Refer to Table 5-12. Between which two quantities listed is demand unit elastic? 177. Table 5-6 Consider the following demand schedule. Price $0 $3 $6 $9 $12 $15
Quantity Demanded 1,000 800 600 400 200 0
Refer to Table 5-3. Using the midpoint method, demand is unit elastic when price changes from 178. Table 5-6 Consider the following demand schedule. Price $0 $3 $6 $9 $12 $15
Quantity Demanded 1,000 800 600 400 200 0
Refer to Table 5-3. Using the midpoint method, what is the price elasticity of demand between $12 and $15? 179. Table 5-6 Consider the following demand schedule. Price $0 $3 .
Quantity Demanded 1,000 800 Page 36
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Ch 05: Elasticity and Its Application $6 $9 $12 $15
600 400 200 0
Refer to Table 5-3. Using the midpoint method, between which two prices is price elasticity of demand most inelastic? 180. Suppose demand is given by the equation: QD = 50 - 5P Using the midpoint method, what is the price elasticity of demand between $1 and $2? 181. Suppose demand is given by the equation: QD = 50 - 5P Using the midpoint method, what is the price elasticity of demand between $7 and $8? 182. Suppose demand is given by the equation: QD = 80/P Using the midpoint method, what is the price elasticity of demand between $1 and $2? 183. Suppose demand is given by the equation: QD = 80/P Using the midpoint method, what is the price elasticity of demand between $2 and $4? 184. Suppose a market has the demand function Qd=20-0.5P. Using the midpoint method, what is the price elasticity of demand between $30 and $40? 185. Suppose the price elasticity of demand for good A is 1.25. If the price of good A increases by 20%, what will be the resulting percentage change in quantity demanded for good A? 186. What is the price elasticity of demand at any point on a perfectly inelastic demand curve? 187. What is the price elasticity of demand at any point on a perfectly elastic demand curve? 188. Adam and Barb go to the store to purchase some lottery tickets. Without looking at the price, Adam says “I’ll take 10 lottery tickets,” and Barb says “I’ll take $10 worth of lottery tickets.” What is each person’s price elasticity of demand for lottery tickets? 189. Suppose demand is given by the equation: QD = 50 - 5P At what price will total revenue be maximized?
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Ch 05: Elasticity and Its Application 190. Suppose demand is given by the equation: QD = 80/P At what point along this demand curve will total revenue be maximized? 191. Suppose a market has the demand function Qd=20-0.5P. At what price will total revenue be maximized? 192. Suppose the price elasticity of demand for a product is 0.5. If a supplier wants to increase revenue, what change should it make to price, if any? 193. Suppose the price elasticity of demand for a product is 1. If a supplier wants to increase revenue, what change should it make to price, if any? 194. Suppose the price elasticity of demand for a product is 1.3. If a supplier wants to increase revenue, what change should it make to price, if any? 195. Suppose you manage a baseball stadium. To pay the salary for a star player, you would like to increase the total revenue from ticket sales. Should you increase or decrease the price of a ticket to increase revenue? Explain. 196. If the cross-price elasticity of demand between two goods is negative, what is the relationship between the two goods? 197. If the cross-price elasticity of demand between two goods is positive, what is the relationship between the two goods? 198. Scenario 5-3 Suppose the demand function for good X is given by: Qdx = 15 − 0.5Px − 0.8Py where Qdx is the quantity demanded of good X, Px is the price of good X, and Py is the price of good Y, which is related to good X. Refer to Scenario 5-2. Using the midpoint method, if the price of good Y is $10 and the price of good X decreases from $5 to $3, what is the price elasticity of demand for good X? Is the demand elastic, unitary elastic, or inelastic? 199. Scenario 5-3 Suppose the demand function for good X is given by: Qdx = 15 − 0.5Px − 0.8Py where Qdx is the quantity demanded of good X, Px is the price of good X, and Py is the price of good Y, which is related to good X. Refer to Scenario 5-2. Good X and Good Y are related as 200. Scenario 5-3 Suppose the demand function for good X is given by: Qdx = 15 − 0.5Px − 0.8Py where Qdx is the quantity demanded of good X, Px is the price of good X, and Py is the price of good Y, which is related to good X. Refer to Scenario 5-2. Using the midpoint method, if the price of good X is $10 and the price of good Y increases from $8 to $10, the cross price elasticity of demand is about 201. If the income elasticity of demand for a good is –1.40, is the good a normal or inferior good? .
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Ch 05: Elasticity and Its Application 202. If the income elasticity of demand for a good is 0.56, is the good a normal or inferior good? 203. Scenario 5-4 Consider the markets for mobile and landline telephone service. Suppose that when the average income of residents of Plainville is $55,000 per year, the quantity demanded of landline telephone service is 12,500 and the quantity demanded of mobile service is 28,000. Suppose that when the price of mobile service rises from $100 to $120 per month, the quantity demanded of landline service decreases to 11,000. Suppose also that when the average income increases to $60,000, the quantity demanded of mobile service increases to 33,000. Refer to Scenario 5-6. Considering the income elasticity, what type of good is mobile telephone service? 204. Scenario 5-4 Consider the markets for mobile and landline telephone service. Suppose that when the average income of residents of Plainville is $55,000 per year, the quantity demanded of landline telephone service is 12,500 and the quantity demanded of mobile service is 28,000. Suppose that when the price of mobile service rises from $100 to $120 per month, the quantity demanded of landline service decreases to 11,000. Suppose also that when the average income increases to $60,000, the quantity demanded of mobile service increases to 33,000. Refer to Scenario 5-6. Using the midpoint method, what is the income elasticity of demand for mobile service? 205. Scenario 5-4 Consider the markets for mobile and landline telephone service. Suppose that when the average income of residents of Plainville is $55,000 per year, the quantity demanded of landline telephone service is 12,500 and the quantity demanded of mobile service is 28,000. Suppose that when the price of mobile service rises from $100 to $120 per month, the quantity demanded of landline service decreases to 11,000. Suppose also that when the average income increases to $60,000, the quantity demanded of mobile service increases to 33,000. Refer to Scenario 5-6. Considering the cross price elasticity of demand for mobile and landline telephone service, is the cross price elasticity of demand positive or negative and do the consumers of Plainville regard these goods as substitutes or complements? 206. Scenario 5-4 Consider the markets for mobile and landline telephone service. Suppose that when the average income of residents of Plainville is $55,000 per year, the quantity demanded of landline telephone service is 12,500 and the quantity demanded of mobile service is 28,000. Suppose that when the price of mobile service rises from $100 to $120 per month, the quantity demanded of landline service decreases to 11,000. Suppose also that when the average income increases to $60,000, the quantity demanded of mobile service increases to 33,000. Refer to Scenario 5-6. Using the midpoint method, what is the cross price elasticity of demand for landline and mobile service? 207. With regard to elasticity, if a firm has a longer time to adjust to a price increase, supply will be more 208. With regard to elasticity, as a firm nears its production capacity, supply becomes more 209. In the short run, as compared to the long run, both the price elasticity of demand and the price elasticity of supply tend to be more 210. Figure 5-8 .
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Ch 05: Elasticity and Its Application
Refer to Figure 5-21. Using the midpoint method, what is the price elasticity of supply between $15 and $25? 211. Figure 5-8
Refer to Figure 5-21. Using the midpoint method, what is the price elasticity of supply between $25 and $35? 212. Figure 5-8
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Ch 05: Elasticity and Its Application
Refer to Figure 5-21. Using the midpoint method, what is the price elasticity of supply between $5 and $15? 213. If the quantity supplied is exactly the same regardless of the price, supply is 214. If a supply curve is perfectly vertical, what is the value of the price elasticity of supply? 215. If a supply curve is perfectly horizontal, what is the value of the price elasticity of supply? 216. Suppose a freeze in Florida significantly reduces the supply of oranges this year. As a result, would you expect the total revenue from the sale of orange juice to rise or fall? Explain. 217. Suppose a farmer knows that they will be able to harvest and sell 3,000 bushels of wheat. Would they prefer a market in which conditions are favorable and most farmers harvest large crops or a market in which conditions are unfavorable and many farmers harvest small crops? Why? 218. Consider the following pairs of goods. For which of the two goods would you expect the demand to be more price elastic? Why? a. water or diamonds b. insulin or nasal decongestant spray c. food in general or breakfast cereal d. gasoline over the course of a week or gasoline over the course of a year e. personal computers or IBM personal computers 219. You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to your movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions.
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Ch 05: Elasticity and Its Application
a. b. c. d. e. f.
What is your current total revenue for both groups? The elasticity of demand is more elastic in which market? Which market has the more inelastic demand? What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or inelastic? What is the elasticity of demand between $5 and $2 in the children's market? Is this elastic or inelastic? Given the graphs, your friend recommends you increase the price of adult tickets to $8 each and lower the price of a child's ticket to $3. How much could you increase total revenue if you take your friend's advice?
220. Use the graph shown to answer the following questions. Put the correct letter(s) in the blank.
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a. b. c. d. e. f. g. h. i. j.
The elastic section of the graph is represented by section _______. The inelastic section of the graph is represented by section _______. The unit elastic section of the graph is represented by section _______. The portion of the graph in which a decrease in price would cause total revenue to fall would be _________. The portion of the graph in which a decrease in price would cause total revenue to rise would be _________. The portion of the graph in which a decrease in price would not cause a change in total revenue would be _________. The section of the graph in which total revenue would be at a maximum would be _______. The section of the graph in which elasticity is greater than 1 is _______. The section of the graph in which elasticity is equal to 1 is ______. The section of the graph in which elasticity is less than 1 is _______.
221. Using the midpoint method, compute the elasticity of demand between points A and B. Is demand along this portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded. Now compute the elasticity of demand between points B and C. Is demand along this portion of the curve elastic or inelastic?
222. When the Shaffers had a monthly income of $4,000, they usually ate out 8 times a month. Now that the couple makes .
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Ch 05: Elasticity and Its Application $4,500 a month, they eat out 10 times a month. Compute the couple's income elasticity of demand using the midpoint method. Explain your answer. Is a restaurant meal a normal or inferior good to the couple? 223. Recently, in Smalltown, the price of Twinkies fell from $0.80 to $0.70. As a result, the quantity demanded of HoHo's decreased from 120 to 100. What would be the appropriate elasticity to compute? Using the midpoint method, compute this elasticity. What does your answer tell you?
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Ch 05: Elasticity and Its Application Answer Key 1. a 2. d 3. c 4. b 5. a 6. b 7. b 8. d 9. a 10. b 11. c 12. b 13. a 14. c 15. b 16. a 17. c 18. b 19. c 20. b 21. b 22. d 23. c 24. d 25. b .
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Ch 05: Elasticity and Its Application 26. a 27. a 28. a 29. b 30. d 31. c 32. b 33. d 34. a 35. c 36. a 37. a 38. a 39. b 40. b 41. d 42. a 43. d 44. a 45. a 46. b 47. a 48. b 49. d 50. b 51. c .
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Ch 05: Elasticity and Its Application 52. c 53. c 54. b 55. c 56. d 57. b 58. d 59. b 60. a 61. d 62. b 63. c 64. b 65. c 66. c 67. a 68. c 69. c 70. a 71. a 72. a 73. a 74. a 75. a 76. b .
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Ch 05: Elasticity and Its Application 77. d 78. d 79. a 80. b 81. d 82. d 83. c 84. c 85. d 86. True 87. True 88. True 89. False 90. False 91. False 92. True 93. True 94. True 95. False 96. True 97. True 98. False 99. False 100. True 101. False 102. True .
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Ch 05: Elasticity and Its Application 103. False 104. True 105. True 106. True 107. True 108. False 109. True 110. False 111. False 112. True 113. True 114. False 115. False 116. True 117. False 118. True 119. False 120. False 121. True 122. False 123. False 124. True 125. False 126. False 127. True .
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Ch 05: Elasticity and Its Application 128. False 129. False 130. True 131. True 132. False 133. True 134. False 135. True 136. True 137. True 138. True 139. False 140. False 141. False 142. True 143. True 144. False 145. False 146. True 147. True 148. False 149. True 150. False 151. False 152. False 153. True .
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Ch 05: Elasticity and Its Application 154. False 155. True 156. True 157. True 158. True 159. True 160. False 161. False 162. True 163. True 164. price elasticity of demand. 165. good Y 166. good X 167. good Y 168. good X 169. a black Honda Accord 170. The price elasticity of demand would be more inelastic immediately after the price increase. 171. 3 years 172. The price elasticity of demand is 0.43. 173. The price elasticity of demand is 2.33. 174. between 50 and 40 175. between 10 and 20 176. between 20 and 30 177. $6 to $9. 178. 9 .
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Ch 05: Elasticity and Its Application 179. $0 to $3 180. The price elasticity of demand is 0.18. 181. The price elasticity of demand is 3.00. 182. The price elasticity of demand is 1.00. 183. The price elasticity of demand is 1.00. 184. 7 185. Quantity demanded will fall by 25%. 186. The price elasticity of demand is zero. 187. The price elasticity of demand is infinity. 188. Since Adam wants 10 tickets regardless of the price, his demand curve is vertical, which is perfectly inelastic. Therefore, Adam’s price elasticity of demand is zero. Barb’s price elasticity of demand is unit elastic, or 1.0. 189. Total revenue will be maximized at the midpoint of a linear demand curve - $5 with this demand curve. 190. Total revenue is constant at $80 along this entire demand curve. 191. $20 192. increase price 193. No change, revenue is maximized. 194. Reduce price 195. If demand is inelastic, then raise the price to increase total revenue. If demand is elastic, then lower the price to increase total revenue. 196. The goods are complements. 197. The goods are substitutes. 198. 0.4 and inelastic 199. complements. 200. -2.57. 201. The good is an inferior good. 202. The good is a normal good. .
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Ch 05: Elasticity and Its Application 203. normal good 204. 1.88 205. The cross price elasticity of demand is negative and consumers regard the two goods as complements. 206. -0.70 207. elastic. 208. inelastic. 209. inelastic. 210. The price elasticity of supply is 1.33. 211. The price elasticity of supply is 1.20. 212. The price elasticity of supply is 2. 213. perfectly inelastic. 214. 0 215. infinity 216. Since oranges are an input into the production of orange juice, the increase in the price of oranges will reduce the supply of orange juice. When the price of orange juice rises, total revenue may rise or fall. If the demand for orange juice is inelastic, then total revenue will rise. On the other hand, if the demand for orange juice is elastic, then total revenue will fall. 217. The farmer prefers a market in which conditions are unfavorable because a smaller supply will result in a higher market price. Because demand is inelastic, a higher price leads to higher revenue. 218. a. b. c. d. e.
Diamonds are luxuries, and water is a necessity. Therefore, diamonds have the more elastic demand. Insulin has no close substitutes, but decongestant spray does. Therefore, nasal decongestant spray has the more elastic demand. Breakfast cereal has more substitutes than does food in general. Therefore, breakfast cereal has the more elastic demand. The longer the time period, the more elastic demand is. Therefore, gasoline over the course of a year has the more elastic demand. There are more substitutes for IBM personal computers than there are for personal computers. Therefore, IBM personal computers have the more elastic demand.
219. a. b. .
Total revenue from children's tickets is $100 and from adult tickets is $250. Total revenue from all sales would be $350. The demand for children's tickets is more elastic. Page 53
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Ch 05: Elasticity and Its Application c. d. e. f.
The adult ticket market has the more inelastic demand. The elasticity of demand between $5 and $2 is 0.21, which is inelastic. The elasticity of demand between $5 and $2 is 1.0, which is unit elastic. Total revenue in the adult market would be $320. Total revenue in the children’s market would be $120, so total revenue for both groups would be $440. $440 - $350 is an increase in total revenue of $90.
220. a. A to B b. B to C c. B d. B to C e. A to B f. B g. B h. A to B i. B j. B to C 221. In the section of the demand curve from A to B, the elasticity of demand would be 2.5. This would be an elastic portion of the curve. This would mean that for every 1 percent change in price, quantity demanded would change by 2.5 percent. In the section of the demand curve from B to C, the elasticity of demand would be .75. This would be an inelastic portion of the curve. This would mean that for every 1 percent change in price, quantity demanded would change by 0.75 percent. 222. The income elasticity of demand for the Shaffers is 1.89. Since the income elasticity of demand is positive, eating out would be interpreted as a normal good. 223. The appropriate elasticity to compute would be cross-price elasticity. The cross-price elasticity for this example would be 1.36. The two goods are substitutes because the cross-price elasticity is positive.
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Ch 06: Supply, Demand, and Government Policies
Indicate the answer choice that best completes the statement or answers the question. 1. Rent-control laws dictate a. the exact rent that landlords must charge tenants. b. only a maximum rent that landlords may charge tenants. c. only a minimum rent that landlords may charge tenants. d. both a minimum rent and a maximum rent that landlords may charge tenants. 2. Minimum-wage laws dictate a. the exact wage that firms must pay workers. b. only a maximum wage that firms may pay workers. c. only a minimum wage that firms may pay workers. d. both a minimum wage and a maximum wage that firms may pay workers. 3. The presence of a price control in a market for a good or service usually is an indication that a. an insufficient quantity of the good or service was being produced in that market to meet the public’s need. b. the usual forces of supply and demand were not able to establish an equilibrium price in that market. c. policymakers believed that the price that prevailed in that market in the absence of price controls was unfair to buyers or sellers. d. policymakers correctly believed that price controls would generate no inequities of their own once imposed. 4. A price ceiling is a. often imposed on markets in which “cutthroat competition” would prevail without a price ceiling. b. a legal maximum on the price at which a good can be sold. c. often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price ceiling. d. imposed to make sure everyone can earn a fair wage. 5. If a price ceiling is not binding, then a. there will be a surplus in the market. b. there will be a shortage in the market. c. the market will be less efficient than it would be without the price ceiling. d. there will be no effect on the market price or quantity sold. 6. Which of the following observations would be consistent with the imposition of a binding price ceiling on a market? After the price ceiling is established, a. a smaller quantity of the good is bought and sold. b. a smaller quantity of the good is demanded. c. a larger quantity of the good is supplied. d. the price rises above the previous equilibrium. 7. If the government removes a binding price ceiling from a market, then the price paid by buyers will a. increase, and the quantity sold in the market will increase. b. increase, and the quantity sold in the market will decrease. c. decrease, and the quantity sold in the market will increase. .
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Ch 06: Supply, Demand, and Government Policies d. decrease, and the quantity sold in the market will decrease. 8. To say that a price ceiling is nonbinding is to say that the price ceiling a. results in a surplus. b. is set above the equilibrium price. c. causes quantity demanded to exceed quantity supplied. d. is set below the equilibrium price. 9. A shortage results when a a. nonbinding price ceiling is imposed on a market. b. nonbinding price ceiling is removed from a market. c. binding price ceiling is imposed on a market. d. binding price ceiling is removed from a market. 10. The imposition of a binding price ceiling on a market causes a. quantity demanded to be greater than quantity supplied. b. quantity demanded to be less than quantity supplied. c. quantity demanded to be equal to quantity supplied. d. the price of the good to be greater than its equilibrium price. 11. Suppose the government wants to encourage Americans to exercise more, so it imposes a binding price ceiling on the market for in-home treadmills. As a result, a. the demand for treadmills will increase. b. the supply of treadmills will decrease. c. a shortage of treadmills will develop. d. a surplus of treadmills will develop. 12. Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, the a. demand curve for physicals shifts to the right. b. supply curve for physicals shifts to the left. c. quantity demanded of physicals increases, and the quantity supplied of physicals decreases. d. number of physicals performed stays the same. 13. Figure 6-1 Graph (a)
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Graph (b)
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Refer to Figure 6-1. A binding price ceiling is shown in a. graph (a) only. b. graph (b) only. c. both graph (a) and graph (b). d. neither graph (a) nor graph (b). 14. Figure 6-1 Graph (a)
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Graph (b)
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Refer to Figure 6-1. The price ceiling shown in graph (a) a. is not binding. b. creates a surplus. c. creates a shortage. d. is binding. 15. Figure 6-2
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Refer to Figure 6-2. The price ceiling a. causes a shortage of 60 units of the good. b. makes it necessary for sellers to ration the good using a mechanism other than price. c. is not binding because it is set below the equilibrium price. d. causes a shortage of 30 units of the good. 16. Figure 6-2
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Refer to Figure 6-2. The price ceiling causes quantity a. supplied to exceed quantity demanded by 60 units. b. supplied to exceed quantity demanded by 90 units. c. demanded to exceed quantity supplied by 30 units. d. demanded to exceed quantity supplied by 90 units. 17. A legal minimum on the price at which a good can be sold is called a a. price subsidy. b. price floor. c. tax. d. price ceiling. 18. A price floor is a. a legal maximum on the price at which a good can be sold. b. often imposed when buyers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price floor. c. a source of efficiency in a market. d. a legal minimum on the price at which a good can be sold. 19. If a price floor is not binding, then a. the equilibrium price is above the price floor. b. the equilibrium price is below the price floor. c. there will be a surplus in the market. .
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Ch 06: Supply, Demand, and Government Policies d. there will be a shortage in the market. 20. If a price floor is not binding, then a. there will be a surplus in the market. b. there will be a shortage in the market. c. there will be no effect on the market price or quantity sold. d. the market will be less efficient than it would be without the price floor. 21. If a nonbinding price floor is imposed on a market, then the a. quantity sold in the market will decrease. b. quantity sold in the market will stay the same. c. price in the market will increase. d. price in the market will decrease. 22. If the government removes a binding price floor from a market, then the price paid by buyers will a. increase, and the quantity sold in the market will increase. b. increase, and the quantity sold in the market will decrease. c. decrease, and the quantity sold in the market will increase. d. decrease, and the quantity sold in the market will decrease. 23. A surplus results when a a. nonbinding price floor is imposed on a market. b. nonbinding price floor is removed from a market. c. binding price floor is imposed on a market. d. binding price floor is removed from a market. 24. If a binding price floor is imposed on the video game market, then a. the demand for video games will decrease. b. the supply of video games will increase. c. a surplus of video games will develop. d. a shortage of video games will develop. 25. Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. As a result of the price floor, the a. demand curve for toothpaste shifts to the left. b. supply curve for toothpaste shifts to the right. c. quantity demanded of toothpaste decreases, and the quantity of toothpaste that firms want to supply increases. d. quantity supplied of toothpaste stays the same. 26. Figure 6-3
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Refer to Figure 6-3. A government-imposed price of $24 in this market is an example of a a. binding price ceiling that creates a shortage. b. nonbinding price ceiling that creates a shortage. c. binding price floor that creates a surplus. d. nonbinding price floor that creates a surplus. 27. Figure 6-4 Graph (a)
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Graph (b)
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Refer to Figure 6-4. In graph (b), there will be a. a shortage. b. equilibrium in the market. c. a surplus. d. lines of people waiting to buy the good. 28. Price ceilings and price floors that are binding a. are desirable because they make markets more efficient and more fair. b. cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price. c. can have the effect of restoring a market to equilibrium. d. are imposed because they can make the individuals in the lowest income decile better off without causing adverse effects. 29. Consider the market for gasoline. Buyers a. and sellers would lobby for a price ceiling. b. and sellers would lobby for a price floor. c. would lobby for a price ceiling, whereas sellers would lobby for a price floor. d. would lobby for a price floor, whereas sellers would lobby for a price ceiling. 30. Figure 6-5
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Refer to Figure 6-5. Which of the following statements is not correct? a. When the price is $10, quantity supplied equals quantity demanded. b. When the price is $6, there is a surplus of 8 units. c. When the price is $12, there is a surplus of 4 units. d. When the price is $16, quantity supplied exceeds quantity demanded by 12 units. 31. Figure 6-5
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Refer to Figure 6-5. A government-imposed price of $12 in this market is an example of a a. binding price ceiling that creates a shortage. b. nonbinding price ceiling that creates a shortage. c. binding price floor that creates a surplus. d. nonbinding price floor that creates a surplus. 32. Figure 6-6
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Refer to Figure 6-6. When a certain price control is imposed on this market, the resulting quantity of the good that is actually bought and sold is such that buyers are willing and able to pay a maximum of P1 dollars per unit for that quantity and sellers are willing and able to accept a minimum of P2 dollars per unit for that quantity. If P1 − P2 = $3, then the price control is a. only a price ceiling of $3.00. b. only a price ceiling of $6.00. c. only a price floor of $6.00. d. either a price ceiling of $3.00 or a price floor of $6.00. 33. Figure 6-7
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Refer to Figure 6-7. If the government imposes a price ceiling at $6, it would be a. binding if market demand is Demand A or Demand B. b. nonbinding if market demand is Demand A or Demand B. c. binding if market demand is Demand A and nonbinding if market demand is Demand B. d. nonbinding if market demand is Demand A and binding if market demand is Demand B. 34. Figure 6-7
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Refer to Figure 6-7. Which of the following statements is not correct? a. A government-imposed price of $8 would be a binding price floor if market demand is Demand A and a binding price ceiling if market demand is Demand B. b. A government-imposed price of $10 would be a binding price ceiling if market demand is either Demand A or Demand B. c. A government-imposed price of $4 would be a binding price ceiling if market demand is either Demand A or Demand B. d. A government-imposed price of $10 would be a binding price floor if market demand is Demand A and a nonbinding price ceiling if market demand is Demand B. 35. Figure 6-8
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Refer to Figure 6-8. When the price ceiling is enforced in this market and the supply curve for gasoline shifts from S1 to S2, a. the market price will increase to P3. b. a surplus will occur at the new market price of P2. c. the market price will stay at P1. d. a shortage will occur at the new market price of P2. 36. Figure 6-8
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Refer to Figure 6-8. When the price ceiling is enforced in this market, and the supply curve for gasoline shifts from S1 to S2, the resulting quantity of gasoline that is bought and sold is a. less than Q3. b. Q3. c. between Q1 and Q3 d. at least Q1. 37. Figure 6-8
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Refer to Figure 6-8. In 1973, OPEC restricted supply and U.S. government regulations limited the price oil companies could charge for gasoline. Which of the following statements best relates the figure to the events that occurred in the United States in the 1970s? a. Buyers of gasoline paid a price of P1 before 1973; they paid a price of P2 after OPEC increased the price of crude oil in 1973, and there was a shortage of gasoline at that price. b. Buyers of gasoline paid a price of P1 before 1973; they paid a price of P3 after OPEC increased the price of crude oil in 1973, and there was a shortage of gasoline at that price. c. Buyers of gasoline paid a price of P2 before 1973; they paid a price of P3 after OPEC increased the price of crude oil in 1973, with no shortage of gasoline at that price. d. The price ceiling was binding before 1973; the price ceiling was no longer binding after OPEC increased the price of crude oil in 1973. 38. Table 6-1 The following table contains the demand schedule and supply schedule for a market for a particular good. Suppose sellers of the good successfully lobby Congress to impose a price floor $2 above the equilibrium price in this market. Price Quantity Demanded Quantity Supplied (Dollars per unit) (Units) (Units) 0 15 0 1 13 3 2 11 6 3 9 9 4 7 12 5 5 15 .
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Refer to Table 6-1. How many units of the good are purchased after the imposition of the price floor? a. 5 b. 9 c. 10 d. 15 39. Table 6-1 The following table contains the demand schedule and supply schedule for a market for a particular good. Suppose sellers of the good successfully lobby Congress to impose a price floor $2 above the equilibrium price in this market. Price Quantity Demanded Quantity Supplied (Dollars per unit) (Units) (Units) 0 15 0 1 13 3 2 11 6 3 9 9 4 7 12 5 5 15 6 3 18
Refer to Table 6-1. Following the imposition of a price floor $2 above the equilibrium price, irate buyers convince Congress to repeal the price floor and to impose a price ceiling $1 below the former price floor. The resulting market price is a. $2. b. $3. c. $4. d. $5. 40. Figure 6-9
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Refer to Figure 6-9. In this market, a minimum wage of $7.00 is a. binding and creates a labor shortage. b. binding and creates unemployment. c. nonbinding and creates a labor shortage. d. nonbinding and creates neither a labor shortage nor unemployment. 41. Figure 6-9
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Refer to Figure 6-9. In this market, a minimum wage of $7.00 creates a labor a. shortage of 2,000 worker hours. b. shortage of 4,000 worker hours. c. surplus of 2,000 worker hours. d. surplus of 4,000 worker hours. 42. In the 1970s, long lines at gas stations in the United States were primarily a result of the fact that a. OPEC raised the price of crude oil in world markets. b. U.S. gasoline producers raised the price of gasoline. c. the U.S. government maintained a price ceiling on gasoline. d. Americans typically commuted long distances. 43. When OPEC raised the price of crude oil in the 1970s, it caused the a. demand for gasoline to increase. b. demand for gasoline to decrease. c. supply of gasoline to increase. d. supply of gasoline to decrease. 44. When OPEC raised the price of crude oil in the 1970s, it caused the United States’ a. nonbinding price floor on gasoline to become binding. b. binding price floor on gasoline to become nonbinding. c. nonbinding price ceiling on gasoline to become binding. d. binding price ceiling on gasoline to become nonbinding. .
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Ch 06: Supply, Demand, and Government Policies 45. Rent control a. serves as an example of how a social problem can be alleviated or even solved by government policies. b. serves as an example of a price ceiling. c. is regarded by most economists as an efficient way of helping the poor. d. is the most efficient way to allocate scarce housing resources. 46. The goal of rent control is to a. facilitate controlled economic experiments in urban areas. b. help landlords by assuring them a low vacancy rate for their apartments. c. help individuals with lower income by assuring them an adequate supply of apartments. d. help individuals with lower income by making housing more affordable. 47. Which of the following is not a rationing mechanism used by landlords in cities with rent control? a. Waiting lists b. Race c. Price d. Bribes 48. Under rent control, bribery is a potential mechanism to a. bring the total price of an apartment (including the bribe) closer to the equilibrium price. b. allocate housing to the poorest individuals in the market. c. force the total price of an apartment (including the bribe) to be less than the market price. d. allocate housing to the most deserving tenants. 49. Under rent control, landlords can cease to be responsive to tenants' concerns about the quality of the housing because a. with rent control, the government guarantees landlords a minimum level of profit. b. they become resigned to the fact that many of their apartments are going to be vacant at any given time. c. with shortages and waiting lists, they have no incentive to maintain and improve their property. d. with rent control, it becomes the government's responsibility to maintain rental housing. 50. Which of the following is not a result of rent control? a. Fewer new apartments offered for rent b. Less maintenance provided by landlords c. Bribery d. Higher quality housing 51. In the housing market, supply and demand are a. more elastic in the short run than in the long run, and so rent control leads to a larger shortage of apartments in the short run than in the long run. b. more elastic in the short run than in the long run, and so rent control leads to a larger shortage of apartments in the long run than in the short run. c. more elastic in the long run than in the short run, and so rent control leads to a larger shortage of apartments in the short run than in the long run. d. more elastic in the long run than in the short run, and so rent control leads to a larger shortage of apartments in the long run than in the short run. .
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Ch 06: Supply, Demand, and Government Policies 52. In the market for apartments, rent control causes the quantity supplied a. and quantity demanded to fall. b. to fall and quantity demanded to rise. c. to rise and quantity demanded to fall. d. and quantity demanded to rise. 53. Which of the following is correct? a. Rent control and the minimum wage are both examples of price ceilings. b. Rent control is an example of a price ceiling, and the minimum wage is an example of a price floor. c. Rent control is an example of a price floor, and the minimum wage is an example of a price ceiling. d. Rent control and the minimum wage are both examples of price floors. 54. The minimum wage was instituted to ensure workers a. a middle-class standard of living. b. employment. c. a minimally adequate standard of living. d. unemployment compensation. 55. Which of the following is not correct? a. The economy contains many labor markets for different types of workers. b. The impact of a minimum wage depends on the skill and experience of the worker. c. A minimum wage would be binding for workers with high skills and much experience. d. A minimum wage would not be binding if the equilibrium wage was above the minimum wage. 56. The Earned Income Tax Credit, a government program that supplements the incomes of low-wage workers, is an example of a a. minimum-wage law. b. price ceiling. c. wage subsidy. d. rent subsidy. 57. One disadvantage of government subsidies over price controls is that subsidies a. prevent the attainment of equilibrium in the markets in which they are imposed. b. make higher taxes necessary. c. are always unfair to those with low incomes. d. cause unemployment. 58. Consider the U.S. market for chocolate, a market in which the government has imposed a nonbinding price ceiling. Which of the following events could convert the price ceiling from a nonbinding to a binding price ceiling? a. A government study that shows that consuming chocolate increases the incidence of cancer. b. A large increase in the size of the cocoa bean crop; cocoa beans are used to produce chocolate. c. South American cocoa bean producers refuse to ship to chocolate producers in the United States. d. A sharp drop in consumer income; chocolate is a normal good. .
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Ch 06: Supply, Demand, and Government Policies 59. If the government removes a tax on a good, then the price paid by buyers will a. increase, and the price received by sellers will increase. b. increase, and the price received by sellers will decrease. c. decrease, and the price received by sellers will increase. d. decrease, and the price received by sellers will decrease. 60. When a tax is placed on the sellers of a product, buyers pay a. more, and sellers receive more than they did before the tax. b. more, and sellers receive less than they did before the tax. c. less, and sellers receive more than they did before the tax. d. less, and sellers receive less than they did before the tax. 61. A tax on the sellers of coffee will increase the price of coffee paid by buyers, a. increase the effective price of coffee received by sellers, and increase the equilibrium quantity of coffee. b. increase the effective price of coffee received by sellers, and decrease the equilibrium quantity of coffee. c. decrease the effective price of coffee received by sellers, and increase the equilibrium quantity of coffee. d. decrease the effective price of coffee received by sellers, and decrease the equilibrium quantity of coffee. 62. If the government levies a $1,000 tax per boat on sellers of boats, then the price paid by buyers of boats would a. increase by more than $1,000. b. increase by exactly $1,000. c. increase by less than $1,000. d. decrease by an indeterminate amount. 63. When a tax is placed on the sellers of cell phones, the size of the cell phone market a. and the effective price received by sellers both increase. b. increases, but the effective price received by sellers decreases. c. decreases, but the effective price received by sellers increases. d. and the effective price received by sellers both decrease. 64. Suppose sellers of perfume are required to send $1.00 to the government for every bottle of perfume they sell. Further, suppose this tax causes the price paid by buyers of perfume to rise by $0.60 per bottle. Which of the following statements is correct? a. The effective price received by sellers is $0.40 per bottle less than it was before the tax. b. Sixty percent of the burden of the tax falls on sellers. c. This tax causes the demand curve for perfume to shift downward by $1.00 at each quantity of perfume. d. This tax does not change the quantity of perfume bought and sold. 65. If a tax is levied on the sellers of a product, then the demand curve will a. shift down. b. shift up. c. become flatter. d. not shift. 66. A tax on the buyers of cameras encourages .
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Ch 06: Supply, Demand, and Government Policies a. sellers to supply a smaller quantity at every price. b. buyers to demand a smaller quantity at every price. c. sellers to supply a larger quantity at every price. d. buyers to demand a larger quantity at every price. 67. Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then the a. demand curve will shift upward by $20, and the price paid by buyers will decrease by less than $20. b. demand curve will shift upward by $20, and the price paid by buyers will decrease by $20. c. supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20. d. supply curve will shift downward by $20, and the effective price received by sellers will increase by $20. 68. A $1.50 tax levied on the buyers of pomegranate juice will shift the demand curve a. upward by exactly $1.50. b. upward by less than $1.50. c. downward by exactly $1.50. d. downward by less than $1.50. 69. Suppose buyers of fountain drinks are required to send $0.50 to the government for every fountain drink they buy. Further, suppose this tax causes the effective price received by sellers of fountain drinks to fall by $0.20 per drink. Which of the following statements is correct? a. This tax causes the supply curve for fountain drinks to shift downward by $0.50 at each quantity. b. The price paid by buyers is $0.20 per drink more than it was before the tax. c. Forty percent of the burden of the tax falls on buyers. d. This tax causes the demand curve for fountain drinks to shift downward by $0.50 at each quantity. 70. Which of the following is not correct? a. Taxes levied on sellers and taxes levied on buyers are not equivalent. b. A tax places a wedge between the price that buyers pay and the price that sellers receive. c. The wedge between the buyers’ price and the sellers’ price is the same, regardless of whether the tax is levied on buyers or sellers. d. In the new after-tax equilibrium, buyers and sellers share the burden of the tax. 71. If the government wants to reduce the burning of fossil fuels, it should impose a tax on a. only the buyers of gasoline. b. only the sellers of gasoline. c. either buyers or sellers of gasoline. d. whichever side of the market is less elastic. 72. The term tax incidence refers to a. whether buyers or sellers of a good are required to send tax payments to the government. b. whether the demand curve or the supply curve shifts when the tax is imposed. c. the distribution of the tax burden between buyers and sellers. d. widespread view that taxes (and death) are the only certainties in life. .
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Ch 06: Supply, Demand, and Government Policies 73. When a tax is placed on the buyers of lemonade, the a. sellers bear the entire burden of the tax. b. buyers bear the entire burden of the tax. c. burden of the tax will always be equally divided between the buyers and the sellers. d. burden of the tax will be shared by the buyers and the sellers, but the division of the burden is not always equal. 74. If a tax is levied on the sellers of flour, then a. buyers will bear the entire burden of the tax. b. sellers will bear the entire burden of the tax. c. buyers and sellers will share the burden of the tax. d. the government will bear the entire burden of the tax. 75. Suppose the government imposes a 20-cent tax on the sellers of artificially-sweetened beverages. The tax would shift a. demand, raising both the equilibrium price and quantity in the market for artificially sweetened beverages. b. demand, lowering the equilibrium price and raising the equilibrium quantity in the market for artificially sweetened beverages. c. supply, raising the equilibrium price and lowering the equilibrium quantity in the market for artificially sweetened beverages. d. supply, lowering the equilibrium price and raising the equilibrium quantity in the market for artificially sweetened beverages. 76. Suppose the government imposes a 50-cent tax on the sellers of packets of chewing gum. The tax would a. shift the supply curve upward by less than 50 cents. b. raise the equilibrium price by 50 cents. c. create a 50-cent tax burden each for buyers and sellers. d. discourage market activity. 77. Figure 6-10 The vertical distance between points A and B represents the tax in the market.
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Refer to Figure 6-10. The price that buyers pay after the tax is imposed is a. $8. b. $10. c. $16. d. $24. 78. Figure 6-10 The vertical distance between points A and B represents the tax in the market.
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Refer to Figure 6-10. The amount of the tax per unit is a. $6. b. $8. c. $14. d. $18. 79. Figure 6-10 The vertical distance between points A and B represents the tax in the market.
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Refer to Figure 6-10. The per-unit burden of the tax on buyers is a. $6. b. $8. c. $14. d. $24. 80. Figure 6-11
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Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. What will be the new equilibrium quantity in this market? a. Less than 60 units b. 60 units c. Between 60 units and 100 units d. Greater than 100 units 81. Figure 6-11
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Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed? a. $3 b. Between $3 and $5 c. Between $5 and $7 d. $7 82. Figure 6-11
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Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. Which of the following is correct? a. One-fourth of the burden of the tax will fall on buyers, and three-fourths of the burden of the tax will fall on sellers. b. One-third of the burden of the tax will fall on buyers, and two-thirds of the burden of the tax will fall on sellers. c. One-half of the burden of the tax will fall on buyers, and one-half of the burden of the tax will fall on sellers. d. Two-thirds of the burden of the tax will fall on buyers, and one-third of the burden of the tax will fall on sellers. 83. Figure 6-12
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Refer to Figure 6-12. Suppose a tax of $5 per unit is imposed on this market. Which of the following is correct? a. Buyers and sellers will share the burden of the tax equally. b. Buyers will bear more of the burden of the tax than sellers will. c. Sellers will bear more of the burden of the tax than buyers will. d. There is no tax burden. 84. Figure 6-13
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Refer to Figure 6-13. What is the amount of the tax per unit? a. $1 b. $2 c. $3 d. $4 85. Figure 6-13
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Refer to Figure 6-13. Acme, Inc. is a seller of the good. Acme sells a unit of the good to a buyer and then pays the tax on that unit to the government. After paying the tax, Acme receives how much? a. $8.00 b. $9.00 c. $10.50 d. $12.00 86. Figure 6-13
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Refer to Figure 6-13. How is the burden of the tax shared between buyers and sellers? Buyers bear a. three-fourths of the burden, and sellers bear one-fourth of the burden. b. two-thirds of the burden, and sellers bear one-third of the burden. c. one-half of the burden, and sellers bear one-half of the burden. d. one-fourth of the burden, and sellers bear three-fourths of the burden. 87. Figure 6-13
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Refer to Figure 6-13. Suppose buyers, rather than sellers, were required to pay this tax (in the same amount per unit as shown in the graph). Relative to the tax on sellers, the tax on buyers would result in a. buyers bearing a larger share of the tax burden. b. sellers bearing a smaller share of the tax burden. c. the same amount of tax revenue for the government. d. an increase in the amount of tax revenue for the government. 88. Which of the following causes the price paid by buyers to be different than the price received by sellers? a. Binding price floor b. Binding price ceiling c. Tax on the good d. Nonbinding price control 89. The price paid by buyers in a market will decrease if the government a. increases a binding price floor in that market. b. increases a binding price ceiling in that market. c. decreases a tax on the good sold in that market. d. increases a tax on the good sold in that market. 90. Which of the following causes a shortage of a good? a. Binding price floor b. Binding price ceiling c. Tax on the good .
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Ch 06: Supply, Demand, and Government Policies d. Nonbinding price control 91. A payroll tax is a a. fixed number of dollars that every firm must pay to the government for each worker that the firm hires. b. tax that each firm must pay to the government before the firm can hire workers and operate its business. c. tax on the wages that firms pay their workers. d. tax on all wages above the minimum wage. 92. You receive a paycheck from your employer, and your pay stub indicates that $300 was deducted to pay the FICA (Social Security/Medicare) tax. Which of the following statements is correct? a. You will owe $300 per paycheck to pay the FICA tax for the remainder of the fiscal year regardless of your wages. b. Your employer is required by law to pay $150 to match half the $300 deducted from your check. c. This type of tax is an example of a sales tax. d. The $300 that you paid is not necessarily the true burden of the tax that falls on you, the employee. 93. Most labor economists believe that the supply of labor is a. less elastic than the demand, and, therefore, firms bear most of the burden of the payroll tax. b. less elastic than the demand, and, therefore, workers bear most of the burden of the payroll tax. c. more elastic than the demand, and, therefore, workers bear most of the burden of the payroll tax. d. more elastic than the demand, and, therefore, firms bear most of the burden of the payroll tax. 94. The federal government uses the revenue from the FICA (Federal Insurance Contribution Act) tax to pay for a. unemployment compensation. b. the salaries of members of Congress. c. Social Security and Medicare. d. housing subsidies for low-income people. 95. Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, then the a. buyers will bear a greater burden of the tax than the sellers. b. sellers will bear a greater burden of the tax than the buyers. c. buyers and sellers are likely to share the burden of the tax equally. d. buyers and sellers will not share the burden equally, but it is impossible to determine who will bear the greater burden of the tax without more information. 96. Suppose that the demand for picture frames is highly inelastic, and the supply of picture frames is highly elastic. A tax of $1 per frame levied on picture frames will increase the price paid by buyers of picture frames by a. less than $0.50. b. $0.50. c. between $0.50 and $1. d. $1. 97. Suppose that a tax is placed on books. If the buyers pay the majority of the tax, then we know that the a. demand is more inelastic than the supply. .
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Ch 06: Supply, Demand, and Government Policies b. supply is more inelastic than the demand. c. government has required that buyers remit the tax payments. d. government has required that sellers remit the tax payments. 98. Which of the following statements is correct? a. A tax levied on buyers will never be partially paid by sellers. b. Who bears the burden of a tax depends on the price elasticities of supply and demand. c. Government can decide who ultimately pays a tax. d. A tax levied on sellers always will be passed on completely to buyers. 99. Figure 6-14 Suppose the government imposes a $2 tax on this market.
Refer to Figure 6-14. The buyers will bear the highest share of the tax burden compared to sellers if the demand is a. D1, and the supply is S1. b. D2, and the supply is S1. c. D1, and the supply is S2. d. D2, and the supply is S2. 100. Figure 6-14 Suppose the government imposes a $2 tax on this market.
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Refer to Figure 6-14. Suppose D1 represents the demand curve for paperback novels, D2 represents the demand curve for gasoline, and S1 is representative of the supply curve for paperback novels as well as the supply curve for gasoline. After the imposition of the $2 tax on paperback novels and on gasoline, the a. buyers of gasoline bear a higher burden of the $2 tax than buyers of paperback novels. b. sellers of gasoline bear a higher burden of the $2 tax than sellers of paperback novels. c. buyers of gasoline bear an equal burden of the $2 tax as buyers of paperback novels. d. buyers of gasoline bear a lower burden of the $2 tax than buyers of paperback novels. 101. Figure 6-14 Suppose the government imposes a $2 tax on this market.
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Refer to Figure 6-14. Suppose D1 represents the demand curve for gasoline in both the short run and long run, S1 represents the supply curve for gasoline in the short run, and S2 represents the supply curve for gasoline in the long run. After the imposition of the $2 tax, the price paid by buyers will be a. higher in the long run than in the short run. b. higher in the short run than in the long run. c. equivalent in the short run and the long run. d. unable to be determined without additional information. 102. Figure 6-15 Graph (a)
Graph (b)
Graph (c)
Refer to Figure 6-15. In which market will the majority of the tax burden fall on buyers? .
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Ch 06: Supply, Demand, and Government Policies a. The market shown in graph (a) b. The market shown in graph (b) c. The market shown in graph (c) d. The tax burden on buyers is the same for all three graphs. 103. The burden of a luxury tax usually falls a. more on the rich customers than on the middle class workers. b. more on individuals with lower income than on the rich customers. c. more on the middle class workers than on the rich customers. d. equally on the rich customers, the middle class workers, and those with relatively less income.
Indicate whether the statement is true or false. 104. Economic policies often have effects that their architects did not intend or anticipate. a. True b. False 105. Price controls are usually enacted when policymakers believe that the market price of a good or service is unfair to buyers or sellers. a. True b. False 106. Price controls can generate inequities. a. True b. False 107. Rent-control laws dictate a minimum rent that landlords may charge tenants. a. True b. False 108. Minimum-wage laws dictate the lowest wage that firms may pay workers. a. True b. False 109. Policymakers use taxes to raise revenue for public purposes and to influence market outcomes. a. True b. False 110. If a good or service is sold in a competitive market free of government regulation, then the price of the good or service adjusts to balance supply and demand. a. True b. False 111. At the equilibrium price, the quantity that buyers want to buy exactly equals the quantity that sellers want to sell. a. True .
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Ch 06: Supply, Demand, and Government Policies b. False 112. Price is the rationing mechanism in a free, competitive market. a. True b. False 113. Prices are inefficient rationing devices. a. True b. False 114. When free markets ration goods with prices, it is both efficient and impersonal. a. True b. False 115. When a free market for a good reaches equilibrium, anyone who is willing and able to pay the market price can buy the good. a. True b. False 116. When a free market for a good reaches equilibrium, anyone who is willing and able to sell at the market price can sell the good. a. True b. False 117. A price ceiling is a legal minimum on the price at which a good or service can be sold. a. True b. False 118. A price ceiling set above the equilibrium price is not binding. a. True b. False 119. If a price ceiling is not binding, then it will have no effect on the market. a. True b. False 120. To be binding, a price ceiling must be set above the equilibrium price. a. True b. False 121. A price ceiling set below the equilibrium price is binding. a. True b. False 122. A price ceiling set below the equilibrium price is nonbinding. a. True .
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Ch 06: Supply, Demand, and Government Policies b. False 123. A price ceiling set below the equilibrium price causes quantity demanded to exceed quantity supplied. a. True b. False 124. A price ceiling set above the equilibrium price causes quantity demanded to exceed quantity supplied. a. True b. False 125. A binding price ceiling causes quantity demanded to be less than quantity supplied. a. True b. False 126. A price ceiling set below the equilibrium price causes a shortage in the market. a. True b. False 127. A price ceiling set above the equilibrium price causes a surplus in the market. a. True b. False 128. A binding price ceiling causes a shortage in the market. a. True b. False 129. When a binding price ceiling is imposed on a market for a good, some people who want to buy the good cannot do so. a. True b. False 130. Long lines and discrimination are examples of rationing methods that may naturally develop in response to a binding price ceiling. a. True b. False 131. Price ceilings are typically imposed to benefit buyers. a. True b. False 132. Price ceilings are typically imposed to benefit sellers. a. True b. False 133. Binding price ceilings benefit consumers because they allow consumers to buy all the goods they demand at a lower price. .
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Ch 06: Supply, Demand, and Government Policies a. True b. False 134. All buyers benefit from a binding price ceiling. a. True b. False 135. A binding price ceiling may not help all consumers, but it does not hurt any consumers. a. True b. False 136. When the government imposes a binding price ceiling on a competitive market, a surplus of the good arises, and sellers must ration the scarce goods among the large number of potential buyers. a. True b. False 137. The rationing mechanisms that develop under binding price ceilings are usually inefficient. a. True b. False 138. If a price ceiling of $2 per gallon is imposed on gasoline, and the market equilibrium price is $1.50, then the price ceiling is a binding constraint on the market. a. True b. False 139. If a price ceiling of $1.50 per gallon is imposed on gasoline, and the market equilibrium price is $2, then the price ceiling is a binding constraint on the market. a. True b. False 140. A price ceiling caused the gasoline shortage of 1973 in the United States. a. True b. False 141. One common example of a price ceiling is rent control. a. True b. False 142. The goal of rent control is to help individuals with lower income by making housing more affordable. a. True b. False 143. Economists argue that rent control is a highly efficient way to help individuals in the lowest income decile raise their standard of living. a. True b. False .
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Ch 06: Supply, Demand, and Government Policies 144. The primary effect of rent control in the short run is to reduce rents. a. True b. False 145. The effects of rent control in the long run include lower rents and lower-quality housing. a. True b. False 146. Rent control may lead to lower rents for those who find housing, but the quality of the housing may also be lower. a. True b. False 147. Renters of rent-controlled apartments will likely benefit from both lower rents and higher quality of apartments. a. True b. False 148. In a free market, the price of housing adjusts to eliminate the shortages that give rise to undesirable landlord behavior. a. True b. False 149. Because the supply and demand of housing are inelastic in the short run, the initial shortage caused by rent control is large. a. True b. False 150. The housing shortages caused by rent control are larger in the long run than in the short run because both the supply of housing and the demand for housing are more elastic in the long run. a. True b. False 151. A price floor is a legal minimum on the price at which a good or service can be sold. a. True b. False 152. A price floor set above the equilibrium price is not binding. a. True b. False 153. A price floor set above the equilibrium price is binding. a. True b. False 154. If a price floor is not binding, then it will have no effect on the market. a. True .
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Ch 06: Supply, Demand, and Government Policies b. False 155. To be binding, a price floor must be set above the equilibrium price. a. True b. False 156. A price floor set below the equilibrium price causes quantity supplied to exceed quantity demanded. a. True b. False 157. A price floor set above the equilibrium price causes quantity supplied to exceed quantity demanded. a. True b. False 158. A binding price floor causes quantity supplied to be less than quantity demanded. a. True b. False 159. A price floor set below the equilibrium price causes a surplus in the market. a. True b. False 160. A price floor set above the equilibrium price causes a surplus in the market. a. True b. False 161. A binding price floor causes a shortage in the market. a. True b. False 162. When a binding price floor is imposed on a market for a good, some people who want to sell the good cannot do so. a. True b. False 163. Discrimination is an example of a rationing mechanism that may naturally develop in response to a binding price floor. a. True b. False 164. Price floors are typically imposed to benefit buyers. a. True b. False 165. Price floors are typically imposed to benefit sellers. a. True b. False .
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Ch 06: Supply, Demand, and Government Policies 166. Binding price floors benefit sellers because they allow sellers to sell all the goods they want at a higher price. a. True b. False 167. Not all sellers benefit from a binding price floor. a. True b. False 168. A binding price floor may not help all sellers, but it does not hurt any sellers. a. True b. False 169. The rationing mechanisms that develop under binding price floors are usually efficient. a. True b. False 170. If the equilibrium price of an airline ticket is $400 and the government imposes a price floor of $500 on airline tickets, then fewer airline tickets will be sold than at the market equilibrium. a. True b. False 171. If the equilibrium price of an airline ticket is $500 and the government imposes a price floor of $400 on airline tickets, then fewer airline tickets will be sold than at the market equilibrium. a. True b. False 172. Figure 6-16
Refer to Figure 6-16. A price ceiling set at $30 would create a shortage of 20 units. a. True b. False .
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Ch 06: Supply, Demand, and Government Policies 173. Figure 6-16
Refer to Figure 6-16. A price ceiling set at $70 would create a shortage of 40 units. a. True b. False 174. Figure 6-16
Refer to Figure 6-16. A price floor set at $60 would create a surplus of 20 units. a. True b. False 175. Figure 6-16
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-16. A price floor set at $40 would create a surplus of 20 units. a. True b. False 176. Workers determine the supply of labor, and firms determine the demand for labor. a. True b. False 177. In an unregulated labor market, the wage adjusts to balance labor supply and labor demand. a. True b. False 178. The economy contains many labor markets for different types of workers. a. True b. False 179. One common example of a price floor is the minimum wage. a. True b. False 180. The goal of the minimum wage is to ensure workers a minimally adequate standard of living. a. True b. False 181. The United States is the only country in the world with minimum-wage laws. a. True b. False 182. States in the U.S. may mandate minimum wages above the federal level. a. True b. False .
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Ch 06: Supply, Demand, and Government Policies 183. A binding minimum wage causes the quantity of labor demanded to exceed the quantity of labor supplied. a. True b. False 184. A binding minimum wage creates unemployment. a. True b. False 185. A binding minimum wage creates a surplus of labor. a. True b. False 186. A binding minimum wage creates a shortage of labor. a. True b. False 187. A binding minimum wage may not help all workers, but it does not hurt any workers. a. True b. False 188. A binding minimum wage raises the incomes of some workers, but it lowers the incomes of workers who cannot find jobs. a. True b. False 189. The impact of the minimum wage depends on the skill and experience of the worker. a. True b. False 190. Workers with high skills and much experience are not typically affected by the minimum wage. a. True b. False 191. The minimum wage has its greatest impact on the market for teenage labor. a. True b. False 192. The minimum wage is more often binding for teenagers than for other members of the labor force. a. True b. False 193. Studies by economists have found that a 10 percent increase in the minimum wage decreases teenage employment by 10 percent. a. True b. False .
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Ch 06: Supply, Demand, and Government Policies 194. A large majority of economists favor eliminating the minimum wage. a. True b. False 195. Advocates of the minimum wage admit that it has some adverse effects, but they believe that these effects are small and that a higher minimum wage makes those with lower income better off. a. True b. False 196. If the equilibrium wage is $4 per hour and the minimum wage is $5.15 per hour, then a shortage of labor will exist. a. True b. False 197. Minimum-wage laws are precise policy instruments that can specifically target workers whose family incomes are low. a. True b. False 198. Minimum-wage laws benefit society by creating a surplus of labor. a. True b. False 199. Most economists are in favor of price controls as a way of allocating resources in the economy. a. True b. False 200. When policymakers set prices by legal decree, they obscure the signals that normally guide the allocation of society’s resources. a. True b. False 201. Price controls often hurt those they are trying to help. a. True b. False 202. Rent subsidies and wage subsidies are better than price controls at helping the people with lower income because they have no costs associated with them. a. True b. False 203. A price ceiling is always a binding price control, whereas a price floor may be either binding or not binding. a. True b. False 204. A tax on golf clubs will cause buyers of golf clubs to pay a higher price, sellers of golf clubs to receive a lower price, and fewer golf clubs to be sold. .
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Ch 06: Supply, Demand, and Government Policies a. True b. False 205. When a tax is imposed on a good, the result is always a shortage of the good. a. True b. False 206. When a tax of $1.00 per gallon is imposed on sellers of gasoline, the supply curve for gasoline shifts upward, but by less than $1.00. a. True b. False 207. A tax on sellers shifts the supply curve but not the demand curve. a. True b. False 208. A tax on sellers shifts the supply curve to the left. a. True b. False 209. A tax on sellers increases supply. a. True b. False 210. A tax on sellers and an increase in input prices affect the supply curve in the same way. a. True b. False 211. A tax of $1 on sellers shifts the supply curve upward by exactly $1. a. True b. False 212. A tax of $1 on sellers always increases the equilibrium price by $1. a. True b. False 213. A tax on sellers reduces the size of a market. a. True b. False 214. A tax on sellers increases the quantity of the good sold in the market. a. True b. False 215. A tax on sellers usually causes buyers to pay more for the good and sellers to receive less for the good than they did before the tax was levied. .
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Ch 06: Supply, Demand, and Government Policies a. True b. False 216. A tax on buyers shifts the demand curve and the supply curve. a. True b. False 217. A tax on buyers shifts the demand curve to the right. a. True b. False 218. A tax on buyers decreases demand. a. True b. False 219. A tax of $1 on buyers shifts the demand curve downward by exactly $1. a. True b. False 220. A tax of $1 on buyers always decreases the equilibrium price by $1. a. True b. False 221. A tax on buyers increases the size of a market. a. True b. False 222. A tax on buyers decreases the quantity of the good sold in the market. a. True b. False 223. A tax on buyers usually causes buyers to pay more for the good and sellers to receive less for the good than they did before the tax was levied. a. True b. False 224. Regardless of whether a tax is levied on sellers or buyers, taxes discourage market activity. a. True b. False 225. Regardless of whether a tax is levied on sellers or buyers, taxes encourage market activity. a. True b. False 226. Taxes levied on sellers and taxes levied on buyers are equivalent. a. True .
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Ch 06: Supply, Demand, and Government Policies b. False 227. The wedge between the buyers’ price and the sellers’ price is the same, regardless of whether the tax is levied on buyers or sellers. a. True b. False 228. The term tax incidence refers to how the burden of a tax is distributed among the various people who make up the economy. a. True b. False 229. If a tax is imposed on the sellers of a product, then the tax burden will fall entirely on the sellers. a. True b. False 230. If a tax is imposed on the buyers of a product, then the tax burden will fall entirely on the buyers. a. True b. False 231. Whether a tax is levied on sellers or buyers, buyers and sellers usually share the burden of taxes. a. True b. False 232. The tax incidence depends on whether the tax is levied on buyers or sellers. a. True b. False 233. Lawmakers can decide whether the buyers or the sellers must send a tax to the government, but they cannot legislate the true burden of a tax. a. True b. False 234. Buyers and sellers always share the burden of a tax equally. a. True b. False 235. Buyers and sellers rarely share the burden of a tax equally. a. True b. False 236. Who bears the majority of a tax burden depends on whether the tax is placed on the buyers or the sellers. a. True b. False 237. Figure 6-17 .
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-17. If the government places a $2 tax in the market, the buyer pays $4. a. True b. False 238. Figure 6-17
Refer to Figure 6-17. If the government places a $2 tax in the market, the buyer pays $6. a. True b. False 239. Figure 6-17
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-17. If the government places a $2 tax in the market, the seller receives $6. a. True b. False 240. Figure 6-17
Refer to Figure 6-17. If the government places a $2 tax in the market, the seller receives $4. a. True b. False 241. Figure 6-17
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-17. If the government places a $2 tax in the market, the buyer bears $2 of the tax burden. a. True b. False 242. Figure 6-17
Refer to Figure 6-17. If the government places a $2 tax in the market, the buyer bears $1 of the tax burden. a. True b. False 243. Figure 6-17
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-17. If the government places a $2 tax in the market, the seller bears $2 of the tax burden. a. True b. False 244. Figure 6-17
Refer to Figure 6-17. If the government places a $2 tax in the market, the seller bears $1 of the tax burden. a. True b. False 245. Most labor economists believe that the supply of labor is much more elastic than the demand. a. True b. False 246. FICA is an example of a payroll tax, which is a tax on the wages that firms pay their workers. a. True b. False 247. Since half of the FICA tax is paid by firms and the other half is paid by workers, the burden of the tax must fall .
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Ch 06: Supply, Demand, and Government Policies equally on firms and workers. a. True b. False 248. Workers, rather than firms, bear most of the burden of the payroll tax. a. True b. False 249. Who bears the majority of a tax burden depends on the relative elasticity of supply and demand. a. True b. False 250. If the demand curve is very elastic and the supply curve is very inelastic in a market, then the sellers will bear a greater burden of a tax imposed on the market, even if the tax is imposed on the buyers. a. True b. False 251. If the demand curve is very inelastic and the supply curve is very elastic in a market, then the sellers will bear a greater burden of a tax imposed on the market, even if the tax is imposed on the buyers. a. True b. False 252. A tax burden falls more heavily on the side of the market that is less elastic. a. True b. False 253. The tax burden falls more heavily on the side of the market that is more inelastic. a. True b. False 254. A tax on a market with elastic demand and elastic supply will shrink the market more than a tax on a market with inelastic demand and inelastic supply will shrink the market. a. True b. False 255. The true burden of a payroll tax has nothing to do with the percentage of the tax that employers are required to pay. a. True b. False 256. Even though federal law mandates that workers and firms each pay half of the total FICA tax, the tax burden may not fall equally on workers and firms. a. True b. False 257. Most of the burden of a luxury tax falls on the middle class workers who produce luxury goods rather than on the rich who buy them. .
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Ch 06: Supply, Demand, and Government Policies a. True b. False 258. The burden that results from a tax on yachts falls more heavily on the buyers of yachts than on the sellers of yachts. a. True b. False 259. The burden of a luxury tax most likely falls more heavily on sellers because demand is more elastic and supply is more inelastic. a. True b. False 260. Price ceilings are never binding when set above the equilibrium price. a. True b. False 261. Rent controls only affect the demand side of the rental market. a. True b. False 262. Since one effect of rent controls is to reduce the supply of available rental properties, rent controls can contribute to the problems of homelessness in cities with rent controls. a. True b. False 263. Long lines and gasoline shortages during the 1970s can be attributed completely to the decision by OPEC to raise crude oil prices. a. True b. False 264. Whether the minimum wage is a binding price floor always depends upon whether the economy is in a recession. a. True b. False 265. The distribution of the burden of a tax depends strictly on the elasticity of demand. a. True b. False 266. The distribution of the burden of a tax depends strictly on the elasticity of supply. a. True b. False 267. To determine the incidence of a tax, it is necessary to have information on both the elasticity of demand and the elasticity of supply. a. True b. False .
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Ch 06: Supply, Demand, and Government Policies 268. Since a tax imposed on buyers of a product only affects demand, such a tax has no impact on sellers in that market. a. True b. False 269. Since the FICA tax is split equally between employers and employees, we can conclude that the incidence of this tax is also equally shared. a. True b. False
270. Define a price ceiling. 271. When a price ceiling is binding, is the price ceiling set above or below the market equilibrium price? 272. Does a binding price ceiling result in a shortage or a surplus in the market? 273. Define a price floor. 274. When a price floor is binding, is the price floor set above or below the market equilibrium price? 275. Will a binding price floor result in a shortage or a surplus in the market? 276. Figure 6-18
Refer to Figure 6-18. If the government set a price ceiling at $9, would there be a shortage or surplus, and how large would be the shortage/surplus? 277. Figure 6-18
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-18. If the government set a price ceiling at $15, would there be a shortage or surplus, and how large would be the shortage/surplus? 278. Figure 6-18
Refer to Figure 6-18. If the government set a price ceiling at $8, would there be a shortage or surplus, and how large would be the shortage/surplus? 279. Figure 6-18
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-18. If the government set a price floor at $15, would there be a shortage or surplus, and how large would be the shortage/surplus? 280. Figure 6-18
Refer to Figure 6-18. If the government set a price floor at $9, would there be a shortage or surplus, and how large would be the shortage/surplus? 281. Figure 6-18
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-18. If the government set a price floor at $17, would there be a shortage or surplus, and how large would be the shortage/surplus? 282. Figure 6-19
Refer to Figure 6-19. If the government set a price ceiling at $40, would there be a shortage or surplus, and how large would be the shortage/surplus? 283. Figure 6-19
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-19. If the government set a price ceiling at $80, would there be a shortage or surplus, and how large would be the shortage/surplus? 284. Figure 6-19
Refer to Figure 6-19. If the government set a price ceiling at $50, would there be a shortage or surplus, and how large would be the shortage/surplus? 285. Figure 6-19
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-19. If the government set a price floor at $70, would there be a shortage or surplus, and how large would be the shortage/surplus? 286. Figure 6-19
Refer to Figure 6-19. If the government set a price floor at $55, would there be a shortage or surplus, and how large would be the shortage/surplus? 287. Scenario 6-1 Suppose that demand in the market for good X is given by the equation QD = 30 - P and that supply in the market for good X is given by the equation QS = 2P. Refer to Scenario 6-1. What are the equilibrium price and quantity in the market for good X? 288. Scenario 6-1 Suppose that demand in the market for good X is given by the equation QD = 30 - P and that supply in the market for good X is given by the equation QS = 2P. .
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Ch 06: Supply, Demand, and Government Policies Refer to Scenario 6-1. If the government set a price ceiling at $8, would there be a shortage or surplus, and how large would be the shortage/surplus? 289. Scenario 6-1 Suppose that demand in the market for good X is given by the equation QD = 30 - P and that supply in the market for good X is given by the equation QS = 2P. Refer to Scenario 6-1. If the government set a price ceiling at $12, would there be a shortage or surplus, and how large would be the shortage/surplus? 290. Scenario 6-1 Suppose that demand in the market for good X is given by the equation QD = 30 - P and that supply in the market for good X is given by the equation QS = 2P. Refer to Scenario 6-1. If the government set a price floor at $13, would there be a shortage or surplus, and how large would be the shortage/surplus? 291. Scenario 6-1 Suppose that demand in the market for good X is given by the equation QD = 30 - P and that supply in the market for good X is given by the equation QS = 2P. Refer to Scenario 6-1. If the government set a price floor at $7, would there be a shortage or surplus, and how large would be the shortage/surplus? 292. Scenario 6-2 Suppose demand for a product is given by the equation QD = 120 - 4P and supply for the product is given by the equation QS = 4P. Refer to Scenario 6-2. What are the equilibrium price and equilibrium quantity in the market for this product? 293. Scenario 6-2 Suppose demand for a product is given by the equation QD = 120 - 4P and supply for the product is given by the equation QS = 4P. Refer to Scenario 6-2. Suppose the government sets a price ceiling at $12 for this product. Is this price ceiling binding, and what will be the size of the shortage/surplus in this market? 294. Scenario 6-2 Suppose demand for a product is given by the equation QD = 120 - 4P and supply for the product is given by the equation QS = 4P. Refer to Scenario 6-2. Suppose the government sets a price ceiling at $17 for this product. Is this price ceiling binding, and what will be the size of the shortage/surplus in this market? 295. Scenario 6-2 .
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Ch 06: Supply, Demand, and Government Policies Suppose demand for a product is given by the equation QD = 120 - 4P and supply for the product is given by the equation QS = 4P. Refer to Scenario 6-2. Suppose the government sets a price floor at $13 for this product. Is this price floor binding, and what will be the size of the shortage/surplus in this market? 296. Scenario 6-2 Suppose demand for a product is given by the equation QD = 120 - 4P and supply for the product is given by the equation QS = 4P. Refer to Scenario 6-2. Suppose the government sets a price floor at $13 for this product. Initially, is this price floor binding? Suppose that for some reason demand were to decrease to QD = 80 - 4P. Would the $13 price floor be binding after the shift in the demand curve? If so, what is the size of the resulting shortage/surplus? 297. The following table shows the demand and supply schedules in a particular market. Price
Quantity Demanded
Quantity Supplied
$1 8 3 $3 6 6 $5 4 9 $7 2 12 $9 0 15 If the government sets a price floor $2 above the equilibrium price, how many units will be sold in this market?
298. Table 6-2 Quantity Demanded
Price ($) 0 1 2 3 4 5 6 7
21 18 15 12 9 6 3 0
Quantity Supplied 0 4 8 12 16 20 24 28
Refer to Table 6-2. If the government set a price ceiling at $2, would there be a shortage or surplus, and how large would be the shortage/surplus? 299. Table 6-2 Quantity .
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Ch 06: Supply, Demand, and Government Policies Price ($) 0 1 2 3 4 5 6 7
Demanded 21 18 15 12 9 6 3 0
Supplied 0 4 8 12 16 20 24 28
Refer to Table 6-2. If the government set a price ceiling at $4, would there be a shortage or surplus, and how large would be the shortage/surplus? 300. Table 6-2 Quantity Demanded
Price ($) 0 1 2 3 4 5 6 7
21 18 15 12 9 6 3 0
Quantity Supplied 0 4 8 12 16 20 24 28
Refer to Table 6-2. If the government set a price floor at $4, would there be a shortage or surplus, and how large would be the shortage/surplus? 301. Table 6-2 Quantity Demanded
Price ($) 0 1 2 3 4 5 6 7
21 18 15 12 9 6 3 0
Quantity Supplied 0 4 8 12 16 20 24 28
Refer to Table 6-2. If the government set a price floor at $2, would there be a shortage or surplus, and how large would be the shortage/surplus? 302. Table 6-2 .
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Ch 06: Supply, Demand, and Government Policies Quantity Demanded
Price ($) 0 1 2 3 4 5 6 7
21 18 15 12 9 6 3 0
Quantity Supplied 0 4 8 12 16 20 24 28
Refer to Table 6-2. In this market, over what range of prices would a price ceiling set by the government be binding? 303. Table 6-2 Quantity Demanded
Price ($) 0 1 2 3 4 5 6 7
21 18 15 12 9 6 3 0
Quantity Supplied 0 4 8 12 16 20 24 28
Refer to Table 6-2. In this market, over what range of prices would a price floor set by the government be binding? 304. Figure 6-20
Refer to Figure 6-20. Suppose a $3 per-unit tax is imposed on the sellers of this good. What price will buyers pay for the good after the tax is imposed? .
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Ch 06: Supply, Demand, and Government Policies 305. Figure 6-20
Refer to Figure 6-20. Suppose a $3 per-unit tax is imposed on the sellers of this good. What is the effective price that sellers will receive for the good after the tax is imposed? 306. Figure 6-20
Refer to Figure 6-20. Suppose a $3 per-unit tax is imposed on the sellers of this good. How much is the burden of this tax on the buyers in this market? 307. Figure 6-20
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-20. Suppose a $3 per-unit tax is imposed on the sellers of this good. How much is the burden of this tax on the sellers in this market? 308. Figure 6-20
Refer to Figure 6-20. Suppose a $4 per-unit tax is imposed on the sellers of this good. How many units of this good will be sold after the tax is imposed? 309. Figure 6-21
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-21. If the government imposes a tax of $6 per unit in this market, how many units will be bought and sold in the market after the tax is imposed? 310. Figure 6-21
Refer to Figure 6-21. If the government imposes a tax of $6 per unit in this market, how much will sellers receive per unit after the tax is imposed? 311. Figure 6-21
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-21. If the government imposes a tax of $6 per unit in this market, what price will buyers pay per unit after the tax is imposed? 312. Figure 6-21
Refer to Figure 6-21. If the government imposes a tax of $6 per unit in this market, how much is the burden of the tax on the buyers in this market? 313. Figure 6-21
.
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Ch 06: Supply, Demand, and Government Policies
Refer to Figure 6-21. If the government imposes a tax of $6 per unit in this market, how much is the burden of the tax on the sellers in this market? 314. Figure 6-21
Refer to Figure 6-21. If the government imposes a tax of $6 per unit in this market, who will bear the greater burden of the tax - the buyers, the sellers, or will the burden be shared equally? 315. In a particular market, market demand is given by the equation QD = 60 - P and market supply is given by the equation QS = P. Suppose a per-unit tax is imposed that reduces the number of units bought and sold in the market to 25 units. What is the size of the tax, and who bears the greater burden of the tax, buyers or sellers? 316. If the demand curve is more price elastic than the supply curve in a particular market, will the buyers or the sellers .
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Ch 06: Supply, Demand, and Government Policies bear a larger burden of a per-unit tax imposed on the market? 317. If the supply curve is more price elastic than the demand curve in a particular market, will the buyers or the sellers bear a larger burden of a per-unit tax imposed on the market? 318. If the demand curve is more price elastic than the supply curve, will the buyers or the sellers bear a greater burden of a tax? Draw a diagram to illustrate your answer. 319. If the supply curve is more price elastic than the demand curve, will the buyers or the sellers bear a greater burden of a tax? Draw a diagram to illustrate your answer. 320. Using a supply and demand diagram, show a labor market with a binding minimum wage. Use the diagram to show those who are helped by the minimum wage and those who are hurt by the minimum wage. 321. a. Use the following graph to analyze the effect a $300 price ceiling would have on the market for ten-speed bicycles. Would this be a binding price ceiling? b. Use the following graph to analyze the effect a $700 price floor would have on this market for ten-speed bicycles. Would this be a binding price floor? c. Why would policymakers choose to impose a price ceiling or price floor?
322. Use the following graph to answer the following questions: a. What was the equilibrium price in this market before the tax? b. What is the amount of the tax? c. How much of the tax will the buyers pay? d. How much of the tax will the sellers pay? e. How much will the buyer pay for the product after the tax is imposed? f. How much will the seller receive after the tax is imposed? g. As a result of the tax, what has happened to the level of market activity?
.
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323. Use the following graph to answer the following questions: a. What was the equilibrium price in this market before the tax? b. What is the amount of the tax? c. How much of the tax will the buyers pay? d. How much of the tax will the sellers pay? e. How much will the buyer pay for the product after the tax is imposed? f. How much will the seller receive after the tax is imposed? g. As a result of the tax, what has happened to the level of market activity?
324. Use the following graph, in which the vertical distance between points A and B represents the tax in the market, to answer the following questions: a. What was the equilibrium price and quantity in this market before the tax? b. What is the amount of the tax? c. How much of the tax will the buyers pay? d. How much of the tax will the sellers pay? e. How much will the buyer pay for the product after the tax is imposed? f. How much will the seller receive after the tax is imposed? g. As a result of the tax, what has happened to the level of market activity?
.
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325. How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams.
.
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Ch 06: Supply, Demand, and Government Policies Answer Key 1. b 2. c 3. c 4. b 5. d 6. a 7. a 8. b 9. c 10. a 11. c 12. c 13. b 14. a 15. b 16. d 17. b 18. d 19. a 20. c 21. b 22. c 23. c 24. c 25. c .
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Ch 06: Supply, Demand, and Government Policies 26. c 27. c 28. b 29. c 30. b 31. c 32. d 33. d 34. b 35. d 36. a 37. a 38. a 39. b 40. b 41. d 42. c 43. d 44. c 45. b 46. d 47. c 48. a 49. c 50. d 51. d .
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Ch 06: Supply, Demand, and Government Policies 52. b 53. b 54. c 55. c 56. c 57. b 58. c 59. c 60. b 61. d 62. c 63. d 64. a 65. d 66. b 67. c 68. c 69. d 70. a 71. c 72. c 73. d 74. c 75. c 76. d .
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Ch 06: Supply, Demand, and Government Policies 77. d 78. c 79. b 80. c 81. c 82. c 83. c 84. d 85. a 86. a 87. c 88. c 89. c 90. b 91. c 92. d 93. b 94. c 95. a 96. c 97. a 98. b 99. d 100. a 101. a 102. b .
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Ch 06: Supply, Demand, and Government Policies 103. c 104. True 105. True 106. True 107. False 108. True 109. True 110. True 111. True 112. True 113. False 114. True 115. True 116. True 117. False 118. True 119. True 120. False 121. True 122. False 123. True 124. False 125. False 126. True 127. False .
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Ch 06: Supply, Demand, and Government Policies 128. True 129. True 130. True 131. True 132. False 133. False 134. False 135. False 136. False 137. True 138. False 139. True 140. True 141. True 142. True 143. False 144. True 145. True 146. True 147. False 148. True 149. False 150. True 151. True 152. False 153. True .
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Ch 06: Supply, Demand, and Government Policies 154. True 155. True 156. False 157. True 158. False 159. False 160. True 161. False 162. True 163. True 164. False 165. True 166. False 167. True 168. False 169. False 170. True 171. False 172. False 173. False 174. True 175. False 176. True 177. True 178. True .
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Ch 06: Supply, Demand, and Government Policies 179. True 180. True 181. False 182. True 183. False 184. True 185. True 186. False 187. False 188. True 189. True 190. True 191. True 192. True 193. False 194. False 195. True 196. False 197. False 198. False 199. False 200. True 201. True 202. False 203. False 204. True .
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Ch 06: Supply, Demand, and Government Policies 205. False 206. False 207. True 208. True 209. False 210. True 211. True 212. False 213. True 214. False 215. True 216. False 217. False 218. True 219. True 220. False 221. False 222. True 223. True 224. True 225. False 226. True 227. True 228. True 229. False .
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Ch 06: Supply, Demand, and Government Policies 230. False 231. True 232. False 233. True 234. False 235. True 236. False 237. False 238. True 239. False 240. True 241. False 242. True 243. False 244. True 245. False 246. True 247. False 248. True 249. True 250. True 251. False 252. True 253. True 254. True 255. True .
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Ch 06: Supply, Demand, and Government Policies 256. True 257. True 258. False 259. True 260. True 261. False 262. True 263. False 264. False 265. False 266. False 267. True 268. False 269. False 270. A price ceiling is a legal maximum on the price at which a good can be sold. 271. A binding price ceiling will be set below the market equilibrium price. 272. A binding price ceiling will result in a shortage in the market. 273. A price floor is a legal minimum on the price at which a good can be sold. 274. A binding price floor will be set above the market equilibrium price. 275. A binding price floor will result in a surplus in the market. 276. There would be a shortage of 6 units. 277. A price ceiling set at $15 would not be binding, so there would be neither a shortage nor a surplus. 278. A price ceiling set at $8 would result in a shortage of 8 units. 279. A price floor set at $15 would result in a surplus of 6 units. 280. A price floor set at $9 would not be binding, so there would be neither a shortage nor a surplus. .
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Ch 06: Supply, Demand, and Government Policies 281. A price floor set at $17 would result in a surplus of 10 units. 282. There would be a shortage of 20 units. 283. A price ceiling set at $80 would not be binding and, therefore, would not result in a shortage or surplus. 284. A price ceiling set at $50 would result in a shortage of 10 units. 285. A price floor set at $70 would result in a surplus of 10 units. 286. A price floor set at $55 would not be binding and, therefore, would not result in a shortage or surplus. 287. The equilibrium price is $10 and the equilibrium quantity is 20 units. 288. A price ceiling set at $8 would result in a shortage of 6 units. 289. A price ceiling set at $12 would not be binding, so there would be neither a shortage nor a surplus. 290. A price floor set at $13 would result in a surplus of 9 units. 291. A price floor set at $7 would not be binding, so there would be neither a shortage nor a surplus. 292. The equilibrium price is $15 and the equilibrium quantity is 60 units. 293. The price ceiling will be binding, and there will be a shortage of 24 units. 294. The price ceiling will not be binding and, therefore, there will be no shortage or surplus in this market resulting from the price ceiling. 295. The price floor will not be binding and, therefore, there will be no shortage or surplus in this market resulting from the price floor. 296. Initially the price floor is not binding since $13 is below the market equilibrium price of $15. However, when the demand curve shifts, the equilibrium price becomes $10. Thus, the price floor is now binding and will result in a surplus of 24 units. 297. The equilibrium price is $3, so the price floor is set at $5, which is a binding price floor. The number of units sold in the market will be the quantity demanded at the price floor, which is 4 units. 298. A price ceiling set at $2 would be binding and would result in a shortage of 7 units. 299. A price ceiling set at $4 would not be binding and, therefore, would not result in a shortage or surplus. 300. A price floor set at $4 would be binding and would result in a surplus of 7 units. 301. A price floor set at $2 would not be binding and, therefore, would not result in a shortage or surplus. 302. A price ceiling must be set below the equilibrium price to be binding. Therefore, a price ceiling will be binding in this market if it is set anywhere below $3. 303. A price floor must be set above the equilibrium price to be binding. Therefore, a price floor will be binding in this .
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Ch 06: Supply, Demand, and Government Policies market if it is set anywhere above $3. 304. Buyers will pay $11.50. 305. The effective price that sellers will receive is $8.50. 306. The burden of the tax on buyers is $1.50. 307. The burden of the tax on sellers is $1.50. 308. With a $4 per-unit tax, 8 units will be sold in this market. 309. With a $6 tax per unit, the number of transactions will fall to 30 units. 310. With a $6 tax per unit, the amount received by sellers will fall to $6 per unit. 311. With a $6 tax per unit, the price buyers pay will rise to $12 per unit. 312. With a $6 tax per unit, the price buyers pay will rise from $8 to $12 per unit. Therefore, the burden of the tax on buyers is $4 per unit. 313. With a $6 tax per unit, the amount sellers receive will fall from $8 to $6 per unit. Therefore, the burden of the tax on sellers is $2 per unit. 314. With a $6 tax per unit, the burden of the tax on buyers is $4 and the burden of the tax on sellers is $2. Therefore, buyers will bear a greater burden of the tax. 315. If the number of transactions falls to 25 units, plugging 25 into the demand and supply curves gives a price paid by buyers of $35 and an amount received by sellers of $25. Therefore, the tax is $10 per unit. In addition, since the initial equilibrium price in this market is $30, the buyers and the sellers share the burden of the tax equally. 316. The sellers will bear the larger burden of the tax. 317. The buyers will bear the larger burden of the tax. 318. When the demand curve is more elastic than the supply curve, the sellers will bear the greater burden of a tax imposed on the market. A graph such as the following illustrates this.
.
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where P’ is the price paid by buyers and P’’ is the amount received by sellers after the tax is imposed. 319. When the supply curve is more price elastic than the demand curve, the buyers will bear the greater burden of a tax imposed on the market. A graph such as the following illustrates this.
where P’ is the price paid by buyers and P’’ is the amount received by sellers after the tax is imposed.
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320.
Those who are helped by the minimum wage are the workers who are still employed and now receive the higher wage. In the diagram, those would be measured by the quantity of labor demanded at the minimum wage, q0. The minimum wage creates unemployment equal to the difference between the quantity of labor supplied and the quantity demanded at the minimum wage, q2-q0. The perceptive student might note that the unemployed group can be divided into those who lose their jobs as a result of the minimum wage (the competitive equilibrium quantity of labor minus the quantity demanded at the minimum wage, q1-q0), and those who enter the market as a result of the higher wage but cannot find employment (quantity of labor supplied at the minimum wage minus the competitive equilibrium quantity, q2-q1). The buyers of the labor (employers) are also worse off because they have to pay a higher wage for labor and, hence, hire a smaller quantity. 321. a.
b.
c.
For this example, a $300 price ceiling would cause a shortage of 4,000 bicycles. A price ceiling is binding if it is set at any price below equilibrium price. Because the equilibrium price in this market is $500, this would be a binding price ceiling. For this example, a $700 price floor would cause a surplus of 4,000 bicycles. A price floor is binding if it is set at any price above equilibrium price. Because the equilibrium price in this market is $500, this would be a binding price floor. More than one reason may exist for policymakers to impose a price ceiling or price floor in a market. Often this is done in an attempt to increase equality; a price ceiling may be imposed if policymakers perceive the equilibrium price to be unfair to buyers, and a price floor may be imposed if policymakers perceive the equilibrium price to be unfair to sellers.
322. a. $6 b. $4 c. $1 d. $3 e. $7 f. $3 As a result of the tax, the level of market activity has fallen, from 60 units bought and g. sold to only 50 units bought and sold. 323. a. $5 b. $3 c. $2 .
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$1 $7 $4 As a result of the tax, the level of market activity has fallen, from 10 units bought and sold to only 8 units bought and sold.
324. a. $8; 8,000 units b. $5 c. $3 d. $2 e. $11 f. $6 As a result of the tax, instead of 8,000 units bought and sold, only 6,000 will be bought g. and sold.
325.
The tax burden falls more heavily on the side of the market that is more inelastic.
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Ch 07: Consumers, Producers, and the Efficiency of Markets
Indicate the answer choice that best completes the statement or answers the question. 1. The particular price that results in quantity supplied being equal to quantity demanded is the best price because it a. maximizes costs of the seller. b. maximizes tax revenue for the government. c. maximizes the combined welfare of buyers and sellers. d. minimizes the expenditure of buyers. 2. A demand curve reflects each of the following except the a. willingness to pay of all buyers in the market. b. value each buyer in the market places on the good. c. highest price buyers are willing to pay for each quantity. d. quantity that each buyer will ultimately purchase. 3. On a graph, consumer surplus is represented by the area a. between the demand and supply curves. b. below the demand curve and above the price. c. below the price and above the supply curve. d. below the demand curve and to the right of equilibrium price. 4. Table 7-1 Buyer Calvin Sam Andrew Lori
Willingness to Pay (Dollars) 150 135 120 100
Refer to Table 7-1. If the price of the product is $110, then who would be willing to purchase the product? a. Calvin b. Calvin and Sam c. Calvin, Sam, and Andrew d. Calvin, Sam, Andrew, and Lori 5. Table 7-2 Buyer Carlos Quilana Wilbur Ming-la
.
Willingness to Pay (Dollars) 15 25 35 45
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Ch 07: Consumers, Producers, and the Efficiency of Markets Refer to Table 7-2. If there is only one unit of the good and if the buyers bid against each other for the right to purchase it, then the good will sell for a. $15 or slightly less. b. $25 or slightly more. c. $35 or slightly more. d. $45 or slightly less. 6. Table 7-2 Willingness to Pay (Dollars) 15 25 35 45
Buyer Carlos Quilana Wilbur Ming-la
Refer to Table 7-2. Who experiences the largest loss of consumer surplus when the price of the good increases from $20 to $22? a. Quilana b. Wilbur c. Ming-la d. All three buyers experience the same loss of consumer surplus. 7. Table 7-3 Buyer Jennifer Bryce Dan David Ken Lisa
Willingness to Pay for a Baseball Game Ticket (Dollars) 10 15 20 25 50 60
Refer to Table 7-3. If you have a ticket that you sell to the group in an auction, what will be the selling price? a. Slightly more than $20 b. Slightly more than $25 c. Slightly more than $50 d. Slightly more than $60 8. Table 7-3 Buyer .
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Jennifer Bryce Dan David Ken Lisa
(Dollars) 10 15 20 25 50 60
Refer to Table 7-3. If you have two (essentially) identical tickets that you sell to the group in an auction, assuming that each person can only buy one ticket, which of the following is closest to the selling price for each ticket? a. $21 b. $26 c. $51 d. $61 9. Table 7-4 For each of the three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Allison, Bob, and Charisse are the only three buyers of oranges, and only three oranges can be supplied per day. Willingness to Pay (Dollars) First Orange Allison 2.00 Bob 1.50 Charisse 0.75
Willingness to Pay (Dollars) Second Orange 1.50 1.00 0.25
Willingness to Pay (Dollars) Third Orange 0.75 0.60 0.00
Refer to Table 7-4. The market quantity of oranges demanded per day is exactly seven if the price of an orange, P, satisfies a. $0.60 < P < $0.75. b. $0.60 < P < $2.00. c. $0.25 < P < $0.75. d. $0.25 < P < $0.60. 10. Table 7-4 For each of the three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Allison, Bob, and Charisse are the only three buyers of oranges, and only three oranges can be supplied per day. Willingness to Pay (Dollars) First Orange Allison 2.00 Bob 1.50 Charisse 0.75 .
Willingness to Pay (Dollars) Second Orange 1.50 1.00 0.25
Willingness to Pay (Dollars) Third Orange 0.75 0.60 0.00 Page 3
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Refer to Table 7-4. If the market price of an orange is $0.90, then the market quantity of oranges demanded per day is a. 5. b. 2. c. 3. d. 4. 11. Table 7-4 For each of the three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Allison, Bob, and Charisse are the only three buyers of oranges, and only three oranges can be supplied per day. Willingness to Pay (Dollars) First Orange Allison 2.00 Bob 1.50 Charisse 0.75
Willingness to Pay (Dollars) Second Orange 1.50 1.00 0.25
Willingness to Pay (Dollars) Third Orange 0.75 0.60 0.00
Refer to Table 7-4. If the market price of an orange increases from $0.80 to $1.05, then consumer surplus a. increases by $0.75. b. decreases by $0.95. c. decreases by $0.75. d. decreases by $1.00. 12. Table 7-4 For each of the three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Allison, Bob, and Charisse are the only three buyers of oranges, and only three oranges can be supplied per day. Willingness to Pay (Dollars) First Orange Allison 2.00 Bob 1.50 Charisse 0.75
Willingness to Pay (Dollars) Second Orange 1.50 1.00 0.25
Willingness to Pay (Dollars) Third Orange 0.75 0.60 0.00
Refer to Table 7-4. Who experiences the largest loss of consumer surplus when the price of an orange increases from $0.70 to $1.40? a. Allison b. Bob c. Charisse d. All three individuals experience the same loss of consumer surplus. .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 13. Table 7-4 For each of the three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Allison, Bob, and Charisse are the only three buyers of oranges, and only three oranges can be supplied per day. Willingness to Pay (Dollars) First Orange Allison 2.00 Bob 1.50 Charisse 0.75
Willingness to Pay (Dollars) Second Orange 1.50 1.00 0.25
Willingness to Pay (Dollars) Third Orange 0.75 0.60 0.00
Refer to Table 7-4. Who experiences the largest gain in consumer surplus when the price of an orange decreases from $1.05 to $0.75? a. Allison b. Bob c. Charisse d. Allison and Bob experience the same gain in consumer surplus, and Charisse's gain is zero. 14. Table 7-4 For each of the three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Allison, Bob, and Charisse are the only three buyers of oranges, and only three oranges can be supplied per day. Willingness to Pay (Dollars) First Orange Allison 2.00 Bob 1.50 Charisse 0.75
Willingness to Pay (Dollars) Second Orange 1.50 1.00 0.25
Willingness to Pay (Dollars) Third Orange 0.75 0.60 0.00
Refer to Table 7-4. Which of the following statements is correct? a. Neither Bob's consumer surplus nor Charisse's consumer surplus can exceed Allison's consumer surplus, for any price of an orange. b. All three individuals will buy at least one orange only if the price of an orange is less than $0.25. c. If the price of an orange is $0.60, then consumer surplus is $4.90. d. Charisse will always have the highest consumer surplus. 15. Table 7-5 Buyer Michael Earvin Larry Charles .
Willingness to Pay (Dollars) 500 400 350 300 Page 5
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Ch 07: Consumers, Producers, and the Efficiency of Markets
Refer to Table 7-5. You are selling extra tickets to the Midwest Regional Sweet 16 game in the men's NCAA basketball tournament. The table shows the willingness to pay of the four potential buyers in the market for a ticket to the game. Which of the following graphs represents the market demand curve? a.
b.
c.
d.
.
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16. Table 7-6 During the last two days, Chad purchased a latte from two different stores. The following table shows Chad's willingness to pay on each day and his consumer surplus from each purchase. Chad's Willingness to Pay Chad's Consumer Surplus (Dollars) (Dollars) First Day 5.00 1.25 Second Day 4.00 0.75
Refer to Table 7-6. The price that Chad paid for a latte on the first day is a. $3.75. b. $6.25. c. $5.00. d. $5.50. 17. You are offered a free ticket to see the Chicago Cubs play the Chicago White Sox at Wrigley Field. Assume the ticket has no resale value. Willie Nelson is performing on the same night, and his concert is your next-best alternative activity. Tickets to see Willie Nelson cost $40. On any given day, you would be willing to pay up to $50 to see and hear Willie Nelson perform. Assume there are no other costs of seeing either event. Based on this information, at a minimum, how much would you have to value seeing the Cubs play the White Sox to accept the ticket and go to the game? a. $0 b. $10 c. $40 d. $50 18. A drought in California destroys many red grapes causing the prices of both red grapes and red wine to rise. As a result, the consumer surplus in the market for red grapes a. increases, and the consumer surplus in the market for red wine increases. b. increases, and the consumer surplus in the market for red wine decreases. c. decreases, and the consumer surplus in the market for red wine increases. d. decreases, and the consumer surplus in the market for red wine decreases. 19. Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book? a. $6 .
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Ch 07: Consumers, Producers, and the Efficiency of Markets b. $2 c. $8 d. $4 20. If a consumer places a value of $15 on a particular good and if the price of the good is $17, then the a. consumer has consumer surplus of $2 if he or she buys the good. b. consumer does not purchase the good. c. market is not a competitive market. d. price of the good will fall due to market forces. 21. Henry is willing to pay 45 cents, and Janine is willing to pay 55 cents, for 1 pound of bananas. When the price of bananas falls from 50 cents a pound to 40 cents a pound, a. Henry experiences an increase in consumer surplus, but Janine does not. b. Janine experiences an increase in consumer surplus, but Henry does not. c. both Janine and Henry experience an increase in consumer surplus. d. neither Janine nor Henry experiences an increase in consumer surplus. 22. Dawn's bridal boutique is having a sale on evening dresses. The increase in consumer surplus comes from the benefit of the lower prices to a. only existing customers who now get lower prices on the gowns they were already planning to purchase. b. only new customers who enter the market because of the lower prices. c. both existing customers who now get lower prices on the gowns they were already planning to purchase and new customers who enter the market because of the lower prices. d. Consumer surplus does not increase; it decreases. 23. Billie Jo values a stainless steel dishwasher for her new house at $500, but she succeeds in buying one for $425. Billie Jo's willingness to pay for the dishwasher is a. $150. b. $425. c. $500. d. $850. 24. If the price a consumer pays for a product is equal to a consumer's willingness to pay, then the consumer surplus relevant to that purchase is a. zero. b. negative, and the consumer would not purchase the product. c. positive, and the consumer would purchase the product. d. There is not enough information given to answer this question. 25. Suppose there is an early freeze in California that reduces the size of the lemon crop. As the price of lemons rises, what happens to consumer surplus in the market for lemons? a. Consumer surplus increases b. Consumer surplus decreases c. Consumer surplus is not affected by this change in market forces d. We would have to know whether the demand for lemons is relatively elastic or inelastic to make this .
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Ch 07: Consumers, Producers, and the Efficiency of Markets determination 26. Suppose the market demand curve for a good passes through the point (quantity demanded = 100, price = $25). If there are five buyers in the market, then a. the marginal buyer's willingness to pay for the 100th unit of the good is $25. b. the sum of the five buyers' willingness to pay for the 100th unit of the good is $25. c. the average of the five buyers' willingness to pay for the 100th unit of the good is $25. d. all of the five buyers are willing to pay at least $25 for the 100th unit of the good. 27. If the cost of producing sofas decreases causing the price of sofas to decrease, consumer surplus in the sofa market will a. increase. b. decrease. c. remain constant. d. increase for some buyers and decrease for other buyers. 28. All else equal, what happens to consumer surplus if the price of a good increases? a. Consumer surplus increases b. Consumer surplus decreases c. Consumer surplus is unchanged d. Consumer surplus may increase, decrease, or remain unchanged 29. When the demand for a good increases and the supply of the good remains unchanged, consumer surplus a. decreases. b. is unchanged. c. increases. d. may increase, decrease, or remain unchanged. 30. Suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer surplus in the television market a. decreases. b. is unchanged. c. increases. d. may increase, decrease, or remain unchanged. 31. Motor oil and gasoline are complements. If the price of motor oil increases, consumer surplus in the gasoline market a. decreases. b. is unchanged. c. increases. d. may increase, decrease, or remain unchanged. 32. Dallas buys strawberries, and he would be willing to pay more than he now pays. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then a. Dallas's consumer surplus would be unaffected. .
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Ch 07: Consumers, Producers, and the Efficiency of Markets b. Dallas's consumer surplus would increase. c. Dallas's consumer surplus would decrease. d. Dallas would be wise to buy fewer strawberries than before. 33. Figure 7-1
Refer to Figure 7-1. When the price is P1, consumer surplus is a. A. b. A+B. c. A+B+C. d. A+B+D. 34. Figure 7-1
.
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Refer to Figure 7-1. When the price rises from P1 to P2, consumer surplus a. increases by an amount equal to A. b. decreases by an amount equal to B+C. c. increases by an amount equal to B+C. d. decreases by an amount equal to C. 35. Figure 7-1
.
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Refer to Figure 7-1. Area C represents the a. decrease in consumer surplus which results from a downward-sloping demand curve. b. consumer surplus to new consumers who enter the market when the price falls from P2 to P1. c. increase in producer surplus when quantity sold increases from Q2 to Q1. d. decrease in consumer surplus to each consumer in the market when the price increases from P1 to P2. 36. Figure 7-2
.
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Refer to Figure 7-2. At the equilibrium price, consumer surplus is a. $1,600. b. $800. c. $1,400. d. $700. 37. Figure 7-2
.
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Refer to Figure 7-2. If the government imposes a price floor of $110 in this market, then consumer surplus will decrease by a. $200. b. $400. c. $600. d. $800. 38. Which of the following is true when the price of a good or service rises? a. Buyers who were already buying the good or service are better off. b. Some buyers exit the market. c. The total consumer surplus in the market increases. d. The total value of purchases before and after the price change is the same. 39. What happens to consumer surplus in the cell phone market if cell phones are normal goods and buyers of cell phones experience an increase in income? a. Consumer surplus decreases. b. Consumer surplus remains unchanged. c. Consumer surplus increases. d. Consumer surplus may increase, decrease, or remain unchanged. 40. As a result of a decrease in price, a. new buyers enter the market, increasing consumer surplus. b. new buyers enter the market, decreasing consumer surplus. c. existing buyers exit the market, increasing consumer surplus. .
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Ch 07: Consumers, Producers, and the Efficiency of Markets d. existing buyers exit the market, decreasing consumer surplus. 41. A seller's opportunity cost measures the a. value of everything they must give up to produce a good. b. amount they paid for a good minus their cost of providing it. c. consumer surplus. d. out-of-pocket expenses to produce a good but not the value of their time. 42. Cost is a measure of the a. seller's willingness to sell. b. seller's producer surplus. c. producer shortage. d. seller's willingness to buy. 43. Justin builds fences for a living. Justin's out-of-pocket expenses (for wood, paint, etc.) plus the value that he places on his own time amount to his a. producer surplus. b. producer deficit. c. cost of building fences. d. profit. 44. A supply curve can be used to measure producer surplus because it reflects a. the actions of sellers. b. quantity supplied. c. sellers' costs. d. the amount that will be purchased by consumers in the market. 45. Producer surplus is a. measured using the demand curve for a good. b. always a negative number for sellers in a competitive market. c. the amount a seller is paid minus the cost of production. d. the opportunity cost of production minus the cost of producing goods that go unsold. 46. Allen tutors in his spare time for extra income. Buyers of his service are willing to pay $40 per hour for as many hours Allen is willing to tutor. On a particular day, he is willing to tutor the first hour for $10, the second hour for $18, the third hour for $28, and the fourth hour for $40. Assume Allen is rational in deciding how many hours to tutor. His producer surplus is a. $40. b. $64. c. $12. d. $56. 47. At Nick's Bakery, the cost to make a cheese danish is $1.50 per danish. As a result of selling 10 danishes, Nick experiences a producer surplus in the amount of $20. Nick must be selling his danishes for a. $2.00 each. .
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Ch 07: Consumers, Producers, and the Efficiency of Markets b. $0.50 each. c. $3.50 each. d. $5.00 each. 48. Kristi and Rebecca sell lemonade on the corner for $0.50 per cup. It costs them $0.10 to make each cup. On a certain day, their producer surplus is $20. How many cups did Kristi and Rebecca sell? a. 40 b. 200 c. 8 d. 50 49. Table 7-7 Seller Abby Bobby Dianne Evaline Carlos
Cost (Dollars) 1,600 1,300 1,100 900 800
Refer to Table 7-7. If the market price is $1,000, the producer surplus in the market is a. $1000. b. $300. c. $1,700. d. $700. 50. Table 7-7 Seller Abby Bobby Dianne Evaline Carlos
Cost (Dollars) 1,600 1,300 1,100 900 800
Refer to Table 7-7. If the price is $1,150, who would be willing to supply the product? a. Abby and Bobby b. Abby, Bobby, and Dianne c. Carlos, Dianne, and Evaline d. Dianne and Evaline only 51. Table 7-7 .
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Seller Abby Bobby Dianne Evaline Carlos
Cost (Dollars) 1,600 1,300 1,100 900 800
Refer to Table 7-7. Suppose each of the five sellers can supply at most one unit of the good. The market quantity supplied is exactly 2 if the price is a. $1,700. b. $1,100. c. $1,650. d. $1,050. 52. Table 7-8 Seller Evan Selena Angie Kris
Cost (Dollars) 50 100 150 200
Refer to Table 7-8. If the sellers bid against each other for the right to sell the good to a consumer, then the good will sell for a. $50 or slightly more. b. $100 or slightly less. c. $150 or slightly less. d. $200 or slightly more. 53. Table 7-9 Opportunity Cost for Seller Providing 10 Piano Lessons (Dollars) Marcia 200 Jan 250 Cindy 350 Greg 400 Peter 700 Bobby 800
.
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Refer to Table 7-9. The equilibrium market price for 10 piano lessons is $400. What is the total producer surplus in the market? a. $0 b. $300 c. $400 d. $700 54. Table 7-10 Seller LeBron Kobe Kevin Steve
Cost (Dollars) 700 600 450 400
Refer to Table 7-10. You want to hire a professional photographer to take pictures of your family. The table shows the costs of the four potential sellers in the local photography market. Which of the following graphs represents the market supply curve? a.
b.
c.
.
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d.
55. Figure 7-3
Refer to Figure 7-3. If the price of the good is $14, then producer surplus is .
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Ch 07: Consumers, Producers, and the Efficiency of Markets a. $19.50. b. $22.50. c. $20.50. d. $25.00. 56. Figure 7-4
Refer to Figure 7-4. Which area represents producer surplus when the price is P1? a. BCG b. ACH c. ABGD d. DGH 57. Figure 7-4
.
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Refer to Figure 7-4. Which area represents the increase in producer surplus when the price rises from P1 to P2? a. BCG b. ACH c. ABGD d. AHGB 58. Figure 7-5
.
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Refer to Figure 7-5. If the supply curve is S, the demand curve is D, and the equilibrium price is $100, what is the producer surplus? a. $625 b. $1,250 c. $2,500 d. $5,000 59. Figure 7-5
.
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Refer to Figure 7-5. If the supply curve is S', the demand curve is D, and the equilibrium price is $150, what is the producer surplus? a. $625 b. $1,250 c. $2,500 d. $5,000 60. Figure 7-5
.
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Refer to Figure 7-5. If the demand curve is D and the supply curve shifts from S' to S, what is the change in producer surplus? a. Producer surplus increases by $625. b. Producer surplus increases by $1,875. c. Producer surplus decreases by $625. d. Producer surplus decreases by $1,875. 61. Figure 7-5
.
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Refer to Figure 7-5. If the supply curve is S and the demand curve shifts from D to D', what is the change in producer surplus? a. Producer surplus increases by $3,125 b. Producer surplus increases by $5,625 c. Producer surplus decreases by $3,125 d. Producer surplus decreases by $5,625 62. Figure 7-5
.
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Refer to Figure 7-5. If the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus to existing producers? a. $625 b. $2,500 c. $3,125 d. $5,625 63. Figure 7-5
.
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Refer to Figure 7-5. If the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus due to new producers entering the market? a. $625 b. $2,500 c. $3,125 d. $5,625 64. Figure 7-6
.
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Refer to Figure 7-6. When the price is P2, producer surplus is a. A. b. A+C. c. A+B+C. d. D+G. 65. Figure 7-6
.
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Refer to Figure 7-6. Suppose producer surplus is larger than C but smaller than A+B+C. The price of the good must be a. lower than P1. b. P1. c. between P1 and P2. d. higher than P2. 66. Figure 7-6
.
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Refer to Figure 7-6. When the price falls from P2 to P1, producer surplus a. decreases by an amount equal to C. b. decreases by an amount equal to A+B. c. decreases by an amount equal to A+C. d. increases by an amount equal to A+B. 67. Figure 7-6
.
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Refer to Figure 7-6. Area A represents a. producer surplus to new producers entering the market as the result of an increase in price from P1 to P2. b. the increase in consumer surplus that results from an upward-sloping supply curve. c. the increase in total surplus when sellers are willing and able to increase supply from Q1 to Q2. d. the increase in producer surplus to those producers already in the market when the price increases from P1 to P2. 68. Producer surplus directly measures a. the well-being of society as a whole. b. the well-being of buyers and sellers. c. the well-being of sellers. d. sellers' willingness to sell. 69. Which of the following will cause an increase in producer surplus? a. The imposition of a binding price ceiling in the market b. Buyers expect the price of the good to be lower next month c. The price of a substitute increases d. Income increases and buyers consider the good to be inferior 70. The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate a. increases, and producer surplus increases. b. increases, and producer surplus decreases. .
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Ch 07: Consumers, Producers, and the Efficiency of Markets c. decreases, and producer surplus increases. d. decreases, and producer surplus decreases. 71. Which of the following events would increase producer surplus? a. Sellers' costs stay the same and the price of the good increases. b. Sellers' costs increase and the price of the good stays the same. c. Sellers' costs increase and the price of the good decreases. d. Sellers' costs stay the same and the price of the good decreases. 72. Which tools allow economists to determine if the allocation of resources determined by free markets is desirable? a. Profits and costs to firms b. Consumer and producer surplus c. The equilibrium price and quantity d. Incomes of and prices paid by buyers 73. We can say that the allocation of resources is efficient if a. producer surplus is maximized. b. consumer surplus is maximized. c. total surplus is maximized. d. sellers' costs are minimized. 74. The distinction between efficiency and equality can be described as follows: a. Efficiency refers to maximizing the number of trades among buyers and sellers; equality refers to maximizing the gains from trade among buyers and sellers. b. Efficiency refers to minimizing the price paid by buyers; equality refers to maximizing the gains from trade among buyers and sellers. c. Efficiency refers to maximizing the size of the pie; equality refers to producing a pie of a given size at the least possible cost. d. Efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society. 75. If an allocation of resources is efficient, then a. consumer surplus is maximized. b. producer surplus is maximized. c. all potential gains from trade among buyers are sellers are being realized. d. the allocation achieves equality as well. 76. Moving production from a high-cost producer to a low-cost producer will a. lower total surplus. b. raise total surplus. c. lower producer surplus. d. raise producer surplus but lower consumer surplus. 77. Table 7-11 .
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Ch 07: Consumers, Producers, and the Efficiency of Markets Price Quantity Demanded Quantity Supplied (Dollars per unit) (Units) (Units) 12.00 0 36 10.00 3 30 8.00 6 24 6.00 9 18 4.00 12 12 2.00 15 6 0.00 18 0
Refer to Table 7-11. The equilibrium price is a. $10.00. b. $8.00. c. $6.00. d. $4.00. 78. Table 7-11 Price Quantity Demanded Quantity Supplied (Dollars per unit) (Units) (Units) 12.00 0 36 10.00 3 30 8.00 6 24 6.00 9 18 4.00 12 12 2.00 15 6 0.00 18 0
Refer to Table 7-11. At a price of $2.00, total surplus is a. larger than it would be at the equilibrium price. b. smaller than it would be at the equilibrium price. c. the same as it would be at the equilibrium price. d. There is insufficient information to make this determination. 79. Table 7-11 Price Quantity Demanded Quantity Supplied (Dollars per unit) (Units) (Units) 12.00 0 36 10.00 3 30 8.00 6 24 .
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9 12 15 18
18 12 6 0
Refer to Table 7-11. Both the demand curve and the supply curve are straight lines. At equilibrium, consumer surplus is a. $24. b. $36. c. $42. d. $48. 80. Table 7-11 Price Quantity Demanded Quantity Supplied (Dollars per unit) (Units) (Units) 12.00 0 36 10.00 3 30 8.00 6 24 6.00 9 18 4.00 12 12 2.00 15 6 0.00 18 0
Refer to Table 7-11. Both the demand curve and the supply curve are straight lines. At equilibrium, producer surplus is a. $24. b. $32. c. $48. d. $64. 81. Table 7-11 Price Quantity Demanded Quantity Supplied (Dollars per unit) (Units) (Units) 12.00 0 36 10.00 3 30 8.00 6 24 6.00 9 18 4.00 12 12 2.00 15 6 0.00 18 0 .
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Refer to Table 7-11. Both the demand curve and the supply curve are straight lines. At equilibrium, total surplus is a. $44. b. $56. c. $72. d. $96. 82. Table 7-11 Price Quantity Demanded Quantity Supplied (Dollars per unit) (Units) (Units) 12.00 0 36 10.00 3 30 8.00 6 24 6.00 9 18 4.00 12 12 2.00 15 6 0.00 18 0
Refer to Table 7-11. Both the demand curve and the supply curve are straight lines. If the price is $4 but only 6 units are bought and sold, consumer surplus will be a. $21. b. $28. c. $36. d. $42. 83. Table 7-11 Price Quantity Demanded Quantity Supplied (Dollars per unit) (Units) (Units) 12.00 0 36 10.00 3 30 8.00 6 24 6.00 9 18 4.00 12 12 2.00 15 6 0.00 18 0
Refer to Table 7-11. Both the demand curve and the supply curve are straight lines. If the price is $4 but only 6 units are bought and sold, producer surplus will be .
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Ch 07: Consumers, Producers, and the Efficiency of Markets a. $16. b. $18. c. $24. d. $26. 84. Table 7-11 Price Quantity Demanded Quantity Supplied (Dollars per unit) (Units) (Units) 12.00 0 36 10.00 3 30 8.00 6 24 6.00 9 18 4.00 12 12 2.00 15 6 0.00 18 0
Refer to Table 7-11. Both the demand curve and the supply curve are straight lines. If the price is $4 but only 6 units are bought and sold, total surplus will be a. $42. b. $48. c. $54. d. $60. 85. Figure 7-7
.
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Refer to Figure 7-7. If the government imposes a price ceiling of $55 in this market, then total surplus will be a. $187.50. b. $125.00. c. $250.00. d. $266.67. 86. Figure 7-8
.
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Refer to Figure 7-8. Total surplus can be measured as the area a. JNK. b. JNML. c. JRL. d. JNL. 87. Figure 7-9
.
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Refer to Figure 7-9. The equilibrium price is a. P1. b. P2. c. P3. d. P4. 88. Figure 7-9
.
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Refer to Figure 7-9. At equilibrium, consumer surplus is represented by the area a. A. b. A+B+C. c. D+H+F. d. A+B+C+D+H+F. 89. Figure 7-9
.
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Refer to Figure 7-9. If the price were P3, consumer surplus would be represented by the area a. A. b. A+B+C. c. D+H+F. d. A+B+C+D+H+F. 90. Figure 7-9
.
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Refer to Figure 7-9. At equilibrium, producer surplus is represented by the area a. F. b. F+G. c. D+H+F. d. D+H+F+G+I. 91. Figure 7-9
.
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Refer to Figure 7-9. At equilibrium, total surplus is represented by the area a. A+B+C. b. A+B+D+F. c. A+B+C+D+H+F. d. A+B+C+D+H+F+G+I. 92. Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6, producer surplus a. would necessarily increase even if the higher price resulted in a surplus of widgets. b. would necessarily decrease because the higher price would create a surplus of widgets. c. might increase or decrease. d. would be unaffected. 93. A simultaneous increase in both the demand for tablets and the supply of tablets would imply that a. both the value of tablets to consumers and the cost of producing tablets has increased. b. both the value of tablets to consumers and the cost of producing tablets has decreased. c. the value of tablets to consumers has decreased, and the cost of producing tablets has increased. d. the value of tablets to consumers has increased, and the cost of producing tablets has decreased. 94. Tomato sauce and spaghetti noodles are complementary goods. A decrease in the price of tomatoes will a. increase consumer surplus in the market for tomato sauce and decrease producer surplus in the market for spaghetti noodles. b. increase consumer surplus in the market for tomato sauce and increase producer surplus in the market for spaghetti noodles. .
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Ch 07: Consumers, Producers, and the Efficiency of Markets c. decrease consumer surplus in the market for tomato sauce and increase producer surplus in the market for spaghetti noodles. d. decrease consumer surplus in the market for tomato sauce and decrease producer surplus in the market for spaghetti noodles. 95. Steak and chicken are substitutes. A sharp reduction in the supply of steak would a. increase consumer surplus in the market for steak and decrease producer surplus in the market for chicken. b. increase consumer surplus in the market for steak and increase producer surplus in the market for chicken. c. decrease consumer surplus in the market for steak and increase producer surplus in the market for chicken. d. decrease consumer surplus in the market for steak and decrease producer surplus in the market for chicken. 96. Efficiency in a market is achieved when a. a social planner intervenes and sets the quantity of output after evaluating buyers' willingness to pay and sellers' costs. b. the sum of producer surplus and consumer surplus is maximized. c. all firms are producing the good at the same low cost per unit. d. no buyer is willing to pay more than the equilibrium price for any unit of the good. 97. A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it a. maximizes both the total revenue for firms and the quantity supplied of the product. b. maximizes the combined welfare of buyers and sellers. c. minimizes costs and maximizes output. d. minimizes the level of welfare payments. 98. The distinction between efficiency and equality can be described as follows: a. Efficiency refers to maximizing the number of trades among buyers and sellers; equality refers to maximizing the gains from trade among buyers and sellers. b. Efficiency refers to minimizing the price paid by buyers; equality refers to maximizing the gains from trade among buyers and sellers. c. Efficiency refers to maximizing the size of the pie; equality refers to producing a pie of a given size at the least possible cost. d. Efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society.
Indicate whether the statement is true or false. 99. Welfare economics is the study of the welfare system. a. True b. False 100. The willingness to pay is the maximum amount that a buyer will pay for a good and measures how much the buyer values the good. a. True b. False 101. For any given quantity, the price on a demand curve represents the marginal buyer's willingness to pay. .
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Ch 07: Consumers, Producers, and the Efficiency of Markets a. True b. False 102. A buyer is willing to buy a product at a price greater than or equal to their willingness to pay, but would refuse to buy a product at a price less than their willingness to pay. a. True b. False 103. Consumer surplus is the amount a buyer actually has to pay for a good minus the amount the buyer is willing to pay for it. a. True b. False 104. Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually has to pay for it. a. True b. False 105. Consumer surplus measures the benefit to buyers of participating in a market. a. True b. False 106. Consumer surplus can be measured as the area between the demand curve and the equilibrium price. a. True b. False 107. Consumer surplus can be measured as the area between the demand curve and the supply curve. a. True b. False 108. Joel has a 1966 Mustang, which he sells to Susie, an avid car collector. Susie is pleased since she paid $8,000 for the car but would have been willing to pay $11,000 for the car. Susie's consumer surplus is $2,000. a. True b. False 109. If Darby values a soccer ball at $50, and she pays $40 for it, her consumer surplus is $10. a. True b. False 110. If Darby values a soccer ball at $50, and she pays $40 for it, her consumer surplus is $90. a. True b. False 111. All else equal, an increase in supply will cause an increase in consumer surplus. a. True b. False .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 112. Suppose there is an increase in supply that reduces market price. Consumer surplus increases because (1) consumer surplus received by existing buyers increases and (2) new buyers enter the market. a. True b. False 113. If the government imposes a binding price floor in a market, then the consumer surplus in that market will increase. a. True b. False 114. If the government imposes a binding price floor in a market, then the consumer surplus in that market will decrease. a. True b. False 115. All else equal, an increase in demand will always increase consumer surplus. a. True b. False 116. If Rosa is willing to pay $450 for hockey tickets and has consumer surplus of $175, the price of the tickets is $625. a. True b. False 117. Suppose you buy an iPod for $100. If your consumer surplus is $30, your willingness to pay is $70. a. True b. False 118. The lower the price, the lower the consumer surplus, all else equal. a. True b. False 119. In order to calculate consumer surplus in a market, we need to know willingness to pay and price. a. True b. False 120. An increase in price increases consumer surplus. a. True b. False 121. Each seller of a product is willing to sell as long as the price they can receive is greater than the opportunity cost of producing the product. a. True b. False 122. At any quantity, the price given by the supply curve shows the cost of the lowest-cost seller. a. True b. False .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 123. In a competitive market, sales go to those producers who are willing to supply the product at the lowest price. a. True b. False 124. Producer surplus is the amount a seller is paid minus the cost of production. a. True b. False 125. Producer surplus is the cost of production minus the amount a seller is paid. a. True b. False 126. All else equal, an increase in demand will cause an increase in producer surplus. a. True b. False 127. All else equal, a decrease in demand will cause an increase in producer surplus. a. True b. False 128. If producing a soccer ball costs Jake $5, and he sells it for $40, his producer surplus is $45. a. True b. False 129. If producing a soccer ball costs Jake $5, and he sells it for $40, his producer surplus is $35. a. True b. False 130. Connie can clean windows in large office buildings at a cost of $1 per window. The market price for windowcleaning services is $3 per window. If Connie cleans 100 windows, her producer surplus is $100. a. True b. False 131. Connie can clean windows in large office buildings at a cost of $1 per window. The market price for windowcleaning services is $3 per window. If Connie cleans 100 windows, her producer surplus is $200. a. True b. False 132. The area below the price and above the supply curve measures the producer surplus in a market. a. True b. False 133. The area below the demand curve and above the supply curve measures the producer surplus in a market. a. True b. False .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 134. If the government imposes a binding price ceiling in a market, then the producer surplus in that market will increase. a. True b. False 135. When demand increases so that market price increases, producer surplus increases because (1) producer surplus received by existing sellers increases and (2) new sellers enter the market. a. True b. False 136. The lower the price, the lower the producer surplus, all else equal. a. True b. False 137. Producer surplus measures the benefit to sellers from receiving a price above their costs. a. True b. False 138. If the government removes a binding price ceiling in a market, then the producer surplus in that market will increase. a. True b. False 139. Let P represent price; let QS represent quantity supplied; and assume the equation of the supply curve is P = 10 + (1/4)QS . If 80 units of the good are produced and sold, then producer surplus amounts to $1,200. a. True b. False 140. Let P represent price; let QS represent quantity supplied; and assume the equation of the supply curve is P = 15 + (1/3) QS . If 90 units of the good are produced and sold, then producer surplus amounts to $1,350. a. True b. False 141. The cost of production plus producer surplus is the price a seller is paid. a. True b. False 142. Total surplus in a market is consumer surplus minus producer surplus. a. True b. False 143. Total surplus = Value to buyers - Costs to sellers. a. True b. False 144. Total surplus in a market can be measured as the area below the supply curve plus the area above the demand curve, up to the point of equilibrium. .
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Ch 07: Consumers, Producers, and the Efficiency of Markets a. True b. False 145. Producing a soccer ball costs Jake $5. He sells it to Darby for $35. Darby values the soccer ball at $50. For this transaction, the total surplus in the market is $40. a. True b. False 146. The equilibrium of supply and demand in a market maximizes the total benefits to buyers and sellers of participating in that market. a. True b. False 147. Efficiency refers to whether a market outcome is fair, while equality refers to whether the maximum amount of output was produced from a given number of inputs. a. True b. False 148. Efficiency is related to the size of the economic pie, whereas equality is related to how the pie gets sliced and distributed. a. True b. False 149. Free markets allocate (a) the supply of goods to the buyers who value them most highly and (b) the demand for goods to the sellers who can produce them at least cost. a. True b. False 150. Economists generally believe that, although there may be advantages to society from ticket-scalping, the costs to society of this activity outweigh the benefits. a. True b. False 151. Economists argue that restrictions against ticket scalping actually drive up the cost of many tickets. a. True b. False 152. Ticket scalping can increase total surplus in the market for tickets to sporting events. a. True b. False 153. If the United States legally allowed for a market in transplant organs, it is estimated that one kidney would sell for at least $100,000. a. True b. False 154. Even though participants in the economy are motivated by self-interest, the "invisible hand" of the marketplace .
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Ch 07: Consumers, Producers, and the Efficiency of Markets guides this self-interest into promoting general economic well-being. a. True b. False 155. The current policy on kidney donation effectively sets a price ceiling of zero. a. True b. False 156. Wendy is willing to pay $50 for a concert ticket and Bruce would like to receive $25. If the market price is $40 for this transaction, then the total surplus would be $15. a. True b. False 157. Suppose you sell a kayak for $600, but you were willing to sell it for $450. The buyer was willing to pay $650. The total surplus is $200. a. True b. False 158. If a market is in equilibrium, then it is impossible for a social planner to raise economic welfare by increasing or decreasing the quantity of the good. a. True b. False 159. Unless markets are perfectly competitive, they may fail to maximize the total benefits to buyers and sellers. a. True b. False 160. In order to conclude that markets are efficient, we assume that they are perfectly competitive. a. True b. False 161. Markets will always allocate resources efficiently. a. True b. False 162. When markets fail, public policy can potentially remedy the problem and increase economic efficiency. a. True b. False 163. Market power and externalities are examples of market failures. a. True b. False
164. What do economists call the highest amount a consumer will pay to purchase a good? .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 165. If John’s willingness to pay for a good is $20 and the price of the good is $15, how much is John’s consumer surplus from purchasing the good? 166. Table 7-12 The following table shows the willingness to pay for a good for the only four consumers in a market. Consumer A B C D
Willingness to Pay $25 $40 $15 $30
Refer to Table 7-12. If the price of the good is $20, how many units will be demanded? 167. Table 7-12 The following table shows the willingness to pay for a good for the only four consumers in a market. Consumer A B C D
Willingness to Pay $25 $40 $15 $30
Refer to Table 7-12. If the price of the good is $20, how much is the total consumer surplus? 168. Scenario 7-1 Suppose market demand is given by the equation QD = 40 - 2P. Refer to Scenario 7-1. If the market equilibrium price is $10, how much is total consumer surplus in this market? 169. Scenario 7-1 Suppose market demand is given by the equation QD = 40 - 2P. Refer to Scenario 7-1. If the market equilibrium price rises from $10 to $15, what is the change in total consumer surplus in the market? 170. Scenario 7-1 Suppose market demand is given by the equation QD = 40 - 2P. Refer to Scenario 7-1. If the market equilibrium price falls from $10 to $5, what is the change in total consumer surplus in the market? 171. Scenario 7-1 Suppose market demand is given by the equation QD = 40 - 2P. Refer to Scenario 7-1. If the market equilibrium price falls from $10 to $5, how much additional consumer surplus do consumers initially in the market at the $10 price receive? 172. Scenario 7-1 Suppose market demand is given by the equation QD = 40 - 2P. .
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Ch 07: Consumers, Producers, and the Efficiency of Markets Refer to Scenario 7-1. If the market equilibrium price falls from $10 to $5, how much consumer surplus do consumers entering the market after the price drop receive? 173. Figure 7-10
Refer to Figure 7-10. If the market equilibrium price is $120, how much is total consumer surplus? 174. Figure 7-10
Refer to Figure 7-10. If the market equilibrium price falls from $120 to $80, how much is the change in total consumer surplus in the market? 175. Figure 7-10 .
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Ch 07: Consumers, Producers, and the Efficiency of Markets
Refer to Figure 7-10. If the market equilibrium price falls from $120 to $80, how much is the increase in consumer surplus to the consumers who were initially in the market at the $120 price? 176. Figure 7-10
Refer to Figure 7-10. If the market equilibrium price falls from $120 to $80, how much consumer surplus do consumers entering the market after the price drop receive? 177. Suppose John’s cost for performing some carpentry work is $120. If John is paid $200 for the carpentry work, what is his producer surplus? 178. Table 7-13 The following table shows the cost of producing a good for the only four producers in a market. Producer .
Cost Page 53
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Ch 07: Consumers, Producers, and the Efficiency of Markets W X Y Z
$40 $30 $20 $10
Refer to Table 7-13. If the market price is $28, which producers will supply units in the market? 179. Table 7-13 The following table shows the cost of producing a good for the only four producers in a market. Producer W X Y Z
Cost $40 $30 $20 $10
Refer to Table 7-13. If the market equilibrium price is $28, what is total producer surplus in the market? 180. Table 7-13 The following table shows the cost of producing a good for the only four producers in a market. Producer W X Y Z
Cost $40 $30 $20 $10
Refer to Table 7-13. If these four producers bid in an auction to supply one unit to a consumer, at what price will the good be sold? 181. Figure 7-11
Refer to Figure 7-11. If the market equilibrium price is $25, how much is total producer surplus in this market? .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 182. Figure 7-11
Refer to Figure 7-11. If the market equilibrium price is $35, how much is total producer surplus in this market? 183. Figure 7-11
Refer to Figure 7-11. If the market equilibrium price rises from $25 to $35, how much is the increase in producer surplus to the producers supplying units at the initial $25 price? 184. Figure 7-11
.
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Ch 07: Consumers, Producers, and the Efficiency of Markets
Refer to Figure 7-11. If the market equilibrium price rises from $25 to $35, how much is the producer surplus for the producers entering the market after the price increase? 185. Table 7-14 Willingness to Pay ($)
Buyer A B C D
15 30 45 60
Seller W X Y Z
Cost ($) 10 20 30 40
Refer to Table 7-14. How much is total consumer surplus at the equilibrium price in this market? 186. Table 7-14 Willingness to Pay ($)
Buyer A B C D
15 30 45 60
Seller W X Y Z
Cost ($) 10 20 30 40
Refer to Table 7-14. How much is total producer surplus at the equilibrium price in this market? 187. Table 7-14 Willingness to Pay ($)
Buyer A B C D
.
15 30 45 60
Seller W X Y Z
Cost ($) 10 20 30 40
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Ch 07: Consumers, Producers, and the Efficiency of Markets Refer to Table 7-14. How much is total surplus at the equilibrium price in this market? 188. Figure 7-12
Refer to Figure 7-12. How much are consumer surplus, producer surplus, and total surplus at the market equilibrium price? 189. Figure 7-12
Refer to Figure 7-12. At what price will total surplus be maximized in this market? 190. Figure 7-12
.
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Refer to Figure 7-12. If the government imposed a price floor at $35 in this market, how much is consumer surplus? 191. Figure 7-12
Refer to Figure 7-12. If the government imposed a price ceiling at $20 in this market, how much are consumer surplus, producer surplus, and total surplus? 192. Figure 7-13
.
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Ch 07: Consumers, Producers, and the Efficiency of Markets
Refer to Figure 7-13. How much is total consumer surplus in this market at the equilibrium price? 193. Figure 7-13
Refer to Figure 7-13. How much is total producer surplus in this market at the equilibrium price? 194. Figure 7-13
.
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Ch 07: Consumers, Producers, and the Efficiency of Markets
Refer to Figure 7-13. How much is total surplus in this market at the equilibrium price? 195. Figure 7-13
Refer to Figure 7-13. Suppose demand shifts such that consumers wish to purchase 12 fewer units at every price. How much is total consumer surplus in this market at the new equilibrium price? 196. Figure 7-13
.
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Ch 07: Consumers, Producers, and the Efficiency of Markets
Refer to Figure 7-13. Suppose demand shifts such that consumers wish to purchase 12 fewer units at every price. How much is total producer surplus in this market at the new equilibrium price? 197. Figure 7-13
Refer to Figure 7-13. Suppose demand shifts such that consumers wish to purchase 12 fewer units at every price. How much is total surplus in this market at the new equilibrium price? 198. Figure 7-14
.
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Ch 07: Consumers, Producers, and the Efficiency of Markets
Refer to Figure 7-14. Suppose the government imposes a price floor at $10 per unit in this market. With the price floor, how much is total consumer surplus? 199. Figure 7-14
Refer to Figure 7-14. Suppose the government imposes a price floor at $10 per unit in this market. With the price floor, how much is total producer surplus assuming those producers with the lowest cost are the ones who supply the market? 200. Figure 7-14
.
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Ch 07: Consumers, Producers, and the Efficiency of Markets
Refer to Figure 7-14. Suppose there is initially a price floor set at $10 in this market. If the government removed the price floor, by how much would total consumer surplus increase? 201. Figure 7-14
Refer to Figure 7-14. Suppose there is initially a price floor set at $10 in this market. If the government removed the price floor, by how much would total consumer surplus increase for those consumers who were purchasing the good when the price floor was in place? 202. Figure 7-14
.
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Ch 07: Consumers, Producers, and the Efficiency of Markets
Refer to Figure 7-14. Suppose there is initially a price floor set at $10 in this market. If the government removed the price floor, by how much would total consumer surplus increase for those consumers who enter the market after the price floor is removed? 203. Figure 7-14
Refer to Figure 7-14. Suppose there is initially a price floor set at $10 in this market. If the government removed the price floor, by how much would total producer surplus change, assuming the producers with the lowest cost were the ones supplying the market when the price floor was in place? 204. Figure 7-14
.
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Ch 07: Consumers, Producers, and the Efficiency of Markets
Refer to Figure 7-14. Suppose there is initially a price ceiling set at $4 in this market. How much is total producer surplus with the price ceiling in place? 205. Figure 7-14
Refer to Figure 7-14. Suppose there is initially a price ceiling set at $4 in this market. If the government removed the price ceiling, by how much would total producer surplus change? 206. Figure 7-14
.
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Ch 07: Consumers, Producers, and the Efficiency of Markets
Refer to Figure 7-14. Suppose there is initially a price ceiling set at $4 in this market. If the government removed the price ceiling, by how much would total producer surplus increase for those producers entering the market after the price ceiling is removed? 207. Scenario 7-2 Suppose market demand and market supply are given by the equations: QD = 40 - P QS = P - 4 Refer to Scenario 7-2. How much is total consumer surplus at the equilibrium price in this market? 208. Scenario 7-2 Suppose market demand and market supply are given by the equations: QD = 40 - P QS = P - 4 Refer to Scenario 7-2. How much is total producer surplus at the equilibrium price in this market? 209. Scenario 7-2 Suppose market demand and market supply are given by the equations: QD = 40 - P QS = P - 4 Refer to Scenario 7-2. How much is total surplus at the equilibrium price in this market? 210. Scenario 7-2 .
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Ch 07: Consumers, Producers, and the Efficiency of Markets Suppose market demand and market supply are given by the equations: QD = 40 - P QS = P - 4 Refer to Scenario 7-2. Suppose a reduction in input prices shifts the market supply curve to QS = P. By how much does total consumer surplus increase as a result of this supply shift? 211. Scenario 7-2 Suppose market demand and market supply are given by the equations: QD = 40 - P QS = P - 4 Refer to Scenario 7-2. Suppose a reduction in input prices shifts the market supply curve to QS = P. By how much does total consumer surplus increase for those consumers who were already willing to purchase the good with the original supply curve? 212. Scenario 7-2 Suppose market demand and market supply are given by the equations: QD = 40 - P QS = P - 4 Refer to Scenario 7-2. Suppose a reduction in input prices shifts the market supply curve to QS = P. How much total consumer surplus goes to new consumers who enter the market after the supply curve shifts? 213. Scenario 7-2 Suppose market demand and market supply are given by the equations: QD = 40 - P QS = P - 4 Refer to Scenario 7-2. Suppose a reduction in input prices shifts the market supply curve to QS = P. By how much does total producer surplus increase as a result of this supply shift? 214. Answer each of the following questions about demand and consumer surplus. a. What is consumer surplus, and how is it measured? b. What is the relationship between the demand curve and the willingness to pay? Other things equal, what happens to consumer surplus if the price of a good falls? Why? c. Illustrate using a demand curve. In what way does the demand curve represent the benefit consumers receive from d. participating in a market? In addition to the demand curve, what else must be considered to determine consumer surplus? .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 215. Tammy loves donuts. The table shown reflects the value Tammy places on each donut she eats: Donuts Value (In Dollars) First donut $0.60 Second donut $0.50 Third donut $0.40 Fourth donut $0.30 Fifth donut $0.20 Sixth donut $0.10 a. b. c. d.
Use this information to construct Tammy's demand curve for donuts. If the price of donuts is $0.20, how many donuts will Tammy buy? Show Tammy's consumer surplus on your graph. How much consumer surplus would she have at a price of $0.20? If the price of donuts rose to $0.40, how many donuts would she purchase now? What would happen to Tammy's consumer surplus? Show this change on your graph.
216. Answer each of the following questions about supply and producer surplus. a. What is producer surplus, and how is it measured? b. What is the relationship between the cost to sellers and the supply curve? Other things equal, what happens to producer surplus when the price of a good rises? c. Illustrate your answer on a supply curve. 217. Given the following two equations: 1) Total Surplus = Consumer Surplus + Producer Surplus 2) Total Surplus = Value to Buyers - Cost to Sellers Show how equation (1) can be used to derive equation (2). 218. Answer the following questions based on the graph that represents J.R.'s demand for ribs per week at Judy's Rib Shack. a. b. c. d. e. f. g. h. i.
.
At the equilibrium price, how many ribs would J.R. be willing to purchase? How much is J.R. willing to pay for 20 ribs? What is the magnitude of J.R.'s consumer surplus at the equilibrium price? At the equilibrium price, how many ribs would Judy be willing to sell? How high must the price of ribs be for Judy to supply 20 ribs to the market? At the equilibrium price, what is the magnitude of total surplus in the market? If the price of ribs rose to $10, what would happen to J.R.'s consumer surplus? If the price of ribs fell to $5, what would happen to Judy's producer surplus? Explain why the graph that is shown verifies the fact that the market equilibrium (quantity) maximizes the sum of producer and consumer surplus.
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Ch 07: Consumers, Producers, and the Efficiency of Markets
.
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Ch 07: Consumers, Producers, and the Efficiency of Markets Answer Key 1. c 2. d 3. b 4. c 5. c 6. d 7. c 8. b 9. d 10. d 11. b 12. a 13. a 14. a 15. a 16. a 17. b 18. d 19. c 20. b 21. c 22. c 23. c 24. a 25. b .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 26. a 27. a 28. b 29. d 30. d 31. d 32. b 33. c 34. b 35. b 36. b 37. c 38. b 39. d 40. a 41. a 42. a 43. c 44. c 45. c 46. b 47. c 48. d 49. b 50. c 51. d .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 52. b 53. c 54. c 55. c 56. a 57. d 58. c 59. a 60. b 61. a 62. b 63. a 64. c 65. c 66. b 67. d 68. c 69. c 70. d 71. a 72. b 73. c 74. d 75. c 76. b .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 77. d 78. b 79. d 80. a 81. c 82. c 83. b 84. c 85. c 86. d 87. b 88. b 89. a 90. c 91. c 92. c 93. d 94. b 95. c 96. b 97. b 98. d 99. False 100. True 101. True 102. False .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 103. False 104. True 105. True 106. True 107. False 108. False 109. True 110. False 111. True 112. True 113. False 114. True 115. False 116. False 117. False 118. False 119. True 120. False 121. True 122. False 123. True 124. True 125. False 126. True 127. False .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 128. False 129. True 130. False 131. True 132. True 133. False 134. False 135. True 136. True 137. True 138. True 139. False 140. True 141. True 142. False 143. True 144. False 145. False 146. True 147. False 148. True 149. True 150. False 151. True 152. True 153. False .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 154. True 155. True 156. False 157. True 158. True 159. True 160. True 161. False 162. True 163. True 164. The (maximum) willingness to pay. 165. Consumer surplus is $5. 166. Three units will be demanded. 167. Total consumer surplus is $35. 168. Consumer surplus is $100. 169. Consumer surplus decreases by $75. 170. Consumer surplus increases by $125. 171. The consumers initially in the market at a price of $10 receive an additional $100 in consumer surplus. 172. The consumers entering the market after the price decrease receive $25 in consumer surplus. 173. Consumer surplus is $800. 174. Consumer surplus increases by $1,000. 175. Consumer surplus increases by $800 for the consumers initially in the market. 176. Consumers entering the market after the price drop receive $200 in consumer surplus. 177. His producer surplus is $80. 178. Producers Y and Z .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 179. Total producer surplus is $26. 180. The good will sell for $20 or slightly less. 181. Total producer surplus is $30. 182. Total producer surplus is $55. 183. The increase in producer surplus to the initial producers is $20. 184. The producer surplus for the producers entering the market after the price increase is $5. 185. Total consumer surplus at the equilibrium price is $45. 186. Total producer surplus at the equilibrium price is $30. 187. Total surplus at the equilibrium price is $75. 188. .Consumer surplus is $312.50, producer surplus is $312.50, and total surplus is $625. 189. .Total surplus will be maximized at the market equilibrium price, $25. 190. Consumer surplus is $112.50. 191. Consumer surplus is $400, producer surplus is $200, and total surplus is $600. 192. Total consumer surplus at the equilibrium price is $324. 193. Total producer surplus at the equilibrium price is $324. 194. Total surplus at the equilibrium price is $648. 195. Total consumer surplus at the new equilibrium price is $225. 196. Total producer surplus at the new equilibrium price is $225. 197. Total surplus at the new equilibrium price is $450. 198. Total consumer surplus with a $10 price floor will be $900. 199. Total producer surplus with a $10 price floor will be $2,100. 200. With the removal of the price floor, total consumer surplus would increase from $900 to $1,600 for an increase of $700. 201. Those consumers who were already in the market when the price floor was removed would see total consumer surplus increase by $600. 202. New consumers entering the market when the price floor is removed will receive total consumer surplus equal to $100. .
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Ch 07: Consumers, Producers, and the Efficiency of Markets 203. Total producer surplus with the price floor is $2,100, and total producer surplus after the price floor is removed is $1,600. Therefore, total producer surplus falls by $500 when the price floor is removed. 204. Total producer surplus with a $4 price ceiling is $400. 205. Total producer surplus with the price ceiling is $400, and total producer surplus after the price ceiling is removed is $1,600. Therefore, total producer surplus increases by $1,200. 206. When the price ceiling is removed, total producer surplus will increase by $400 for those producers entering the market after the price ceiling is removed. 207. Total consumer surplus at the equilibrium price is $162. 208. Total producer surplus at the equilibrium price is $162. 209. Total surplus at the equilibrium price is $324. 210. Total consumer surplus prior to the shift is $162, and total consumer surplus after the shift is $200. Therefore, total consumer surplus increases by $38 as a result of the supply shift. 211. For those consumers already in the market with the original supply curve, total consumer surplus increases by $36. 212. Total consumer surplus increases by $2 for those consumers who enter the market after the supply curve shifts. 213. Total producer surplus prior to the shift is $162, and total producer surplus after the shift is $200. Therefore, total producer surplus increases by $38 as a result of the supply shift. 214.
a.
b.
c.
d.
.
Consumer surplus measures the benefit to buyers of participating in a market. It is measured as the amount a buyer is willing to pay for a good minus the amount a buyer actually pays for it. For an individual purchase, consumer surplus is the difference between the willingness to pay, as shown on the demand curve, and the market price. For the market, total consumer surplus is the area under the demand curve and above the price, from the origin to the quantity purchased. Because the demand curve shows the maximum amount buyers are willing to pay for a given market quantity, the price given by the demand curve represents the willingness to pay of the marginal buyer. When the price of a good falls, consumer surplus increases for two reasons. First, those buyers who were already buying the good receive an increase in consumer surplus because they are paying less (area B). Second, some new buyers enter the market because the price of the good is now lower than their willingness to pay (area C); hence, there is additional consumer surplus generated from their purchases. The graph should show that as price falls from P2 to P1, consumer surplus increases from area A to area A+B+C. Since the demand curve represents the maximum price the marginal buyer is willing to pay for a good, it must also represent the maximum benefit the buyer expects to receive from consuming the good. Consumer surplus must take into account the amount the buyer actually pays for the good, with consumer surplus measured as the difference between what the buyer is willing to pay and what he/she actually paid. Consumer surplus, then, measures the benefit the buyer didn't have to "pay for."
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Ch 07: Consumers, Producers, and the Efficiency of Markets
215.
a.
b. c.
d. .
At a price of $0.20, Tammy would buy 5 donuts. The figure below shows Tammy's consumer surplus. At a price of $0.20, Tammy's consumer surplus would be $1.00.
If the price of donuts rose to $0.40, Tammy's consumer surplus would fall to $0.30 and she would purchase only 3 donuts. Page 79
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Ch 07: Consumers, Producers, and the Efficiency of Markets
216.
a.
b.
c.
Producer surplus measures the benefit to sellers of participating in a market. It is measured as the amount a seller is paid minus the cost of production. For an individual sale, producer surplus is measured as the difference between the market price and the cost of production, as shown on the supply curve. For the market, total producer surplus is measured as the area above the supply curve and below the market price, between the origin and the quantity sold. Because the supply curve shows the minimum amount sellers are willing to accept for a given quantity, the supply curve represents the cost of the marginal seller. When the price of a good rises, producer surplus increases for two reasons. First, those sellers who were already selling the good have an increase in producer surplus because the price they receive is higher (area A). Second, new sellers will enter the market because the price of the good is now higher than their willingness to sell (area B); hence, there is additional producer surplus generated from their sales. The graph should show that as price rises from P1 to P2, producer surplus increases from area C to area A+B+C.
217. Start with the equation: Total Surplus = Consumer Surplus + Producer Surplus. Then, since Consumer Surplus = Value to buyers - Amount paid by buyers, and since Producer Surplus = Amount received by sellers - Costs of sellers, Total Surplus can be written as: Value to buyers - Amount paid by buyers + Amount received by sellers - Costs of sellers. .
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Ch 07: Consumers, Producers, and the Efficiency of Markets Since the Amount paid by buyers equals the Amount received by sellers, the middle two terms cancel out and the result is: Total Surplus = Value to buyers - Costs of sellers. 218. a. 40 b. $10.00 c. $80.00. d. 40 e. $5 f. $200 g. It would fall from $80 to only $20. h. It would fall from $120 to only $30. At quantities less than the equilibrium quantity, the marginal value to buyers exceeds the marginal cost to sellers. Increasing the quantity in this region raises total surplus until i. equilibrium quantity is reached. At quantities greater than the equilibrium quantity, the marginal cost to sellers exceeds the marginal value to buyers and total surplus falls.
.
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Ch 08: Application: The Costs of Taxation
Indicate the answer choice that best completes the statement or answers the question. 1. To fully understand how taxes affect economic well-being, we must a. assume that economic well-being is not affected if all tax revenue is spent on goods and services for the people who are being taxed. b. compare the taxes raised in the United States with those raised in other countries, especially France. c. compare the reduced welfare of buyers and sellers to the amount of revenue the government raises. d. take into account the fact that almost all taxes reduce the welfare of buyers, increase the welfare of sellers, and raise revenue for the government. 2. When a tax is levied on a good, the buyers and sellers of the good share the burden, a. provided the tax is levied on the sellers. b. provided the tax is levied on the buyers. c. provided a portion of the tax is levied on the buyers, with the remaining portion levied on the sellers. d. regardless of how the tax is levied. 3. A tax on a good a. raises the price that buyers pay and raises the price that sellers receive. b. raises the price that buyers pay and lowers the price that sellers receive. c. lowers the price that buyers pay and raises the price that sellers receive. d. lowers the price that buyers pay and lowers the price that sellers receive. 4. A tax affects a. buyers only. b. sellers only. c. buyers and sellers only. d. buyers, sellers, and the government. 5. What happens to the total surplus in a market when the government imposes a tax? a. Total surplus increases by the amount of the tax. b. Total surplus increases but by less than the amount of the tax. c. Total surplus decreases. d. Total surplus is unaffected by the tax. 6. The government's benefit from a tax can be measured by a. consumer surplus. b. producer surplus. c. tax revenue. d. consumer surplus plus producer surplus. 7. When a good is taxed, a. both buyers and sellers of the good are made worse off. b. only buyers are made worse off, because they ultimately bear the burden of the tax. c. only sellers are made worse off, because they ultimately bear the burden of the tax. d. neither buyers nor sellers are made worse off, since tax revenue is used to provide goods and services that .
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Ch 08: Application: The Costs of Taxation would otherwise not be provided in a market economy. 8. When a tax is imposed on a good, the a. supply curve for the good always shifts. b. demand curve for the good always shifts. c. amount of the good that buyers are willing to buy at each price always remains unchanged. d. equilibrium quantity of the good always decreases. 9. A tax levied on the sellers of a good shifts the a. supply curve upward by the size of the tax. b. supply curve downward by the size of the tax. c. demand curve upward by the size of the tax. d. demand curve downward by the size of the tax. 10. If a tax shifts the demand curve downward, we can infer that the tax was levied on a. buyers of the good. b. sellers of the good. c. both buyers and sellers of the good. d. We cannot infer anything because the shift described is not consistent with a tax. 11. When a tax is imposed on the buyers of a good, the demand curve shifts a. downward by the amount of the tax. b. upward by the amount of the tax. c. downward by less than the amount of the tax. d. upward by more than the amount of the tax. 12. Suppose a tax is imposed on the sellers of fast-food French fries. The burden of the tax will a. fall entirely on the buyers of fast-food French fries. b. fall entirely on the sellers of fast-food French fries. c. be shared equally by the buyers and sellers of fast-food French fries. d. be shared by the buyers and sellers of fast-food French fries but not necessarily equally. 13. If T represents the size of the tax on a good and Q represents the quantity of the good that is sold, total tax revenue received by government can be expressed as a. T/Q. b. T + Q. c. T × Q. d. (T × Q)/Q. 14. When a tax is levied on buyers, the a. supply curves shifts upward by the amount of the tax. b. tax creates a wedge between the price buyers pay and the price sellers receive. c. tax has no effect on the well-being of sellers. d. buyers bear the entire burden of the tax. .
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Ch 08: Application: The Costs of Taxation 15. The decrease in total surplus that results from a market distortion, such as a tax, is called a a. wedge loss. b. revenue loss. c. deadweight loss. d. consumer surplus loss. 16. Which of the following quantities decrease in response to a tax on a good? a. The equilibrium quantity in the market for the good, the effective price of the good paid by buyers, and consumer surplus b. The equilibrium quantity in the market for the good, producer surplus, and the well-being of buyers of the good c. The effective price received by sellers of the good, the wedge between the effective price paid by buyers and the effective price received by sellers, and consumer surplus d. It depends on whether the tax is levied on buyers or on sellers. 17. For a good that is taxed, the area on the relevant supply-and-demand graph that represents government's tax revenue is a. smaller than the area that represents the loss of consumer surplus and producer surplus caused by the tax. b. bounded by the supply curve, the demand curve, the effective price paid by buyers, and the effective price received by sellers. c. a right triangle. d. a triangle, but not necessarily a right triangle. 18. For widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. A tax of $15 per unit is imposed on widgets. The tax reduces the equilibrium quantity in the market by 300 units. The deadweight loss from the tax is a. $1,750. b. $2,250. c. $3,000. d. $4,500. 19. In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. As a result, the government is able to raise $800 per month in tax revenue. We can conclude that the equilibrium quantity of widgets has fallen by a. 40 per month. b. 50 per month. c. 75 per month. d. 100 per month. 20. Figure 8-1
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Refer to Figure 8-1. Suppose the government imposes a tax of P'–P'''. Total surplus before the tax is measured by the area a. I + Y. b. J + K + L + M. c. L + M + Y. d. I + J + K + L + M + Y. 21. Figure 8-1
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Refer to Figure 8-1. Suppose the government imposes a tax of P'–P'''. Total surplus after the tax is measured by the area a. I + Y. b. J + K + L + M. c. I + Y + B. d. I + J + K + L + M + Y. 22. Figure 8-1
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Refer to Figure 8-1. Suppose the government imposes a tax of P'–P'''. The area measured by K + L represents a. tax revenue. b. consumer surplus before the tax. c. producer surplus after the tax. d. total surplus before the tax. 23. Figure 8-1
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Refer to Figure 8-1. Suppose the government imposes a tax of P'–P'''. The area measured by L + M + Y represents a. consumer surplus after the tax. b. consumer surplus before the tax. c. producer surplus after the tax. d. producer surplus before the tax. 24. Figure 8-1
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Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by M represents a. consumer surplus after the tax. b. consumer surplus before the tax. c. producer surplus after the tax. d. producer surplus before the tax. 25. Figure 8-1
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Refer to Figure 8-1. Suppose the government imposes a tax of P'' - P. The area measured by J + K + I represents a. consumer surplus after the tax. b. consumer surplus before the tax. c. producer surplus after the tax. d. producer surplus before the tax. 26. Figure 8-1
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Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by J represents a. consumer surplus after the tax. b. consumer surplus before the tax. c. producer surplus after the tax. d. producer surplus before the tax. 27. Figure 8-1
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Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by I + Y represents the a. deadweight loss due to the tax. b. loss in consumer surplus due to the tax. c. loss in producer surplus due to the tax. d. total surplus before the tax. 28. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The imposition of the tax causes the quantity sold to a. increase by 1 unit. b. decrease by 1 unit. c. increase by 2 units. d. decrease by 2 units. 29. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The imposition of the tax causes the price paid by buyers to a. decrease by $2. b. increase by $3. c. decrease by $4. d. increase by $5. 30. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The imposition of the tax causes the price received by sellers to a. decrease by $2. b. increase by $3. c. decrease by $4. d. increase by $5. 31. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The amount of the tax on each unit of the good is a. $1. b. $4. c. $5. d. $9. 32. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The per-unit burden of the tax on buyers is a. $2. b. $3. c. $4. d. $5. 33. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The per-unit burden of the tax on sellers is a. $2. b. $3. c. $4. d. $5. 34. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The amount of tax revenue received by the government is a. $2.50. b. $4. c. $5. d. $9. 35. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The amount of deadweight loss as a result of the tax is a. $2.50. b. $5. c. $7.50. d. $10. 36. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The loss of consumer surplus as a result of the tax is a. $1.50. b. $3. c. $4.50. d. $6. 37. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The loss of producer surplus as a result of the tax is a. $1. b. $2. c. $3. d. $4. 38. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. Consumer surplus without the tax is a. $6, and consumer surplus with the tax is $1.50. b. $6, and consumer surplus with the tax is $4.50. c. $10, and consumer surplus with the tax is $1.50. d. $10, and consumer surplus with the tax is $4.50. 39. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. Producer surplus without the tax is a. $4, and producer surplus with the tax is $1. b. $4, and producer surplus with the tax is $3. c. $10, and producer surplus with the tax is $1. d. $10, and producer surplus with the tax is $3. 40. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. Total surplus without the tax is a. $10, and total surplus with the tax is $2.50. b. $10, and total surplus with the tax is $7.50. c. $20, and total surplus with the tax is $2.50. d. $20, and total surplus with the tax is $7.50. 41. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The loss of consumer surplus associated with some buyers dropping out of the market as a result of the tax is a. $0. b. $1.50. c. $3. d. $4.50. 42. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The loss of consumer surplus for those buyers of the good who continue to buy it after the tax is imposed is a. $0. b. $1.50. c. $3. d. $4.50. 43. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The loss of producer surplus associated with some sellers dropping out of the market as a result of the tax is a. $0. b. $1. c. $2. d. $3. 44. Figure 8-2 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-2. The loss of producer surplus for those sellers of the good who continue to sell it after the tax is imposed is a. $0. b. $1. c. $2. d. $3. 45. Figure 8-3 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-3. Suppose a 20th unit of the good was sold by a seller to a buyer. Which of the following statements is correct? a. For the 20th unit, the difference between the buyer's value and the seller's cost is less than the tax per unit. b. For the 20th unit, the difference between the buyer's value and the seller's cost is greater than the tax per unit. c. For the 20th unit, the difference between the buyer's value and the seller's cost is equal to the tax per unit. d. It makes sense for the buyer to buy and for the seller to sell the 20th unit, with or without the tax in place. 46. Figure 8-3 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-3. Which of the following statements is correct? a. Total surplus before the tax is imposed is $500. b. After the tax is imposed, consumer surplus is 45 percent of its pre-tax value. c. After the tax is imposed, producer surplus is 45 percent of its pre-tax value. d. Total surplus after the tax is imposed is $500. 47. Figure 8-3 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-3. As a result of the tax, a. consumer surplus decreases from $200 to $80. b. producer surplus decreases from $200 to $145. c. the market experiences a deadweight loss of $80. d. total surplus increases from $180 to $200. 48. Figure 8-3 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-3. As a result of the tax, consumer surplus decreases by a. $130, producer surplus decreases by $170, tax revenue is $240, and deadweight loss is $60. b. $150, producer surplus decreases by $150, tax revenue is $240, and deadweight loss is $60. c. $160, producer surplus decreases by $160, tax revenue is $240, and deadweight loss is $80. d. $240, producer surplus decreases by $240, tax revenue is $400, and deadweight loss is $80. 49. Figure 8-3 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-3. Which of the following statements is correct? a. The loss of producer surplus that is associated with some sellers dropping out of the market as a result of the tax is $60. b. The loss of consumer surplus for those buyers of the good who continue to buy it after the tax is imposed is $120. c. The loss of consumer surplus caused by this tax exceeds the loss of producer surplus caused by this tax. d. This tax produces $320 in tax revenue for the government. 50. Figure 8-3 The vertical distance between points A and B represents a tax in the market.
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Refer to Figure 8-3. The deadweight loss associated with this tax amounts to a. $80, and this figure represents the amount by which tax revenue to the government exceeds the combined loss of producer and consumer surpluses. b. $80, and this figure represents the surplus that is lost because the tax discourages mutually advantageous trades between buyers and sellers. c. $60, and this figure represents the amount by which tax revenue to the government exceeds the combined loss of producer and consumer surpluses. d. $60, and this figure represents the surplus that is lost because the tax discourages mutually advantageous trades between buyers and sellers. 51. Figure 8-4 Suppose the government imposes a $10 per unit tax on a good.
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Refer to Figure 8-4. The tax causes consumer surplus to decrease by the area a. A. b. B + C. c. A + B + C. d. A + B + C + D + F. 52. Figure 8-4 Suppose the government imposes a $10 per unit tax on a good.
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Refer to Figure 8-4. The tax causes producer surplus to decrease by the area a. D + F. b. D + F + G. c. D + F + J. d. D + F + G + H. 53. Scenario 8-1 Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week. Refer to Scenario 8-1. If Erin pays Ernesto $90 to clean her house, Erin's consumer surplus is a. $80. b. $30. c. $20. d. $10. 54. Scenario 8-1 Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week. Refer to Scenario 8-1. If Ernesto cleans Erin's house for $90, Ernesto's producer surplus is a. $80. b. $30. c. $20. d. $10. .
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Ch 08: Application: The Costs of Taxation 55. Scenario 8-1 Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week. Refer to Scenario 8-1. Assume Erin is required to pay a tax of $40 when she hires someone to clean her house for a week. Which of the following is correct? a. Erin will now clean her own house. b. Ernesto will continue to clean Erin's house, but his producer surplus will decline. c. Total economic welfare (consumer surplus plus producer surplus plus tax revenue) will increase. d. Erin will continue to hire Ernesto to clean her house, but her consumer surplus will decline. 56. Scenario 8-2 Roland mows Karla's lawn for $25. Roland's opportunity cost of mowing Karla's lawn is $20, and Karla's willingness to pay Roland to mow her lawn is $28. Refer to Scenario 8-2. Assume Roland is required to pay a tax of $3 each time he mows a lawn. Which of the following results is most likely? a. Karla now will decide to mow her own lawn, and Roland will decide it is no longer in his interest to mow Karla's lawn. b. Karla is willing to pay Roland to mow her lawn, but Roland will decline her offer. c. Roland is willing to mow Karla's lawn, but Karla will decide to mow her own lawn. d. Roland and Karla still can engage in a mutually-agreeable trade. 57. Suppose a tax of $5 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 200 units to 100 units. The tax decreases consumer surplus by $450 and decreases producer surplus by $300. The deadweight loss from the tax is a. $250. b. $500. c. $750. d. $1,000. 58. A tax of $0.25 is imposed on each bag of potato chips that is sold. The tax decreases producer surplus by $600 per day, generates tax revenue of $1,220 per day, and decreases the equilibrium quantity of potato chips by 120 bags per day. The tax a. decreases consumer surplus by $645 per day. b. decreases the equilibrium quantity from 6,000 bags per day to 5,880 bags per day. c. decreases total surplus from $3,000 to $1,800 per day. d. creates a deadweight loss of $15 per day. 59. Suppose a tax is imposed on each new hearing aid that is sold. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. As a result of the tax, the equilibrium quantity of hearing aids decreases from 10,000 to 9,000, and the deadweight loss of the tax is $60,000. We can conclude that the tax on each hearing aid is a. $60. b. $120. c. $160. .
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Ch 08: Application: The Costs of Taxation d. $200. 60. Kate is a personal trainer whose client William pays $80 per hour-long session. William values this service at $100 per hour, while the opportunity cost of Kate's time is $75 per hour. The government places a tax of $10 per hour on personal trainers. After the tax, what is likely to happen in the market for personal training? a. Kate and William will agree to a new price somewhere between $85 and $100. b. Kate and William will agree to a new price somewhere between $70 and $110. c. Kate will no longer offer personal training services to William because she must charge more than $100 in order to cover her opportunity costs and pay the tax. d. The price will remain at $80, and Kate will pay the $10 tax. 61. Suppose Yolanda needs a dog sitter so that she can travel to her sister's wedding. Yolanda values dog sitting for the weekend at $200. Rebecca is willing to dog sit for Yolanda so long as she receives at least $175. Yolanda and Rebecca agree on a price of $185. Suppose the government imposes a tax of $30 on dog sitting. What is the deadweight loss of the tax? a. The maximum value that Yolanda would pay for dog sitting b. The $30 tax c. The lost benefit to Yolanda and Rebecca because after the tax, Rebecca will not dog sit for Yolanda d. The lost benefit to Yolanda of being unable to hire a dog sitter because Yolanda is the one who would pay the tax 62. Suppose a tax is imposed on bananas. In which of the following cases will the tax cause the equilibrium quantity of bananas to shrink by the largest amount? a. The response of buyers to a change in the price of bananas is strong, and the response of sellers to a change in the price of bananas is weak. b. The response of sellers to a change in the price of bananas is strong, and the response of buyers to a change in the price of bananas is weak. c. The response of buyers and sellers to a change in the price of bananas is strong. d. The response of buyers and sellers to a change in the price of bananas is weak. 63. The size of a tax and the deadweight loss that results from the tax are a. positively related. b. negatively related. c. independent of each other. d. equal to each other. 64. The deadweight loss from a tax per unit of good will be smallest in a market with a. inelastic supply and elastic demand. b. inelastic supply and inelastic demand. c. elastic supply and elastic demand. d. elastic supply and inelastic demand. 65. Table 8-1 Market Characteristic A Demand is very elastic relative to supply. .
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Ch 08: Application: The Costs of Taxation B C D
Demand is very inelastic relative to supply. Supply is very elastic relative to demand. Supply is very inelastic relative to demand.
Refer to Table 8-1. Suppose the government is considering levying a tax in one or more of the markets described in the table. Which of the markets will allow the government to minimize the deadweight loss(es) from the tax? a. Market A only b. Markets A and C only c. Markets B and D only d. Market C only 66. Figure 8-5
Refer to Figure 8-5. Which of the following combinations will maximize the deadweight loss from a tax? a. Supply1 and Demand1 b. Supply2 and Demand2 c. Supply1 and Demand2 d. Supply2 and Demand1 67. Suppose the government imposes a tax on cheese. The deadweight loss from this tax will likely be greater in the .
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Ch 08: Application: The Costs of Taxation a. first year after it is imposed than in the eighth year after it is imposed because demand and supply will be more elastic in the first year than in the eighth year. b. first year after it is imposed than in the eighth year after it is imposed because demand and supply will be less elastic in the first year than in the eighth year. c. eighth year after it is imposed than in the first year after it is imposed because demand and supply will be more elastic in the first year than in the eighth year. d. eighth year after it is imposed than in the first year after it is imposed because demand and supply will be less elastic in the first year than in the eighth year. 68. Assume the price of gasoline is $2.00 per gallon, and the equilibrium quantity of gasoline is 10 million gallons per day with no tax on gasoline. Starting from this initial situation, which of the following scenarios would result in the largest deadweight loss? a. The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for gasoline is 0.6; and the gasoline tax amounts to $0.20 per gallon. b. The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for gasoline is 0.4; and the gasoline tax amounts to $0.20 per gallon. c. The price elasticity of demand for gasoline is 0.2; the price elasticity of supply for gasoline is 0.6; and the gasoline tax amounts to $0.30 per gallon. d. There is insufficient information to make this determination. 69. Taxes on labor may distort labor markets greatly if a. labor supply is highly inelastic. b. many workers choose to work 40 hours per week regardless of their earnings. c. the number of hours many part-time workers want to work is very sensitive to the wage rate. d. "underground" workers do not respond to changes in the wages of legal jobs because they prefer not to pay taxes. 70. Concerning the labor market and taxes on labor, economists disagree about a. the size of the tax on labor. b. the size of the deadweight loss of the tax on labor. c. whether or not a tax on labor places a wedge between the wage that firms pay and the wage that workers receive. d. nothing. 71. The Social Security tax is a tax on a. capital. b. labor. c. land. d. savings. 72. If the labor supply curve is very elastic, a tax on labor a. has a large deadweight loss. b. raises enough tax revenue to offset the loss in welfare. c. has a relatively small impact on the number of hours that workers choose to work. d. results in a large tax burden on the firms that hire labor. .
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Ch 08: Application: The Costs of Taxation 73. The less freedom young mothers have to work outside the home, the a. more elastic the supply of labor will be. b. less elastic the supply of labor will be. c. more horizontal the labor supply curve will be. d. larger is the decrease in employment that will result from a tax on labor. 74. Taxes on labor encourage which of the following? a. Labor demand to be more inelastic b. Mothers to stay at home rather than work in the labor force c. Workers to work overtime d. Fathers to take on second jobs 75. Figure 8-5 Graph (a)
Graph (b)
Refer to Figure 8-5. Graph (a) and Graph (b) each illustrate a $4 tax placed on a market. In comparison to Graph (a), Graph (b) illustrates which of the following statements? a. When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand is relatively elastic. b. When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively inelastic. c. When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is relatively elastic. .
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Ch 08: Application: The Costs of Taxation d. When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is relatively inelastic. 76. Figure 8-6
Refer to Figure 8-6. Suppose the government imposes a $1 tax in each of the four markets represented by demand curves D1, D2, D3, and D4. The deadweight will be the smallest in the market represented by a. D1. b. D2. c. D3. d. D4. 77. Figure 8-7 The vertical distance between points A and B represents the original tax.
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Refer to Figure 8-7. If the government changed the per-unit tax from $5.00 to $2.50, then the price paid by buyers would be $7.50, the price received by sellers would be $5, and the quantity sold in the market would be 1.5 units. Compared to the original tax rate, this lower tax rate would a. increase government revenue and increase the deadweight loss from the tax. b. increase government revenue and decrease the deadweight loss from the tax. c. decrease government revenue and increase the deadweight loss from the tax. d. decrease government revenue and decrease the deadweight loss from the tax. 78. If the size of a tax increases, tax revenue a. increases. b. decreases. c. remains the same. d. may increase, decrease, or remain the same. 79. Suppose the government increases the size of a tax by 20 percent. The deadweight loss from that tax a. increases by 20 percent. b. increases by more than 20 percent. c. increases but by less than 20 percent. d. decreases by 20 percent. 80. If the tax on a good is increased from $1 per unit to $4 per unit, the deadweight loss from the tax increases by a factor of a. 5. b. 9. .
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Ch 08: Application: The Costs of Taxation c. 16. d. 24. 81. In which of the following instances would the deadweight loss of the tax on airline tickets increase by a factor of 9? a. The tax on airline tickets increases from $20 per ticket to $60 per ticket. b. The tax on airline tickets increases from $20 per ticket to $90 per ticket. c. The tax on airline tickets increases from $15 per ticket to $60 per ticket. d. The tax on airline tickets increases from $15 per ticket to $135 per ticket. 82. Which of the following statements regarding a Laffer curve is the most plausible? a. Reducing a high tax rate is less likely to increase tax revenue than is reducing a low tax rate. b. Reducing a high tax rate is more likely to increase tax revenue than is reducing a low tax rate. c. Reducing a high tax rate will have the same effect on tax revenue as reducing a low tax rate. d. Reducing a tax rate can never increase tax revenue. 83. Figure 8-8 Graph (a)
Graph (b)
Graph (c)
Graph (d)
Refer to Figure 8-8. Which graph correctly illustrates the relationship between the size of a tax and the size of the deadweight loss associated with the tax? a. Graph (a) b. Graph (b) c. Graph (c) d. Graph (d) 84. Suppose the federal government doubles the gasoline tax. The deadweight loss associated with the tax a. also doubles. b. triples. c. quadruples. d. rises by a factor of 8. 85. Which of the following scenarios is consistent with the Laffer curve? .
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Ch 08: Application: The Costs of Taxation a. An increase in the tax rate always increases tax revenue. b. The tax rate is 1 percent, and tax revenue is very high. c. The tax rate is 99 percent, and tax revenue is very high. d. A decrease in the tax rate always increases tax revenue. 86. When a country is on the downward-sloping side of the Laffer curves, a cut in the tax rate will a. decrease tax revenue and decrease the deadweight loss. b. decrease tax revenue and increase the deadweight loss. c. increase tax revenue and decrease the deadweight loss. d. increase tax revenue and increase the deadweight loss.
Indicate whether the statement is true or false. 87. Total surplus is always equal to the sum of consumer surplus and producer surplus. a. True b. False 88. Total surplus in a market does not change when the government imposes a tax on that market because the loss of consumer surplus and producer surplus is equal to the gain of government revenue. a. True b. False 89. When a tax is imposed on buyers, consumer surplus and producer surplus both decrease. a. True b. False 90. When a tax is imposed on buyers, consumer surplus decreases but producer surplus increases. a. True b. False 91. When a tax is imposed on sellers, producer surplus decreases but consumer surplus increases. a. True b. False 92. When a tax is imposed on sellers, consumer surplus and producer surplus both decrease. a. True b. False 93. Taxes affect market participants by increasing the price paid by the buyer and received by the seller. a. True b. False 94. Taxes affect market participants by increasing the price paid by the buyer and decreasing the price received by the seller. a. True .
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Ch 08: Application: The Costs of Taxation b. False 95. A tax raises the price received by sellers and lowers the price paid by buyers. a. True b. False 96. Normally, both buyers and sellers of a good become worse off when the good is taxed. a. True b. False 97. When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare of buyers and sellers caused by the tax. a. True b. False 98. A tax places a wedge between the price buyers pay and the price sellers receive. a. True b. False 99. A tax on a good causes the size of the market to increase. a. True b. False 100. A tax on a good causes the size of the market to shrink. a. True b. False 101. When a tax is imposed, the loss of consumer surplus and producer surplus as a result of the tax exceeds the tax revenue collected by the government. a. True b. False 102. Economists use the government’s tax revenue to measure the public benefit from a tax. a. True b. False 103. Because taxes distort incentives, they cause markets to allocate resources inefficiently. a. True b. False 104. Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade. a. True b. False 105. If the government imposes a $3 tax in a market, the equilibrium price will rise by $3. a. True .
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Ch 08: Application: The Costs of Taxation b. False 106. If the government imposes a $3 tax in a market, the buyers and sellers will share an equal burden of the tax. a. True b. False 107. Taxes create deadweight losses. a. True b. False 108. When a tax is imposed on a good, consumer surplus decreases and producer surplus remains unchanged. a. True b. False 109. When a tax is imposed on a good, the resulting decrease in consumer surplus is always larger than the resulting decrease in producer surplus. a. True b. False 110. Taxes drive a wedge into the market by raising the price that sellers receive and lowering the price that buyers pay. a. True b. False 111. Tax revenue equals the size of the tax multiplied by the quantity sold in the market after the tax is levied. a. True b. False 112. As the price elasticities of supply and demand increase, the deadweight loss from a tax increases. a. True b. False 113. The greater the elasticity of demand, the smaller the deadweight loss of a tax. a. True b. False 114. The more inelastic are demand and supply, the greater is the deadweight loss of a tax. a. True b. False 115. The elasticities of the supply and demand curves in the market for cigarettes affect how much a tax distorts that market. a. True b. False 116. If a tax did not induce buyers or sellers to change their behavior, it would not cause a deadweight loss. a. True .
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Ch 08: Application: The Costs of Taxation b. False 117. The most important tax in the U.S. economy is the tax on corporations’ profits. a. True b. False 118. The Social Security tax, and to a large extent, the federal income tax, are labor taxes. a. True b. False 119. Taxes on labor tend to increase the number of hours that people choose to work. a. True b. False 120. Taxes on labor tend to encourage the elderly to retire early. a. True b. False 121. Taxes on labor tend to encourage second earners to stay at home rather than work in the labor force. a. True b. False 122. Economists disagree on whether labor taxes have a small or large deadweight loss. a. True b. False 123. The demand for bread is less elastic than the demand for donuts; hence, a tax on bread will create a larger deadweight loss than will the same tax on donuts, other things equal. a. True b. False 124. The larger the deadweight loss from taxation, the larger the cost of government programs. a. True b. False 125. A tax on insulin is likely to cause a very large deadweight loss to society. a. True b. False 126. When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively inelastic. a. True b. False 127. The more elastic the supply, the larger the deadweight loss from a tax, all else equal. a. True b. False .
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Ch 08: Application: The Costs of Taxation 128. The demand for beer is more elastic than the demand for milk, so a tax on beer would have a smaller deadweight loss than an equivalent tax on milk, all else equal. a. True b. False 129. The Social Security tax is a labor tax. a. True b. False 130. When a good is taxed, the deadweight loss is larger the more elastic are demand and supply. a. True b. False 131. The deadweight loss of a tax rises even more rapidly than the size of the tax. a. True b. False 132. As the size of a tax increases, the government's tax revenue rises, then falls. a. True b. False 133. Tax revenues increase in direct proportion to increases in the size of the tax. a. True b. False 134. If the size of a tax doubles, the deadweight loss doubles. a. True b. False 135. If the size of a tax triples, the deadweight loss increases by a factor of six. a. True b. False 136. Economist Arthur Laffer made the argument that tax rates in the United States were so high that reducing the rates would increase tax revenue. a. True b. False 137. The Laffer curve is the curve showing how tax revenue varies as the size of the tax varies. a. True b. False 138. The result of the large tax cuts in the first Reagan Administration demonstrated very convincingly that Arthur Laffer was correct when he asserted that cuts in tax rates would increase tax revenue. a. True .
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Ch 08: Application: The Costs of Taxation b. False 139. The idea that tax cuts would increase the quantity of labor supplied, thus increasing tax revenue, became known as supply-side economics. a. True b. False 140. The Laffer curve illustrates how taxes in markets with greater elasticities of demand compare to taxes in markets with smaller elasticities of supply. a. True b. False 141. The more elastic are supply and demand in a market, the greater are the distortions caused by a tax on that market, and the more likely it is that a tax cut in that market will raise tax revenue. a. True b. False 142. The optimal tax is difficult to determine because although revenues rise and fall as the size of the tax increases, deadweight loss continues to increase. a. True b. False 143. Suppose that a university charges students a $100 “tax” to register for business classes. The next year the university raises the “tax” to $150. The deadweight loss from the “tax” triples. a. True b. False 144. Economists dismiss the idea that lower tax rates can lead to higher tax revenue, because there is a consensus that the relevant elasticities of demand and supply are very low. a. True b. False 145. When the government imposes taxes on buyers and sellers of a good, society loses some of the benefits of market efficiency. a. True b. False
146. In terms of gains from trade, why is it true that taxes cause deadweight losses? 147. A tax is imposed on a certain good. The tax produces revenue of $5,000 for the government. The tax reduces consumer surplus by $3,000 and it reduces producer surplus by $4,000. What is the amount of the deadweight loss of the tax? 148. Figure 8-9
.
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-9. What are the equilibrium price and equilibrium quantity in this market? 149. Figure 8-9
Refer to Figure 8-9. How much is consumer surplus at the market equilibrium? 150. Figure 8-9
.
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-9. How much is producer surplus at the market equilibrium? 151. Figure 8-9
Refer to Figure 8-9. How much is total surplus at the market equilibrium? 152. Figure 8-9
.
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-9. Suppose the government places a $4 tax per unit on this good. What price will consumers pay for the good after the tax is imposed? 153. Figure 8-9
Refer to Figure 8-9. Suppose the government places a $4 tax per unit on this good. What price will sellers receive for the good after the tax is imposed? 154. Figure 8-9
.
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-9. Suppose the government places a $4 tax per unit on this good. How many units of this good will be bought and sold after the tax is imposed? 155. Figure 8-9
Refer to Figure 8-9. Suppose the government places a $4 tax per unit on this good. How much is consumer surplus after the tax is imposed? 156. Figure 8-9
.
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-9. Suppose the government places a $4 tax per unit on this good. How much is producer surplus after the tax is imposed? 157. Figure 8-9
Refer to Figure 8-9. Suppose the government places a $4 tax per unit on this good. How much tax revenue is collected after the tax is imposed? 158. Figure 8-9
.
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-9. Suppose the government increases the size of the tax on this good from $4 per unit to $6 per unit. Will the tax revenue collected from the tax increase, decrease, or stay the same? 159. Figure 8-9
Refer to Figure 8-9. Suppose the government places a $4 tax per unit on this good. How much is total surplus after the tax is imposed? 160. Figure 8-9
.
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-9. Suppose the government places a $4 tax per unit on this good. How much is the deadweight loss from this tax? 161. Scenario 8-3 Suppose the market demand and market supply curves are given by the equations: QD = 200 - P QS = 3P Refer to Scenario 8-3. What are the equilibrium price and equilibrium quantity in this market? 162. Scenario 8-3 Suppose the market demand and market supply curves are given by the equations: QD = 200 - P QS = 3P Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve becomes: QD = 200 - (P + T) What price will sellers receive and what price will buyers pay after the tax is imposed? 163. Scenario 8-3 Suppose the market demand and market supply curves are given by the equations: QD = 200 - P QS = 3P Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve becomes: QD = 200 - (P + T) What quantity will be bought and sold after the tax is imposed? 164. Scenario 8-3 .
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Ch 08: Application: The Costs of Taxation Suppose the market demand and market supply curves are given by the equations: QD = 200 - P QS = 3P Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve becomes: QD = 200 - (P + T) How much tax revenue will be collected after this tax is imposed? 165. Scenario 8-3 Suppose the market demand and market supply curves are given by the equations: QD = 200 - P QS = 3P Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve becomes: QD = 200 - (P + T) What will be the deadweight loss from this tax? 166. Scenario 8-3 Suppose the market demand and market supply curves are given by the equations: QD = 200 - P QS = 3P Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve becomes: QD = 200 - (P + T) If T = 40, what price will buyers pay and what price will sellers receive? 167. Scenario 8-3 Suppose the market demand and market supply curves are given by the equations: QD = 200 - P QS = 3P Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve becomes: QD = 200 - (P + T) If T = 40, how many units will be bought and sold after the tax is imposed? 168. Scenario 8-3 Suppose the market demand and market supply curves are given by the equations: QD = 200 - P QS = 3P Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve becomes: .
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Ch 08: Application: The Costs of Taxation QD = 200 - (P + T) If T = 40, how much tax revenue will be collected from this tax? 169. Scenario 8-3 Suppose the market demand and market supply curves are given by the equations: QD = 200 - P QS = 3P Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve becomes: QD = 200 - (P + T) If T = 40, how much is the burden of the tax on the buyers and on the sellers? 170. Scenario 8-3 Suppose the market demand and market supply curves are given by the equations: QD = 200 - P QS = 3P Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve becomes: QD = 200 - (P + T) If T = 40, how much will be the deadweight loss from this tax? 171. Figure 8-10
Refer to Figure 8-10. What are the equilibrium price and equilibrium quantity in this market? 172. Figure 8-10 .
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-10. How much is consumer surplus at the market equilibrium? 173. Figure 8-10
Refer to Figure 8-10. How much is producer surplus at the market equilibrium? 174. Figure 8-10
.
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-10. How much is total surplus at the market equilibrium? 175. Figure 8-10
Refer to Figure 8-10. Suppose the government places a $3 tax per unit on this good. What price will consumers pay for the good after the tax is imposed? 176. Figure 8-10
.
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-10. Suppose the government places a $3 tax per unit on this good. What price will sellers receive for the good after the tax is imposed? 177. Figure 8-10
Refer to Figure 8-10. Suppose the government places a $3 tax per unit on this good. How many units of this good will be bought and sold after the tax is imposed? 178. Figure 8-10
.
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-10. Suppose the government places a $3 tax per unit on this good. How much is consumer surplus after the tax is imposed? 179. Figure 8-10
Refer to Figure 8-10. Suppose the government places a $3 tax per unit on this good. How much is producer surplus after the tax is imposed? 180. Figure 8-10
.
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-10. Suppose the government places a $3 tax per unit on this good. How much tax revenue is collected after the tax is imposed? 181. Figure 8-10
Refer to Figure 8-10. Suppose the government increases the size of the tax on this good from $3 per unit to $6 per unit. Will the tax revenue collected from the tax increase, decrease, or stay the same? 182. Figure 8-10
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-10. Suppose the government places a $3 tax per unit on this good. How much is total surplus after the tax is imposed? 183. Figure 8-10
Refer to Figure 8-10. Suppose the government places a $3 tax per unit on this good. How much is the deadweight loss from this tax? 184. Figure 8-11
.
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-11. Suppose that Market A is characterized by Demand 1 and Supply 1, and Market B is characterized by Demand 2 and Supply 1. If an identical tax is imposed on each market, the tax will create a larger deadweight loss in which market? Explain. 185. Figure 8-12
Refer to Figure 8-12. Suppose that Market A is characterized by Demand 1 and Supply 1, and Market B is characterized by Demand 1 and Supply 2. If an identical tax is imposed on each market, the tax will create a larger deadweight loss in which market? Explain. 186. Provide several examples of important taxes on labor in the United States. For a typical worker, what is the marginal tax rate on labor income once all the labor taxes are summed? 187. Is the United States’ labor supply more inelastic or more elastic? Briefly summarize the competing theories. .
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Ch 08: Application: The Costs of Taxation 188. The demand for energy drinks is more elastic than the demand for milk. Would a tax on energy drinks or a tax on milk have a larger deadweight loss? Explain. 189. Suppose that the market for product X is characterized by a typical, downward-sloping, linear demand curve and a typical, upward-sloping, linear supply curve. Suppose the price elasticity of supply is 0.7. Will the deadweight loss from a $3 tax per unit be smaller if the absolute value of the price elasticity of demand is 0.6 or if the absolute value of the price elasticity of demand is 1.5? 190. Suppose the demand curve and the supply curve in a market are both linear, and suppose the price elasticity of supply is 0.5. Will the deadweight loss from a $3 tax per unit be larger if the price elasticity of demand is 0.3 or if the price elasticity of demand is 0.7? 191. Suppose that the market for product X is characterized by a typical, downward-sloping, linear demand curve and a typical, upward-sloping, linear supply curve. If a $2 tax per unit results in a deadweight loss of $200, how large would be the deadweight loss from a $4 tax per unit? 192. Suppose that the market for product X is characterized by a typical, downward-sloping, linear demand curve and a typical, upward-sloping, linear supply curve. If a $2 tax per unit results in a deadweight loss of $200, how large would be the deadweight loss from a $6 tax per unit? 193. Suppose the demand curve and the supply curve in a market are both linear. If a $2 tax per unit results in a deadweight loss of $200, how large would be the deadweight loss from a $3 tax per unit? 194. Suppose the demand curve and the supply curve in a market are both linear. To begin, there was a $5 tax per unit, and the $5 tax resulted in a deadweight loss of $1,500. Now, the tax per unit is higher, with the higher tax resulting in a deadweight loss of $6,000. What is the amount of the new tax per unit? 195. Figure 8-13
Refer to Figure 8-13. As the size of the tax increases from $3 to $6 to $9, what happens to tax revenues? 196. Figure 8-13 .
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Ch 08: Application: The Costs of Taxation
Refer to Figure 8-13. As the size of the tax increases from $3 to $6 to $9, what happens to the deadweight loss from the tax? 197. Figure 8-13
Refer to Figure 8-13. If you were a policymaker choosing between a $3, $6, or $9 tax, which would you choose and why? 198. Describe the Laffer curve. 199. Suppose the government levies a tax of the vertical distance from point A to point B. Using the graph shown, determine the value of each of the following: a. equilibrium price before the tax b. consumer surplus before the tax .
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Ch 08: Application: The Costs of Taxation c. d. e. f. g. h. i.
producer surplus before the tax total surplus before the tax consumer surplus after the tax producer surplus after the tax total tax revenue to the government total surplus (consumer surplus+producer surplus+tax revenue) after the tax deadweight loss
200. John has been in the habit of mowing Willa's lawn each week for $20. John's opportunity cost is $15, and Willa would be willing to pay $25 to have her lawn mowed. What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement? 201. Use the following graph shown to fill in the table that follows.
WITHOUT TAX
WITH TAX
CHANGE
Consumer surplus Producer surplus Tax revenue Total surplus .
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202. Suppose that instead of a supply-demand diagram, you are given the following information: Qs = 100 + 3P Qd = 400 - 2P From this information compute equilibrium price and quantity. Now suppose that a tax is placed on buyers so that Qd = 400 - 2(P + T). If T = 15, solve for the new equilibrium price and quantity. (Note: P is the price received by sellers and P + T is the price paid by buyers.) Compare these answers for equilibrium price and quantity with your first answers. What does this show you? 203. Using demand and supply diagrams, show the difference in deadweight loss between (a) a market with inelastic demand and supply and (b) a market with elastic demand and supply. 204. Illustrate on three demand-and-supply graphs how the size of a tax (small, medium and large) can alter total revenue and deadweight loss.
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Ch 08: Application: The Costs of Taxation Answer Key 1. c 2. d 3. b 4. d 5. c 6. c 7. a 8. d 9. a 10. a 11. a 12. d 13. c 14. b 15. c 16. b 17. a 18. b 19. a 20. d 21. b 22. a 23. d 24. c 25. b .
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Ch 08: Application: The Costs of Taxation 26. a 27. a 28. b 29. b 30. a 31. c 32. b 33. a 34. c 35. a 36. c 37. c 38. a 39. a 40. b 41. b 42. c 43. b 44. c 45. a 46. a 47. c 48. c 49. b 50. b 51. b .
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Ch 08: Application: The Costs of Taxation 52. a 53. d 54. c 55. a 56. d 57. a 58. d 59. b 60. a 61. c 62. c 63. a 64. b 65. c 66. b 67. d 68. c 69. c 70. b 71. b 72. a 73. b 74. b 75. a 76. a .
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Ch 08: Application: The Costs of Taxation 77. d 78. d 79. b 80. c 81. a 82. b 83. a 84. c 85. c 86. c 87. False 88. False 89. True 90. False 91. False 92. True 93. False 94. True 95. False 96. True 97. False 98. True 99. False 100. True 101. True 102. True .
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Ch 08: Application: The Costs of Taxation 103. True 104. True 105. False 106. False 107. True 108. False 109. False 110. False 111. True 112. True 113. False 114. False 115. True 116. True 117. False 118. True 119. False 120. True 121. True 122. True 123. False 124. True 125. False 126. True 127. True .
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Ch 08: Application: The Costs of Taxation 128. False 129. True 130. True 131. True 132. True 133. False 134. False 135. False 136. True 137. True 138. False 139. True 140. False 141. True 142. True 143. False 144. False 145. True 146. Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade. 147. The deadweight loss amounts to $3,000 + $4,000 - $5,000 = $2,000. 148. The equilibrium price is $5 and the equilibrium quantity is 100 units. 149. Consumer surplus is $250 at the equilibrium. 150. Producer surplus is $250 at the equilibrium. 151. Total surplus is $500 at the equilibrium. 152. Consumers will pay $7 per unit after the tax is imposed. 153. Sellers will receive $3 per unit after the tax is imposed. .
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Ch 08: Application: The Costs of Taxation 154. 60 units will be bought and sold after the tax is imposed. 155. Consumer surplus is $90 after the tax is imposed. 156. Producer surplus is $90 after the tax is imposed. 157. Total tax revenue is $240 after the tax is imposed. 158. Total tax revenue will stay the same at $240. 159. Total surplus is $420 after the tax is imposed. 160. The deadweight loss from this tax is $80. 161. The equilibrium price is $50 and the equilibrium quantity is 150 units. 162. Buyers will pay (200 + 3T)/4 and sellers will receive (200 - T)/4 163. The quantity will be (600 - 3T)/4 164. The tax revenue will be ( 600T - 3T2 ) / 4 165. The deadweight loss will be (3T2 ) / 8 166. Buyers will pay $80 per unit and sellers will receive $40 per unit. 167. 120 units will be bought and sold after the tax is imposed. 168. Tax revenue will be $4,800. 169. The burden of the tax on buyers is $30, and the burden of the tax on sellers is $10. 170. The deadweight loss from this tax will be $600. 171. The equilibrium price is $4, and the equilibrium quantity is 80 units. 172. Consumer surplus is 0.5 x 80 x (12-4) = $320 at the market equilibrium. 173. Producer surplus is 0.5 x 80 x (4-0) = $160 at the market equilibrium. .
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Ch 08: Application: The Costs of Taxation 174. Total surplus is the sum of consumer surplus and producer surplus, which equals $320 + $160 = $480 at the market equilibrium. 175. Consumers will pay $6 per unit after the tax is imposed.
176. Sellers will receive $3 per unit after the tax is imposed.
177. 60 units will be bought and sold after the tax is imposed.
178. Consumer surplus is 0.5 x 60 x (12-6) = $180 after the tax is imposed. .
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Ch 08: Application: The Costs of Taxation 179. Producer surplus is 0.5 x 60 x (3-0) = $90 after the tax is imposed. 180. Total tax revenue is $3 x 60 = $180 after the tax is imposed.
181. Total tax revenue will increase from the $3 x 60 = $180 before the tax to $6 x 40 = $240 after the tax.
182. Total surplus is the sum of consumer surplus and producer surplus and tax revenue, which equals $180 + $90 + $180 = $450 after the tax is imposed. 183. The deadweight loss from this tax is 0.5 x (80-60) x (6-3) = $30. Another way to calculate deadweight loss is to subtract the total surplus after the tax from the total surplus before the tax, which equals $480 - $450. 184. The deadweight loss will be larger in Market A than Market B because the demand curve is more elastic in Market A than in Market B. The more elastic (inelastic) the demand, the more (less) that quantity decreases when the tax increases the price. The amount by which quantity decreases is the key factor for measuring deadweight loss. The decrease in quantity is the “base” of the deadweight loss triangle. Recall that we measure the area of a triangle as 0.5 x base x height. The height is the amount of the tax, which remains constant in this comparison. The more (less) that quantity responds to a change in price, the larger (smaller) the area of deadweight loss. The figure below illustrates the area of deadweight loss using a $6 tax in each market.
.
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185. The deadweight loss will be larger in Market A than Market B because the supply curve is more elastic in Market A than in Market B. The more elastic (inelastic) the supply, the more (less) that quantity decreases when the tax increases the price. The amount by which quantity decreases is the key factor for measuring deadweight loss. The decrease in quantity is the “base” of the deadweight loss triangle. Recall that we measure the area of a triangle as 0.5 x base x height. The height is the amount of the tax, which remains constant in this comparison. The more (less) that quantity responds to a change in price, the larger (smaller) the area of deadweight loss. The figure below illustrates the area of deadweight loss using a $3 tax in each market.
186. *the Social Security tax *the Medicare tax *the federal income tax *a state income tax (for many states) The marginal tax rate on labor income for a typical worker is about 40 percent. .
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Ch 08: Application: The Costs of Taxation 187. Some labor economists believe that most workers work full time regardless of their wages. Hence, these economists believe that labor supply is more inelastic. Other labor economists believe that labor supply is more elastics because of the following reasons: *Many workers can adjust the number of hours that they work. Some people have a choice about working overtime, for example. *Some workers are the second earner in their families. They may choose to work part time in the work place in order to spend more time at home. They may respond to higher wages by entering the work force, thus working more hours. *Some older workers can choose when to retire, and once retired, they may choose to work part time. *Some people engage in economic activity that is a part of the underground economy. These people will adjust whether they work in legitimate jobs or as a part of the underground economy based on wages. 188. A tax on energy drinks would have a larger deadweight loss than a tax on milk. A tax on energy drinks would raise their price. Because their demand is more elastic, quantity would respond more, thus increasing deadweight loss. 189. The deadweight loss will be smaller if the price elasticity of demand is 0.6 because the more inelastic the price elasticity of demand, the less quantity will decrease due to the increase in price from the tax. The smaller the decrease in quantity, the smaller the deadweight loss. 190. The deadweight loss will be greater if the price elasticity of demand is 0.7. 191. The deadweight loss will be $800 because the deadweight loss rises by the square of the tax increase. Thus, if the tax doubles, the deadweight loss quadruples. 192. The deadweight loss will be $1,800 because the deadweight loss rises by the square of the tax increase. Thus, if the tax triples, the deadweight loss increases nine-fold. 193. The deadweight loss will be $450. 194. The new tax per unit is $10. Doubling the size of the tax quadruples the size of the deadweight loss. 195. When the tax is $3, tax revenue is $3 x 60 = $180. When the tax is $6, tax revenue is $6 x 40 = $240. When the tax is $9, tax revenue is $9 x 20 = $180. So tax revenue first increases, then decreases as the size of the tax increases. 196. When the tax is $3, deadweight loss is 0.5 x 3 x 20 = $30. When the tax is $6, deadweight loss is 0.5 x 6 x 40 = $120. When the tax is $9, deadweight loss is 0.5 x 9 x 60 = $270. So the deadweight loss of the tax increases exponentially as the size of the tax increases. 197. If the objective is to maximize tax revenues, the $6 tax generates the highest tax revenues of the three choices. If the objective is to minimize deadweight loss, the $3 tax generates the lowest deadweight loss of the three choices. Many people would choose the “medium” level tax, which in this case would be the $6 tax, because it raises the most revenues, while the deadweight loss that it creates is smaller than the “large” tax (although bigger than the “small” tax). 198. The Laffer curve depicts the relationship between the size of a tax and the amount of tax revenue generated. As the size of a tax increases, tax revenue first increases but then decreases. 199. a. $10 b. $3,600 c. $2,400 .
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Ch 08: Application: The Costs of Taxation d. e. f. g. h. i.
$6,000 $900 $600 $3,000 $4,500 $1,500
200. If the tax is less than $10, there will exist a price at which both John and Willa will still benefit from the lawnmowing arrangement. If the tax is $10, a price can be set which will leave John and Willa neither better off nor worse off from the lawn-mowing arrangement. If the tax is greater than $10, all possible prices will leave at least one of the parties worse off from the lawn-mowing arrangement. 201. WITHOUT TAX Consumer surplus A+B+C Producer surplus D+F+G Tax revenue None Total surplus A+B+C+D+F+G
WITH TAX A F B+D A+B+D+F
CHANGE –(B+C) –(D+G) (B+D) –(C+G)
202. Prior to the tax, the equilibrium price would be $60 and the equilibrium quantity would be 280. After the tax is imposed, P, the price received by sellers would be $54. The price paid by buyers would be $69. The quantity sold would be 262. The new answer shows three obvious facts. First, buyers pay more with a tax. Second, sellers receive less with a tax. Third, the size of the market shrinks when a tax is imposed on a product.
203.
.
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Ch 08: Application: The Costs of Taxation
204.
.
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Ch 09: Application: International Trade
Indicate the answer choice that best completes the statement or answers the question. 1. What is the fundamental basis for trade among nations? a. Shortages or surpluses in nations that do not trade b. Misguided economic policies c. Absolute advantage d. Comparative advantage 2. The nation of Wheatland forbids international trade. In Wheatland, you can buy 1 pound of corn for 3 pounds of fish. In other countries, you can buy 1 pound of corn for 2 pounds of fish. These facts indicate that a. Wheatland has a comparative advantage, relative to other countries, in producing corn. b. other countries have a comparative advantage, relative to Wheatland, in producing fish. c. the price of fish in Wheatland exceeds the world price of fish. d. if Wheatland were to allow trade, it would import corn. 3. A tax on an imported good is called a a. quota. b. tariff. c. supply tax. d. trade tax. 4. Assume, for Vietnam, that the domestic price of textiles without international trade is higher than the world price of textiles. This suggests that, in the production of textiles, a. Vietnam has a comparative advantage over other countries and Vietnam will import textiles. b. Vietnam has a comparative advantage over other countries and Vietnam will export textiles. c. other countries have a comparative advantage over Vietnam and Vietnam will import textiles. d. other countries have a comparative advantage over Vietnam and Vietnam will export textiles. 5. Assume, for Vietnam, that the domestic price of textiles without international trade is lower than the world price of textiles. This suggests that, in the production of textiles, a. Vietnam has a comparative advantage over other countries and Vietnam will import textiles. b. Vietnam has a comparative advantage over other countries and Vietnam will export textiles. c. other countries have a comparative advantage over Vietnam and Vietnam will import textiles. d. other countries have a comparative advantage over Vietnam and Vietnam will export textiles. 6. Suppose Brazil has an absolute advantage over other countries in producing almonds, but other countries have a comparative advantage over Brazil in producing almonds. If trade in almonds is allowed, Brazil a. will import almonds. b. will export almonds. c. will either import almonds or export almonds, but it is not clear from the given information. d. would have nothing to gain either from exporting or importing almonds. 7. Suppose Japan exports cars to Russia and imports wine from France. This situation suggests a. Japan has a comparative advantage relative to France in producing wine, and Russia has a comparative advantage to Japan in producing cars. .
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Ch 09: Application: International Trade b. Japan has a comparative advantage relative to Russia in producing cars, and France has a comparative advantage relative to Japan in producing wine. c. Japan has an absolute advantage relative to Russia in producing cars, and France has an absolute advantage relative to Japan in producing wine. d. Japan has an absolute advantage relative to France in producing wine, and Russia has an absolute advantage relative to Japan in producing cars. 8. In analyzing the gains and losses from international trade, to say that Moldova is a small country is to say that a. Moldova can only import goods; it cannot export goods. b. Moldova’s choice of which goods to export and which goods to import is not based on the principle of comparative advantage. c. only the domestic price of a good is relevant for Moldova; the world price of a good is irrelevant. d. Moldova is a price taker. 9. When the nation of Worldova allows trade and becomes an exporter of silk, a. residents of Worldova who produce silk become worse off; residents of Worldova who buy silk become better off; and the economic well-being of Worldova rises. b. residents of Worldova who produce silk become worse off; residents of Worldova who buy silk become better off; and the economic well-being of Worldova falls. c. residents of Worldova who produce silk become better off; residents of Worldova who buy silk become worse off; and the economic well-being of Worldova rises. d. residents of Worldova who produce silk become better off; residents of Worldova who buy silk become worse off; and the economic well-being of Worldova falls. 10. When the nation of Duxembourg allows trade and becomes an importer of software, a. residents of Duxembourg who produce software become worse off; residents of Duxembourg who buy software become better off; and the economic well-being of Duxembourg rises. b. residents of Duxembourg who produce software become worse off; residents of Duxembourg who buy software become better off; and the economic well-being of Duxembourg falls. c. residents of Duxembourg who produce software become better off; residents of Duxembourg who buy software become worse off; and the economic well-being of Duxembourg rises. d. residents of Duxembourg who produce software become better off; residents of Duxembourg who buy software become worse off; and the economic well-being of Duxembourg falls. 11. When a country allows trade and becomes an exporter of a good, which of the following is not a consequence? a. The price paid by domestic consumers of the good increases. b. The price received by domestic producers of the good increases. c. The losses of domestic consumers of the good exceed the gains of domestic producers of the good. d. The gains of domestic producers of the good exceed the losses of domestic consumers of the good. 12. When a country allows trade and becomes an importer of bottled water, which of the following is not a consequence? a. The gains of domestic consumers of bottled water exceed the losses of domestic producers of bottled water. b. The losses of domestic producers of bottled water exceed the gains of domestic consumers of bottled water. c. The price paid by domestic consumers of bottled water decreases. d. The price received by domestic producers of bottled water decreases. .
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Ch 09: Application: International Trade 13. Figure 9-1 Guatemala
Refer to Figure 9-1. From the figure it is apparent that a. Guatemala will experience a shortage of coffee if trade is not allowed. b. Guatemala will experience a surplus of coffee if trade is not allowed. c. Guatemala has a comparative advantage in producing coffee, relative to the rest of the world. d. foreign countries have a comparative advantage in producing coffee, relative to Guatemala. 14. Figure 9-1 Guatemala
.
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Ch 09: Application: International Trade
Refer to Figure 9-1. From the figure it is apparent that a. Guatemala will export coffee if trade is allowed. b. Guatemala will import coffee if trade is allowed. c. Guatemala has nothing to gain either by importing or exporting coffee. d. the world price will fall if Guatemala begins to allow its citizens to trade with other countries. 15. Figure 9-1 Guatemala
.
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Ch 09: Application: International Trade
Refer to Figure 9-1. With trade, Guatemala will a. export 22 units of coffee. b. export 10 units of coffee. c. import 30 units of coffee. d. import 12 units of coffee. 16. Figure 9-1 Guatemala
.
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Ch 09: Application: International Trade
Refer to Figure 9-1. In the absence of trade, the equilibrium price of coffee in Guatemala is a. $30. b. $90. c. $110. d. $140. 17. Figure 9-1 Guatemala
.
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Ch 09: Application: International Trade
Refer to Figure 9-1. In the absence of trade, total surplus in Guatemala is represented by the area a. A + B + C. b. A + B + C + D + F. c. A + B + C + D + F + G. d. A + B + C + D + F + G + H. 18. Figure 9-1 Guatemala
.
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Ch 09: Application: International Trade
Refer to Figure 9-1. When trade in coffee is allowed, consumer surplus in Guatemala a. increases by the area B + D. b. increases by the area C + F. c. decreases by the area B + D. d. decreases by the area D + G. 19. Figure 9-1 Guatemala
.
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Ch 09: Application: International Trade
Refer to Figure 9-1. When trade in coffee is allowed, producer surplus in Guatemala a. increases by the area B + D. b. increases by the area B + D + G. c. decreases by the area C + F. d. decreases by the area G. 20. Figure 9-1 Guatemala
.
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Ch 09: Application: International Trade
Refer to Figure 9-1. When trade is allowed, a. Guatemalan producers of coffee become better off and Guatemalan consumers of coffee become worse off. b. Guatemalan consumers of coffee become better off and Guatemalan producers of coffee become worse off. c. both Guatemalan producers and consumers of coffee become better off. d. both Guatemalan producers and consumers of coffee become worse off. 21. Figure 9-1 Guatemala
.
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Ch 09: Application: International Trade
Refer to Figure 9-1. Relative to the no-trade situation, trade with the rest of the world results in a. Guatemalan consumers paying a higher price for coffee. b. a decrease in producer surplus in Guatemala. c. a decrease in total surplus in Guatemala. d. an increase in consumer surplus. 22. Figure 9-1 Guatemala
.
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Ch 09: Application: International Trade
Refer to Figure 9-1. In the absence of trade, total surplus in the Guatemalan coffee market amounts to a. 750. b. 1,100. c. 1,514. d. 1,650. 23. Figure 9-1 Guatemala
.
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Ch 09: Application: International Trade
Refer to Figure 9-1. With trade, total surplus in the Guatemalan coffee market amounts to a. 1,250. b. 1,468. c. 1,870. d. 1,980. 24. Suppose the world price of a television is $300. Before Paraguay allowed trade in televisions, the price of a television there was $350. Once Paraguay began allowing trade in televisions with other countries, Paraguay began a. importing televisions and the price of a television in Paraguay decreased to $300. b. importing televisions and the price of a television in Paraguay remained at $350. c. exporting televisions and the price of a television in Paraguay decreased to $300. d. exporting televisions and the price of a television in Paraguay remained at $350. 25. The world price of a pound of almonds is $4.50. Before Uruguay allowed trade in almonds, the price of a pound of almonds there was $3.00. Once Uruguay began allowing trade in almonds with other countries, Uruguay began a. exporting almonds and the price per pound in Uruguay remained at $3.00. b. exporting almonds and the price per pound in Uruguay increased to $4.50. c. importing almonds and the price per pound in Uruguay remained at $3.00. d. importing almonds and the price per pound in Uruguay increased to $4.50. 26. Figure 9-2
.
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Ch 09: Application: International Trade
Refer to Figure 9-2. With trade, this country a. exports 160 tricycles. b. exports 320 tricycles. c. imports 160 tricycles. d. imports 320 tricycles. 27. Figure 9-2
.
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Ch 09: Application: International Trade
Refer to Figure 9-2. Without trade, consumer surplus amounts to a. $810. b. $1,620. c. $3,240. d. $6,480. 28. Figure 9-2
.
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Ch 09: Application: International Trade
Refer to Figure 9-2. Without trade, producer surplus amounts to a. $810. b. $1,620. c. $3,240. d. $6,480. 29. Figure 9-2
.
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Ch 09: Application: International Trade
Refer to Figure 9-2. Without trade, total surplus amounts to a. $810. b. $1,620. c. $3,240. d. $6,480. 30. Figure 9-2
.
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Ch 09: Application: International Trade
Refer to Figure 9-2. With trade, the price of tricycles in this country is a. $11, with 200 tricycles produced in this country and another 320 tricycles imported. b. $11, with 360 tricycles produced in this country and another 160 tricycles imported. c. $19, with 200 tricycles produced in this country and another 160 tricycles imported. d. $19, with 360 tricycles produced in this country and another 320 tricycles imported. 31. Figure 9-2
.
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Ch 09: Application: International Trade
Refer to Figure 9-2. With trade, consumer surplus is a. $3,240. b. $6,480. c. $6,760. d. $13,520. 32. Figure 9-2
.
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Ch 09: Application: International Trade
Refer to Figure 9-2. With trade, producer surplus is a. $500. b. $1,000. c. $1,500. d. $2,000. 33. Figure 9-2
.
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Ch 09: Application: International Trade
Refer to Figure 9-2. With trade, total surplus is a. $3,240. b. $6,480. c. $7,760. d. $15,520. 34. Figure 9-2
.
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Ch 09: Application: International Trade
Refer to Figure 9-2. Total surplus with trade exceeds total surplus without trade by a. $640. b. $1,280. c. $2,560. d. $3,840. 35. Figure 9-2
.
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Ch 09: Application: International Trade
Refer to Figure 9-2. The increase in total surplus resulting from trade is a. $640, since consumer surplus increases by $1,760 and producer surplus falls by $1,120. b. $1,280, since consumer surplus increases by $3,520 and producer surplus falls by $2,240. c. $2,240, since consumer surplus increases by $3,240 and producer surplus falls by $1,000. d. $2,560, since consumer surplus increases by $7,040 and producer surplus falls by $4,480. 36. Figure 9-2
.
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Ch 09: Application: International Trade
Refer to Figure 9-2. If this country allows free trade in tricycles, a. consumers will gain and producers will lose. b. consumers will lose and producers will gain. c. both consumers and producers will gain. d. both consumers and producers will lose. 37. Figure 9-3
.
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Ch 09: Application: International Trade
Refer to Figure 9-3. Without trade, the equilibrium price of roses is a. $4 and the equilibrium quantity is 300. b. $3 and the equilibrium quantity is 200. c. $3 and the equilibrium quantity is 400. d. $2 and the equilibrium quantity is 500. 38. Figure 9-3
.
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Ch 09: Application: International Trade
Refer to Figure 9-3. With trade and without a tariff, a. the domestic price is equal to the world price. b. roses are sold at $4 in this market. c. there is a shortage of 400 roses in this market. d. this country imports 200 roses. 39. Figure 9-3
.
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Ch 09: Application: International Trade
Refer to Figure 9-3. Before the tariff is imposed, this country a. imports 200 roses. b. imports 400 roses. c. exports 200 roses. d. exports 400 roses. 40. Figure 9-3
.
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Ch 09: Application: International Trade
Refer to Figure 9-3. The size of the tariff on roses is a. $4. b. $3. c. $2. d. $1. 41. Figure 9-3
.
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Ch 09: Application: International Trade
Refer to Figure 9-3. The imposition of a tariff on roses a. increases the number of roses imported by 100. b. increases the number of roses imported by 200. c. decreases the number of roses imported by 200. d. decreases the number of roses imported by 400. 42. Figure 9-3
.
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Ch 09: Application: International Trade
Refer to Figure 9-3. The amount of revenue collected by the government from the tariff is a. $200. b. $400. c. $500. d. $600. 43. Figure 9-3
.
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Ch 09: Application: International Trade
Refer to Figure 9-3. When a tariff is imposed in the market, domestic producers a. gain $100 of producer surplus. b. gain $150 of producer surplus. c. gain $200 of producer surplus. d. gain $300 of producer surplus. 44. Figure 9-3
.
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Ch 09: Application: International Trade
Refer to Figure 9-3. The amount of deadweight loss caused by the tariff equals a. $100. b. $200. c. $400. d. $500. 45. Figure 9-3
.
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Ch 09: Application: International Trade
Refer to Figure 9-3. When the tariff is imposed, domestic consumers a. lose surplus of $200. b. lose surplus of $450. c. gain surplus of $200. d. gain surplus of $450. 46. Figure 9-4
.
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Ch 09: Application: International Trade
Refer to Figure 9-4. Consumer surplus in this market before trade is a. A. b. A + B. c. A + B + D. d. C. 47. Figure 9-4
.
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Ch 09: Application: International Trade
Refer to Figure 9-4. Consumer surplus in this market after trade is a. A. b. A + B. c. A + B + D. d. C. 48. Figure 9-4
.
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Ch 09: Application: International Trade
Refer to Figure 9-4. Producer surplus in this market before trade is a. A. b. A + B. c. B + C + D. d. C. 49. Figure 9-4
.
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Ch 09: Application: International Trade
Refer to Figure 9-4. Producer surplus in this market after trade is a. A. b. A + B. c. B + C + D. d. C. 50. Figure 9-4
.
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Ch 09: Application: International Trade
Refer to Figure 9-4. Total surplus in this market before trade is a. A + B. b. A + B + C. c. A + B + C + D. d. B + C + D. 51. Figure 9-4
.
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Ch 09: Application: International Trade
Refer to Figure 9-4. Total surplus in this market after trade is a. A + B. b. A + B + C. c. A + B + C + D. d. B + C + D. 52. Figure 9-4
.
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Ch 09: Application: International Trade
Refer to Figure 9-4. The change in total surplus in this market because of trade is a. D, and this area represents a loss of total surplus because of trade. b. D, and this area represents a gain in total surplus because of trade. c. B + D, and this area represents a loss of total surplus because of trade. d. B + D, and this area represents a gain in total surplus because of trade. 53. Figure 9-4
.
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Ch 09: Application: International Trade
Refer to Figure 9-4. When the country for which the figure is drawn allows international trade in crude oil, a. consumer surplus for domestic crude oil consumers decreases. b. the demand for crude oil by domestic crude oil consumers decreases. c. the losses of the domestic losers outweigh the gains of the domestic winners. d. domestic crude oil producers sell less crude oil. 54. Figure 9-4
.
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Ch 09: Application: International Trade
Refer to Figure 9-4. When the country for which the figure is drawn allows international trade in crude oil, a. consumer surplus changes from the area A + B + D to the area A. b. producer surplus changes from the area C to the area B + C + D. c. total surplus decreases by the area D. d. consumer surplus changes from the area A to the area A + B. 55. Figure 9-4
.
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Ch 09: Application: International Trade
Refer to Figure 9-4. The country for which the figure is drawn a. has a comparative advantage relative to other countries in the production of crude oil and it will export crude oil. b. has a comparative advantage relative to other countries in the production of crude oil and it will import crude oil. c. has a comparative disadvantage relative to other countries in the production of crude oil and it will export crude oil. d. has a comparative disadvantage relative to other countries in the production of crude oil and it will import crude oil. 56. Figure 9-4
.
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Ch 09: Application: International Trade
Refer to Figure 9-4. A result of this country allowing international trade in crude oil is as follows a. The well-being of domestic crude-oil producers is now higher in that they now sell more crude oil at a higher price per barrel. b. The effect on the well-being of domestic crude-oil consumers is unclear in that they now buy more crude oil, but at a higher price per barrel. c. The effect on the well-being of the country is unclear in that domestic producer surplus increases, while the effect on domestic consumer surplus is unclear. d. domestic consumers lose by more than domestic producers gain. 57. Figure 9-5
.
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Ch 09: Application: International Trade
Refer to Figure 9-5. Consumer surplus in this market before trade is a. A. b. B + C. c. A + B + D. d. C. 58. Figure 9-5
.
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Ch 09: Application: International Trade
Refer to Figure 9-5. Consumer surplus in this market after trade is a. A. b. C + B. c. A + B + D. d. B + C + D. 59. Figure 9-5
.
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Ch 09: Application: International Trade
Refer to Figure 9-5. Producer surplus in this market before trade is a. C. b. B + C. c. A + B + D. d. B + C + D. 60. Figure 9-5
.
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Ch 09: Application: International Trade
Refer to Figure 9-5. Producer surplus in this market after trade is a. C. b. C + B. c. A + B + D. d. B + C + D. 61. Figure 9-5
.
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Ch 09: Application: International Trade
Refer to Figure 9-5. Producer surplus plus consumer surplus in this market before trade is a. A + B. b. A + B + C. c. A + B + C + D. d. B + C + D. 62. Figure 9-5
.
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Ch 09: Application: International Trade
Refer to Figure 9-5. Producer surplus plus consumer surplus in this market after trade is a. A + B. b. A + B + C. c. B + C + D. d. A + B + C + D. 63. Figure 9-5
.
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Ch 09: Application: International Trade
Refer to Figure 9-5. The change in total surplus in this market because of trade is a. A, and this area represents a loss of total surplus. b. B, and this area represents a gain in total surplus. c. C, and this area represents a loss of total surplus. d. D, and this area represents a gain in total surplus. 64. When a country that imports a particular good imposes a tariff on that good, a. consumer surplus increases and total surplus increases in the market for that good. b. consumer surplus increases and total surplus decreases in the market for that good. c. consumer surplus decreases and total surplus increases in the market for that good. d. consumer surplus decreases and total surplus decreases in the market for that good. 65. When a country that imports a particular good imposes an import quota on that good, a. consumer surplus increases and total surplus increases in the market for that good. b. consumer surplus increases and total surplus decreases in the market for that good. c. consumer surplus decreases and total surplus increases in the market for that good. d. consumer surplus decreases and total surplus decreases in the market for that good. 66. Denmark is an importer of computer chips, taking the world price of $12 per chip as given. Suppose Denmark imposes a $5 tariff on chips. Which of the following outcomes is possible? a. More Danish-produced chips are sold in Denmark. b. More foreign-produced chips are sold in Denmark. c. Danish consumers of chips become better off. .
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Ch 09: Application: International Trade d. Total surplus in the Danish chip market increases. 67. Figure 9-6
Refer to Figure 9-6. Government revenue raised by the tariff is represented by the area a. E. b. B + E. c. D + E + F. d. B + D + E + F. 68. Figure 9-6
.
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Ch 09: Application: International Trade
Refer to Figure 9-6. The tariff a. decreases producer surplus by the area C and decreases consumer surplus by the area C + D + E + F. b. decreases producer surplus by the area C + D and decreases consumer surplus by the area D + E + F. c. increases producer surplus by the area C and decreases consumer surplus by the area C + D + E + F. d. increases producer surplus by the area B + C and decrease consumer surplus by the area D + E + F. 69. Figure 9-6
.
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Ch 09: Application: International Trade
Refer to Figure 9-6. The tariff a. decreases producer surplus by the area C, decreases consumer surplus by the area C + D + E, and decreases total surplus by the area D + F. b. increases producer surplus by the area C, decreases consumer surplus by the area C + D + E + F, and decreases total surplus by the area D + F. c. creates government revenue represented by the area B + E and decreases total surplus by the area D + E + F. d. increases producer surplus by the area C + G and creates government revenue represented by the area D + E + F. 70. Figure 9-6
.
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Refer to Figure 9-6. The deadweight loss created by the tariff is represented by the area a. B. b. D + F. c. D + E + F. d. B + D + E + F. 71. Figure 9-6
.
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Refer to Figure 9-6. The area C + D + E + F represents a. the decrease in consumer surplus caused by the tariff. b. the decrease in total surplus caused by the tariff. c. the deadweight loss of the tariff minus government revenue raised by the tariff. d. the deadweight loss of the tariff plus government revenue raised by the tariff. 72. Import quotas and tariffs produce some common results. Which of the following is not one of those common results? a. Total surplus in the domestic country always falls. b. Producer surplus in the domestic country always increases. c. The domestic country always experiences a deadweight loss. d. Equal revenue is always raised for the domestic government. 73. Zelzar has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. Which groups in Zelzar are better off as a result of the new free-trade policy? a. producers of incense and consumers of steel b. consumers of all three goods c. consumers of incense and producers of rugs d. producers of steel and consumers of incense 74. When a country that exported a particular good abandons a free-trade policy and adopts a no-trade policy, a. producer surplus increases and total surplus increases in the market for that good. b. producer surplus increases and total surplus decreases in the market for that good. c. producer surplus decreases and total surplus increases in the market for that good. .
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Ch 09: Application: International Trade d. producer surplus decreases and total surplus decreases in the market for that good. 75. When a country that imported a particular good abandons a free-trade policy and adopts a no-trade policy, a. consumer surplus increases and total surplus increases in the market for that good. b. consumer surplus increases and total surplus decreases in the market for that good. c. consumer surplus decreases and total surplus increases in the market for that good. d. consumer surplus decreases and total surplus decreases in the market for that good. 76. The world price of a ton of steel is $1,000. Before Russia allowed trade in steel, the price of a ton of steel there was $650. Once Russia allowed trade in steel with other countries, Russia began a. exporting steel and the price per ton in Russia remained at $650. b. exporting steel and the price per ton in Russia increased to $1,000. c. importing steel and the price per ton in Russia remained at $650. d. importing steel and the price per ton in Russia increased to $1,000. 77. The world price of a ton of steel is $650. Before Russia allowed trade in steel, the price of a ton of steel there was $1,000. Once Russia allowed trade in steel with other countries, Russia began a. exporting steel and the price per ton in Russia decreased to $650. b. exporting steel and the price per ton in Russia remained at $1,000. c. importing steel and the price per ton in Russia decreased to $650. d. importing steel and the price per ton in Russia remained at $1,000. 78. Scenario 9-1 For a small country called Boxland, the equation of the domestic demand curve for cardboard is QD = 200 − 2P, where QD represents the domestic quantity of cardboard demanded, in tons, and P represents the price of a ton of cardboard. For Boxland, the equation of the domestic supply curve for cardboard is QS = -60 + 3P, where QS represents the domestic quantity of cardboard supplied, in tons, and P again represents the price of a ton of cardboard.
Refer to Scenario 9-1. If Boxland prohibits international trade in cardboard, then the equilibrium price of a ton of cardboard is a. $36 and the equilibrium quantity of cardboard is 74 tons. b. $44 and the equilibrium quantity of cardboard is 88 tons. c. $52 and the equilibrium quantity of cardboard is 96 tons. d. $60 and the equilibrium quantity of cardboard is 100 tons. 79. Scenario 9-1 For a small country called Boxland, the equation of the domestic demand curve for cardboard is QD = 200 − 2P, where QD represents the domestic quantity of cardboard demanded, in tons, and P represents the price of a ton of cardboard. For Boxland, the equation of the domestic supply curve for cardboard is QS = -60 + 3P, where QS represents the domestic quantity of cardboard supplied, in tons, and P again represents the price of a ton of cardboard.
Refer to Scenario 9-1. Suppose the world price of cardboard is $45. Then, if Boxland goes from prohibiting international .
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Ch 09: Application: International Trade trade in cardboard to allowing international trade in cardboard, a. domestic producers of cardboard become better off and domestic consumers of cardboard become better off. b. domestic producers of cardboard become better off and domestic consumers of cardboard become worse off. c. domestic producers of cardboard become worse off and domestic consumers of cardboard become better off. d. domestic producers of cardboard become worse off and domestic consumers of cardboard become worse off. 80. Scenario 9-1 For a small country called Boxland, the equation of the domestic demand curve for cardboard is QD = 200 − 2P, where QD represents the domestic quantity of cardboard demanded, in tons, and P represents the price of a ton of cardboard. For Boxland, the equation of the domestic supply curve for cardboard is QS = -60 + 3P, where QS represents the domestic quantity of cardboard supplied, in tons, and P again represents the price of a ton of cardboard.
Refer to Scenario 9-1. Suppose the world price of cardboard is $45 and international trade is allowed. Then Boxland’s consumers demand a. 110 tons of cardboard and Boxland’s producers supply 75 tons of cardboard. b. 110 tons of cardboard and Boxland’s producers supply 96 tons of cardboard. c. 96 tons of cardboard and Boxland’s producers supply 75 tons of cardboard. d. 96 tons of cardboard and Boxland’s producers supply 96 tons of cardboard. 81. Scenario 9-1 For a small country called Boxland, the equation of the domestic demand curve for cardboard is QD = 200 − 2P, where QD represents the domestic quantity of cardboard demanded, in tons, and P represents the price of a ton of cardboard. For Boxland, the equation of the domestic supply curve for cardboard is QS = -60 + 3P, where QS represents the domestic quantity of cardboard supplied, in tons, and P again represents the price of a ton of cardboard.
Refer to Scenario 9-1. Suppose the world price of cardboard is $45. Then, relative to the no-trade situation, international trade in cardboard produces which of the following results for Boxland? a. It increases consumer surplus, decreases producer surplus, and increases total surplus. b. It increases consumer surplus, increases producer surplus, and increases total surplus. c. It increases consumer surplus, decreases producer surplus, and decreases total surplus. d. It decreases consumer surplus, increases producer surplus, and increases total surplus. 82. Scenario 9-1 For a small country called Boxland, the equation of the domestic demand curve for cardboard is QD = 200 − 2P, where QD represents the domestic quantity of cardboard demanded, in tons, and P represents the price of a ton of cardboard. For Boxland, the equation of the domestic supply curve for cardboard is QS = -60 + 3P, where QS represents the domestic quantity of cardboard supplied, in tons, and P again represents the price of a ton of cardboard.
Refer to Scenario 9-1. Suppose the world price of cardboard is $45. Then Boxland’s gains from international trade in cardboard amount to .
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Ch 09: Application: International Trade a. $88.75. b. $102.50. c. $122.50. d. $135.00. 83. Scenario 9-1 For a small country called Boxland, the equation of the domestic demand curve for cardboard is QD = 200 − 2P, where QD represents the domestic quantity of cardboard demanded, in tons, and P represents the price of a ton of cardboard. For Boxland, the equation of the domestic supply curve for cardboard is QS = -60 + 3P, where QS represents the domestic quantity of cardboard supplied, in tons, and P again represents the price of a ton of cardboard.
Refer to Scenario 9-1. Suppose the world price of cardboard is $45. Then, relative to the no-trade situation, international trade in cardboard a. benefits Boxlandian consumers by $721 and harms Boxlandian producers by $525.00. b. benefits Boxlandian consumers by $721 and harms Boxlandian producers by $598.50. c. benefits Boxlandian consumers by $672 and harms Boxlandian producers by $598.50. d. harms Boxlandian consumers by $336 and harms Boxlandian producers by $525.00. 84. Representative Vazquez cites the “jobs argument” when he argues before Congress in favor of restrictions on trade; he argues that everything can be produced at lower cost in other countries. The likely flaw in Representative Vazquez's reasoning is that he ignores the fact that a. there is no evidence that any worker ever lost their job because of free trade. b. unemployment of labor is not a serious problem relative to other economic problems. c. the gains from trade are based on comparative advantage. d. the gains from trade are based on absolute advantage. 85. The “unfair-competition” argument might be cited by an American who believes that a. almost every country has a comparative advantage, relative to the United States, in producing almost all goods. b. young industries should be protected against foreign competition until they become profitable. c. the American automobile industry should be protected against Japanese firms that are able to produce automobiles at relatively low cost. d. the French government’s subsidies to French farmers justify restrictions on American imports of French agricultural products. 86. Which of the following is not a commonly-advanced argument for trade restrictions? a. The jobs argument b. The national-security argument c. The infant-industry argument d. The efficiency argument 87. The infant-industry argument a. is based on the belief that protecting industries when they are young will pay off later. .
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Ch 09: Application: International Trade b. is based on the belief that protecting industries producing goods and services for infants is necessary if a country is to have healthy children. c. has the support of most economists. d. is an argument that is advanced by advocates of free trade. 88. If the Korean steel industry subsidizes the steel that it sells to the United States, the a. United States should protect its domestic steel industry from this unfair competition. b. harm done to U.S. steel producers from this unfair competition exceeds the gain to U.S. consumers of cheap Korean steel. c. harm done to U.S. steel producers is less than the benefit that accrues to U.S. consumers of steel. d. United States should subsidize the products it sells to Korea. 89. Which of the following is not an advantage of a multilateral approach to free trade over a unilateral approach? a. A multilateral approach can reduce trade restrictions abroad as well as at home. b. A multilateral approach has the potential to result in freer trade. c. A multilateral approach requires the agreement of two or more nations. d. A multilateral approach may have political advantages. 90. The North American Free Trade Agreement a. is an example of the unilateral approach to free trade. b. eliminated tariffs on imports to North America from the rest of the world. c. reduced trade restrictions among Canada, Mexico, and the United States. d. eliminated quotas between North America and China. 91. The General Agreement on Tariffs and Trade (GATT) was initiated in response to a. an increase in exports of low-priced goods from developing countries to developed countries. b. the replacement of manufacturing jobs with service jobs in developed countries. c. economic dislocations caused by the North American Free Trade Agreement (NAFTA) in the 1990s. d. high tariffs imposed during the Great Depression of the 1930s. 92. The problem with the protection-as-a-bargaining-chip argument for trade restrictions is a. if it works, consumer surplus will decline. b. if it works, producer surplus falls. c. if it fails, the country faces a choice between two bad options. d. if it fails, total surplus will increase. 93. If the United States threatens to impose a tariff on Colombian coffee if Colombia does not remove agricultural subsidies, the United States will be a. better off regardless of how Colombia responds. b. better off if Colombia removes the subsidies, and will be no worse off if it doesn’t. c. worse off if Colombia doesn't remove the subsidies in response to the threat. d. worse off regardless of how Colombia responds.
Indicate whether the statement is true or false. .
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Ch 09: Application: International Trade 94. The history of the textile industry raises important questions for economic policy. a. True b. False 95. Trade decisions are based on the principle of absolute advantage. a. True b. False 96. The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive from participating in a market. a. True b. False 97. According to the principle of comparative advantage, all countries can benefit from trading with one another because trade allows each country to specialize in doing what it does best. a. True b. False 98. The world price of cotton is the highest price of cotton observed anywhere in the world. a. True b. False 99. If the world price of a good is greater than the domestic price in a country that can engage in international trade, then that country becomes an importer of that good. a. True b. False 100. Without free trade, the domestic price of a good must be equal to the world price of a good. a. True b. False 101. The nation of Aviana soon will abandon its no-trade policy and adopt a free-trade policy. If the world price of goose meat is $3 per pound and the domestic price of goose meat without trade is $2 per pound, then Aviana should export goose meat. a. True b. False 102. If a country allows free trade and its domestic price for a given good is lower than the world price, then it will import that good. a. True b. False 103. “Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers.” This statement is correct for a nation that exports manufactured goods, but it is not correct for a nation that imports manufactured goods. a. True b. False .
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Ch 09: Application: International Trade 104. The nation of Loneland does not allow international trade. In Loneland, you can buy 1 pound of beef for 2 pounds of cheese. In neighboring countries, you can buy 2 pounds of beef for 3 pounds of cheese. If Loneland were to allow free trade, it would export cheese. a. True b. False 105. If Argentina exports oranges to the rest of the world, Argentina's producers of oranges are worse off, and Argentina's consumers of oranges are better off, as a result of trade. a. True b. False 106. If a country’s domestic price of a good is lower than the world price, then that country has a comparative advantage in producing that good. a. True b. False 107. When a country allows international trade and becomes an importer of a good, domestic producers of the good are better off, and domestic consumers of the good are worse off. a. True b. False 108. If the United Kingdom imports tea cups from other countries, then U.K. producers of tea cups are better off, and U.K. consumers of tea cups are worse off, as a result of trade. a. True b. False 109. If Belgium exports chocolate to the rest of the world, then Belgian chocolate producers benefit from higher producer surplus, Belgian chocolate consumers are worse off because of lower consumer surplus, and total surplus in Belgium increases because of the exports of chocolate. a. True b. False 110. In principle, trade can make a nation better off, because the gains to the winners exceed the losses to the losers. a. True b. False 111. Suppose the Ivory Coast, a small country, imports wheat at the world price of $4 per bushel. If the Ivory Coast imposes a tariff of $1 per bushel on imported wheat, then, other things equal, the price of wheat in Ivory Coast will increase, but by less than $1. a. True b. False 112. The small-economy assumption is necessary to analyze the gains and losses from international trade. a. True b. False .
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Ch 09: Application: International Trade 113. The greater the elasticities of supply and demand, the smaller are the gains from trade. a. True b. False 114. If a tariff is placed on watches, the price of both domestic and imported watches will rise by the amount of the tariff. a. True b. False 115. When a government imposes a tariff on a product, the domestic price will equal the world price. a. True b. False 116. A tariff increases the quantity of imports and moves the market farther from its equilibrium without trade. a. True b. False 117. When a country abandons no-trade policies in favor of free-trade policies and becomes an importer of steel, then the domestic price of steel will increase as a result. a. True b. False 118. When a country that imports shoes imposes a tariff on shoes, buyers of shoes in that country become worse off. a. True b. False 119. When a country that imports shoes imposes a tariff on shoes, buyers of shoes in that country become worse off and sellers of shoes in that country become better off. a. True b. False 120. Deadweight loss measures the decrease in total surplus that results from a tariff or quota. a. True b. False 121. If a small country imposes a tariff on an imported good, domestic sellers will gain producer surplus, the government will gain tariff revenue, and domestic consumers will gain consumer surplus. a. True b. False 122. Domestic consumers gain and domestic producers lose when the government imposes a tariff on imports. a. True b. False 123. The imposition of a tariff on imported wine will increase the domestic price of wine, decrease the quantity of wine imported, and increase the quantity of wine produced domestically. a. True .
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Ch 09: Application: International Trade b. False 124. Suppose that Australia imposes a tariff on imported beef. If the increase in producer surplus is $100 million, the increase in tariff revenue is $200 million, and the reduction in consumer surplus is $500 million, the deadweight loss of the tariff is $300 million. a. True b. False 125. Suppose Ecuador imposes a tariff on imported bananas. If the increase in producer surplus is $50 million, the reduction in consumer surplus is $150 million, and the deadweight loss of the tariff is $30 million, then the tariff generates $130 million in revenue for the government. a. True b. False 126. Tariffs cause deadweight loss because they move the price of an imported product closer to the equilibrium without trade, thus reducing the gains from trade. a. True b. False 127. Import quotas and tariffs both cause the quantity of imports to fall. a. True b. False 128. Import quotas and tariffs make domestic sellers better off and domestic buyers worse off. a. True b. False 129. If a country allows free trade and imports cars, then it is the case that the gains to domestic producers outweigh the losses to domestic consumers. a. True b. False 130. The nation of Cranolia used to prohibit international trade, but now trade is allowed, and Cranolia is exporting furniture. Relative to the previous no-trade situation, buyers of furniture in Cranolia are now better off. a. True b. False 131. The nation of Spritzland used to prohibit international trade, but now trade is allowed, and Spritzland is exporting wristwatches. Relative to the previous no-trade situation, total surplus in the market for wristwatches in Spritzland has increased. a. True b. False 132. Free trade allows firms to realize economies of scale, resulting in higher costs of production. a. True b. False .
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Ch 09: Application: International Trade 133. For a given country, comparing the world price of aluminum and the domestic price of aluminum before trade indicates whether that country’s demand for aluminum exceeds the demand for aluminum in other countries. a. True b. False 134. For Country A, the world price of soybeans exceeds the domestic equilibrium price of soybeans. As a result, international trade allows buyers of soybeans in Country A to experience greater consumer surplus than they otherwise would experience. a. True b. False 135. For Country A, the world price of textiles exceeds the domestic equilibrium price of textiles. As a result, international trade allows sellers of textiles in Country A to experience greater producer surplus than they otherwise would experience. a. True b. False 136. William and Jamal live in the country of Dumexia. As a result of Dumexia’s legalization of international trade in bananas, William becomes better off and Jamal becomes worse off. It follows that William is a seller, and Jamal is a buyer, of bananas. a. True b. False 137. William and Jamal live in the country of Dumexia. When Dumexia legalized international trade in bananas, the price of bananas in Dumexia increased. As a result, William became better off and Jamal became worse off. It follows that William is a seller, and Jamal is a buyer, of bananas. a. True b. False 138. Economists agree that trade ought to be restricted if free trade means that domestic jobs might be lost because of foreign competition. a. True b. False 139. Free trade causes job losses in industries in which a country does not have a comparative advantage, but it also causes job gains in industries in which the country has a comparative advantage. a. True b. False 140. Most economists support the infant-industry argument because it is so easy to implement in practice. a. True b. False 141. If Honduras were to subsidize the production of wool blankets and sell them in Sweden at artificially low prices, the Swedish economy would be worse off. a. True b. False .
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Ch 09: Application: International Trade 142. Policymakers often consider trade restrictions in order to protect domestic producers from foreign competitors. a. True b. False 143. GATT is an example of a successful unilateral approach to achieving free trade. a. True b. False 144. NAFTA is an example of a multilateral approach to achieving free trade. a. True b. False 145. The rules established under the General Agreement on Tariffs and Trade (GATT) are enforced by an international body called the World Trade Organization (WTO). a. True b. False 146. A multilateral approach to free trade has greater potential to increase the gains from trade than a unilateral approach, because the multilateral approach can reduce trade restrictions abroad as well as at home. a. True b. False 147. Economists feel that national security concerns never provide a legitimate rationale for trade restrictions. a. True b. False 148. Economists view free trade as a way to raise living standards both at home and abroad. a. True b. False 149. The results of a 2008 Los Angeles Times poll suggest that a significant majority of Americans believe that free international trade helps the American economy. a. True b. False 150. The results of a 2008 Los Angeles Times poll suggest that the percentage of Americans who believe trade is harmful to the economy exceeds the percentage of Americans who believe trade is beneficial to the economy. a. True b. False 151. Most economists view the United States as an ongoing experiment that raises serious doubts about the virtues of free trade. a. True b. False 152. If a country is exporting a good, this is because the country has an absolute advantage in the production of that good. .
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Ch 09: Application: International Trade a. True b. False 153. When markets open up to international trade, we know that consumer surplus will rise. a. True b. False 154. When markets open up to international trade, we know that total surplus will rise. a. True b. False 155. Since a tariff can increase employment in an industry, the result is a net increase in total surplus. a. True b. False 156. There are only increases in total surplus when a country exports a good, since more units of the country’s output of that good are produced. a. True b. False 157. If we know that Canada exports maple syrup, we can conclude that maple syrup consumers in Canada are worse off than they would be in the absence of trade. a. True b. False 158. Imposing a quota on the import of a good is preferable to a tariff because a tariff creates a deadweight loss while a quota does not. a. True b. False 159. Imposing a tariff on the import of a good is preferable to a quota because a tariff produces revenue for the government, while a quota never produces any revenue for a government. a. True b. False 160. The small country assumption is made in developing models of international trade because it applies to US markets. a. True b. False 161. We can conclude that international trade is beneficial because, regardless of whether the country imports or exports a good, the overall increase in well-being outweighs the losses associated with trade. a. True b. False
162. Suppose in the country of Jumanji that the price of coffee with no trade allowed is below the world price of coffee. If .
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Ch 09: Application: International Trade Jumanji allows free trade, will Jumanji be an importer or an exporter of coffee? 163. Suppose in the country of Jumanji that the price of wheat with no trade allowed is above the world price of wheat. If Jumanji allows free trade, will Jumanji be an importer or an exporter of wheat? 164. Suppose in the country of Nash that the price of corn is $4 per bushel with no trade allowed. If the world price of corn is $3 per bushel and if Nash allows free trade, will Nash be an importer or an exporter of corn? 165. Suppose in the country of Nash that the price of oranges is $8 per bushel with no trade allowed. If the world price of oranges is $10 per bushel and if Nash allows free trade, will Nash be an importer or an exporter of oranges? 166. A tax on an imported good is called a ______ . 167. A country has a comparative advantage in a product if the world price is _____ than that country’s domestic price without trade. 168. Suppose the world price of coffee is $3 per pound and Brazil’s domestic price of coffee without trade is $2 per pound. If Brazil allows free trade, will Brazil be an importer or an exporter of coffee? 169. Suppose the world price of coffee is $2 per pound and Brazil’s domestic price of coffee without trade is $3 per pound. If Brazil allows free trade, will Brazil be an importer or an exporter of coffee? 170. Figure 9-7 The following diagram shows the domestic demand and domestic supply curves in a market.
Refer to Figure 9-7. With no trade allowed, what are the equilibrium price and equilibrium quantity in this market? 171. Figure 9-7 The following diagram shows the domestic demand and domestic supply curves in a market.
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Refer to Figure 9-7. With no trade allowed, how much are consumer surplus, producer surplus, and total surplus in this market? 172. Figure 9-7 The following diagram shows the domestic demand and domestic supply curves in a market.
Refer to Figure 9-7. Suppose the world price in this market is $7. If the country allows free trade, how many units will domestic consumers demand, and how many units will domestic producers produce? 173. Figure 9-7 The following diagram shows the domestic demand and domestic supply curves in a market.
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Refer to Figure 9-7. Suppose the world price in this market is $7. If the country allows free trade, will the country import or export this good, and how many units will be imported/exported? 174. Figure 9-7 The following diagram shows the domestic demand and domestic supply curves in a market.
Refer to Figure 9-7. Suppose the world price in this market is $7. If the country allows free trade, how much are consumer surplus, producer surplus, and total surplus with trade? 175. Figure 9-7 The following diagram shows the domestic demand and domestic supply curves in a market.
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Refer to Figure 9-7. Suppose the world price in this market is $7. If the country allows free trade, by how much do consumer surplus, producer surplus, and total surplus change with trade? 176. Figure 9-8 The following diagram shows the domestic demand and supply curves in a market. Assume that the world price in this market is $20 per unit.
Refer to Figure 9-8. With no trade allowed, what are the equilibrium price and equilibrium quantity in this market? 177. Figure 9-8 The following diagram shows the domestic demand and supply curves in a market. Assume that the world price in this market is $20 per unit.
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Refer to Figure 9-8. With no trade allowed, how much are consumer surplus, producer surplus, and total surplus? 178. Figure 9-8 The following diagram shows the domestic demand and supply curves in a market. Assume that the world price in this market is $20 per unit.
Refer to Figure 9-8. If the country allows free trade, how many units will domestic consumers demand and how many units will domestic producers produce? 179. Figure 9-8 The following diagram shows the domestic demand and supply curves in a market. Assume that the world price in this market is $20 per unit.
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Refer to Figure 9-8. If the country allows free trade, will the country import or export this good, and how many units will be imported/exported? 180. Figure 9-8 The following diagram shows the domestic demand and supply curves in a market. Assume that the world price in this market is $20 per unit.
Refer to Figure 9-8. If the country allows free trade, how much are consumer surplus, producer surplus, and total surplus with trade? 181. Figure 9-8 The following diagram shows the domestic demand and supply curves in a market. Assume that the world price in this market is $20 per unit.
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Refer to Figure 9-8. If the country allows free trade, by how much do consumer surplus, producer surplus, and total surplus change with trade? 182. Figure 9-8 The following diagram shows the domestic demand and supply curves in a market. Assume that the world price in this market is $20 per unit.
Refer to Figure 9-8. Suppose the country imposes a $5 per unit tariff. If the country allows trade with a tariff, how much are consumer surplus, producer surplus, tariff revenue, and total surplus? 183. Figure 9-8 The following diagram shows the domestic demand and supply curves in a market. Assume that the world price in this market is $20 per unit.
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Refer to Figure 9-8. Suppose the country imposes a $5 per unit tariff. If the country allows trade with a tariff, how much is the deadweight loss caused by the tariff? 184. Scenario 9-2 Suppose domestic demand and domestic supply in a market are given by the following equations:
Refer to Scenario 9-2. With no trade allowed, what are the equilibrium price and quantity in this market? 185. Scenario 9-2 Suppose domestic demand and domestic supply in a market are given by the following equations:
Refer to Scenario 9-2. With no trade allowed, how much are consumer surplus, producer surplus, and total surplus in this market? 186. Scenario 9-2 Suppose domestic demand and domestic supply in a market are given by the following equations:
Refer to Scenario 9-2. Suppose the world price in this market is $8 per unit. If the country allows free trade, will the .
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Ch 09: Application: International Trade country import or export this good, and how many units will be imported/exported? 187. Scenario 9-2 Suppose domestic demand and domestic supply in a market are given by the following equations:
Refer to Scenario 9-2. Suppose the world price in this market is $8 per unit. If the country allows free trade, how much are consumer surplus, producer surplus, and producer surplus with trade? 188. Scenario 9-2 Suppose domestic demand and domestic supply in a market are given by the following equations:
Refer to Scenario 9-2. Suppose the world price in this market is $8 per unit. If the country allows free trade, by how much do consumer surplus, producer surplus, and producer surplus change? 189. Scenario 9-2 Suppose domestic demand and domestic supply in a market are given by the following equations:
Refer to Scenario 9-2. Suppose the world price in this market is $8 per unit, and suppose the country imposes a $1 per unit tariff. If the country allows trade with a tariff, how much are consumer surplus, producer surplus, tariff revenue, and total surplus? 190. Scenario 9-2 Suppose domestic demand and domestic supply in a market are given by the following equations:
Refer to Scenario 9-2. Suppose the world price in this market is $8 per unit, and suppose the country imposes a $1 per unit tariff. If the country allows trade with a tariff, how much is the deadweight loss caused by the tariff? 191. Figure 9-9 The following diagram shows the domestic demand and domestic supply curves in a market.
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Refer to Figure 9-9. With no trade allowed, what are the equilibrium price and equilibrium quantity in this market? 192. Figure 9-9 The following diagram shows the domestic demand and domestic supply curves in a market.
Refer to Figure 9-9. With no trade allowed, how much are consumer surplus, producer surplus, and total surplus in this market? 193. Figure 9-9 The following diagram shows the domestic demand and domestic supply curves in a market.
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Refer to Figure 9-9. Suppose the world price in this market is $6. If the country allows free trade, how many units will domestic consumers demand, and how many units will domestic producers supply? 194. Figure 9-9 The following diagram shows the domestic demand and domestic supply curves in a market.
Refer to Figure 9-9. Suppose the world price in this market is $6. If the country allows free trade, will the country import or export this good, and how many units will be imported/exported? 195. Figure 9-9 The following diagram shows the domestic demand and domestic supply curves in a market.
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Refer to Figure 9-9. Suppose the world price in this market is $6. If the country allows free trade, how much is consumer surplus? 196. Figure 9-9 The following diagram shows the domestic demand and domestic supply curves in a market.
Refer to Figure 9-9. Suppose the world price in this market is $6. If the country allows free trade, how much is producer surplus? 197. Figure 9-9 The following diagram shows the domestic demand and domestic supply curves in a market.
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Refer to Figure 9-9. Suppose the world price in this market is $6. If the country allows free trade, how much is total surplus? 198. Figure 9-10 The following diagram shows the domestic demand and domestic supply curves in a market. Assume that the world price in this market is $1 per unit.
Refer to Figure 9-10. With no trade allowed, what are the equilibrium price and equilibrium quantity in this market? 199. Figure 9-10 The following diagram shows the domestic demand and domestic supply curves in a market. Assume that the world price in this market is $1 per unit.
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Refer to Figure 9-10. With no trade allowed, how much are consumer surplus, producer surplus, and total surplus? 200. Figure 9-10 The following diagram shows the domestic demand and domestic supply curves in a market. Assume that the world price in this market is $1 per unit.
Refer to Figure 9-10. If the country allows free trade, how many units will domestic consumers demand and how many units will domestic producers supply? 201. Figure 9-10 The following diagram shows the domestic demand and domestic supply curves in a market. Assume that the world price in this market is $1 per unit.
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Ch 09: Application: International Trade
Refer to Figure 9-10. If the country allows free trade, will the country import or export this good, and how many units will be imported/exported? 202. Figure 9-10 The following diagram shows the domestic demand and domestic supply curves in a market. Assume that the world price in this market is $1 per unit.
Refer to Figure 9-10. If the country allows free trade, how much are consumer surplus, producer surplus, and total surplus with trade? 203. Figure 9-10 The following diagram shows the domestic demand and domestic supply curves in a market. Assume that the world price in this market is $1 per unit.
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Ch 09: Application: International Trade
Refer to Figure 9-10. Suppose the country imposes a $1 per unit tariff. If the country allows trade with a tariff, what will be the domestic price in this market? 204. Figure 9-10 The following diagram shows the domestic demand and domestic supply curves in a market. Assume that the world price in this market is $1 per unit.
Refer to Figure 9-10. Suppose the country imposes a $1 per unit tariff. If the country allows trade with a tariff, how many units will domestic consumers demand and how many units will domestic producers supply? 205. Figure 9-10 The following diagram shows the domestic demand and domestic supply curves in a market. Assume that the world price in this market is $1 per unit.
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Ch 09: Application: International Trade
Refer to Figure 9-10. Suppose the country imposes a $1 per unit tariff. If the country allows trade with a tariff, how many units will be imported? 206. Figure 9-10 The following diagram shows the domestic demand and domestic supply curves in a market. Assume that the world price in this market is $1 per unit.
Refer to Figure 9-10. Suppose the country imposes a $1 per unit tariff. If the country allows trade with a tariff, how much are consumer surplus and producer surplus? 207. Figure 9-10 The following diagram shows the domestic demand and domestic supply curves in a market. Assume that the world price in this market is $1 per unit.
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Ch 09: Application: International Trade
Refer to Figure 9-10. Suppose the country imposes a $1 per unit tariff. If the country allows trade with a tariff, how much is tariff revenue? 208. Figure 9-10 The following diagram shows the domestic demand and domestic supply curves in a market. Assume that the world price in this market is $1 per unit.
Refer to Figure 9-10. Suppose the country imposes a $1 per unit tariff. If the country allows trade with a tariff, how much is total surplus? 209. Figure 9-10 The following diagram shows the domestic demand and domestic supply curves in a market. Assume that the world price in this market is $1 per unit.
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Ch 09: Application: International Trade
Refer to Figure 9-10. Suppose the country imposes a $1 per unit tariff. If the country allows trade with a tariff, how much is the deadweight loss caused by the tariff? 210. List four benefits of international trade. 211. List five arguments given to support trade restrictions. 212. Use the graph to answer the following questions about CDs.
a. b. c. d. e. f. .
What is the equilibrium price of CDs before trade? What is the equilibrium quantity of CDs before trade? What is the price of CDs after trade is allowed? What is the quantity of CDs exported after trade is allowed? What is the amount of consumer surplus before trade? What is the amount of consumer surplus after trade? Page 86
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Ch 09: Application: International Trade g. h. i. j. k.
What is the amount of producer surplus before trade? What is the amount of producer surplus after trade? What is the amount of total surplus before trade? What is the amount of total surplus after trade? What is the change in total surplus because of trade?
213. Using the graph below, answer the following questions about hammers.
a. b. c. d. e. f. g. h. i. j. k.
What is the equilibrium price of hammers before trade? What is the equilibrium quantity of hammers before trade? What is the price of hammers after trade is allowed? What is the quantity of hammers imported after trade is allowed? What is the amount of consumer surplus before trade? What is the amount of consumer surplus after trade? What is the amount of producer surplus before trade? What is the amount of producer surplus after trade? What is the amount of total surplus before trade? What is the amount of total surplus after trade? What is the change in total surplus because of trade?
214. Using the graph, assume that the government imposes a $1 tariff on hammers. Answer the following questions given this information.
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Ch 09: Application: International Trade
a. b. c. d. e. f. g. h. i.
What is the domestic price and quantity demanded of hammers after the tariff is imposed? What is the quantity of hammers imported before the tariff? What is the quantity of hammers imported after the tariff? What would be the amount of consumer surplus before the tariff? What would be the amount of consumer surplus after the tariff? What would be the amount of producer surplus before the tariff? What would be the amount of producer surplus after the tariff? What would be the amount of government revenue because of the tariff? What would be the total amount of deadweight loss due to the tariff?
215. How does an import quota differ from an equivalent tariff? 216. Characterize the two different approaches a nation can take to achieve free trade. Does one approach have an advantage over the other? 217. What are the arguments in favor of trade restrictions, and what are the counterarguments? According to most economists, do any of these arguments really justify trade restrictions? Explain.
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Ch 09: Application: International Trade Answer Key 1. d 2. d 3. b 4. c 5. b 6. a 7. b 8. d 9. c 10. a 11. c 12. b 13. c 14. a 15. a 16. b 17. b 18. c 19. b 20. a 21. a 22. d 23. c 24. a 25. b .
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Ch 09: Application: International Trade 26. d 27. c 28. c 29. d 30. a 31. c 32. b 33. c 34. b 35. b 36. a 37. a 38. a 39. b 40. d 41. c 42. a 43. b 44. a 45. b 46. b 47. a 48. d 49. c 50. b 51. c .
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Ch 09: Application: International Trade 52. b 53. a 54. b 55. a 56. a 57. a 58. c 59. b 60. a 61. b 62. d 63. d 64. d 65. d 66. a 67. a 68. c 69. b 70. b 71. a 72. d 73. d 74. d 75. d 76. b .
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Ch 09: Application: International Trade 77. c 78. c 79. c 80. a 81. a 82. c 83. b 84. c 85. d 86. d 87. a 88. c 89. c 90. c 91. d 92. c 93. c 94. True 95. False 96. True 97. True 98. False 99. False 100. False 101. True 102. False .
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Ch 09: Application: International Trade 103. False 104. True 105. False 106. True 107. False 108. False 109. True 110. True 111. False 112. False 113. False 114. True 115. False 116. False 117. False 118. True 119. True 120. True 121. False 122. False 123. True 124. False 125. False 126. True 127. True .
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Ch 09: Application: International Trade 128. True 129. False 130. False 131. True 132. False 133. False 134. False 135. True 136. False 137. True 138. False 139. True 140. False 141. False 142. True 143. False 144. True 145. True 146. True 147. False 148. True 149. False 150. True 151. False 152. False 153. False .
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Ch 09: Application: International Trade 154. True 155. False 156. False 157. True 158. False 159. False 160. False 161. True 162. Jumanji will be an exporter of coffee. 163. Jumanji will be an importer of wheat. 164. Nash will be an importer of corn. 165. Nash will be an exporter of oranges. 166. tariff 167. higher 168. Brazil will be an exporter of coffee. 169. Brazil will be an importer of coffee. 170. The equilibrium price is $5 and the equilibrium quantity is 25 units. 171. Consumer surplus is $62.50, producer surplus is $62.50, and total surplus is $125. 172. Domestic consumers will demand 15 units and domestic producers will produce 35 units. 173. The country will export 20 units. 174. With trade, consumer surplus is $22.50, producer surplus is $122.50, and total surplus is $145. 175. With trade, consumer surplus falls by $40, producer surplus rises by $60, and total surplus increases by $20. 176. The equilibrium price is $30 and the equilibrium quantity is 400 units. 177. Without trade, consumer surplus is $4,000, producer surplus is $4,000, and total surplus is $8,000. 178. With trade, domestic consumers will demand 600 units and domestic producers will produce 200 units. .
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Ch 09: Application: International Trade 179. With trade, the country will import 400 units. 180. With trade, consumer surplus is $9,000, producer surplus is $1,000, and total surplus is $10,000. 181. With trade, consumer surplus increases by $5,000, producer surplus falls by $3,000, and total surplus rises by $2,000. 182. With trade and a tariff, consumer surplus is $6,250, producer surplus is $2,250, tariff revenue is $1,000, and total surplus is $9,500. 183. The deadweight loss of the tariff is $500. 184. The equilibrium price is $10 and the equilibrium quantity is 10 units. 185. Without trade, consumer surplus is $50, producer surplus is $50, and total surplus is $100. 186. The country will import 4 units. 187. With trade, consumer surplus is $72, producer surplus is $32, and total surplus is $104. 188. With trade, consumer surplus increases by $22, producer surplus falls by $18, and total surplus increases by $4. 189. With trade and a tariff, consumer surplus is $60.50, producer surplus is $40.50, tariff revenue is $2, and total surplus is $103. 190. The deadweight loss caused by the tariff is $1. 191. The equilibrium price is $4 and the equilibrium quantity is 20 units. 192. Consumer surplus is $40, producer surplus is $40, and total surplus is $80. 193. Domestic consumers will demand 10 units and domestic producers will supply 30 units. 194. The country will export 20 units. 195. With trade, consumer surplus is $10. 196. With trade, producer surplus is $90. 197. With trade, total surplus is $100. 198. The equilibrium price is $3 and the equilibrium quantity is 300 units. 199. Without trade, consumer surplus is $450, producer surplus is $450, and total surplus is $900. 200. With trade, domestic consumers will demand 500 units and domestic producers will supply 100 units. 201. With trade, the country will import 400 units. 202. With trade, consumer surplus is $1,250, producer surplus is $50, and total surplus is $1,300. 203. With trade and a tariff, the domestic price wil be $2. .
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Ch 09: Application: International Trade 204. With trade and a tariff, domestic consumers will demand 400 units and domestic producers will supply 200 units. 205. With trade and a tariff, 200 units will be imported. 206. With trade and a tariff, consumer surplus is $800 and producer surplus is $200. 207. With trade and a tariff, tariff revenue is $200. 208. With trade and a tariff, total surplus is $1,200. 209. The deadweight loss of the tariff is $100. 210. Increased variety of goods; lower costs through economies of scale; increased competition; and enhanced flow of ideas 211. The jobs argument; the national security argument; the infant industry argument; the unfair competition argument; and the protection-as-a-bargaining-chip argument. 212. a. $12 b. 50 c. $15 d. 30 e. $250 f. $122.50 g. $250 h. $422.50 i. $500 j. $545 k. $45 213. a. $14 b. 90 c. $10 d. 85 e. $360 f. $810 g. $405 h. $125 i. $765 j. $935 k. $170 214. a. $6, 84 b. 66 c. 44 d. $384 e. $294 .
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Ch 09: Application: International Trade f. g. h. i.
$45 $80 $44 $11
215. Both the import quota and the tariff raise the domestic price of the good, reduce the welfare of domestic consumers, increase the welfare of domestic producers, and cause deadweight losses. The only difference for the economy is that the tariff raises revenue for the government, while the import quota creates surplus for license holders. 216. A unilateral approach is when a country removes its trade restrictions on its own. A multilateral approach is when a country removes its trade restrictions while other countries do the same. A multilateral approach has two advantages. The first is that it has the potential to result in freer trade because it can reduce trade restrictions abroad as well as at home. If international negotiations fail, however, the result could be more restricted trade than under a unilateral approach. Also, the multilateral approach may have a political advantage and can sometimes win political support when a unilateral reduction cannot. 217. Arguments mentioned in the text include the jobs argument, the national security argument, the infant industry argument, the unfair competition argument, and the protection-as-a-bargaining-chip argument. These arguments and counter-arguments are outlined in section 9-3 of the text. Most economists would dismiss the jobs argument, the infant industry argument, and the unfair competition argument on strictly economic grounds. The bargaining-chip argument carries high risks of economic harm if the threat doesn't work. The national-security argument balances economic loss from trade restriction against the benefit of long-term national survival, and is probably the argument that economists would most likely buy if it were clear that the industry being protected was clearly crucial to national security.
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Ch 10: Externalities
Indicate the answer choice that best completes the statement or answers the question. 1. An externality is the uncompensated impact of a. society's decisions on the well-being of society. b. a person's actions on that person's well-being. c. one person's actions on the well-being of a bystander. d. society's decisions on the person with the lowest income in society. 2. Which of the following statements about a well-maintained yard best conveys the general nature of the externality? a. A well-maintained yard conveys a positive externality because it increases the home's market value. b. A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner. c. A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood. d. A well-maintained yard cannot provide any type of externality. 3. When an externality is present, the market equilibrium is a. efficient, and the equilibrium maximizes the total benefit to society as a whole. b. efficient, but the equilibrium does not maximize the total benefit to society as a whole. c. inefficient, but the equilibrium maximizes the total benefit to society as a whole. d. inefficient, and the equilibrium does not maximize the total benefit to society as a whole. 4. Dioxin emission that results from the production of paper is a good example of a negative externality, because a. self-interested paper firms are generally unaware of environmental regulations. b. there are fines for producing too much dioxin. c. self-interested paper producers will not consider the full cost of the dioxin pollution they create. d. toxic emissions cause firms to produce less than the socially optimal amount of paper. 5. Which of the following statements is not correct? a. Government policies may improve the market's allocation of resources when negative externalities are present. b. Government policies may improve the market's allocation of resources when positive externalities are present. c. A positive externality is an example of a market failure. d. Without government intervention, the market will tend to undersupply products that produce negative externalities. 6. Josiah installed a metal sculpture in his front yard. A positive externality arises if the sculpture a. increases the value of other properties in the neighborhood. b. increases the value of Josiah's home. c. is visually unappealing to Josiah's neighbors. d. creates a safety hazard for neighborhood children. 7. If a sawmill creates too much noise for local residents, a. noise restrictions will force residents to move out of the area. b. a sense of social responsibility will cause owners of the mill to reduce noise levels. c. the government can raise economic well-being through noise-control regulations. .
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Ch 10: Externalities d. the government should avoid intervening because the market will always allocate resources efficiently. 8. Figure 10-1. The following graph represents the tobacco industry.
Refer to Figure 10-1. The industry creates a. positive externalities. b. negative externalities. c. no externalities. d. no equilibrium in the market. 9. Figure 10-1. The following graph represents the tobacco industry.
.
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Ch 10: Externalities
Refer to Figure 10-1. Without any government intervention, the equilibrium price and quantity are a. $3.00 and 30 units, respectively. b. $2.80 and 24 units, respectively. c. $2.07 and 38 units, respectively. d. $1.50 and 50 units, respectively. 10. Figure 10-1. The following graph represents the tobacco industry.
.
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Ch 10: Externalities
Refer to Figure 10-1. The socially optimal price and quantity are a. $3.00 and 30 units, respectively. b. $2.80 and 24 units, respectively. c. $2.07 and 38 units, respectively. d. $1.50 and 50 units, respectively. 11. Figure 10-2
.
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Ch 10: Externalities
Refer to Figure 10-2. If this market is currently producing at Q4, then total economic well-being would be maximized if output a. decreased to Q1. b. decreased to Q2. c. decreased to Q3. d. stayed at Q4. 12. Figure 10-2
.
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Ch 10: Externalities
Refer to Figure 10-2. This market is characterized by a. government intervention. b. a positive externality. c. a negative externality. d. a price control. 13. Figure 10-2
.
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Ch 10: Externalities
Refer to Figure 10-2. Without government intervention, the equilibrium quantity would be a. Q1. b. Q2. c. Q3. d. Q4. 14. Figure 10-2
.
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Ch 10: Externalities
Refer to Figure 10-2. The socially optimal quantity would be a. Q1. b. Q2. c. Q3. d. Q4. 15. Figure 10-2
.
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Ch 10: Externalities
Refer to Figure 10-2. This market a. has no need for government intervention. b. would be more efficient with a tax on the product. c. would be more efficient with a subsidy for the product. d. would maximize total well-being at Q3. 16. Figure 10-2
.
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Ch 10: Externalities
Refer to Figure 10-2. If all external costs were internalized, then the market's output would be a. Q1. b. Q2. c. Q3. d. Q4. 17. Figure 10-2
.
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Ch 10: Externalities
Refer to Figure 10-2. At Q3, a. the marginal consumer values this product less than the social cost of producing it. b. every consumer values this product less than the social cost of producing it. c. the cost to society is equal to the value to society. d. the marginal consumer values this product more than the private cost. 18. Table 10-1 Quantity (Units) 1 2 3 4 5 6 7
Private Value (Dollars) 14 13 12 11 10 9 8
Private Cost (Dollars) 10 11 12 13 14 15 16
External Cost (Dollars) 2 2 2 2 2 2 2
Refer to Table 10-1. What is the equilibrium quantity of output in the market? a. 2 units b. 3 units c. 4 units .
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Ch 10: Externalities d. 5 units 19. Table 10-1 Quantity (Units) 1 2 3 4 5 6 7
Private Value (Dollars) 14 13 12 11 10 9 8
Private Cost (Dollars) 10 11 12 13 14 15 16
External Cost (Dollars) 2 2 2 2 2 2 2
Refer to Table 10-1. What is the socially optimal quantity of output in this market? a. 1 unit b. 2 units c. 3 units d. 4 units 20. Table 10-1 Quantity (Units) 1 2 3 4 5 6 7
Private Value (Dollars) 14 13 12 11 10 9 8
Private Cost (Dollars) 10 11 12 13 14 15 16
External Cost (Dollars) 2 2 2 2 2 2 2
Refer to Table 10-1. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially optimal outcome? a. $2 b. $3 c. $9 d. $10 21. Table 10-1 Quantity (Units) .
Private Value (Dollars)
Private Cost (Dollars)
External Cost (Dollars) Page 12
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Ch 10: Externalities 1 2 3 4 5 6 7
14 13 12 11 10 9 8
10 11 12 13 14 15 16
2 2 2 2 2 2 2
Refer to Table 10-1. Which of the following statements is correct? a. If the external cost per unit of output were $0 instead of $2, then the socially efficient quantity of output would be 4 units. b. A tax of $4 per unit would enable this market to move from the equilibrium quantity of output to the socially optimal level of output. c. Taking the external cost into account, total surplus declines when the 3rd unit of output is produced and consumed. d. The market for flu shots is a market to which the concepts in this table apply very well. 22. Which of the following illustrates the concept of a negative externality? a. A college professor plays a vigorous game of racquet ball with the racquet they recently purchased. b. A flood wipes out a farmer's corn crop. c. A college student plays loud music on their new stereo system at 2:00 a.m. d. A janitor eats a hamburger during their lunch break. 23. When negative externalities are present in a market a. private costs will be greater than social costs. b. social costs will be greater than private costs. c. only government regulation will solve the problem. d. the market will not be able to generate an equilibrium. 24. Negative externalities lead markets to produce a. greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels. b. smaller than efficient output levels and positive externalities lead markets to produce greater than efficient output levels. c. greater than efficient output levels and positive externalities lead markets to produce efficient output levels. d. efficient output levels and positive externalities lead markets to produce greater than efficient output levels. 25. When Monique drives to work every morning, she drives on a congested highway. What Monique does not realize is that when she enters the highway each morning she increases the travel time of all other drivers on the highway. In this case, the external cost of Monique's highway trip a. increases the social cost above the private cost. b. lowers the social cost below the private cost. c. increases the social value above the private benefit. .
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Ch 10: Externalities d. decreases the social value below the private benefit. 26. Suppose that coal producers create a negative externality equal to $5 per ton of coal. What is the relationship between the equilibrium quantity of coal and the socially optimal quantity of coal? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question. 27. Figure 10-3
Refer to Figure 10-3. What is the equilibrium price in this market? a. $8 b. Between $8 and $10 c. $10 d. More than $10 28. Figure 10-3
.
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Ch 10: Externalities
Refer to Figure 10-3. What is the socially optimal quantity of output in this market? a. 8 units b. Between 8 and 10 units c. 10 units d. More than 10 units 29. Figure 10-3
.
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Ch 10: Externalities
Refer to Figure 10-3. If the government wanted to tax or subsidize this good to achieve the socially optimal level of output, it would a. introduce a subsidy of $2 per unit. b. impose a tax of $2 per unit. c. introduce a subsidy of $4 per unit. d. impose a tax of $4 per unit. 30. Table 10-2 Quantity (Units) 1 2 3 4 5 6
Private Value (Dollars) 27 24 21 18 15 12
Private Cost (Dollars) 6 10 14 18 22 26
Social Value (Dollars) 34 31 28 25 22 19
Refer to Table 10-2. What is the equilibrium quantity of output in this market? a. 3 units b. 4 units c. 5 units d. 6 units .
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Ch 10: Externalities 31. Table 10-2 Quantity (Units) 1 2 3 4 5 6
Private Value (Dollars) 27 24 21 18 15 12
Private Cost (Dollars) 6 10 14 18 22 26
Social Value (Dollars) 34 31 28 25 22 19
Refer to Table 10-2. What is the socially optimal level of output in this market? a. 3 units b. 4 units c. 5 units d. 6 units 32. Table 10-2 Quantity (Units) 1 2 3 4 5 6
Private Value (Dollars) 27 24 21 18 15 12
Private Cost (Dollars) 6 10 14 18 22 26
Social Value (Dollars) 34 31 28 25 22 19
Refer to Table 10-2. How large would a subsidy need to be in this market to move the market from the equilibrium level of output to the socially optimal level of output? a. $3 b. $5 c. $7 d. $9 33. Which of the following is an example of a positive externality? a. A college student buys a new car when they graduates. b. The mayor of a small town plants flowers in the city park. c. Local high school teachers have pizza delivered every Friday for lunch. d. An avid fisherman buys new fishing gear for their next fishing trip. 34. A benevolent social planner would prefer that the output of good x be increased from its current level if, at the current .
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Ch 10: Externalities level of output of good x, a. social value = private value = private cost < social cost. b. social cost > private value = social value > private cost. c. social cost = private cost = private value < social value. d. social value = private cost = social cost > private value. 35. Suppose that cookie producers create a positive externality equal to $2 per dozen. What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question. 36. Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct? a. At the current output level, the marginal social cost exceeds the marginal private cost. b. The current output level is inefficiently high. c. A per-shot tax could turn an inefficient situation into an efficient one. d. At the current output level, the marginal social benefit exceeds the marginal private benefit. 37. Which of the following statements is not correct? a. A patent is a way for the government to encourage the production of a good with technology spillovers. b. A tax is a way for the government to reduce the production of a good with a negative externality. c. A tax that accurately reflects external costs produces the socially optimal outcome. d. Government policies cannot improve upon private market outcomes. 38. Which of the following is NOT a way of internalizing technology spillovers? a. Subsidies b. Patent protection c. Industrial policy d. Taxes 39. If the production of computer chips yields greater technology spillovers than the production of potato chips, the government should a. encourage the production of computer chips with subsidies. b. discourage the production of potato chips with taxes. c. encourage the production of potato chips with subsidies. d. discourage the production of computer chips with taxes. 40. Figure 10-4 Graph (a)
.
Graph (b)
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Graph (c)
Refer to Figure 10-4. Which graph represents a market with no externality? a. Graph (a) b. Graph (b) only .
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Ch 10: Externalities c. Graph (c) only d. Graphs (b) and (c) 41. Figure 10-4 Graph (a)
Graph (b)
Graph (c)
.
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Ch 10: Externalities
Refer to Figure 10-4. The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the market for antibiotics is shown in a. Graph (a). b. Graph (b) only. c. Graph (c) only. d. Graphs (b) and (c). 42. Figure 10-4 Graph (a)
.
Graph (b)
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Graph (c)
Refer to Figure 10-4, Graph (b) and Graph (c). The overuse of antibiotics leads to the development of antibioticresistant diseases. Therefore, the socially optimal quantity of antibiotics is represented by point a. Q2. .
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Ch 10: Externalities b. Q3. c. Q4. d. Q5. 43. Figure 10-4 Graph (a)
Graph (b)
Graph (c)
.
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Ch 10: Externalities
Refer to Figure 10-4, Graph (b) and Graph (c). The overuse of antibiotics leads to the development of antibioticresistant diseases. Therefore, the external cost of antibiotic overuse is represented by a. Q3 − Q2. b. Q5 − Q4. c. P3a − P3b. d. P4a − P4b. 44. Figure 10-4 Graph (a)
.
Graph (b)
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Graph (c)
Refer to Figure 10-4, Graph (b) and Graph (c). The overuse of antibiotics leads to the development of antibioticresistant diseases. Therefore, a government policy that internalized the externality would move the quantity of antibiotics used from point .
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Ch 10: Externalities a. Q2 to point Q3. b. Q3 to point Q2. c. Q4 to point Q5. d. Q5 to point Q4. 45. Figure 10-4 Graph (a)
Graph (b)
Graph (c)
.
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Ch 10: Externalities
Refer to Figure 10-4. The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the market for smokestack scrubbers is shown in a. Graph (a). b. Graph (b) only. c. Graph (c) only. d. Graphs (b) and (c). 46. Figure 10-4 Graph (a)
.
Graph (b)
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Ch 10: Externalities
Graph (c)
Refer to Figure 10-4, Graph (b) and Graph (c). The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the socially optimal quantity of smokestack scrubbers is represented by point .
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Ch 10: Externalities a. Q2. b. Q3. c. Q4. d. Q5. 47. Figure 10-4 Graph (a)
Graph (b)
Graph (c)
.
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Refer to Figure 10-4, Graph (b) and Graph (c). The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the external benefit of smokestack scrubber installation is represented by a. Q3 − Q2. b. Q5 − Q4. c. P3a − P3b. d. P4a − P4b. 48. Figure 10-4 Graph (a)
.
Graph (b)
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Graph (c)
Refer to Figure 10-4, Graph (b) and Graph (c). The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, a government policy that internalized the externality would move the quantity of smokestack scrubbers installed from point .
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Ch 10: Externalities a. Q2 to point Q3. b. Q3 to point Q2. c. Q4 to point Q5. d. Q5 to point Q4. 49. Table 10-3 Quantity (Units) 1 2 3 4 5 6
Private Value (Dollars) 22 20 18 16 14 12
Private Cost (Dollars) 12 15 18 21 24 27
External Benefit (Dollars) 10 10 10 10 10 10
Refer to Table 10-3. The table represents a market in which a. there is no externality. b. there is a positive externality. c. there is a negative externality. d. The answer cannot be determined from inspection of the table. 50. Table 10-3 Quantity (Units) 1 2 3 4 5 6
Private Value (Dollars) 22 20 18 16 14 12
Private Cost (Dollars) 12 15 18 21 24 27
External Benefit (Dollars) 10 10 10 10 10 10
Refer to Table 10-3. The social value of the 4th unit of output that is produced is a. $10. b. $16. c. $26. d. $30. 51. Table 10-3 .
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Private Value (Dollars) 22 20 18 16 14 12
Private Cost (Dollars) 12 15 18 21 24 27
External Benefit (Dollars) 10 10 10 10 10 10
Refer to Table 10-3. The market equilibrium quantity of output is a. 3 units. b. 4 units. c. 5 units. d. 6 units. 52. Table 10-3 Quantity (Units) 1 2 3 4 5 6
Private Value (Dollars) 22 20 18 16 14 12
Private Cost (Dollars) 12 15 18 21 24 27
External Benefit (Dollars) 10 10 10 10 10 10
Refer to Table 10-3. The socially optimal quantity of output is a. 3 units. b. 4 units. c. 5 units. d. 6 units. 53. Table 10-3 Quantity (Units) 1 2 3 4 .
Private Value (Dollars) 22 20 18 16
Private Cost (Dollars) 12 15 18 21
External Benefit (Dollars) 10 10 10 10 Page 33
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14 12
24 27
10 10
Refer to Table 10-3. What amount of subsidy per unit of output would move the market from the equilibrium level of output to the socially optimal level of output? a. $2 b. $3 c. $5 d. $10 54. Table 10-3 Quantity (Units) 1 2 3 4 5 6
Private Value (Dollars) 22 20 18 16 14 12
Private Cost (Dollars) 12 15 18 21 24 27
External Benefit (Dollars) 10 10 10 10 10 10
Refer to Table 10-3. Taking into account private and external benefits, the total surplus to society at the socially efficient quantity is a. $18. b. $38. c. $43. d. $50. 55. Figure 10-5
.
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Refer to Figure 10-5. The graph represents a market in which a. there is no externality. b. there is a positive externality. c. there is a negative externality. d. The answer cannot be determined from inspection of the graph. 56. Figure 10-5
.
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Refer to Figure 10-5. The socially optimal quantity of output is a. 240 units, since the value to the buyer of the 240th unit is equal to the cost incurred by the seller of the 240th unit. b. 240 units, since the value to society of the 240th unit is equal to the cost incurred by the seller of the 240th unit. c. 420 units, since the value to the buyer of the 420th unit is equal to the cost incurred by the seller of the 420th unit. d. 420 units, since the value to society of the 420th unit is equal to the cost incurred by the seller of the 420th unit. 57. Figure 10-5
.
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Refer to Figure 10-5. A benevolent social planner would prefer a. a $24 price to any other price. b. 420 units to any other quantity of output. c. a subsidy of $24 per unit to a subsidy of $27 per unit. d. a tax of $27 per unit to a subsidy of $27 per unit. 58. Figure 10-5
.
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Refer to Figure 10-5. Taking into account private value and external benefits, the maximum total surplus that can be achieved in this market is a. $5,880. b. $9,480. c. $13,230. d. $15,360. 59. Figure 10-5
.
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Refer to Figure 10-5. Taking only private value and private cost into account, total surplus at the market equilibrium amounts to a. $3,850. b. $4,320. c. $4,980. d. $5,530. 60. Table 10-4 Quantity (Units) 1 2 3 4 5 6 7
Private Value (Dollars) 46 44 42 40 38 36 34
Private Cost (Dollars) 21 24 27 30 33 36 39
External Cost (Dollars) 6 6 6 6 6 6 6
Refer to Table 10-4. The table represents a market in which a. there is no externality. b. there is a positive externality. c. there is a negative externality. .
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Ch 10: Externalities d. The answer cannot be determined from inspection of the table. 61. Table 10-4 Quantity (Units) 1 2 3 4 5 6 7
Private Value (Dollars) 46 44 42 40 38 36 34
Private Cost (Dollars) 21 24 27 30 33 36 39
External Cost (Dollars) 6 6 6 6 6 6 6
Refer to Table 10-4. The social cost of the 2nd unit of output that is produced is a. $7. b. $23. c. $30. d. $38. 62. Table 10-4 Quantity (Units) 1 2 3 4 5 6 7
Private Value (Dollars) 46 44 42 40 38 36 34
Private Cost (Dollars) 21 24 27 30 33 36 39
External Cost (Dollars) 6 6 6 6 6 6 6
Refer to Table 10-4. The market equilibrium quantity of output is a. 3 units. b. 4 units. c. 5 units. d. 6 units. 63. Table 10-4 Quantity .
Private Value
Private Cost
External Cost Page 40
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(Dollars) 46 44 42 40 38 36 34
(Dollars) 21 24 27 30 33 36 39
(Dollars) 6 6 6 6 6 6 6
Refer to Table 10-4. Take into account private and external costs and assume the quantity of output is always a whole number (that is, fractional units of output are not possible). The maximum total surplus that can be achieved in this market is a. $29. b. $35. c. $40. d. $46. 64. Table 10-4 Quantity (Units) 1 2 3 4 5 6 7
Private Value (Dollars) 46 44 42 40 38 36 34
Private Cost (Dollars) 21 24 27 30 33 36 39
External Cost (Dollars) 6 6 6 6 6 6 6
Refer to Table 10-4. Which of the following policies would move the market from the market equilibrium to the socially optimal equilibrium? a. A tax of $4 per unit of output b. A subsidy of $4 per unit of output c. A tax of $6 per unit of output d. A subsidy of $6 per unit of output 65. Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000th gallon of gasoline entails the following: • a private cost of $3.10; • a social cost of $3.55; .
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Ch 10: Externalities • a value to consumers of $3.70. Refer to Scenario 10-1. From the given information, it is apparent that a. the production of gasoline involves a negative externality, so the market will produce a smaller quantity of gasoline than is socially desirable. b. the production of gasoline involves a negative externality, so the market will produce a larger quantity of gasoline than is socially desirable. c. the production of gasoline involves a positive externality, so the market will produce a smaller quantity of gasoline than is socially desirable. d. the production of gasoline involves a positive externality, so the market will produce a larger quantity of gasoline than is socially desirable. 66. Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000th gallon of gasoline entails the following: • a private cost of $3.10; • a social cost of $3.55; • a value to consumers of $3.70. Refer to Scenario 10-1. The production of the 1,000th gallon of gasoline entails an a. external cost of $0.15. b. external cost of $0.45. c. external benefit of $0.15. d. external benefit of $0.45. 67. Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000th gallon of gasoline entails the following: • a private cost of $3.10; • a social cost of $3.55; • a value to consumers of $3.70. Refer to Scenario 10-1. Let Q represent the number of gallons of gasoline and let P represent the price of a gallon of gasoline. Which of the following statements is correct? a. One point on the social-cost curve is (Q = 1,000, P = $0.45). b. One point on the supply curve is (Q = 1,000, P = $3.10). c. One point on the demand curve is (Q = 1,000, P = $3.55). d. The socially optimal quantity of gasoline is less than 1,000 gallons. 68. Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000th gallon of gasoline entails the following: • a private cost of $3.10; • a social cost of $3.55; • a value to consumers of $3.70. .
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Ch 10: Externalities Refer to Scenario 10-1. Let QMARKET represent the equilibrium quantity of gasoline, and let QOPTIMUM represent the socially optimal quantity of gasoline. Which of the following inequalities is correct? a. 1,000 < QOPTIMUM < QMARKET b. QOPTIMUM < 1,000 < QMARKET c. QMARKET < 1,000 < QOPTIMUM d. QOPTIMUM < QMARKET < 1,000 69. Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000th gallon of gasoline entails the following: • a private cost of $3.10; • a social cost of $3.55; • a value to consumers of $3.70. Refer to Scenario 10-1. Suppose the equilibrium quantity of gasoline is 1,150 gallons; that is, QMARKET = 1,150. Then the equilibrium price of a gallon could be a. $2.80. b. $3.00. c. $3.30. d. $3.80. 70. Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000th gallon of gasoline entails the following: • a private cost of $3.10; • a social cost of $3.55; • a value to consumers of $3.70. Refer to Scenario 10-1. Suppose the dollar amount of the externality, per gallon of gasoline, is constant, regardless of how much gasoline is produced. Then the externality could be internalized if producers of gasoline were a. provided a subsidy of $0.30 per gallon of gasoline sold. b. provided a subsidy of $0.45 per gallon of gasoline sold. c. required to pay a tax of $0.45 per gallon of gasoline sold. d. required to pay a tax of $0.30 per gallon of gasoline sold. 71. Education yields positive externalities. For example, a. colleges and universities have benefited, in recent years, from increases in tuition paid by students. b. as a result of earning a college degree, a person becomes a more productive worker and benefits by earning higher wages. c. a more educated population tends to result in lower crime rates. d. when students go to school, they reinforce the demand for teachers. 72. Figure 10-6
.
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Refer to Figure 10-6. Each unit of plastics that is produced results in an external a. cost of $6. b. cost of $8. c. benefit of $6. d. benefit of $8. 73. Figure 10-6
.
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Refer to Figure 10-6. In order to reach the social optimum, the government could a. impose a tax of $2 per unit on plastics. b. impose a tax of $6 per unit on plastics. c. impose a tax of $8 per unit on plastics. d. offer a subsidy of $6 per unit on plastics. 74. Figure 10-6
.
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Refer to Figure 10-6. If 250 units of plastics are produced and consumed, then the a. social optimum has been reached. b. market equilibrium has been reached. c. negative externality associated with plastics has been eliminated. d. positive externality associated with plastics has been eliminated. 75. Figure 10-6
.
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Refer to Figure 10-6. If 325 units of plastics are produced and consumed, then the a. social optimum has been reached. b. market equilibrium has been reached. c. government must have imposed a corrective tax to guide the market to this outcome. d. government must have offered a corrective subsidy to guide the market to this outcome. 76. Figure 10-6
.
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Refer to Figure 10-6. If the government imposed a corrective tax that successfully moved the market from the market equilibrium to the social optimum, then tax revenue for the government would amount to a. $1,250. b. $1,600. c. $2,000. d. $2,500. 77. If the government were to limit the release of air pollution produced by a glue factory to 75 parts per million, the policy would be considered a a. corrective tax. b. subsidy. c. command-and-control policy. d. market-based policy. 78. Which of the following is not an advantage of corrective taxes? a. They raise revenues for the government. b. They enhance economic efficiency. c. They subsidize the production of goods with positive externalities. d. They move the allocation of resources closer to the social optimum. 79. Which of the following statements is not correct? a. Corrective taxes can be used to place a price on the right to pollute. b. Corrective taxes allocate pollution to those producers who face the highest cost of reducing pollution. c. Corrective taxes provide incentives to develop cleaner technologies. .
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Ch 10: Externalities d. Corrective taxes require the government to set a target level of pollution. 80. Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government imposes a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced? a. They are equal. b. The after-tax equilibrium quantity is greater than the socially optimal quantity. c. The after-tax equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question. 81. Suppose that candy producers create a positive externality equal to $1 per pound of candy. Further suppose that the government offers a $1-per-pound subsidy to the producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of candy? a. The equilibrium quantity is greater than the socially optimal quantity. b. The equilibrium quantity is less than the socially optimal quantity. c. They are equal. d. There is not enough information to answer the question. 82. Which of the following statements is not correct? a. Tradable pollution permits have an advantage over corrective taxes if the government is uncertain as to the optimal size of the tax necessary to reduce pollution to a specific level. b. Both corrective taxes and tradable pollution permits provide market-based incentives for firms to reduce pollution. c. Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution. d. Both corrective taxes and tradable pollution permits reduce the cost of environmental protection and thus should increase the public's demand for a clean environment. 83. Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because the marketbased solution a. is less efficient. b. can result in a greater increase in pollution. c. lowers revenue for the government. d. is less costly to society. 84. In some cases, tradable pollution permits may be better than a corrective tax because a. pollution permits allow for a market solution while a corrective tax does not. b. pollution permits generate more revenue for the government than a corrective tax. c. pollution permits are never preferred over a corrective tax. d. the government can set a maximum level of pollution using permits. 85. Which of the following is not a characteristic of pollution permits? a. Prices are set by supply and demand. b. Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation. c. Real-world markets for pollution permits include sulfur dioxide and carbon. .
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Ch 10: Externalities d. Firms for whom pollution reduction is very expensive are willing to pay more for permits than firms for whom pollution reduction is less expensive. 86. Figure 10-7 The following graph shows the market for pollution when permits are issued to firms and traded in the marketplace.
Refer to Figure 10-7. The equilibrium price of pollution is a. $50. b. $500. c. $1,000. d. $2,000. 87. Figure 10-7 The following graph shows the market for pollution when permits are issued to firms and traded in the marketplace.
.
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Refer to Figure 10-7. The equilibrium number of permits is a. 50. b. 100. c. 1,000. d. 2,000. 88. Figure 10-7 The following graph shows the market for pollution when permits are issued to firms and traded in the marketplace.
.
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Refer to Figure 10-7. In the absence of a pollution permit system, the quantity of pollution would be a. 25 units. b. 50 units. c. 75 units. d. 100 units. 89. Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit a. 20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air. b. 100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of pollution into the air. c. 50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution into the air. d. 20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air. 90. Table 10-5 The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. Firm A .
Marginal Cost to Eliminate (Dollars) First Unit Second Unit Third Unit Fourth Unit 54 67 82 107 Page 52
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57 54 62
68 66 73
86 82 91
108 107 111
Refer to Table 10-5. If the government charged a fee of $69 per unit of pollution, how many units of pollution would the firms eliminate altogether? a. 7 b. 8 c. 9 d. 10 91. Table 10-5 The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. Firm A B C D
Marginal Cost to Eliminate (Dollars) First Unit Second Unit Third Unit Fourth Unit 54 67 82 107 57 68 86 108 54 66 82 107 62 73 91 111
Refer to Table 10-5. If the government wanted to reduce pollution from 16 units to 6 units, which of the following fees per unit of pollution would achieve that goal? a. $67 b. $68 c. $81 d. $83 92. Table 10-5 The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. Firm A B C D .
Marginal Cost to Eliminate (Dollars) First Unit Second Unit Third Unit Fourth Unit 54 67 82 107 57 68 86 108 54 66 82 107 62 73 91 111 Page 53
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Refer to Table 10-5. If the government wanted to eliminate exactly 11 units of pollution, which of the following fees per unit of pollution would achieve that goal? a. $75 b. $87 c. $99 d. $106 93. Table 10-5 The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. Firm A B C D
Marginal Cost to Eliminate (Dollars) First Unit Second Unit Third Unit Fourth Unit 54 67 82 107 57 68 86 108 54 66 82 107 62 73 91 111
Refer to Table 10-5. Suppose the government wants to reduce pollution from 16 units to 8 units and auctions off 8 pollution permits to achieve this goal. Which of the following is a likely auction price of the permits? a. $69 b. $81 c. $83 d. $97 94. Which of the following statements is not true of both pollution permits and corrective taxes? a. Both policies internalize the externality of pollution. b. Both policies require firms to pay for their pollution. c. Both policies lead to the establishment of an equilibrium price of pollution. d. Both policies increase the amount of pollution compared to the market equilibrium. 95. Two types of private solutions to the problem of externalities are a. charities and the Golden Rule. b. charities and subsidies. c. the Golden Rule and taxes. d. taxes and subsidies. 96. Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of a. an opportunity cost. b. an implicit cost. .
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Ch 10: Externalities c. a sunk cost. d. a transaction cost. 97. In which of the following cases is the Coase theorem most likely to solve the externality? a. Ed is allergic to his roommate's cat. b. Chemicals from manufacturing plants in the Midwest are causing acid rain in Canada. c. Polluted water runoff from farms is making residents of a nearby town sick. d. Industrialization around the world is causing global warming. 98. According to the Coase theorem, private parties can solve the problem of externalities if a. the cost of bargaining is small. b. the initial distribution of legal rights favors the person being adversely affected by the externality. c. the number of parties involved is sufficiently large. d. property rights aren't clearly defined. 99. Zaria and Hannah are roommates. Zaria assigns a $30 value to smoking cigarettes. Hannah values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem? a. Hannah offers Zaria $20 not to smoke. Zaria accepts and does not smoke. b. Zaria pays Hannah $16 so that Zaria can smoke. c. Zaria pays Hannah $14 so that Zaria can smoke. d. Hannah offers Zaria $15 not to smoke. Zaria accepts and does not smoke. 100. 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 soybased 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.
Indicate whether the statement is true or false. 101. Markets sometimes fail to allocate resources efficiently. a. True b. False 102. When a transaction between a buyer and seller directly affects a third party, the effect is called an externality. a. True b. False 103. Buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply. a. True b. False .
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Ch 10: Externalities 104. In a market characterized by externalities, the market equilibrium fails to maximize the total benefit to society as a whole. a. True b. False 105. In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole. a. True b. False 106. Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange. a. True b. False 107. When a driver enters a crowded highway they increase the travel times of all other drivers on the highway. This is an example of a negative externality. a. True b. False 108. Research into new technologies conveys neither negative externalities nor positive externalities. a. True b. False 109. The social cost of pollution includes the private costs of the producers plus the costs to those bystanders adversely affected by the pollution. a. True b. False 110. Organizers of an outdoor concert in a park surrounded by residential neighborhoods are likely to consider the noise and traffic cost to residential neighborhoods when they assess the financial viability of the concert venture. a. True b. False 111. When firms internalize a negative externality, the market supply curve shifts to the left. a. True b. False 112. Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education. a. True b. False 113. A congestion toll imposed on a highway driver to force the driver to take into account the increase in travel time they imposes on all other drivers is an example of internalizing the externality. a. True b. False .
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Ch 10: Externalities 114. Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive externalities lead markets to produce a larger quantity of a good than is socially desirable. a. True b. False 115. The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities. a. True b. False 116. If the social value of producing robots is greater than the private value of producing robots, the private market produces too few robots. a. True b. False 117. The patent system gives firms greater incentive to engage in research and other activities that advance technology. a. True b. False 118. Government intervention in the economy with the goal of promoting technology-producing industries is known as patent policy. a. True b. False 119. A technology spillover is a type of negative externality. a. True b. False 120. Suppose a certain good conveys either an external cost or an external benefit. If the private cost of the last unit of the good that was produced is equal to the private value of that unit, then the sum of producer and consumer surplus is maximized. a. True b. False 121. Suppose a certain good provides an external benefit. If the private cost of the last unit of the good that was produced is equal to the social value of that unit, then the sum of producer and consumer surplus is maximized. a. True b. False 122. The concept of external cost is associated with a negative externality, but not with a positive externality. a. True b. False 123. When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level. a. True .
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Ch 10: Externalities b. False 124. To determine the optimal level of output in a market with negative externalities, a benevolent social planner would look for the level of output at which private cost equals private value. a. True b. False 125. The concept of external benefit is associated with a negative externality, but not with a positive externality. a. True b. False 126. Patent protection is one way to deal with technology spillovers. a. True b. False 127. Laws that are passed that either require or forbid certain behaviors are examples of command-and-control policies. a. True b. False 128. The tax on gasoline causes deadweight losses, as is the case with all taxes. a. True b. False 129. Even if possible, it would be inefficient to prohibit all polluting activity. a. True b. False 130. When correcting for an externality, command-and-control policies are always preferable to market-based policies. a. True b. False 131. Corrective taxes enhance efficiency, but the cost to administer them exceeds the revenue they raise for the government. a. True b. False 132. Corrective taxes cause deadweight losses, reducing economic efficiency. a. True b. False 133. Most economists prefer regulation to taxation because regulation corrects market inefficiencies at a lower cost than taxation does. a. True b. False 134. A corrective tax places a price on the right to pollute. .
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Ch 10: Externalities a. True b. False 135. According to recent research, the gas tax in the United States is lower than the optimal level. a. True b. False 136. The least expensive way to clean up the environment is for all firms to reduce pollution by an equal percentage. a. True b. False 137. Corrective taxes are more efficient than regulations for keeping the environment clean. a. True b. False 138. A market for pollution permits can efficiently allocate the right to pollute by using the forces of supply and demand. a. True b. False 139. Economists believe that the optimal level of pollution is zero. a. True b. False 140. The Environmental Protection Agency (EPA) cannot reach a target level of pollution through the use of pollution permits. a. True b. False 141. Social welfare can be enhanced by allowing firms to trade their rights to pollute. a. True b. False 142. Firms that can reduce pollution easily would be willing to sell their pollution permits. a. True b. False 143. In some circumstances, selling pollution permits may be better than levying a corrective tax. a. True b. False 144. Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently. a. True b. False 145. Government can be used to solve externality problems that are too costly for private parties to solve. .
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Ch 10: Externalities a. True b. False 146. Government intervention is necessary to correct all externalities. a. True b. False 147. According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the problem of externalities. a. True b. False 148. According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome. a. True b. False 149. Despite the appealing logic of the Coase theorem, private actors often fail to resolve on their own the problems caused by externalities. a. True b. False 150. According to the Coase theorem, individuals can always work out a mutually beneficial agreement to solve the problems of externalities even when high transaction costs are involved. a. True b. False 151. According to the Coase theorem, whatever the initial distribution of rights, the interested parties can bargain to an efficient outcome. a. True b. False 152. Private parties may choose not to solve an externality problem if the transaction costs are large enough. a. True b. False 153. Many charities like the Sierra Club are established to deal with externalities. a. True b. False 154. The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement. a. True b. False 155. When externalities are present, reaching an efficient outcome is especially difficult when the number of interested .
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Ch 10: Externalities parties is large. a. True b. False 156. The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities. a. True b. False 157. All externalities impose a cost on others. a. True b. False 158. Figure 10-8
Refer to Figure 10-8. This market is characterized by a negative externality. a. True b. False 159. Figure 10-8
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Ch 10: Externalities
Refer to Figure 10-8. This market would benefit from a tax equal to $50 per unit. a. True b. False 160. Figure 10-8
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Ch 10: Externalities
Refer to Figure 10-8. The socially optimal price and quantity are $250 and 250 units, respectively. a. True b. False 161. The majority of economists believe that the social benefit of mandating measles vaccines for all Americans (except those with compelling medical reasons) would exceed the social cost. a. True b. False 162. Sophia sits behind Gabriel on an airplane. Gabriel owns the right to recline his seat and values this right at $10. Sophia values a non-reclined seat in front of her at $20. Assuming no transaction costs, an efficient solution would be for Sophia to pay Gabriel $15 to not recline his seat. a. True b. False
163. Does research into new technologies create a positive externality or does it create a negative externality? 164. Does the phenomenon of externalities strengthen the argument that we should rely upon the “invisible hand” of the marketplace, or does it weaken that argument? 165. Bruce engages in an activity that diminishes the well-being of Shawna. Bruce pays no compensation to Shawna for her loss in well-being. What specific term do economists use to describe this situation? .
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Ch 10: Externalities 166. Sheryl sits on her patio and plays her guitar while her neighbors are outside. Sheryl neither pays nor receives any compensation for playing her guitar. Under what condition does her guitar-playing give rise to a positive externality? 167. Does the restoration of historic buildings create a positive externality or does it create a negative externality? 168. Briefly explain how research into new technologies gives rise to a positive externality. 169. At any given quantity, the willingness to pay of the marginal buyer is the height of the __________. 170. At any given quantity, the cost of the marginal seller is the height of the __________. 171. Scenario 10-2 The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50th restored historic building entails the following: • a private cost of $800,000; • a private value of $650,000; • a social value of $800,000. Refer to Scenario 10-2. Is there an externality associated with this market? If your answer is “Yes,” is the externality positive or negative? 172. Scenario 10-2 The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50th restored historic building entails the following: • a private cost of $800,000; • a private value of $650,000; • a social value of $800,000. Refer to Scenario 10-2. Is there an external cost associated with the restoration of the 50th historic building, or is there an external benefit? What is the amount of that external cost or external benefit? 173. Scenario 10-2 The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50th restored historic building entails the following: • a private cost of $800,000; • a private value of $650,000; • a social value of $800,000. Refer to Scenario 10-2. Is the market equilibrium quantity of restored historic buildings less than, equal to, or greater than 50? 174. Scenario 10-2 The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50th restored historic building entails the following: • a private cost of $800,000; • a private value of $650,000; • a social value of $800,000. .
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Ch 10: Externalities Refer to Scenario 10-2. Is the socially optimal quantity of restored historic buildings less than, equal to, or greater than 50? 175. Scenario 10-2 The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50th restored historic building entails the following: • a private cost of $800,000; • a private value of $650,000; • a social value of $800,000. Refer to Scenario 10-2. Could the government impose a tax or provide a subsidy to move the market to the social optimum? If your answer is “Yes,” should it be a tax or should it be a subsidy? 176. Scenario 10-3 Suppose the equation for the demand curve in a market is P = 120 - (1/5) QD , where QD is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is P = (1/10) QS , where QS is the quantity supplied. Refer to Scenario 10-3. What are the market equilibrium quantity and price? 177. Scenario 10-3 Suppose the equation for the demand curve in a market is P = 120 - (1/5) QD , where QD is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is P = (1/10) QS , where QS is the quantity supplied. Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What particular tax or subsidy would move the market to the social optimum? 178. Scenario 10-3 Suppose the equation for the demand curve in a market is P = 120 - (1/5) QD , where QD is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is P = (1/10) QS , where QS is the quantity supplied. Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the equation of the social-cost curve? 179. Scenario 10-3 Suppose the equation for the demand curve in a market is P = 120 - (1/5) QD , where QD is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is P = (1/10) QS , where QS is the quantity supplied. Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the social cost of producing 30 units of the good? 180. Scenario 10-3 Suppose the equation for the demand curve in a market is P = 120 - (1/5) QD , where QD is the quantity demanded and .
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Ch 10: Externalities is the price. Also, suppose the equation for the supply curve in the same market is P = (1/10) QS , where QS is the quantity supplied. Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What are the socially optimal quantity and price? 181. Suppose the market-equilibrium quantity of good x is larger than the socially-optimal quantity of good x. Does the production of good x convey a positive externality or does it convey a negative externality? 182. Suppose the socially-optimal quantity of good x is larger than the market-equilibrium quantity of good x. Does the production of good x convey a positive externality or does it convey a negative externality? 183. Suppose a tax is imposed on producers of aluminum as a means of internalizing the externality associated with aluminum production. If the tax accurately reflects the external costs of pollutants released into the atmosphere, then the new supply curve for aluminum coincides with which other curve? 184. Suppose a subsidy is offered to consumers of education as a means of internalizing the externalities associated with education. If the subsidy accurately reflects the external benefits of education, then the new demand curve for education coincides with which other curve? 185. Assume each gallon of gasoline that is produced gives rise to an external cost of $1.25. On any given day, the production of the 10,000th gallon of gasoline entails a private value of $4.00 and a social cost of $3.50. What is the private cost of the 10,000th gallon? 186. Assume each college degree that is granted conveys an external benefit of $3,500. The granting of the 500th college degree entails a private cost of $15,000 and a private value of $25,000. What is the social value of the 500th college degree? 187. Scenario 10-4 The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500th fire extinguisher entails the following: • a private cost of $10; • an external cost of $0; • a private value of $9; • an external benefit of $3. Refer to Scenario 10-4. Does the production of fire extinguishers convey a positive externality, a negative externality, or neither? 188. Scenario 10-4 The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500th fire extinguisher entails the following: • a private cost of $10; • an external cost of $0; • a private value of $9; • an external benefit of $3. Refer to Scenario 10-4. What is the social value of the 500th fire extinguisher? .
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Ch 10: Externalities 189. Scenario 10-4 The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500th fire extinguisher entails the following: • a private cost of $10; • an external cost of $0; • a private value of $9; • an external benefit of $3. Refer to Scenario 10-4. In order to reach the social optimum, should fire extinguishers be taxed or subsidized? What is the appropriate amount of the tax or subsidy on each fire extinguisher? 190. Scenario 10-4 The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500th fire extinguisher entails the following: • a private cost of $10; • an external cost of $0; • a private value of $9; • an external benefit of $3. Refer to Scenario 10-4. Is the market-equilibrium quantity of fire extinguishers less than, equal to, or greater than 500? Explain. 191. Scenario 10-4 The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500th fire extinguisher entails the following: • a private cost of $10; • an external cost of $0; • a private value of $9; • an external benefit of $3. Refer to Scenario 10-4. Is the socially-optimal quantity of fire extinguishers less than, equal to, or greater than 500? Explain. 192. Scenario 10-4 The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500th fire extinguisher entails the following: • a private cost of $10; • an external cost of $0; • a private value of $9; • an external benefit of $3. Refer to Scenario 10-4. In order to maximize the total benefit of fire extinguishers to society as a whole, should the number of fire extinguishers produced be less than, equal to, or greater than 500? Explain. 193. When we identify public policies toward externalities, we contrast command-and-control policies with what other type of policies? 194. Some policies toward externalities provide incentives so that private decision makers will choose to solve the problem on their own. What name do we use for these types of policies? .
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Ch 10: Externalities 195. As a means of dealing with pollution, do economists generally prefer corrective taxes or do they prefer regulations? 196. Suppose the Environmental Protection Agency issues pollution permits in order to limit the quantity of pollution. Under this policy, is the supply of pollution rights perfectly elastic or is it perfectly inelastic? 197. What are the three externalities that are associated with driving cars and trucks? 198. A former senator remarked that “We cannot give anyone the option of polluting for a fee.” Do most economists agree with this statement, or do they disagree with it? 199. Suppose a new market for tradable pollution permits is created. As long as there is a free market for the pollution rights, the final allocation will be __________ , regardless of the initial allocation of permits. 200. Suppose the Environmental Protection Agency uses a corrective tax to set a price for pollution. Under this policy, is the supply curve for pollution rights vertical or is it horizontal? 201. Some government policies provide incentives for private decision makers to choose to solve the problem of externalities on their own. What term do we use to describe such policies? 202. Suppose a Pigovian tax is imposed on a market that is characterized by one or more externalities. Is this a commandand-control policy or is it a market-based policy? 203. The Environmental Protection Agency (EPA) requires that firms in a certain industry adopt a particular technology to reduce the emission of pollutants. Is this requirement a command- and-control policy or is it a market-based policy? 204. Describe the circumstances under which it would be better for the government to sell pollution permits than to levy a corrective tax. 205. Suppose the government levies a corrective tax on firms that pollute in order to limit the quantity of pollution. Under this policy, does the demand curve for pollution rights determine the quantity of pollution, or does it determine the price of pollution? 206. Suppose the government issues a limited number of pollution permits in order to limit the quantity of pollution. Under this policy, does the demand curve for pollution rights determine the quantity of pollution, or does it determine the price of pollution? 207. The likelihood of successful private solutions to problems caused by externalities depends, in part, upon the number of interested parties. Briefly explain. 208. Tyler owns a dog and receives a $300 benefit from owning it. Tyler’s neighbor, Liz, incurs a cost of $450 from the dog’s barking. Suggest a deal between Tyler and Liz that would result in both individuals becoming better off. 209. Beverly owns a rabbit and receives a $600 benefit from owning it. Sometimes Beverly’s rabbit makes its way onto the lawn of her neighbor, Charles, and eats the vegetables in Charles’ garden. This intrusion by the rabbit costs Charles $400. Can both individuals become better off if Charles pays Beverly some amount of money to get rid of the rabbit? Explain. 210. An example of a private solution to externalities is charities. The government encourages this private solution by allowing ___________ . .
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Ch 10: Externalities 211. In some situations, private economic actors cannot solve the problem of externalities among themselves because of substantial _________ costs. 212. Which theorem asserts that private economic actors can often solve the problem of externalities among themselves? 213. Using a supply and demand diagram, demonstrate how a negative externality leads to market inefficiency. How might the government help to eliminate this inefficiency? 214. Using a supply and demand diagram, demonstrate how a positive externality leads to market inefficiency. How might the government help to eliminate this inefficiency? 215. Why are Pigovian taxes preferred to regulatory policies as methods to remedy negative externalities? 216. Use a graph to illustrate the quantity of pollution that would be emitted (a) after a corrective tax has been imposed and (b) after tradable pollution permits have been imposed. Could these two quantities ever be equivalent? 217. To produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar, they pollinate the crops in the fields, which increases the yields of these fields at no additional cost to the farmer. What might be a reasonable private solution to this externality, and how might the solution be reached? 218. The Coase theorem suggests that efficient solutions to externalities can be determined through bargaining. Under what circumstances will private bargaining fail to produce a solution?
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Ch 10: Externalities Answer Key 1. c 2. c 3. d 4. c 5. d 6. a 7. c 8. b 9. c 10. b 11. b 12. c 13. c 14. b 15. b 16. b 17. a 18. b 19. b 20. a 21. c 22. c 23. b 24. a 25. a .
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Ch 10: Externalities 26. b 27. a 28. c 29. c 30. b 31. c 32. c 33. b 34. c 35. c 36. d 37. d 38. d 39. a 40. a 41. b 42. a 43. c 44. b 45. c 46. d 47. d 48. c 49. b 50. c 51. a .
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Ch 10: Externalities 52. c 53. d 54. d 55. b 56. d 57. b 58. c 59. b 60. c 61. c 62. d 63. d 64. c 65. b 66. b 67. b 68. a 69. c 70. c 71. c 72. b 73. c 74. a 75. b 76. c .
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Ch 10: Externalities 77. c 78. c 79. d 80. a 81. c 82. c 83. d 84. d 85. b 86. c 87. a 88. d 89. a 90. a 91. d 92. b 93. b 94. d 95. a 96. d 97. a 98. a 99. b 100. b 101. True 102. True .
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Ch 10: Externalities 103. True 104. True 105. False 106. False 107. True 108. False 109. True 110. False 111. True 112. False 113. True 114. False 115. True 116. True 117. True 118. False 119. False 120. False 121. True 122. True 123. False 124. False 125. False 126. True 127. True .
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Ch 10: Externalities 128. False 129. True 130. False 131. False 132. False 133. False 134. True 135. True 136. False 137. True 138. True 139. False 140. False 141. True 142. True 143. True 144. False 145. True 146. False 147. True 148. False 149. True 150. False 151. True 152. True 153. True .
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Ch 10: Externalities 154. False 155. True 156. False 157. False 158. True 159. False 160. False 161. True 162. True 163. Research into new technologies creates a positive externality. 164. The phenomenon of externalities weakens the argument for the “invisible hand.” 165. The term is negative externality. 166. Sheryl’s guitar-playing gives rise to a positive externality if it enhances the well-being of her neighbors. 167. The restoration of historic buildings creates a positive externality. 168. Research into new technologies gives rise to a positive externality in that it creates knowledge that other people can use, thereby improving their well-being. 169. demand curve 170. supply curve 171. There is a positive externality associated with this market. 172. There is an external benefit of $150,000 associated with the restoration of the 50th historic building. 173. The market equilibrium quantity of restored historic buildings is less than 50. 174. The socially optimal quantity of restored historic buildings is equal to 50. 175. The government could move the market to the social optimum by providing a subsidy. 176. The market equilibrium quantity is 400 and the market equilibrium price is 40. 177. A tax of $12 per unit would move the market to the social optimum.
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Ch 10: Externalities 178. The equation of the social-cost curve is P' = 12 + (1/10)QS . 179. The social cost of producing 30 units of the good is $15. 180. The socially optimal quantity is 360 and the socially optimal price is 48. 181. The production of good x conveys a negative externality. 182. The production of good x conveys a positive externality. 183. The new supply curve coincides with the social-cost curve. 184. The new demand curve coincides with the social-value curve. 185. For each gallon, the social cost is equal to the sum of the private and external costs. Thus, the private cost of the 10,000th gallon is $3.50 - $1.25 = $2.25. 186. For each college degree, the social value is equal to the sum of the private value and external benefit. Thus, the social value of the 500th college degree is $25,000 + $3,500 = $28,500. 187. The social value exceeds the private value, so the production of fire extinguishers conveys a positive externality. The social cost is equal to the private cost, so there is no negative externality. 188. The social value is equal to the private value plus the external benefit, so the social value of the 500th fire extinguisher is $12. 189. Each fire extinguisher should be subsidized by $3, which is the amount of the external benefit. 190. For the 500th fire extinguisher, the private cost ($10) exceeds the private value ($9), so the market-equilibrium quantity is less than 500. 191. For the 500th fire extinguisher, the social value ($12) exceeds the social cost ($9), so the socially-optimal quantity is greater than 500. 192. For the 500th fire extinguisher, the social value ($12) exceeds the social cost ($9), so the socially-optimal quantity is greater than 500. The total benefit to society as a whole is maximized at the social optimum, so more than 500 fire extinguishers should be produced. 193. The other type of policies is market-based policies. 194. We call these policies market-based policies. 195. Economists generally prefer corrective taxes to regulations. 196. The supply is perfectly inelastic. 197. The negative externalities are congestion, accidents, and pollution. 198. Most economists disagree with this statement. .
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Ch 10: Externalities 199. efficient 200. The supply curve is horizontal. 201. We use the term market-based policies to describe such policies. 202. A Pigovian tax is a market-based policy. 203. The requirement that firms adopt a particular technology is a command-and-control policy. 204. When the governmental authority (e.g., EPA) wants to restrict the quantity of emissions by a certain amount but does not know the demand curve for pollution, then it can auction off a certain number of pollution permits to achieve the desired result. Levying a corrective tax would involve guesswork as to the appropriate size of the tax. 205. With a corrective tax, the demand curve for pollution rights determines the quantity of pollution. 206. With pollution permits, the demand curve for pollution rights determines the price of pollution. 207. When there is a large number of interested parties, coordinating them all to bargain is costly, if not impossible. 208. Since Liz’s cost exceeds Tyler’s benefit, Liz could offer Tyler some amount of money to get rid of his dog. Specifically, Liz could offer an amount of money, M, such that $300 < M < $450, and both individuals would become better off. 209. No, since Beverly would require a payment of more than $600 in order to become better off, while Charles could become better off only if he paid Beverly less than $400. 210. tax deductions for charitable donations 211. transaction 212. The Coase theorem makes this assertion.
213.
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Ch 10: Externalities When a negative externality exists, the private cost (or supply curve) is less than the social cost. The market equilibrium quantity of Q0 will be greater than the socially optimal quantity of Q1. The government could help eliminate this inefficiency by taxing the product. In this example, the size of the per-unit tax would be P3 - P1 (or P2 - P0).
214.
When a positive externality exists, the private value (or demand curve) is less than the social value. The market equilibrium quantity will be less than the socially optimal quantity. The government could help eliminate this inefficiency by subsidizing the product. In this example, the size of the per-unit subsidy would be P3 - P1. 215. Pigovian taxes allow markets to coordinate optimal resource allocation. In order for regulations to be efficient, the government needs detailed information about specific industries, including information about the alternative technologies that those industries could adopt. Thus, taxes are likely to mitigate negative externalities at a lower cost to society.
216.
Yes, these two quantities could be equal. For example, PB could be equal to the amount of the corrective tax. 217. One solution would be to have one person own both the farm fields and the beehives, in which case the externality is internalized. Another solution would be to have the farmer and beekeeper enter into a contract so that they can coordinate .
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Ch 10: Externalities the number of bee hives and acres of crops to maintain an efficient outcome. 218. Private parties may fail to bargain to an efficient solution under a variety of circumstances. First, the transaction costs of bargaining may be so high that one or both of the parties decides not to bargain. Second, the bargaining may not take place if one or both of the parties believes that the agreement cannot be enforced. Third, one or both of the parties may try to hold out for a better deal, in which case the bargaining process breaks down. Fourth, if there are a large number of parties taking part in the negotiations, the costs of coordination may be so great that the bargaining is not successful.
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Ch 11: Public Goods and Common Resources
Indicate the answer choice that best completes the statement or answers the question. 1. For private goods allocated in markets, a. prices guide the decisions of buyers and sellers and these decisions lead to an efficient allocation of resources. b. prices guide the decisions of buyers and sellers and these decisions lead to an inefficient allocation of resources. c. the government guides the decisions of buyers and sellers and these decisions lead to an efficient allocation of resources. d. the government guides the decisions of buyers and sellers and these decisions lead to an inefficient allocation of resources. 2. Governments can improve market outcomes for a. public goods but not common resources. b. common resources but not public goods. c. both public goods and common resources. d. neither public goods nor common resources. 3. For most goods in an economy, the primary signal that guides the decisions of buyers and sellers is a. advertising. b. quality. c. reputation. d. price. 4. Which of the following is usually true about government-provided goods? a. These goods have a zero opportunity cost. b. These goods are not scarce. c. People do not have to pay an explicit fee to enjoy these goods. d. The invisible hand is at work to ensure these goods are provided in the market 5. A city street is a. always a public good, whether or not it is congested. b. a public good when it is congested, but it is a common resource when it is not congested. c. a common resource when it is congested, but it is a public good when it is not congested. d. always a common resource, whether or not it is congested. 6. The provision of a public good generates a a. positive externality, as does the use of a common resource. b. positive externality, and the use of a common resource generates a negative externality. c. negative externality, as does the use of a common resource. d. negative externality, and the use of a common resource generates a positive externality. 7. Private decisions about consumption of common resources and production of public goods usually lead to an a. efficient allocation of resources and external effects. b. efficient allocation of resources and no external effects. c. inefficient allocation of resources and external effects. .
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Ch 11: Public Goods and Common Resources d. inefficient allocation of resources and no external effects. 8. A good is excludable if a. one person's use of the good diminishes another person's enjoyment of it. b. the government can regulate its availability. c. it is not a normal good. d. people can be prevented from using it. 9. Goods that are excludable include both a. club goods and public goods. b. public goods and common resources. c. common resources and private goods. d. private goods and club goods. 10. Both public goods and common resources are a. rival in consumption. b. nonrival in consumption. c. excludable. d. nonexcludable. 11. Brad owns 5 acres of land. Brad sells the land to a real estate developer who builds a subdivision with 10 houses. The land is an example of a good that is a. both rival in consumption and excludable. b. neither rival in consumption nor excludable. c. excludable, but not rival in consumption. d. rival in consumption, but not excludable. 12. When a good is rival in consumption, a. one person's use of the good diminishes another person's ability to use it. b. people can be prevented from using the good. c. an unlimited number of people can use the good at the same time. d. everyone will be excluded from obtaining the good. 13. Goods that are rival in consumption include both a. club goods and public goods. b. public goods and common resources. c. common resources and private goods. d. private goods and club goods. 14. A television broadcast is an example of a good that is a. private. b. not rival in consumption. c. social. d. excludable. .
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Ch 11: Public Goods and Common Resources 15. Goods that are rival in consumption but not excludable would be considered a. club goods. b. common resources. c. public goods. d. private goods. 16. If a road is congested, then use of that road by an additional person would lead to a a. negative externality. b. positive externality. c. Pigovian externality. d. free-rider problem with rush-hour drivers stuck in traffic. 17. Which of the following would not be considered a private good? a. A pair of scissors b. A pair of shoes c. An SUV d. Cable TV service 18. Private goods are both a. excludable and nonrival in consumption. b. nonexcludable and rival in consumption. c. excludable and rival in consumption. d. nonexcludable and nonrival consumption. 19. Which of the following goods is rival and excludable? a. An uncongested toll road b. An uncongested nontoll road c. A congested nontoll road d. A congested toll road 20. Under which of the following scenarios would a park be considered a common resource? a. Visitors to the park must pay an admittance fee, but there are always plenty of empty picnic tables. b. Visitors to the park must pay an admittance fee and frequently all of the picnic tables are in use. c. Visitors can enter the park free of charge and there are always plenty of empty picnic tables. d. Visitors can enter the park free of charge, but frequently all of the picnic tables are in use. 21. Pay-per-view broadcasts are a. private goods. b. club goods. c. common resources. d. public goods. 22. The Pennsylvania Turnpike is a tolled freeway running through the state of Pennsylvania. Motorists must pay tolls at various points along the Turnpike based on the distance they traveled on the freeway. Suppose that despite the tolls, many motorists in the urban areas use the Turnpike causing traffic to slow during peak times. What type of good would the .
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Ch 11: Public Goods and Common Resources Turnpike be classified as in this case? a. Private good b. Club good c. Common resource d. Public good 23. People cannot be prevented from using a good if the good is a a. private good or a public good. b. private good or a common resource. c. public good or a common resource. d. public good or a club good. 24. Figure 11-1
Excludable?
Yes No
Rival in Consumption? Yes No A B C D
Refer to Figure 11-1. Emma's use of good x does not affect anyone else's use of good x. Neither Emma nor anyone else can be prevented from using the good. Good x is an example of the type of good that belongs in a. Box A, which represents private goods. b. Box B, which represents common resources. c. Box C, which represents common resources. d. Box D, which represents public goods. 25. Figure 11-1
Excludable?
Yes No
Rival in Consumption? Yes No A B C D
Refer to Figure 11-1. A membership at a gym that always has space in classes and on machines is an example of the type of good represented by Box a. A. b. B. c. C. d. D. 26. Figure 11-1 Rival in Consumption? Yes No .
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Ch 11: Public Goods and Common Resources Excludable?
Yes No
A C
B D
Refer to Figure 11-1. For which two boxes is it the case that externalities arise because something of value has no price attached to it? a. Box A and Box B b. Box A and Box C c. Box B and Box D d. Box C and Box D 27. A traffic light at an intersection is a. rival and excludable in consumption. b. not rival but excludable in consumption. c. rival but not excludable in consumption. d. not rival and not excludable in consumption. 28. Because public goods are a. excludable, people have an incentive to be free riders. b. excludable, people do not have an incentive to be free riders. c. not excludable, people have an incentive to be free riders. d. not excludable, people do not have an incentive to be free riders. 29. Which of the following goods is the best example of a public good? a. Garbage-collection services that are provided by a municipal government. b. Music that is broadcast over the airwaves by a privately-owned FM radio station. c. Electricity that is provided to farmhouses by a rural electric cooperative. d. Cable TV services that are provided by a privately-owned firm that is regulated by the government of the city in which it operates. 30. Which of the following pairs of goods includes a good that is excludable and rival in consumption as well as a good that is not excludable and not rival in consumption? a. Tablet computer, membership at a gym that always has plenty of open equipment and classes b. Tablet computer, national defense c. Congested nontoll road, national defense d. Online music subscription, streetlight 31. The U.S. military defends Jacob from foreign conflict. The fact that Jacob enjoys this protection does not detract from other Americans' enjoyment of it. For this reason, we say that national defense is a. excludable. b. not excludable. c. rival in consumption. d. not rival in consumption. 32. A free rider is a person who .
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Ch 11: Public Goods and Common Resources a. will only purchase a product on sale. b. receives the benefit of a good but avoids paying for it. c. can produce a good at no cost. d. rides public transit regularly. 33. Because of the free-rider problem, a. private markets tend to undersupply public goods. b. the federal government spends too many resources on national defense and not enough resources on medical research. c. firework displays provided by private markets have become increasingly popular. d. poverty can easily be eliminated through private charity. 34. Who among the following is a free rider? a. Ernie listens to National Public Radio, but does not contribute to any fundraising efforts. b. Bert takes the commuter rail to work, but he purchases the discounted monthly passes rather than buying tickets each day. c. Grover sends his five children to a private school rather than to the public school in his neighborhood. d. Oscar goes to Elmo's house to watch a football game on the local commercial television channel. 35. The phenomenon of free riding is most closely associated with which type of good? a. Private goods b. Club goods c. Inferior goods d. Public goods 36. Market failure associated with the free-rider problem is a result of a. a problem associated with pollution. b. benefits that accrue to those who don't pay. c. benefits that accrue to providers of the product. d. market power. 37. A lighthouse is typically considered to be a public good because a. the owner of the lighthouse is able to exclude beneficiaries from enjoying the lighthouse. b. there is rarely another lighthouse nearby to provide competition. c. a nearby port authority cannot avoid paying fees to the lighthouse owner. d. all passing ships are able to enjoy the benefits of the lighthouse without paying. 38. It is commonly argued that national defense is a public good. Nevertheless, the weapons used by the U.S. military are produced by private firms. We can conclude that a. resources would be used more efficiently if the government produced the weapons. b. resources would be used more efficiently if private firms provided national defense. c. weapons are rival in consumption and excludable, but national defense is not rival in consumption and not excludable. d. national defense is rival in consumption and excludable, but weapons are not rival in consumption and not excludable. .
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Ch 11: Public Goods and Common Resources 39. Knowledge that is patented is a a. public good, whereas knowledge that is not patented is a common resource. b. private good, whereas knowledge that is not patented is a club good. c. common resource, whereas knowledge that is not patented is a private good. d. club good, whereas knowledge that is not patented is a public good. 40. Which of the following is not a reason why government agencies subsidize basic research? a. The private market devotes too few resources to basic research. b. The general knowledge developed through basic research can be used without charge. c. The social benefit of additional knowledge is perceived to be greater than the cost of the subsidies. d. The government wants to attract the brightest researchers away from private research firms. 41. Private companies are most likely to invest in medical research if a. they will produce general knowledge. b. they will produce a specific product for which they may receive a patent. c. there is no government intervention in the market for medical products. d. others will benefit from their discoveries. 42. Which of the following is a disadvantage of government provision of a public good? a. The government lacks information about the value people place on the good. b. The government does not provide enough of any public good. c. The private sector can provide all public goods at a lower cost. d. There are no disadvantages of government provision of a public good. 43. Which of the following is not a characteristic of a public good? a. It is not excludable. b. It is not diminished or depreciated as additional people consume the good. c. Its benefits cannot be withheld from anyone. d. Because it is a free good, there is no opportunity cost. 44. Producers have little incentive to produce a public good because a. the social benefit is less than the private benefit. b. the social benefit is less than the social cost. c. there is a free-rider problem. d. there is a Tragedy of the Commons. 45. The privately-owned school system in Smalltown has a virtually unlimited capacity. It accepts all applicants and operates on both tuition and private donations. Although every resident places value on having an educated community, the school's revenues have suffered lately due to a large decline in private donations from the elderly population. Because the benefit that each citizen receives from having an educated community is a public good, which of the following would not be correct? a. The free-rider problem causes the private market to undersupply education to the community. b. The government can potentially help the market reach a socially optimal level of education. c. A tax increase to pay for education could potentially make the community better off. .
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Ch 11: Public Goods and Common Resources d. The private market is the best way to supply education. 46. Table 11-1 Consider the town of Springfield with only three residents, Sophia, Amber, and Cedric. The three residents are trying to determine how large, in acres, they should build the public park. The following table shows each resident's willingness to pay for each acre of the park. Acres
Sophia
1 2 3 4 5 6 7
Willingness to Pay (Dollars) Amber 10 24 8 18 6 14 3 8 1 6 0 4 0 2
Cedric 6 5 4 3 2 1 0
Refer to Table 11-1. Suppose the cost to build the park is $24 per acre. How many acres should the park be to maximize total surplus from the park in Springfield? a. 1 acre b. 2 acres c. 3 acres d. 4 acres 47. Table 11-1 Consider the town of Springfield with only three residents, Sophia, Amber, and Cedric. The three residents are trying to determine how large, in acres, they should build the public park. The following table shows each resident's willingness to pay for each acre of the park. Acres 1 2 3 4 5 6 7
Sophia
Willingness to Pay (Dollars) Amber 10 24 8 18 6 14 3 8 1 6 0 4 0 2
Cedric 6 5 4 3 2 1 0
Refer to Table 11-1. Suppose the cost to build the park is $24 per acre and that the residents have agreed to split the cost of building the park equally. If the residents vote to determine the size of park to build, basing their decision solely on their own willingness to pay (and trying to maximize their own surplus), what is the largest park size for which the majority of residents would vote "yes?" a. 0 acres .
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Ch 11: Public Goods and Common Resources b. 1 acre c. 2 acres d. 3 acres 48. Table 11-1 Consider the town of Springfield with only three residents, Sophia, Amber, and Cedric. The three residents are trying to determine how large, in acres, they should build the public park. The following table shows each resident's willingness to pay for each acre of the park. Acres 1 2 3 4 5 6 7
Willingness to Pay (Dollars) Sophia Amber 10 24 8 18 6 14 3 8 1 6 0 4 0 2
Cedric 6 5 4 3 2 1 0
Refer to Table 11-1. Suppose the cost to build the park is $24 per acre and that the residents have agreed to split the cost of building the park equally. To maximize his own surplus, how many acres would Cedric like Springfield to build? a. 0 acres b. 1 acre c. 2 acres d. 3 acres 49. If the government decides to build a new highway, the first step would be to conduct a study to determine the value of the project. The study is called a a. budget analysis. b. project analysis. c. reimbursement analysis. d. cost-benefit analysis. 50. Miguel, Maria, and Marcos all would like a place to sit while waiting at their children's bus stop. The neighborhood association is considering installing several park benches at the bus stop. Miguel values the benches at $20, Maria at $30, and Marcos at $40. The park benches and labor for installation cost $100. If Miguel, Maria, and Marcos are the only residents who value the benches, what should the neighborhood association do? a. Install the park benches because people like places to sit. b. Install the park benches because the benefits outweigh the costs. c. Do not install the park benches because the costs outweigh the benefits. d. Do not install the park benches to prevent the Tragedy of the Commons problem of overuse. 51. A cost-benefit analysis of a highway is difficult to conduct because analysts a. cannot estimate the explicit cost of a project that has not been completed. .
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Ch 11: Public Goods and Common Resources b. are unlikely to have access to costs on similar projects. c. are not able to consider the opportunity cost of resources. d. will have difficulty estimating the value of the highway. 52. Cost-benefit analysts often encounter the problem that those who would benefit from government provision of a public good tend to a. overstate the benefit they would receive from the public good, and those who would be harmed by government provision of a public good tend to overstate the costs they would incur from the public good. b. overstate the benefit they would receive from the public good, and those who would be harmed by government provision of a public good tend to understate the costs they would incur from the public good. c. understate the benefit they would receive from the public good, and those who would be harmed by government provision of a public good tend to overstate the costs they would incur from the public good. d. understate the benefit they would receive from the public good, and those who would be harmed by government provision of a public good tend to understate the costs they would incur from the public good. 53. Before considering any public project, the government should a. only measure the total benefits of the project. b. only measure the cost of the project. c. conduct a cost-benefit analysis and compare the total cost and total benefits of the project. d. infer that citizens who vote for a project are willing to pay equally for it. 54. The Occupational Safety and Health Administration (OSHA) has determined that the probability of a worker dying from exposure to a hazardous chemical used in the production of fertilizer is 0.008. The cost of imposing a regulation that would ban the chemical is $32 million. If the value of a human life is equal to $10 million, how many people must the policy affect in order for the benefits to exceed the costs? a. 256 b. 401 c. 3201 d. 4001 55. A textbook is a a. private good and the knowledge that one gains from reading the book is a common resource. b. private good and the knowledge that one gains from reading the book is a public good. c. common resource and the knowledge that one gains from reading the book is a public good. d. common resource and the knowledge that one gains from reading the book is a private good. 56. Which of the following is not a common resource? a. Elephants in the wild b. A narrow trail in a public park c. A vegetable garden d. Neither a nor b is a common resource. 57. The overuse of a common resource relative to its economically efficient use is called a. the free-rider problem. b. the Tragedy of the Commons. .
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Ch 11: Public Goods and Common Resources c. a public good. d. cost-benefit analysis. 58. Which of the following is not a typical solution to the "Tragedy of the Commons?" a. Taxing the use of the common resource b. Turning the common resource into a club good c. Turning the common resource into a private good d. Regulating the use of the common resource 59. The Tragedy of the Commons results when a good is a. rival in consumption and not excludable. b. excludable and not rival in consumption. c. both rival in consumption and excludable. d. neither rival in consumption nor excludable. 60. The Tragedy of the Commons will be evident when a growing number of sheep grazing on the town commons leads to a destruction of the grazing resource. To correct for this problem, the town could a. allow individual shepherds to choose their own flock sizes. b. internalize the externality by subsidizing the production of sheep's wool. c. auction off a limited number of sheep-grazing permits. d. wait until the market corrects the problem. 61. The parable called the Tragedy of the Commons applies to goods such as a. fire protection and cable TV. b. tornado sirens and basic research. c. clean air and clean water. d. antipoverty programs and national defense. 62. Four friends decide to meet at a Chinese restaurant for dinner. They decide that each person will order an item off the menu, and they will share all dishes. They will split the cost of the final bill evenly among each of the people at the table. A Tragedy of the Commons problem is likely for each of the following reasons except a. each person has an incentive to eat as much as possible since their individual rate of consumption will not affect their individual cost. b. there is an externality associated with eating the food on the table. c. when one person eats, they may not take into account how their choice affects their friends. d. each dish would be both excludable and rival in consumption. 63. Which of the following is an example of the Tragedy of the Commons? a. The number of professional football teams increases to the point where the quality of the games decreases, as does television viewership. b. The number of satellites increases to the point where they begin running into each other. c. Disney World becomes so crowded that it institutes a lottery for admissions. d. A tiger breeding program becomes so successful that local zoos have to build additional exhibits so that visitors can view the cats. .
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Ch 11: Public Goods and Common Resources 64. What causes the Tragedy of the Commons? a. Social and private incentives are the same. b. Social and private incentives differ, and common resources are not rival in consumption and are not excludable. c. Common resources are not rival in consumption and are not excludable. d. Social and private incentives differ, and common resources are not excludable but are rival in consumption. 65. A toll on a congested road is in essence a. an interstate highway subsidy. b. a hidden tax. c. a gasoline tax. d. a corrective tax. 66. The town of Isle is on a small island connected to Big City by a single bridge. Most of the residents of Isle work in Big City. As a result, the bridge becomes very congested for two hours each day at the typical morning and evening commute times. Which of the following policies considered by the mayor of Isle would likely be most efficient in alleviating the congestion? a. A fixed toll for the bridge payable by every vehicle crossing the bridge at all days and times. b. A variable toll for the bridge payable only by vehicles crossing the bridge during the congested commute times. c. Any vehicle crossing the bridge at any time must have a sticker paid for with a one-time fee of $25. d. A press conference in which the mayor requests that people try to cross the bridge earlier or later than the typical commute times. 67. Scenario 11-1 Becca is a single mother of two young children who spend their days at a daycare center while Becca goes to work. The daycare center closes at 5:30. If parents do not pick up their children at or before 5:30, the daycare center charges a late fee of $5 per child for every 10 minutes the parent is late. Refer to Scenario 11-1. Due to traffic, Becca expects to be 20 minutes late to pick up her children. Which of the following most accurately describes the set of prices that she would be willing to pay for a variable toll road that would get her to the daycare center on time? a. Any price less than $30 b. Any price less than $25 c. Any price less than $20 d. Becca would not be willing to pay out of pocket to avoid traffic. 68. The goal of requiring licenses for hunting and fishing is to a. reduce the use of a common resource. b. ensure that the people hunting and fishing are qualified. c. promote hunting and fishing. d. monitor compliance with federal gun laws. 69. Imagine a 2,000-acre park with picnic benches, trees, and a pond. Suppose it is publicly owned, and people are invited to enjoy its beauty. When the weather is nice, it is difficult to find parking, and the trash cans overflow with food wrappers on summer afternoons. Otherwise, it is a great place. The park is a common resource because .
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Ch 11: Public Goods and Common Resources a. people can be prevented from using it. b. access is limited due to driving distances. c. if too many people use it, one person's use diminishes other peoples' use. d. anyone can use it without affecting anyone else. 70. On hot summer days, electricity-generating capacity is sometimes stretched to the limit. At these times, electric companies may ask people to voluntarily cut back on their use of electricity. An economist would suggest that a. every electric customer has an incentive to prevent the system from overloading, so this voluntary approach is the most efficient. b. it would be more efficient if the electric company raised its rates for electricity at peak times. c. it would be more efficient to have a lottery to decide who had to cut back their use of electricity at peak times. d. it would be more efficient to force everyone to cut their usage of electricity by the same amount. 71. On hot summer days, electricity-generating capacity is sometimes stretched to the limit. At these times, electric companies may ask people to voluntarily cut back on their use of electricity. On these days, electricity is a. excludable, but nonrival in consumption. b. not excludable, but rival in consumption. c. excludable and rival in consumption. d. not excludable and nonrival in consumption. 72. Pollution is a a. problem that is entirely unrelated to the parable called the Tragedy of the Commons. b. problem that cannot be remedied with regulations or corrective taxes. c. negative externality that can be viewed as a public-goods problem. d. negative externality that can be viewed as a common-resource problem. 73. The failure of markets to adequately protect the environment can be viewed either as a problem of a. externalities or as a problem of common resources. b. externalities or as a problem of private goods. c. the overprovision of public goods or as a problem of the underprovision of private goods. d. club goods or as a problem that arises when the quantity of excludable goods exceeds the socially-efficient quantity. 74. A regional lobster management board recently proposed a five-year moratorium on lobster fishing in the Atlantic waters south of Cape Cod based on a study of the lobster population. Which of the following statements is not correct? a. Lobsters are rival but not excludable. b. The lobster population is an example of the tragedy of the commons. c. Reducing the quota on the number of lobsters any fisher can catch would have a protective effect on the lobster population. d. If left unregulated, the lobster population will likely increase. 75. Markets fail to allocate resources efficiently when a. demanders and suppliers cannot agree on a price. b. goods are rival in consumption and excludable. c. property rights are not well established. .
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Ch 11: Public Goods and Common Resources d. too many buyers and sellers exist in the same market. 76. When property rights are not well established, a. private goods become public goods. b. markets fail to allocate resources efficiently. c. the distribution of private goods is unfair. d. government resources are used inefficiently.
Indicate whether the statement is true or false. 77. When goods are available free of charge, the market forces that normally allocate resources in our economy are absent. a. True b. False 78. Free goods are usually efficiently allocated without government intervention. a. True b. False 79. Most goods in our economy are allocated in markets, where buyers pay for what they receive and sellers are paid for what they provide. a. True b. False 80. Government intervention cannot improve the allocation of resources for goods that do not have prices attached to them. a. True b. False 81. A good that is excludable but not rival is known as a club good. a. True b. False 82. National Public Radio would be considered a club good. a. True b. False 83. Concerts in arenas are not excludable because it is virtually impossible to prevent someone from seeing the show. a. True b. False 84. A pair of jeans is rival but non-excludable. a. True b. False 85. A good that is rival in consumption is one that someone can be prevented from using if she did not pay for it. .
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Ch 11: Public Goods and Common Resources a. True b. False 86. A good that is excludable is one that someone can be prevented from using if she did not pay for it. a. True b. False 87. Some goods can be classified as either public goods or private goods depending on the circumstances. a. True b. False 88. Roads can be considered either public goods or common resources, depending on how congested they are. a. True b. False 89. You and your friends watch a movie in your bedroom. For you and your friends, the enjoyment that you get from watching the movie is not rival in consumption. a. True b. False 90. You and your friends eat potato chips in your bedroom. For you and your friends, the potato chips are rival in consumption. a. True b. False 91. All goods that are excludable are also rival in consumption, but not all goods that are rival in consumption are excludable. a. True b. False 92. Common resources and public goods have in common that they are not excludable and they are not rival in consumption. a. True b. False 93. Private goods and club goods have in common that they are excludable, but are different in that private goods are rival while club goods are not rival in consumption. a. True b. False 94. When one person enjoys the benefit of a tornado siren, they reduce the benefit to others. a. True b. False 95. A free rider is someone who receives the benefit of a good but avoids paying for it. a. True .
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Ch 11: Public Goods and Common Resources b. False 96. A free rider is a person who pays for a good but does not receive the benefit of it. a. True b. False 97. The free-rider problem arises when the number of beneficiaries is large and exclusion of any of them is impossible. a. True b. False 98. When free riders are present in a market, the market generally fails to provide the efficient outcome. a. True b. False 99. Even economists who advocate small government agree that national defense is a good that the government should provide. a. True b. False 100. Although national defense is currently a public good, economists who advocate small government generally agree that the U.S. should privatize national defense to increase the efficiency of the good. a. True b. False 101. One benefit of the patent system is that it encourages the production of technical knowledge. a. True b. False 102. Government agencies, such as the National Science Foundation, subsidize basic research because in the absence of a subsidy too little research would be conducted. a. True b. False 103. Because the benefits of basic research are obvious and easy to measure, it is likely that the public sector pays for the right amount and the right kinds of basic research. a. True b. False 104. In some cases the government can make everyone better off by raising taxes to pay for certain goods that the market fails to provide. a. True b. False 105. The free-rider problem makes it unlikely that poverty will be entirely eliminated through private charity. a. True b. False .
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Ch 11: Public Goods and Common Resources 106. Advocates of antipoverty programs claim that fighting poverty is a public good. a. True b. False 107. Private markets usually provide lighthouses because ship captains have the incentive to navigate using the lighthouse and therefore will pay for the service. a. True b. False 108. Some goods, such as lighthouses, can switch between being public goods and being private goods depending on the circumstances. a. True b. False 109. A study that compares the costs and benefits to society of providing a public good is called externality analysis. a. True b. False 110. In determining whether and how much of a public good to provide, cost-benefits analysts use the same type of price signals for public goods as are readily available for private goods. a. True b. False 111. Economists argue that we can calculate the value of a human life by observing voluntary risks that people take every day. a. True b. False 112. If we can conclude that human life has a finite value, cost-benefit analysis can lead to solutions in which human life is worth less than the cost of a potential project. a. True b. False 113. Aristotle writes, “What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others.” In this statement, Aristotle is referring to the free-rider problem that occurs when a person receives the benefit of a good without paying for it. a. True b. False 114. One solution to the “Tragedy of the Commons” is to turn the common resource into a private good. a. True b. False 115. An example of the “Tragedy of the Commons” is litter in the picnic area of a local park. a. True b. False .
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Ch 11: Public Goods and Common Resources 116. London drivers who choose to drive in “congestion zones” pay a tax designed to reduce traffic congestion. a. True b. False 117. Governments that chose to make endangered elephants private goods have met with more success protecting elephants than governments that chose to make killing elephants illegal. a. True b. False 118. One person's use of common resources does not reduce the enjoyment other people receive from the resource. a. True b. False 119. If Dave and Jesse are the only two fishermen in town and neither is bothered by the other's fishing, the lake they fish in is not a common resource. a. True b. False 120. One possible solution to the problem of protecting a common resource is to convert that resource to a private good. a. True b. False 121. Tolls are not effective in altering people's incentives to drive during rush hour. a. True b. False 122. The profit motive that stems from private ownership means that elephant populations are best protected as common resources. a. True b. False 123. In the Tragedy of the Commons, joint action among the individual citizens would be necessary to solve their common-resource problem unless the government intervenes. a. True b. False 124. Depending on congestion, national parks can be either a common resource or a public good. a. True b. False 125. Pollution is a negative externality, but it is not appropriate to view the problem of pollution as a common-resource problem. a. True b. False 126. The pollution market failure is an example of the free-rider problem. .
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Ch 11: Public Goods and Common Resources a. True b. False 127. When a highway is congested, giving rise to negative externalities, it is appropriate to view the highway as a common resource. a. True b. False 128. Nontoll roads can be either public goods or common resources, depending upon the degree of congestion. a. True b. False 129. Markets may fail to allocate resources efficiently when property rights are not well established. a. True b. False 130. A traffic light would be considered a common resource. a. True b. False 131. Table 11-2 Consider the city of Widgetapolis with only four residents, John, James, Mary, and Lydia. The four residents are trying to determine how many hours to spend in cleaning up the public lake. The table below shows each resident’s willingness to pay for each hour of cleaning. Hours 1 2 3 4 5 6 7
John $30 25 20 15 9 3 0
James $50 40 30 20 10 0 0
Mary $40 37 34 30 25 15 5
Lydia $10 9 8 7 6 5 4
Refer to Table 11-2. Suppose the cost to clean the lake is $12 per hour and that the residents have agreed to split the cost of cleaning the lake equally. The number of cleaning hours that maximizes total surplus of Widgetapolis is 7 hours. a. True b. False 132. Table 11-2 Consider the city of Widgetapolis with only four residents, John, James, Mary, and Lydia. The four residents are trying to determine how many hours to spend in cleaning up the public lake. The table below shows each resident’s willingness to pay for each hour of cleaning. .
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Ch 11: Public Goods and Common Resources Hours 1 2 3 4 5 6 7
John $30 25 20 15 9 3 0
James $50 40 30 20 10 0 0
Mary $40 37 34 30 25 15 5
Lydia $10 9 8 7 6 5 4
Refer to Table 11-2. Suppose the cost to clean the lake is $8 per hour and that the residents have agreed to split the cost of cleaning the lake equally. The number of cleaning hours that maximizes total surplus of Widgetapolis is 7 hours. a. True b. False 133. Table 11-2 Consider the city of Widgetapolis with only four residents, John, James, Mary, and Lydia. The four residents are trying to determine how many hours to spend in cleaning up the public lake. The table below shows each resident’s willingness to pay for each hour of cleaning. Hours 1 2 3 4 5 6 7
John $30 25 20 15 9 3 0
James $50 40 30 20 10 0 0
Mary $40 37 34 30 25 15 5
Lydia $10 9 8 7 6 5 4
Refer to Table 11-2. Suppose the cost to clean the lake is $32 per hour and that the residents have agreed to split the cost of cleaning the lake equally. It would maximize Lydia's surplus if 6 hours of cleaning is done. a. True b. False 134. Table 11-2 Consider the city of Widgetapolis with only four residents, John, James, Mary, and Lydia. The four residents are trying to determine how many hours to spend in cleaning up the public lake. The table below shows each resident’s willingness to pay for each hour of cleaning. Hours 1 2 3 .
John $30 25 20
James $50 40 30
Mary $40 37 34
Lydia $10 9 8 Page 20
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Ch 11: Public Goods and Common Resources 4 5 6 7
15 9 3 0
20 10 0 0
30 25 15 5
7 6 5 4
Refer to Table 11-2. Suppose the cost to clean the lake is $32 per hour and that the residents have agreed to split the cost of cleaning the lake equally. It would maximize Mary's surplus if 3 hours of cleaning is done. a. True b. False
135. When a good does not have a __________ attached to it, private markets fail to ensure that the good is produced and consumed in the proper amounts. 136. “Given that most people like to get ‘free stuff,’ it follows that goods that are available free of charge are produced and consumed in the proper amounts in a market economy.” What is wrong with this statement? 137. What do we mean when we say that a good is excludable? 138. If no one can be prevented from using good x, then good x is one of two types of goods. What are those two types? 139. What do we mean when we say that a good is rival in consumption? 140. If one person’s use of good x diminishes other people’s use of it, then good x is one of two types of goods. What are those two types? 141. Are common resources excludable? Are they rival in consumption? 142. Are public goods excludable? Are they rival in consumption? 143. Which two types of goods are rival in consumption? 144. Which two types of goods are excludable? 145. What particular characteristic do private goods and club goods have in common? 146. What particular characteristic do private goods and common resources have in common? 147. What particular characteristic do public goods and common resources have in common? 148. What particular characteristic do public goods and club goods have in common? 149. Scenario 11-2 Consider the following goods: .
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Ch 11: Public Goods and Common Resources • fire-protection services provided by a fire department; • a beautiful mural on the outside wall of a fire station; • a firefighter’s helmet. Refer to Scenario 11-2. Which of these goods is the best example of a private good? Briefly explain. 150. Scenario 11-2 Consider the following goods: • fire-protection services provided by a fire department; • a beautiful mural on the outside wall of a fire station; • a firefighter’s helmet. Refer to Scenario 11-2. Which of these goods is the best example of a public good? Briefly explain. 151. Scenario 11-2 Consider the following goods: • fire-protection services provided by a fire department; • a beautiful mural on the outside wall of a fire station; • a firefighter’s helmet. Refer to Scenario 11-2. Which of these goods is the best example of a club good? Briefly explain. 152. Scenario 11-3 Consider the following goods: • a fish fillet served at a restaurant; • fish in the ocean; • exotic fish in a huge aquarium in a privately-owned building. Refer to Scenario 11-3. Which of these goods is the best example of a private good? Briefly explain. 153. Scenario 11-3 Consider the following goods: • a fish fillet served at a restaurant; • fish in the ocean; • exotic fish in a huge aquarium in a privately-owned building. Refer to Scenario 11-3. Which of these goods is the best example of a club good? Briefly explain. 154. Scenario 11-3 Consider the following goods: • a fish fillet served at a restaurant; • fish in the ocean; • exotic fish in a huge aquarium in a privately-owned building. Refer to Scenario 11-3. Which of these goods is the best example of a common resource? Briefly explain. .
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Ch 11: Public Goods and Common Resources 155. Scenario 11-3 Consider the following goods: • a fish fillet served at a restaurant; • fish in the ocean; • exotic fish in a huge aquarium in a privately-owned building. Refer to Scenario 11-3. Do any of these goods cause an externality? If so, which one(s)? Positive or negative? Briefly explain. 156. A rather large city has only one fire station, two fire trucks, and four firefighters. Is fire protection in this city characterized by rivalry in consumption? 157. Why is cable TV reception regarded as a club good? 158. Is a tornado siren excludable? Is it rival in consumption? How do we classify a tornado siren in terms of the four types of goods? 159. Is basic research excludable? Is it rival in consumption? How do we classify basic research in terms of the four types of goods? 160. Identify the externality that arises when basic research leads to new general knowledge. Is the externality positive or negative? 161. Is a congested nontoll road excludable? Is it rival in consumption? How do we classify a congested nontoll road in terms of the four types of goods? 162. In what sense is it meaningful to say that fighting poverty is a public good? 163. Is national defense excludable? Is it rival in consumption? How do we classify national defense in terms of the four types of goods? 164. Recall the four types of goods. Are national defense and a patented invention the same type of good? Briefly explain. 165. Recall the four types of goods. Are national defense and basic research the same type of good? Briefly explain. 166. In what way do public goods give rise to positive externalities? 167. Someone who uses a good without paying for it is called a ? 168. What is the main difficulty facing cost-benefit analysts when they attempt to evaluate the worthiness of proposed public projects? 169. One way to place a value on human life is to examine the risks that people voluntarily take and how much they must be paid for taking them. What is the approximate value of a human life according to studies that use this approach? 170. The mayor of Newton is considering proposals to deal with an unsafe intersection. She could install a traffic light at a cost of $50,000 or she could install stop signs at a cost of $5,000. The traffic light is expected to reduce the risk of fatality by 0.45 percent and the stop signs are expected to reduce the risk of fatality by 0.054 percent. If the value of human life is estimated to be $10 million, what choice should the mayor make? Briefly explain. .
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Ch 11: Public Goods and Common Resources 171. Drivers have to pay a toll to drive on certain roads. In essence, a toll is a corrective tax on the externality of __________. 172. Are whales excludable? Are they rival in consumption? How do we classify whales in terms of the four types of goods? 173. Why does the commercial value of ivory threaten the elephant, while the commercial value of beef protects the cow? 174. In almost all cases of common resources, the same problem arises as in the Tragedy of the __________. 175. In what way do common resources give rise to negative externalities? 176. What can the government do to solve the problem of excessive use of common resources? 177. An absence of property rights often leads to market failure. When this is the case, how does society usually solve the problem? 178. For all types of goods that are not private goods, the market fails to allocate resources efficiently because _________________. 179. Table 11-3 Rival in Consumption? Yes Excludable? Yes Excludable? No
Rival in Consumption? No
A
B
C
D
Refer to Table 11-3. The box labeled A represents what type of good? 180. Table 11-3 Rival in Consumption? Yes Excludable? Yes Excludable? No
Rival in Consumption? No
A
B
C
D
Refer to Table 11-3. The box labeled B represents what type of good? .
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Ch 11: Public Goods and Common Resources 181. Table 11-3 Rival in Consumption? Yes Excludable? Yes Excludable? No
Rival in Consumption? No
A
B
C
D
Refer to Table 11-3. The box labeled C represents what type of good? 182. Table 11-3 Rival in Consumption? Yes Excludable? Yes Excludable? No
Rival in Consumption? No
A
B
C
D
Refer to Table 11-3. The box labeled D represents what type of good? 183. Table 11-3 Rival in Consumption? Yes Excludable? Yes Excludable? No
Rival in Consumption? No
A
B
C
D
Refer to Table 11-3. A mathematical theorem is an example of general knowledge. In which of the boxes — A, B, C, or D — does a mathematical theorem belong? 184. Table 11-3 Rival in Consumption? No .
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Ch 11: Public Goods and Common Resources Rival in Consumption? Yes Excludable? Yes Excludable? No
A
B
C
D
Refer to Table 11-3. In which box — A, B, C, or D — does clean air belong? 185. Table 11-3 Rival in Consumption? Yes Excludable? Yes Excludable? No
Rival in Consumption? No
A
B
C
D
Refer to Table 11-3. In which box — A, B, C, or D — does cable TV belong? 186. Table 11-3 Rival in Consumption? Yes Excludable? Yes Excludable? No
Rival in Consumption? No
A
B
C
D
Refer to Table 11-3. To which of the boxes — A, B, C, or D — does the phenomenon of free riding most clearly apply? 187. Table 11-3 Rival in Consumption? Yes Excludable? Yes .
A
Rival in Consumption? No B Page 26
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Ch 11: Public Goods and Common Resources Excludable? No
C
D
Refer to Table 11-3. With which of the boxes — A, B, C, or D — do we associate the Tragedy of the Commons? 188. Table 11-3 Rival in Consumption? Yes Excludable? Yes Excludable? No
Rival in Consumption? No
A
B
C
D
Refer to Table 11-3. In which box — A, B, C, or D — does each of the following types of roads belong? (Consider each type of road separately.) • an uncongested toll road • an uncongested nontoll road • a congested toll road • a congested nontoll road 189. Place each of the following in the correct location in the table. Rival? Yes Excludable? Yes Excludable? No a. b. c. d. e. f. g. h. i. j. k. l. .
Private Goods Common Resources
Rival? No Club Goods Public Goods
Congested toll roads Knowledge Fish in the ocean National defense Congested nontoll roads Cable TV The environment Fire protection Ice-cream cones Uncongested toll roads Clothing Uncongested nontoll roads Page 27
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Ch 11: Public Goods and Common Resources
190. The creation of knowledge is a public good. Because knowledge is a public good, profit-seeking firms tend to freeride on the knowledge created by others and, as a result, devote too few resources to the creation of knowledge. How does the U.S. government correct for this apparent market failure? 191. Some advocates of antipoverty programs claim that fighting poverty is a public good. Describe why government intervention may be necessary to reduce poverty. 192. The government often intervenes when private markets fail to provide an optimal level of certain goods and services. For example, the government imposes an excise tax on gasoline to account for the negative externality that drivers impose on one another. Why might the private market not reach the socially optimal level of traffic without the help of government? 193. Why do wild salmon populations face the threat of extinction while goldfish populations are in no such danger?
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Ch 11: Public Goods and Common Resources Answer Key 1. a 2. c 3. d 4. c 5. c 6. b 7. c 8. d 9. d 10. d 11. a 12. a 13. c 14. b 15. b 16. a 17. d 18. c 19. d 20. d 21. b 22. a 23. c 24. d 25. b .
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Ch 11: Public Goods and Common Resources 26. d 27. d 28. c 29. b 30. b 31. d 32. b 33. a 34. a 35. d 36. b 37. d 38. c 39. d 40. d 41. b 42. a 43. d 44. c 45. d 46. c 47. c 48. a 49. d 50. c 51. d .
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Ch 11: Public Goods and Common Resources 52. a 53. c 54. b 55. b 56. c 57. b 58. b 59. a 60. c 61. c 62. d 63. b 64. d 65. d 66. b 67. c 68. a 69. c 70. b 71. c 72. d 73. a 74. d 75. c 76. b .
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Ch 11: Public Goods and Common Resources 77. True 78. False 79. True 80. False 81. True 82. False 83. False 84. False 85. False 86. True 87. True 88. True 89. True 90. True 91. False 92. False 93. True 94. False 95. True 96. False 97. True 98. True 99. True 100. False 101. True 102. True .
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Ch 11: Public Goods and Common Resources 103. False 104. True 105. True 106. True 107. False 108. True 109. False 110. False 111. True 112. True 113. False 114. True 115. True 116. True 117. True 118. False 119. True 120. True 121. False 122. False 123. True 124. True 125. False 126. False 127. True .
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Ch 11: Public Goods and Common Resources 128. True 129. True 130. False 131. False 132. True 133. False 134. False 135. price 136. In the absence of government intervention, private markets cannot ensure that goods without prices are produced and consumed in the proper amounts; that is, private markets usually lead to an inefficient allocation of resources when goods are available free of charge. 137. A good is excludable if people can be prevented from using the good. 138. As described, good x is not excludable, so it must be either a common resource or a public good. 139. A good is rival in consumption if one person’s use of the good reduces another person’s ability to use it. 140. As described, good x is rival in consumption, so it must be either a private good or a common resource. 141. No, common resources are not excludable. Yes, they are rival in consumption. 142. No, public goods are not excludable. No, they are not rival in consumption. 143. Private goods and common resources are rival in consumption. 144. Private goods and club goods are excludable. 145. Private goods and club goods are both excludable. 146. Private goods and common resources are both rival in consumption. 147. Public goods and common resources are both nonexcludable; that is, people cannot be prevented from using these goods. 148. Public goods and club goods are both nonrival in consumption; that is, one person’s use of these goods does not diminish another person’s ability to use them. 149. A firefighter’s helmet is the best example of a private good, because it is excludable and rival in consumption. 150. The beautiful mural is the best example of a public good, because it is neither excludable nor rival in consumption. 151. Fire-protection services is the best example of a club good, because it is excludable and nonrival in consumption. .
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Ch 11: Public Goods and Common Resources 152. The fish fillet served by the restaurant is the best example of a private good, because the fillet is excludable and rival in consumption. 153. The exotic fish in the huge aquarium is the best example of a club good, because the viewing of these fish is excludable and nonrival in consumption. 154. Fish in the ocean is the best example of a common resource, because they are rival in consumption and not excludable. 155. The exotic fish in the huge aquarium result in a positive externality because many people can enjoy viewing them. Consumption of fish in the ocean results in a negative externality because one person’s consumption reduces the amount available for others. 156. Fire protection in this city is somewhere between rival in consumption and nonrival in consumption. If, at any point in time, only one fire occurs, then the limited amount of equipment and personnel may be sufficient to fight the fire. However, if several fires occur simultaneously, then the limited amount of equipment and personnel will diminish the ability of some owners of houses or businesses to be protected from fire. 157. Cable TV reception is excludable, because the supplier can prevent the signal from being received by any particular customer. Cable TV reception is not rival in consumption, because one customer’s reception of programming does not reduce the ability of other customers to receive the programming. 158. A tornado siren is neither excludable nor rival in consumption, so it is a public good. 159. Basic research is neither excludable nor rival in consumption, so it is a public good. 160. Other people, besides the person(s) who engaged in the research, benefit from the new knowledge. A positive externality arises as a result. 161. A congested nontoll road is not excludable and it is rival in consumption, so it is a common resource. 162. The argument that fighting poverty is a public good rests on the idea that, even if everyone prefers living in a society without poverty, fighting poverty is not a “good” that private actions will adequately provide. In the fight against poverty, people tend to free ride on the generosity of others. 163. National defense is neither excludable nor rival in consumption, so it is a public good. 164. No. National defense is not excludable; a patented invention is excludable. 165. Yes. Both national defense and basic research are classified as public goods. 166. When one person provides a public good, other people can benefit from it; thus, a positive externality arises. 167. free rider 168. The main difficulty is that cost-benefit analysts have no market price(s) with which to evaluate proposed projects. 169. According to these studies, the value of a human life is about $10 million. (This is the number cited by Mankiw. The “correctness” of an answer, of course, is determined by instructor discretion.) .
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Ch 11: Public Goods and Common Resources 170. The mayor should install stop signs because the benefit, $5,400, exceeds the cost, $5,000. The mayor should not install a traffic light because the cost, $50,000, exceeds the benefit, $45,000. 171. congestion 172. Whales are not excludable, but they are rival in consumption, so whales are classified as common resources. 173. Elephants are a common resource, whereas cows are a private good. Poachers have a strong incentive to kill as many elephants as they can find, while ranchers have a strong incentive to maintain the cattle population on their ranches. 174. Commons 175. When one person uses a common resource, other people become worse off because there are now fewer units of the resource; thus, a negative externality arises. 176. Government can impose regulations or taxes to reduce consumption of a common resource. In some cases, government can transform the common resource into a private good. 177. The solution to the problem usually involves government intervention. Government can define property rights, regulate, tax, subsidize, or supply goods directly. 178. property rights are not well established. That is, some item of value does not have an owner with the legal authority to control it. 179. Box A represents private goods. 180. Box B represents club goods. 181. Box C represents common resources. 182. Box D represents public goods. 183. A mathematical theorem is a public good, so it belongs in box D. 184. Clean air is a common resource, so it belongs in box C. 185. Cable TV is a club good, so it belongs in box B. 186. The phenomenon of free riding is associated with public goods, so it most clearly applies to box D. 187. We associate the Tragedy of the Commons with box C, which represents common resources. 188. An uncongested toll road belongs in box B; an uncongested nontoll road belongs in box D; a congested toll road belongs in box A; and a congested nontoll road belongs in box C. 189. Rival? Yes Private Goods Excludable? Yes ∙ Ice-cream cones ∙ Clothing .
Rival? No Club Goods ∙ Fire protection ∙ Cable TV Page 36
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Ch 11: Public Goods and Common Resources ∙ Congested toll roads Common Resources ∙ Fish in the ocean Excludable? No ∙ The environment ∙ Congested nontoll roads
∙ Uncongested toll roads Public Goods ∙ National defense ∙ Knowledge ∙ Uncongested nontoll roads
190. The government assigns and protects the property rights of the producers of specific, technological knowledge through patents. The inventor will obtain much of the benefit of his invention. The U.S. government also subsidizes basic research in many different fields. 191. Eliminating poverty is not a good that the private market can provide. No single individual can solve the problem of poverty, and those who do not donate to charity can free-ride on the generosity of others. If we all prefer to live in a society without poverty, taxing the wealthy to raise the living standards of the poor may be able to make everyone better off. 192. It is possible that everyone can agree that the roads are too crowded, but no one is willing to make the sacrifice to stay home to help solve the congestion problem. The private incentive to fix the problem is small, so government policies such as tolls and gasoline taxes may improve social welfare. 193. No one owns the wild salmon, while private individuals own goldfish. The profit motive leads to different allocations of the resources. Salmon fishermen have an individual incentive to catch as many salmon as possible before someone else does. Pet shop owners have a profit incentive to breed goldfish to sell to consumers.
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Ch 12: The Economics of Healthcare
Indicate whether the statement is true or false. 1. A situation when a person engages in an activity that adversely influences the well-being of a bystander who does not receive compensation for that effect is called a negative externality. a. True b. False 2. Since buyers and sellers always neglect the external effects of their actions, their actions always result in a negative externality that results in an inefficient market outcome. a. True b. False 3. Victor vaccinates himself against COVID-19. Economists say that Victor’s action conveys a positive externality. a. True b. False 4. When the government grants a researcher a patent, it creates a monopoly on a new pharmaceutical drug. This creates a negative externality because the monopoly price is higher than the marginal cost of production. a. True b. False 5. BasilGen is a pharmaceutical research company which was granted patent for developing a vaccine against a highly contagious disease. If the government buys out BasilGen's patent, it will make the vaccine more widely available while still providing BasilGen with incentives for further research. a. True b. False 6. The annual budget of the National Institutes of Health, which funds medical research, is over $40 billion. By subsidizing medical research the government inevitably creates negative externality. a. True b. False 7. The annual budget of the National Institutes of Health, which funds medical research, is over $40 billion. The government will create a positive externality by subsidizing medical research if the benefits from the funded research exceed the cost of the research. a. True b. False 8. In the healthcare market consumers (patients) always know exactly what product they need to buy. a. True b. False 9. The need for government regulations of the healthcare market such as the requirement for health professionals to have licenses to practice is largely caused by the inability of healthcare consumers to monitor the quality of the product they are buying. a. True b. False .
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Ch 12: The Economics of Healthcare 10. The tendency of a person who is imperfectly monitored to engage in dishonest or undesirable behavior is called moral hazard. a. True b. False 11. The tendency of a person who is imperfectly monitored to engage in dishonest or undesirable behavior is called adverse selection. a. True b. False 12. The tendency for the mix of unobserved attributes to become undesirable from the standpoint of uninformed party is called adverse selection. a. True b. False 13. The tendency for the mix of unobserved attributes to become undesirable from the standpoint of uninformed party is called moral hazard. a. True b. False 14. BasilGen is a pharmaceutical research company which was granted patent for developing a vaccine against a highly contagious disease. If the government buys out BasilGen's patent, it will raise the price of the vaccine, reduce consumption of the vaccine, and lead to inefficiency as measured by the deadweight loss. a. True b. False 15. Healthcare-as-a-right paradigm maintains that healthcare is like food as it is essential to survive. a. True b. False 16. Canada and England, the government runs the healthcare systems, financed mostly by taxes. a. True b. False 17. Canada and England, most people have private health insurance, often through their employers. a. True b. False 18. In the United States, most people have private health insurance, often through their employers. a. True b. False 19. In the United States, the government runs the healthcare systems, financed mostly by taxes. a. True b. False .
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Ch 12: The Economics of Healthcare 20. Figure 12-1. U.S. Life Expectancy, 1900-2020 (Source: Centers for Disease Control and Prevention)
Refer to Figure 12-1. Since 1900, life expectancy has increased substantially. a. True b. False 21. Figure 12-1. U.S. Life Expectancy, 1900-2020 (Source: Centers for Disease Control and Prevention)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-1.Since the flu pandemic of 1918, U.S. life expectancy has been declining steadily. a. True b. False 22. Figure 12-1. U.S. Life Expectancy, 1900-2020 (Source: Centers for Disease Control and Prevention)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-1.Since the World War II, U.S. life expectancy has been declining steadily. a. True b. False 23. Figure 12-1. U.S. Life Expectancy, 1900-2020 (Source: Centers for Disease Control and Prevention)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-1. U.S. life expectancy has been declining steadily due to the opioid epidemic. a. True b. False 24. The economist William Baumol pointed out that productivity in the healthcare section does not change much over time. The only way to explain the rising healthcare prices is through inflated costs of health services. a. True b. False 25. The Baumol’s cost disease phenomenon explain why U.S. live expectancy has been rising for the past century. a. True b. False 26. Figure 12-2. Health Spending as a Share of GDP: International Comparison, 2019. (Source: The World Bank. Data are for 2019)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-2. Most developed nations spend 9 to 12 percent of GDP on healthcare, while the United States spends about 17 percent. a. True b. False 27. Figure 12-2. Health Spending as a Share of GDP: International Comparison, 2019. (Source: The World Bank. Data are for 2019)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-2. Most developed nations spend 17 percent of GDP on healthcare, while the United States spends about 9 percent. a. True b. False 28. Figure 12-2. Health Spending as a Share of GDP: International Comparison, 2019. (Source: The World Bank. Data are for 2019)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-2. Healthcare spending in Canada, France, and Japan is higher than in the U.S. a. True b. False 29. Figure 12-2. Health Spending as a Share of GDP: International Comparison, 2019. (Source: The World Bank. Data are for 2019)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-2. Healthcare spending in Canada, France, and Japan is lower than in the U.S. a. True b. False 30. Figure 12-3. Out-of-Pocket Spending as a Share of Total Personal Health Spending, 1960-2020. (Source: Centers for Medicare & Medicaid Services)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-3. The share of U.S. personal healthcare that households pay for themselves has declined over time. Some economists believe that the U.S. health system has become too reliant on health insurance, which exacerbates the moral hazard problem. a. True b. False 31. Figure 12-3. Out-of-Pocket Spending as a Share of Total Personal Health Spending, 1960-2020. (Source: Centers for Medicare & Medicaid Services)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-3. The share of U.S. personal healthcare that households pay for themselves has increased over time. Some economists believe that employees have an incentive to bargain for more generous health insurance. a. True b. False
Indicate the answer choice that best completes the statement or answers the question. 32. Which of the following is a feature of the market for healthcare? a. Buyers may not know what product they need to buy. b. Buyers have a very good idea of what product they need to buy. c. Sellers always receive payments directly from buyers. d. Prices and allocation of resources are guided by the forces of supply and demand. 33. Which of the following is a feature of the market for healthcare? a. Producers always receive payments directly from sellers. b. Consumers always have a very good idea of what product they need to buy. c. Producers are often paid a third party rather than directly by buyers. d. Prices and allocation of resources are guided by the forces of supply and demand. 34. Which of the following is a feature of the market for healthcare? a. Buyers pay sellers directly. b. Buyers always have a very good idea of what product they want to buy. c. The main interested parties are the buyers and sellers. .
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Ch 12: The Economics of Healthcare d. The allocation of resources can be highly inefficient. 35. An example of a positive externality is a. Anna turning on music so loud that all neighbors can listen to it. b. Marco biking to work instead of driving in an attempt to reduce air pollution. c. a toy factory dumping its waste into a river flowing through a city. d. Oakley smoking a pipe while walking in a neighborhood park every afternoon. 36. An example of a positive externality is a. Ben dog sitting for neighbors for below the minimum wage per hour. b. Marco driving to work instead of biking in an attempt to save time. c. a toy factory dumping its waste into a river flowing through a city. d. Alex planting flowers in the front yard. 37. An example of a positive externality is a. Ishaan house sitting for below the minimum wage. b. Inaya, Jai, and Amar carpooling to work. c. a farmer increasing the use of antibiotics to treat livestock. d. Alejandro building a high fence around a beautiful garden. 38. An example of negative externality is a. Ishaan house sitting for below the minimum wage. b. Inaya, Jai, and Amar carpooling to work. c. a farmer increasing the use of antibiotics to treat livestock. d. Savitha volunteering in a community garden. 39. An example of negative externality is a. Benjamin smoking on the front porch in a busy neighborhood every afternoon. b. Inaya biking to work instead of carpooling with Jai and Amar. c. Francisco hiring Sasha as an assistant tennis coach for above minimum wage. d. Savitha growing apples in a community garden and selling them to Marco. 40. An example of a negative externality is a. Mia dog sitting for neighbors for above the minimum wage per hour. b. Dakota biking to work instead of driving. c. a toy factory dumping its waste into a river flowing through a city. d. Phoenix planting flowers in the front yard. 41. The reason for an inefficiency in the market for healthcare is because a. the market forces of supply and demand not always result in equilibrium. b. patients and healthcare providers may neglect the external effect of their actions. c. there are not enough healthcare providers. d. patience may not have health insurance.
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Ch 12: The Economics of Healthcare 42. Gia's refusing to vaccination against a highly contagious infectious disease is an example of a. a positive externality. b. a negative externality. c. a moral hazard. d. a market failure. 43. Shuchang's vaccination against a highly contagious infectious disease is an example of a. a positive externality. b. a negative externality. c. a moral hazard. d. a market failure. 44. One of the reasons why people refuse vaccination against infectious disease is because a. it results in a positive externality. b. it results in a negative externality. c. vaccination is costly. d. it involves risk aversion. 45. The government can increase the number of vaccinated people by a. imposing a higher tax rate on unvaccinated people. b. denying healthcare to unvaccinated people. c. by encouraging vaccinations through media campaigns and incentives. d. publicly shaming unvaccinated people. 46. The government can increase the number of vaccinated people by a. imposing a higher tax rate on unvaccinated people. b. subsidizing production and distribution of vaccines. c. denying healthcare to unvaccinated people. d. publicly shaming unvaccinated people. 47. A temporary monopoly is a way for a. the government to incentivize a medical research in a particular area. b. medical researchers in a highly important area to reduce the price they charge for their discoveries. c. the government to increase risk aversion. d. health care providers to treat more patients. 48. The government patent allows medical researchers to a. enjoy a natural monopoly. b. profit from a temporary monopoly. c. reduce risk aversion. d. lower the price of their discoveries. 49. The government patent for new pharmaceutical drugs may not be an efficient approach to internalize the externality because a. it reduces moral hazard. .
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Ch 12: The Economics of Healthcare b. the monopoly price is higher than the marginal cost of production. c. the monopoly price equals the marginal cost of production. d. the monopoly price is lower than the marginal cost of production. 50. The government should directly subsidize medical research a. even is the positive externalities from the research fall short of the cost of the research, including the deadweight losses from taxation. b. if researchers do not collude to form a monopoly. c. if the positive externalities from the research exceed the cost of the research, including the deadweight losses from taxation. d. if the subsidy does not require raising taxes. 51. Douglas Norton is a young physician. To practice medicine, he needs a. to go to the job market. b. to create a social media account. c. to acquire a medical license. d. to receive an FDA approval. 52. To work as a nurse, Mateo Lopez needs to a. be at least 21 years old. b. acquire a medical license. c. volunteer at a local hospital. d. receive an FDA approval. 53. Marina Liu is a dentist. To be able to practice medicine, Marina needs to a. obtain a medical license. b. obtain an FDA approval. c. create a social media account. d. serve at least 100 hours as a volunteer at a free dental clinic. 54. To ensure quality of medical services, the government requires all physicians, dentists and nurses to a. have perfect health. b. obtain FDA approvals. c. volunteer at free clinics. d. obtain medical licenses. 55. To ensure quality of new pharmaceutical drugs, the government requires all drugs to a. be cheaper than $25 per unit. b. obtain FDA approvals. c. be free of side effects. d. be administered at special clinics. 56. The Food and Drug Administration (FDA) oversees a. the licensing of new physicians, dentists, and nurses, b. the testing and release of new pharmaceutical drugs. .
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Ch 12: The Economics of Healthcare c. pricing of new pharmaceutical drugs. d. creation of new medical programs. 57. According to some economists, opening new medical schools is too problematic, which a. is beneficial for society as ultimately it allows to control the cost of healthcare. b. limits the number of doctors, increases their salaries, and ultimately inflates the cost of healthcare. c. allows to divert more resources to medical research. d. increases the number of medical administrators. 58. Some economists compare the medical profession to a. a free market. b. a temporary monopoly. c. a monopoly. d. a cartel. 59. Zhao, a risk averse person, is offered $1,000 with certainty or to receive $500 or $1,500 with a 50-50 probability. Zhao will a. renegotiate. b. prefer to gamble. c. refuse the deal altogether. d. prefer $1,000 with certainty. 60. Suppose Zhao is offered $1,000 with certainty or to receive $500 or $1,500 with a 50-50 probability. If Zhao prefers $1,000, Zhao is a. a risk-averse person. b. a risk-loving person. c. a risk-neutral person. d. a smart person. 61. Risk aversion is defined as a. indifference to risk. b. a dislike of uncertainty. c. a preference to risk. d. an opportunistic behavior. 62. Consider an imaginary country of Farma with a population of 10,000 people. Suppose that a serious disease affects 5% of the population. The treatment costs $10,000. Given that all citizens are risk-averse, how much is likely to be their insurance payment? a. $10,000. b. $500. c. $5,000. d. $50. 63. Consider an imaginary country of Florin with a population of 15,000 people. Suppose that a serious disease affects 3% of the population. The treatment costs $2,000. Given that all citizens are risk-averse, how much is likely to be their .
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Ch 12: The Economics of Healthcare insurance payment? a. $2,000. b. $0. c. $60. d. $1,500. 64. Consider an imaginary country of Avedin with a population of 5,000 people. Suppose that a serious disease affects 4% of the population. The treatment costs $7,000. Given that all citizens are risk-averse, how much is likely to be their insurance payment? a. $280. b. $0. c. $7,000. d. $5,500. 65. Consider an imaginary country of Derry with a population of 20,000 people. Suppose that a serious disease affects 2% of the population. The treatment costs $5,000. Given that all citizens are risk-averse, how much is likely to be their insurance payment? a. $5,000. b. $0. c. $4,000. d. $100. 66. A situation in which one party engages in risky behavior because it knows the other party bears the economic consequences of their behavior is called a. risk aversion. b. moral hazard. c. adverse selection. d. negative externality. 67. Adverse selection is a situation in which a. patients are better informed about their health than the insurance company. b. one party is less risk averse than the other party. c. patients engage in risky behavior knowing that the insurance company bears the economic consequences of their behavior. d. one party is more risk averse than the other party. 68. Mira does not have a copayment for doctor visits and tends to go to the doctor every time minor symptoms occur. This situation is called a. moral hazard. b. adverse selection. c. negative externality. d. positive externality. 69. Doctor Edith knows that Marco's insurance will cover 100% of all tests and procedures. Dr. Edith orders tests to check every minor symptom that Marco is experiencing. This situation is referred to as .
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Ch 12: The Economics of Healthcare a. malpractice. b. adverse selection. c. moral hazard. d. positive externality. 70. Health insurance companies charge patients co-payments to a. maximize positive externality. b. reduce moral hazard. c. minimize adverse selection. d. minimize negative externality. 71. To reduce moral hazard, health insurance companies a. pick up the entire cost of a doctor visit. b. reduce the mix of undesirable attributes in patients. c. charge patients co-payments. d. charges every patient the same price. 72. A situation in which one party engages in risky behavior because it knows the other party bears the economic consequences of their behavior is called a. risk aversion. b. moral hazard. c. adverse selection. d. negative externality. 73. When insurance companies raise prices, a. the most unhealthy people tend to drop coverage. b. the most risk averse people tend to buy insurance policies. c. the least risk averse people tend to buy insurance policies. d. the healthiest people tend to drop coverage. 74. A situation in which one party has the mix of unobserved attributes that are undesirable from the standpoint of an uninformed party is called a. risk aversion. b. moral hazard. c. adverse selection. d. negative externality. 75. The Affordable Care Act signed by President Obama in 2010 and often called “Obamacare” a. forced the healthiest patients to forgo coverage by increasing insurance premiums to everyone. b. prevented health insurance companies from charging more to cover people with pre-existing medical conditions. c. allowed health insurance companies charge more to cover people with pre-existing medical conditions. d. reduced adverse selection by decreasing the insurance premiums to everyone. 76. The Affordable Care Act signed by President Obama in 2010 and often called “Obamacare” .
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Ch 12: The Economics of Healthcare a. forced the healthiest patients to drop coverage by increasing insurance premiums to everyone. b. required all Americans to buy health insurance and imposed a financial penalty on those who did not. c. allowed health insurance companies charge more to cover people with pre-existing medical conditions. d. reduced moral hazard by decreasing the insurance premiums to everyone. 77. The Affordable Care Act signed by President Obama in 2010 and often called “Obamacare” a. forced the healthiest patients to drop coverage by increasing insurance premiums to everyone. b. reduced moral hazard by decreasing the insurance premiums to everyone. c. allowed health insurance companies charge more to cover people with pre-existing medical conditions. d. increased the number of healthy people buying insurance. 78. The Affordable Care Act signed by President Obama in 2010 and often called “Obamacare” a. forced the healthiest patients to drop coverage by increasing the insurance premiums to everyone. b. reduced moral hazard by lowering the cost of insurance. c. reduced the problem of adverse selection and lowered the cost of insurance. d. allowed health insurance companies charge more to cover people with pre-existing medical conditions. 79. The Affordable Care Act signed by President Obama in 2010 and often called “Obamacare” resulted in a. people without pre-existing conditions subsidizing people with them. b. reduced the problem of moral hazard by lowering the cost of insurance. c. reduced the problem of adverse selection by increasing the cost of insurance. d. people with pre-existing medical conditions paying higher premiums. 80. In the United States, people aged 65 years and older are covered by a. Medicare. b. Medicaid. c. private health insurance. d. the Affordable Care Act. 81. In the United States, people with low income are covered by a. Medicare. b. Medicaid. c. private health insurance. d. the Affordable Care Act. 82. In the United States, former members of the military are covered by a. Medicare. b. Medicaid. c. the Veterans Health Administration. d. the Affordable Care Act. 83. In Canada, the healthcare system is run by a. Medicare. b. Medicaid. .
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Ch 12: The Economics of Healthcare c. private health insurance. d. the government. 84. In a single-payer insurance system the payment for healthcare is a. financed by the premiums people pay for their coverage. b. part of the tax system. c. financed by people's employers. d. paid by the healthiest part of population. 85. If the insurer is a private company, healthcare is a. financed by the premiums people pay for their coverage. b. part of the tax system. c. financed by people's employers. d. paid by the healthiest part of population. 86. Life expectancy measures a. how long our parents will live, on average. b. how long our children will live, on average, if they faced current mortality rates at every age. c. how long an average person would live given the state of the health care. d. how long people born today would live, on average, if they faced current mortality rates at every age. 87. Over the past century, life expectancy has a. decreased largely due to COVID-19 pandemic. b. increased largely due to a decline in infant morality. c. increased due to access to Medicare. d. increased largely due to the Affordable Care Act. 88. Rapid development of effective COVID-19 vaccines was possible due to a. access to Medicare. b. access to Medicaid. c. the Affordable Care Act. d. advances in medical technology. 89. "Baumol’s cost disease" is the term that explains a. a reduction in life expectancy due to COVID-19 pandemic. b. a reduction in life expectancy due to the flu pandemic of 1918. c. the rise of wages for jobs that have experienced low productivity growth. d. a steep reduction in the consumption of cigarettes per person in the second half of the 20th century. 90. Overall increase in wages in sectors with low productivity growth is called a. a positive externality b. Baumol’s cost disease. c. a negative externality. d. Cadillac tax. .
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Ch 12: The Economics of Healthcare 91. Since the mid 20th century, healthcare spending as a percentage of GDP in the United States a. shows strong positive growth. b. shows strong negative growth c. remains constant. d. decreased until the early 2000s and then started to increase. 92. Since the mid 20th century, healthcare spending as a percentage of GDP in the United States a. remains constant which is explained in part by Baumol’s cost disease. b. shows strong negative growth which is explained in part by falling birth rates. c. shows strong positive growth which is explained in part by rising costs of treatment. d. decreased until the early 2000s and then started to increase which is explain in part by Baumol’s cost disease. 93. Since the mid 20th century, healthcare spending as a percentage of GDP in the United States a. remains constant which is explained in part by Baumol’s cost disease. b. shows strong positive growth which is explained in part by falling birth rates. c. shows strong negative growth which is explained in part by rising costs of treatment. d. decreased until the early 2000s and then started to increase which is explain in part by Baumol’s cost disease. 94. Since the mid 20th century, healthcare spending as a percentage of GDP in the United States a. shows strong positive growth which is explained in part by Baumol’s cost disease. b. shows strong positive growth which is explained in part by rising birth rates. c. shows strong negative growth which is explained in part by rising costs of treatment. d. decreased until the early 2000s and then started to increase which is explain in part by Baumol’s cost disease. 95. Figure 12-1. U.S. Life Expectancy, 1900-2020 (Source: Centers for Disease Control and Prevention)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-1. In 1900, U.S. life expectancy was approximately a. 40 years. b. 47 years. c. 68 years. d. 79 years. 96. Figure 12-1. U.S. Life Expectancy, 1900-2020 (Source: Centers for Disease Control and Prevention)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-1. In 1950, U.S. life expectancy was approximately a. 40 years. b. 47 years. c. 68 years. d. 79 years. 97. Figure 12-1. U.S. Life Expectancy, 1900-2020 (Source: Centers for Disease Control and Prevention)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-1. In 2019, U.S. life expectancy was approximately a. 40 years. b. 47 years. c. 68 years. d. 79 years. 98. Figure 12-2. Health Spending as a Share of GDP: International Comparison, 2019. (Source: The World Bank. Data are for 2019)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-2. Which of the following countries spends the most on healthcare as a percentage of GDP? a. Canada b. France c. Japan d. The United States 99. Figure 12-2. Health Spending as a Share of GDP: International Comparison, 2019. (Source: The World Bank. Data are for 2019)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-2. How much do most developed nations spend on healthcare as percentage of GDP? a. Less than 10 percent b. From 9 to 12 percent c. Approximately 17 percent d. Over 12 percent 100. Figure 12-2. Health Spending as a Share of GDP: International Comparison, 2019. (Source: The World Bank. Data are for 2019)
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Ch 12: The Economics of Healthcare
Refer to Figure 12-2. How much does the United States spend on healthcare as percentage of GDP? a. Less than 10 percent b. From 9 to 12 percent c. Approximately 17 percent d. Over 12 percent 101. Which is a popular argument among critics of the U.S. health system? a. Administrative costs are too high because of the government involvement in healthcare. b. Costs of healthcare could be reduced significantly by shifting to a government-financed single-payer system. c. Private insurance companies should receive tax break in order to reduce their costs and ultimately the premiums they charge. d. The government should incentivize citizens to lead a healthier life style instead of spending on healthcare. 102. Which is a popular argument among the defenders of the U.S. health system? a. Administrative costs are too high because of the government involvement in healthcare. b. Costs of healthcare could be reduced significantly by shifting to a government-financed single-payer system. c. Private insurance companies should receive tax break in order to reduce their costs and ultimately the premiums they charge. d. The international differences observed in health data reflect differing approaches to diet and exercise. 103. Which is a popular argument among critics of the U.S. health system? a. Administrative costs are too high because of the government involvement in healthcare. b. Costs of healthcare will rise significantly by shifting to a government-financed single-payer system. .
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Ch 12: The Economics of Healthcare c. The U.S. government should follow undertake more aggressive regulatory policies to reduce drug prices. d. The government should incentivize citizens to lead a healthier life style instead of spending on healthcare. 104. Which is a popular argument among the defenders of the U.S. health system? a. The U.S. government should undertake more aggressive regulatory policies to reduce drug prices. b. Costs of healthcare could be reduced significantly by shifting to a government-financed single-payer system. c. Private insurance companies should receive tax break in order to reduce their costs and ultimately the premiums they charge. d. Countries with low drug prices are free-riding on the research that is largely financed by higher prices in the United States. 105. Figure 12-3. Out-of-Pocket Spending as a Share of Total Personal Health Spending, 1960-2020. (Source: Centers for Medicare & Medicaid Services)
Refer to Figure 12-3. What was the percentage of spending on personal healthcare that is paid out of pocket in the United States in 1960? a. 13 percent b. 55 percent c. 45 percent d. 87 percent
106. The Affordable Care Act tried to remedy this problem by levying a so-called “Cadillac tax” on especially expensive employer-provided health plans. In your own words, explain the meaning of the "Cadillac tax." .
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Ch 12: The Economics of Healthcare 107. Figure 12-4.
Refer to Figure 12-4. Explain why panel (b) is a better illustration of the healthcare market than panel (a). 108. Figure 12-4.
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Ch 12: The Economics of Healthcare
Refer to Figure 12-4. In your own words, explain the differences between a typical market for goods and services and the market for healthcare services. 109. Figure 12-4.
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Ch 12: The Economics of Healthcare
Refer to Figure 12-4. Explain the rules guiding the market for healthcare services. (Hint: Be sure to describe three sets of rules.) 110. Describe the pros and cons of a private insurance system, as well as a single-payer system. 111. Explain how adverse selection can lead to a phenomenon known as the death spiral. (Hint: be sure to define the concept of adverse selection.) 112. Scenario 12-1. The following table shows expected healthcare costs for the coming year for five types of people in equal numbers with different pre-existing health problems. The companies need to cover the average cost plus a normal profit of $700. Assume that the companies must charge all consumers the same price. Consumers will forgo insurance if its price exceeds their own expected healthcare costs by more than $500. Cost Type (Dollars) A 1,000 B 2,000 C 3,000 D 4,000 E 5,000 Refer to Scenario 12-1. Explain what effect charging all consumers the same price of insurance will have on the healthcare market. Be sure to calculate average costs, the insurance prices, and the death spiral.
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Ch 12: The Economics of Healthcare Answer Key 1. True 2. False 3. True 4. True 5. True 6. False 7. True 8. False 9. True 10. True 11. False 12. True 13. False 14. False 15. True 16. True 17. False 18. True 19. False 20. True 21. False 22. False 23. False 24. True 25. False .
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Ch 12: The Economics of Healthcare 26. True 27. False 28. False 29. True 30. True 31. False 32. a 33. c 34. d 35. b 36. d 37. b 38. c 39. a 40. c 41. b 42. b 43. a 44. c 45. c 46. b 47. a 48. b 49. b 50. c 51. c .
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Ch 12: The Economics of Healthcare 52. b 53. a 54. d 55. b 56. b 57. b 58. c 59. d 60. a 61. b 62. b 63. c 64. a 65. d 66. b 67. a 68. a 69. c 70. b 71. c 72. b 73. d 74. c 75. b 76. b .
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Ch 12: The Economics of Healthcare 77. d 78. c 79. a 80. a 81. b 82. c 83. d 84. b 85. a 86. d 87. b 88. d 89. c 90. b 91. a 92. c 93. b 94. a 95. b 96. c 97. d 98. d 99. b 100. c 101. b 102. d .
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Ch 12: The Economics of Healthcare 103. c 104. d 105. b 106. Many economists believe that Since the U.S. income tax system gives preferential treatment to employer-provided health insurance, employees have an incentive to bargain for more expensive health insurance than they otherwise would, reducing the amount of healthcare they pay out of pocket. A “Cadillac tax” on especially expensive employer-provided health plans would have leveled the playing field between paying workers in the form of cash compensation and paying them in the form of generous health insurance. 107. Providers of medical services are not paid directly by patients. Patients pay money to insurers in the form of either a premium or taxes. The insurers use this money to compensate the providers, who in turn provide medical services to the patients. 108. In a typical market, shown in panel (a), sellers deliver a good or service to buyers, who pay sellers a marketdetermined price. In the healthcare market, shown in panel (b), providers deliver healthcare to patients, but providers are paid by insurers (either the government or private companies). This arrangement requires rules for financing, access, and payment. 109. There are three sets of rules regarding financing, access, and payment guiding the healthcare markets: 1) Financing. If the insurer is the government, the payment for healthcare is part of the tax system. If the insurer is a private company, healthcare is financed by the premiums people pay for their coverage. Although the premium is set in the insurance market, federal governments may limit the extent to which companies can price differentiate based on age, gender, and pre-existing conditions. 2) Patients’ access to healthcare. Since insured do not pay the full cost of each medical services, there is the moral hazard problem. The insurer establishes rules that ration the use of medical services based on estimated costs and benefits. For example, a routine checkup no more than once a year, referral requirement from a general practitioner access a specialist. 3) Payments from insurers to providers. These rules establish what treatment will be covered by insurers. If an insurer believes that a treatment is too expensive or unnecessary it may refuse to covet and as a result, providers will not offer patients the service. For example, most cosmetic procedures require that the patient pays the full cost of the procedure. 110. Some economists believe that private insurance companies are inefficient and tend to put profit ahead of people. If the insurer is a private company, healthcare is financed by the premiums people pay for their coverage. The premium is set in the insurance market, which bases price on costs. Others believe that in a single-payer system in which the government pays for healthcare for everyone out of tax revenue, similar to Medicare, any person can have insurance instead of purchasing private insurance. This will allow to reduce administrative inefficiency, eliminate wasteful treatment, lower costs, and allocate healthcare resources relatively more equitably. 111. Generally, adverse selection refers to a situation when one negotiating party has valuable information another lacks. In the market for health, this is usually a situation when high-risk (or sicker-than-average) individuals obtain insurance. Adverse selection may result in a death spiral is an insurance company charges everyone the same price based on the health characteristics of the average person. The healthiest people may decide that insurance is not worth the cost and drop out of the insured pool. With a sicker-than-expected group of customers, the company has higher costs and must therefore raise .
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Ch 12: The Economics of Healthcare the price of insurance. The price increase then induces the next healthiest group of people to drop insurance coverage, driving up the cost and price again. As this process continues, more people drop coverage, the insured pool gets less healthy, and the price keeps rising. In the end, the insurance market may disappear. 112. If all five types of people buy health insurance, the average cost of healthcare is equal to ($1,000 + $2,000 +$3,000 + $4,000 + $5,000) / 5 = $3,000. The companies need to cover this average cost, plus a normal profit) of $700. Assuming the companies charge all consumers the same price, this price is $3,000 + $700 = $3,700. We know that consumers will forgo insurance if its price exceeds their own expected healthcare costs by more than $500. Since the price is the same for everyone and is equal to $3,700, only people in groups D and E will purchase the insurance under the given conditions. For groups D and E, the average price is ($4,000 + $5,000) / 2 = $4,500. To make a normal profit, the companies will charge $4,500 + $700 = $5,200. Therefore, consumers in group D will have to opt out. The remaining group E will buy insurance at at price no higher than $5,000 + $500 = $5,500. However, the insurance companies would want to charge $5,000 + $700 = $5,700 to make a normal profit. Ultimately, none will buy insurance and the healthcare market will cease to exist. This is the logic of a phenomenon known as the death spiral, when adverse selection results in a dissipation of the market. If the insurance companies charged the price based on the group characteristics, the death spiral could be avoided.
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Ch 13: The Design of the Tax System
Indicate the answer choice that best completes the statement or answers the question. 1. Which of the following statements is correct? a. Equity is more important than efficiency as a goal of the tax system. b. Efficiency is more important than equity as a goal of the tax system. c. Both equity and efficiency are important goals of the tax system. d. Neither equity nor efficiency is an important goal of the tax system. 2. Citizens expect the government to provide various goods and services making taxes a. inefficient. b. equitable. c. inevitable. d. intolerable. 3. Of the following countries, which country's government collects the largest amount of tax revenue as a percentage of that country's total income? a. Denmark b. United States c. Canada d. Greece 4. The U.S. tax burden is a. about the same as most European countries. b. higher than most European countries. c. lower than most European countries. d. higher than all European countries. 5. The U.S. federal government collects about a. one-third of the taxes in our economy. b. one-half of the taxes in our economy. c. two-thirds of the taxes in our economy. d. three-fourths of the taxes in our economy. 6. In 2020, the size of the U.S. population was 331 million and total receipts of the federal government that year were $3.7 trillion. This means that the average American paid to the federal government a. $8,800. b. $10,012. c. $1,069. d. $11,069. 7. A family's income tax liability is a. a standard percentage of all income earned. b. determined by wage income rather than dividend and interest income. c. based on total taxable income. .
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Ch 13: The Design of the Tax System d. constant from year to year. 8. Which of the following is an example of a payroll tax? a. A tax on the wages that a firm pays its workers b. A "sin" tax on distilled alcohol c. A tax on corporate profits d. The portion of federal income taxes earmarked to pay for national defense 9. Corporate profits distributed as dividends are a. tax free. b. taxed once. c. taxed twice. d. taxed three times. 10. Which of the following are taxed? a. Both corporate profits and dividends shareholders receive b. Corporate profits but not dividends shareholders receive c. Dividends shareholders receive but not corporate profits d. Neither corporate profits nor dividends shareholders receive 11. Taxes on specific goods such as gasoline and alcoholic beverages are called a. excise taxes. b. payroll taxes. c. sales taxes. d. social insurance taxes. 12. The revenue that the federal government collects from payroll taxes is mostly earmarked to pay for a. national defense and income security (welfare) programs. b. national defense and Medicare. c. Social Security and public schools. d. Social Security and Medicare. 13. The government's health plan for the elderly is called a. Medicaid. b. Medicare. c. Social Security. d. Food Supplement Program. 14. The federal healthcare spending program that specifically targets the needy is called a. Medicaid. b. Medicare. c. National Institutes of Health. d. Blue Cross/Blue Shield.
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Ch 13: The Design of the Tax System 15. In 2020, federal government collected $3.66 trillion in taxes. Which of the following correctly rank the sources of federal government tax revenue from large to small? a. Personal income taxes, corporate income taxes, social insurance taxes. b. Social insurance taxes, personal income taxes, corporate income taxes. c. Personal income taxes, social insurance taxes, corporate income taxes. d. Corporate income taxes, social insurance taxes, personal income taxes. 16. As the economy's income has grown, the government has a. grown at about the same pace. b. grown at a faster pace. c. grown at a slower pace. d. shrunk. 17. When a state levies a sales tax, the tax a. is paid only by the state's residents. b. occasionally excludes items that are deemed to be necessities. c. is commonly levied on labor services. d. applies to wholesale purchases but not retail purchases. 18. State and local governments a. use a mix of taxes and fees to generate revenue. b. are required by federal mandate to levy income taxes. c. are required to tax property at a standard rate set by the federal government. d. must tax wages more heavily than interest and dividend income. 19. A tax levied on the total amount spent in retail stores is called a. a sales tax. b. an excise tax. c. a retail tax. d. an income tax. 20. Suppose Ron is willing to pay $200 to see a professional basketball game and Felix is willing to pay $150. Assume the normal price of a ticket is $125. The local government decides to impose a $35/ticket surcharge to raise revenue, causing the ticket price to rise to $160.The resulting deadweight loss is a. $75. b. $25. c. $35. d. $150. 21. One tax system is less efficient than another if it a. places a lower tax burden on lower-income families than on higher-income families. b. places a higher tax burden on lower-income families than on higher-income families. c. raises the same amount of revenue at a higher cost to taxpayers. d. raises less revenue at a lower cost to taxpayers. .
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Ch 13: The Design of the Tax System 22. An efficient tax system is one that imposes small a. deadweight losses and administrative burdens. b. marginal rates and deadweight losses. c. administrative burdens and transfers of money. d. marginal rates and transfers of money. 23. When the government taxes labor earnings, people usually a. work more so they can keep the same standard of living. b. work less and enjoy more leisure. c. quit their present job and find one that pays better. d. stop working altogether and go on welfare. 24. Deadweight losses represent the a. inefficiency that taxes create. b. shift in benefit from producers to consumers. c. part of consumer and producer surplus that is now revenue to the government. d. increase in revenue to the government. 25. One reason that deadweight losses are so difficult to avoid is that a. taxes affect the decisions that people make. b. income taxes are not paid by everyone. c. consumption taxes must be universally applied to all commodities. d. the administrative burden is hard to calculate. 26. In the absence of taxes, Carlos would prefer to purchase a large fishing boat with a 75 hp motor. The government has recently decided to place a tax on boats with 75 hp motors or higher. If Carlos decides to purchase a smaller boat with a 50 hp motor as a result of the tax, which of the following statements is correct? a. Other people who choose to purchase large boats will incur the cost of the deadweight loss of the tax. b. There are no deadweight losses as long as some people still choose to purchase large boats. c. The deadweight loss will decrease as a result of an increases in Carlos's consumer surplus. d. Carlos is worse off, and his loss of welfare is part of the deadweight loss of the tax. 27. Athos, Porthos, and Aramis each like to take fencing lessons. The price of a fencing lesson is $11. Athos values a lesson at $16, Porthos at $14, and Aramis at $12. Suppose that if the government taxes fencing lessons at $2 each, the price will rise to $13. A consequence of the tax is that consumer surplus shrinks by a. $4 and tax revenues increase by $6, so there is a deadweight loss of $2. b. $6 and tax revenues increase by $6, so there is no deadweight loss. c. $5 and tax revenues increase by $6, so there is no deadweight loss. d. $5 and tax revenues increase by $4, so there is a deadweight loss of $1. 28. Leonard, Sheldon, Raj, and Penny each like to attend comic-book conventions. The price of a ticket to a convention is $50. Leonard values a ticket at $70, Sheldon at $65, Raj at $60, and Penny at $55. Suppose that if the government taxes tickets at $5 each, the price will rise to $55. A consequence of the tax is that consumer surplus shrinks by a. $50 and tax revenues increase by $20, so there is a deadweight loss of $30. b. $30 and tax revenues increase by $20, so there is a deadweight loss of $10. .
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Ch 13: The Design of the Tax System c. $20 and tax revenues increase by $20, so there is no deadweight loss. d. $50 and tax revenues increase by $20, so there is no deadweight loss. 29. Suppose Luke values a scoop of Italian gelato at $4. Leia values a scoop of Italian gelato at $6. The pre-tax price of a scoop of Italian gelato is $2. The government imposes a tax of $3 on each scoop of Italian gelato, and the price rises to $5. The deadweight loss from the tax is a. $4, and the deadweight loss comes from both Luke and Leia. b. $4, and the deadweight loss comes only from Luke because he does not buy gelato after the tax. c. $2, and the deadweight loss comes from both Luke and Leia. d. $2, and the deadweight loss comes only from Luke because he does not buy gelato after the tax. 30. Scenario 13-1 Ken places a $20 value on a cigar, and Mark places a $17 value on it. The equilibrium price for this brand of cigar is $15. Refer to Scenario 13-1. How much total consumer surplus do Ken and Mark get when each purchases one cigar? a. $1 b. $2 c. $5 d. $7 31. Scenario 13-1 Ken places a $20 value on a cigar, and Mark places a $17 value on it. The equilibrium price for this brand of cigar is $15. Refer to Scenario 13-1. Suppose the government levies a tax of $3 on each cigar, and the equilibrium price of a cigar increases to $18. How much tax revenue is collected? a. $0 b. $2 c. $3 d. $6 32. Scenario 13-1 Ken places a $20 value on a cigar, and Mark places a $17 value on it. The equilibrium price for this brand of cigar is $15. Refer to Scenario 13-1. Suppose the government levies a tax of $3 on each cigar, and the equilibrium price of a cigar increases to $18. What is total consumer surplus after the tax is levied? a. $0 b. $2 c. $5 d. $6 33. Scenario 13-1 Ken places a $20 value on a cigar, and Mark places a $17 value on it. The equilibrium price for this brand of cigar is $15. Refer to Scenario 13-1. Suppose the government levies a tax of $3 on each cigar, and the equilibrium price of a cigar increases to $18. Because total consumer surplus has a. fallen by more than the tax revenue, the tax has a deadweight loss b. fallen by less than the tax revenue, the tax has no deadweight loss. c. fallen by exactly the amount of the tax revenue, the tax has no deadweight loss. .
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Ch 13: The Design of the Tax System d. increased by less than the tax revenue, the tax has a deadweight loss. 34. Scenario 13-2 Suppose Ren and Regina receive great satisfaction from their consumption of cheesecake. Regina would be willing to purchase only one slice and would pay up to $8 for it. Ren would be willing to pay $11 for his first slice, $9 for his second slice, and $5 for his third slice. The current market price is $5 per slice. Refer to Scenario 13-2. How much consumer surplus does Regina receive from consuming her slice of cheesecake? a. $3 b. $5 c. $9 d. $12 35. Scenario 13-2 Suppose Ren and Regina receive great satisfaction from their consumption of cheesecake. Regina would be willing to purchase only one slice and would pay up to $8 for it. Ren would be willing to pay $11 for his first slice, $9 for his second slice, and $5 for his third slice. The current market price is $5 per slice. Refer to Scenario 13-2. How much total consumer surplus do Regina and Ren collectively receive from consuming cheesecake? a. $3 b. $6 c. $9 d. $13 36. Scenario 13-2 Suppose Ren and Regina receive great satisfaction from their consumption of cheesecake. Regina would be willing to purchase only one slice and would pay up to $8 for it. Ren would be willing to pay $11 for his first slice, $9 for his second slice, and $5 for his third slice. The current market price is $5 per slice. Refer to Scenario 13-2. Assume that the government places a $4 tax on each slice of cheesecake and that the new equilibrium price is $9. What is Regina's consumer surplus from cheesecake? a. zero b. $2 c. $3 d. $6 37. Scenario 13-2 Suppose Ren and Regina receive great satisfaction from their consumption of cheesecake. Regina would be willing to purchase only one slice and would pay up to $8 for it. Ren would be willing to pay $11 for his first slice, $9 for his second slice, and $5 for his third slice. The current market price is $5 per slice. Refer to Scenario 13-2. Assume that the government places a $4 tax on each slice of cheesecake and that the new equilibrium price is $9. How much tax revenue will be generated from sales to Regina and Ren? a. zero b. $4 c. $8 d. $12 .
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Ch 13: The Design of the Tax System 38. Scenario 13-2 Suppose Ren and Regina receive great satisfaction from their consumption of cheesecake. Regina would be willing to purchase only one slice and would pay up to $8 for it. Ren would be willing to pay $11 for his first slice, $9 for his second slice, and $5 for his third slice. The current market price is $5 per slice. Refer to Scenario 13-2. Assume that the government places a $4 tax on each slice of cheesecake and that the new equilibrium price is $9. Which of the following statements is correct? a. Ren will bear the full burden of the deadweight loss. b. Regina will bear the full burden of the deadweight loss. c. Both Regina and Ren will share the burden of the deadweight loss. d. There will be no deadweight loss. 39. Table 13-1 Person Anna Brian Clem Dave
Value of a Weekend Ski Trip (Dollars) 150 90 75 50
Refer to Table 13-1. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual unit cost of providing a weekend of skiing. What is the value of the surplus that accrues to all four skiers from their weekend trip? a. $75 b. $105 c. $185 d. $215 40. Table 13-1 Person Anna Brian Clem Dave
Value of a Weekend Ski Trip (Dollars) 150 90 75 50
Refer to Table 13-1. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual unit cost of providing a weekend of skiing. How much consumer surplus accrues to Anna and Clem individually? a. $125 and $20 respectively b. $105 and $30 respectively c. $85 and $40 respectively d. $65 and $50 respectively 41. Table 13-1 .
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Ch 13: The Design of the Tax System
Person Anna Brian Clem Dave
Value of a Weekend Ski Trip (Dollars) 150 90 75 50
Refer to Table 13-1. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual unit cost of providing a weekend of skiing. Suppose the government imposes a tax of $12 on skiing, which raises the price of a weekend ski pass to $57. What is the value of the surplus that accrues to all four skiers from their weekend trip? a. $41 b. $95 c. $144 d. $185 42. Table 13-1 Person Anna Brian Clem Dave
Value of a Weekend Ski Trip (Dollars) 150 90 75 50
Refer to Table 13-1. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual unit cost of providing a weekend of skiing. Suppose the government imposes a tax of $12 on skiing, which raises the price of a weekend ski pass to $57. How much tax revenue is collected from these four skiers? a. $0 b. $12 c. $36 d. $48 43. Table 13-1 Person Anna Brian Clem Dave
Value of a Weekend Ski Trip (Dollars) 150 90 75 50
Refer to Table 13-1. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual unit cost of providing a weekend of skiing. Suppose the government imposes a tax of $12 on skiing, which raises the price of a .
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Ch 13: The Design of the Tax System weekend ski pass to $57. The deadweight loss associated with the tax is a. $5. b. $12. c. $36. d. $41. 44. The deadweight loss associated with a tax on a commodity is generated by a. the consumers who still choose to consume the commodity but pay a higher price that reflects the tax. b. the consumers who choose to not consume the commodity that is taxed. c. all citizens who are able to use services provided by government. d. the consumers who are unable to avoid paying the tax. 45. Many economists believe that the U.S. tax system would be made more efficient if the basis of taxation were changed so that people paid taxes, more so than they do now, based on their a. saving rather than their income. b. spending rather than their income. c. income rather than their wealth. d. wealth rather than their spending. 46. European countries tend to rely on which type of tax more so than the United States does? a. An income tax b. A lump-sum tax c. A value-added tax d. A corrective tax 47. Why do some policymakers support a consumption tax rather than an income tax? a. The average tax rate would be lower under a consumption tax. b. A consumption tax would encourage people to save earned income. c. A consumption tax would raise more revenues than an income tax. d. The marginal tax rate would be higher under an income tax. 48. A value-added tax or VAT is a tax on a. retail purchases only. b. wholesale purchases only. c. pollution. d. all stages of production of a good. 49. The U.S. income tax a. discourages saving. b. encourages saving. c. has no effect on saving. d. will reduce the administrative burden of taxation. 50. A consumption tax is a tax on a. goods but not on services. .
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Ch 13: The Design of the Tax System b. the amount of income that people spend. c. the amount of income that people earn. d. the amount of income that people save. 51. Individual Retirement Accounts and 401(k) plans make the current U.S. tax system a. less like European tax systems than it otherwise would be. b. more like a payroll tax than it otherwise would be. c. more like an income tax than it otherwise would be. d. more like a consumption tax than it otherwise would be. 52. Part of the administrative burden of a tax is a. the money people pay to the government in taxes. b. reducing the size of the market because of the tax. c. the hassle and expense of filling out tax forms that is imposed on taxpayers who comply with the tax. d. the cost of administering programs that use tax revenue. 53. Which of the following statements is correct? a. Both tax avoidance and tax evasion are legal. b. Both tax avoidance and tax evasion are illegal. c. Tax avoidance is legal, whereas tax evasion is illegal. d. Tax avoidance is illegal, whereas tax evasion is legal. 54. As tax laws become more complex, a. the administrative burden of taxes will increase. b. compliance costs are likely to decrease. c. the government will collect more in tax revenue. d. the amount of tax revenue lost to tax evasion will decrease. 55. A person's marginal tax rate equals a. their tax obligation divided by their average tax rate. b. the increase in taxes they would pay as a percentage of the rise in their income. c. their tax obligation divided by their income. d. the increase in taxes if their average tax rate were to rise by 1 percent. 56. In the United States, the marginal tax rate on individual federal income tax a. decreases as income increases. b. increases as income increases. c. is constant at all income levels. d. applies only to payroll taxes. 57. Scenario 13-3 A taxpayer faces the following tax rates on their income: 20 percent of the first $40,000 of their income; 30 percent of all their income above $40,000. .
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Ch 13: The Design of the Tax System Refer to Scenario 13-3. The taxpayer faces a marginal tax rate of a. 20 percent when her income rises from $40,000 to $40,001. b. 20 percent when her income rises from $30,000 to $30,001. c. 0 percent when her income rises from $30,000 to $30,001. d. 10 percent when her income rises from $40,000 to $40,001. 58. Scenario 13-3 A taxpayer faces the following tax rates on their income: 20 percent of the first $40,000 of their income; 30 percent of all their income above $40,000. Refer to Scenario 13-3. The taxpayer faces a. an average tax rate of 22.5 percent when her income is $30,000. b. an average tax rate of 22.0 percent when her income is $50,000. c. a marginal tax rate of 10 percent when her income rises from $40,000 to $40,001. d. a marginal tax rate of 50 percent when her income rises from $60,000 to $60,001. 59. Scenario 13-3 A taxpayer faces the following tax rates on their income: 20 percent of the first $40,000 of their income; 30 percent of all their income above $40,000. Refer to Scenario 13-3. At what level of income would the taxpayer's marginal tax rate be 30 percent and her average tax rate be 25 percent? a. $42,000 b. $57,000 c. $60,000 d. $80,000 60. If your income is $40,000 and your income tax liability is $5,000, your marginal tax rate is a. 8 percent. b. 12.5 percent. c. 20 percent. d. unknown. We do not have enough information to answer this question. 61. If we want to gauge how much the income tax system distorts incentives, we should use the a. average tax rate. b. ability-to-pay principle. c. total tax revenue collected. d. marginal tax rate. 62. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income above $40,000. What are the tax liability and the marginal tax rate for a person whose income is $50,000? a. 12 percent and 20 percent, respectively b. 12 percent and $50,000, respectively .
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Ch 13: The Design of the Tax System c. $6,000 and 12 percent, respectively d. $6,000 and 20 percent, respectively 63. Sue earns income of $80,000 per year. Her average tax rate is 50 percent. Sue paid $5,000 in taxes on the first $30,000 she earned. What was the marginal tax rate on the first $30,000 she earned, and what was the marginal tax rate on the remaining $50,000? a. 6.25 percent and 50.00 percent, respectively b. 10.00 percent and 70.00 percent, respectively c. 16.67 percent and 60.00 percent, respectively d. 16.67 percent and 70.00 percent, respectively 64. If your income is $50,000, your income tax liability is $10,000, and you paid $0.25 in taxes on the last dollar you earned, your a. marginal tax rate is 20 percent. b. average tax rate is 5 percent. c. marginal tax rate is 25 percent. d. average tax rate is 25 percent. 65. If we want to gauge the sacrifice made by a taxpayer, we should use the a. average tax rate. b. marginal tax rate. c. lump-sum tax rate. d. sales tax rate. 66. If your income is $40,000 and your income tax liability is $5,000, your a. marginal tax rate is 8 percent. b. average tax rate is 8 percent. c. marginal tax rate is 12.5 percent. d. average tax rate is 12.5 percent. 67. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income above $40,000. What is the average tax rate when income is $50,000? a. 20 percent b. 15 percent c. 12 percent d. 10 percent 68. Suppose that the government taxes income in the following fashion: 30 percent of the first $20,000, 50 percent of the next $30,000, and 60 percent of all income over $50,000. Ted earns $40,000, and Robin earns $60,000. Which of the following statements is correct? a. Ted's marginal tax rate is 60 percent, and his average tax rate is 50 percent. b. Ted's marginal tax rate is 50 percent, and his average tax rate is 40 percent. c. Robin's marginal tax rate is 50 percent, and her average tax rate is 45 percent. d. Robin's marginal tax rate is 60 percent, and her average tax rate is 40 percent. .
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Ch 13: The Design of the Tax System 69. Suppose that the government taxes income in the following fashion: 20 percent of the first $50,000, 40 percent of the next $50,000, and 60 percent of all income over $100,000. Marshall earns $200,000, and Lily earns $600,000. Which of the following statements is correct? a. Marshall's marginal tax rate is higher than Lily's marginal tax rate. b. Marshall's average tax rate is higher than his marginal tax rate. c. Lily's average tax rate is higher than her marginal tax rate. d. Lily's average tax rate is higher than Marshall's average tax rate. 70. The income tax requires that taxpayers pay 10 percent on the first $40,000 of income and 20 percent on all income over $40,000. Karen paid $6,000 in taxes. What were her marginal and average tax rates? a. 20 percent and 12 percent, respectively b. 20 percent and 15 percent, respectively c. 10 percent and 12 percent respectively d. 10 percent and 15 percent respectively 71. Table 13-2 The following table shows the marginal tax rates for unmarried individuals for two years. 2019 On Taxable Income… The Tax Rate Is… $0 to $15,000 10% $15,000 to $40,000 15% $40,000 to $75,000 20% $75,000 to $120,000 25% Over $120,000 30%
2020 On Taxable Income… The Tax Rate Is… Over $0 20%
Refer to Table 13-2. For an individual who earned $80,000 in both years, which of the following statements is true regarding the individual's marginal tax rate? a. The marginal tax rate is higher in 2020 than in 2019. b. The marginal tax rate is the same in 2020 as it was in 2019. c. The marginal tax rate is lower in 2020 than in 2019. d. With a proportional tax, as in 2020, it is not possible to determine the individual's marginal tax rate so it is not possible to compare the marginal tax rates in the two years. 72. Table 13-2 The following table shows the marginal tax rates for unmarried individuals for two years. 2019 On Taxable Income… The Tax Rate Is… $0 to $15,000 10% $15,000 to $40,000 15% $40,000 to $75,000 20% .
2020 On Taxable Income… The Tax Rate Is… Over $0 20%
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Ch 13: The Design of the Tax System $75,000 to $120,000 Over $120,000
25% 30%
Refer to Table 13-2. For an individual who earned $80,000 of taxable income in 2019, what was the individual's average tax rate in 2019? a. 12.7% b. 15.0% c. 16.1% d. 16.9% 73. Table 13-2 The following table shows the marginal tax rates for unmarried individuals for two years. 2019 On Taxable Income… The Tax Rate Is… $0 to $15,000 10% $15,000 to $40,000 15% $40,000 to $75,000 20% $75,000 to $120,000 25% Over $120,000 30%
2020 On Taxable Income… The Tax Rate Is… Over $0 20%
Refer to Table 13-2. For an individual who earned $35,000 in taxable income in both years, which of the following describes the change in the individual's marginal tax rate between the two years? a. The marginal tax rate increased from 2019 to 2020. b. The marginal tax rate decreased from 2019 to 2020. c. The marginal tax rate remained constant from 2019 to 2020. d. The change in the marginal tax rate cannot be determined for the two tax schedules shown. 74. Table 13-3 The following table presents the total tax liability for an unmarried taxpayer under four different tax schedules for the income levels shown. Income (Dollars) Tax Schedule A 50,000 10,000 100,000 30,000 200,000 80,000
.
Amount of Tax Due (Dollars) Tax Schedule B Tax Schedule C Tax Schedule D 20,000 17,500 15,000 30,000 25,000 30,000 40,000 30,000 60,000
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Ch 13: The Design of the Tax System Refer to Table 13-3. For an individual with $200,000 in taxable income, which tax schedule has the lowest average tax rate? a. Tax Schedule A b. Tax Schedule B c. Tax Schedule C d. Tax Schedule D 75. Table 13-4 United States Income Tax Rates for a Single Individual, 2018 and 2020. 2018 Tax Rates 10% 12% 22% 24% 32% 35% 37%
2020
Income Ranges $0 to $9,525 $9,525 to $38,700 $38,700 to $82,500 $82,500 to $157,500 $157,500 to $200,000 $200,000 to $500,000 Over $500,000
Tax Rates 10% 15% 22% 24% 32% 35% 37%
Income Ranges $0 to $9,875 $9,876 to $40,125 $40,126 to $85,525 $85,526 to $163,300 $163,301 to $207,350 $207,351 to $518,400 Over $518,401
Refer to Table 13-4. Zara is single with an annual taxable income of $38,000. What happened to Zara's average tax rate between 2018 and 2020? a. It decreased. b. It increased. c. It did not change. d. You do not have enough information to answer this question. 76. Table 13-5 On Taxable Income… Up to $8,375 $8,375 to $34,000 $34,000 to $82,400 $82,400 to $171,850 $171,850 to $373,650 Over $373,650
The Tax Rate Is… 10% 15% 25% 28% 33% 35%
Refer to Table 13-5. If Miss Kay has $80,000 in taxable income, then if rounded to nearest dollar, her tax liability is a. $11,581. b. $16,181. c. $20,000. .
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Ch 13: The Design of the Tax System d. $24,881. 77. Under a regressive tax system, the marginal tax rate for high income taxpayers is a. higher than the marginal tax rate for low income taxpayers. b. the same as the marginal tax rate for low income taxpayers. c. lower than the marginal tax rate for low income taxpayers. d. is unknown relative to the low income tax payer. 78. If the government imposes a tax of $3,000 on everyone, the tax would be a. an income tax. b. a consumption tax. c. a lump-sum tax. d. a marginal tax. 79. Under a progressive tax system, the marginal tax rate could be equal to the average tax rate only when a taxpayer a. has a very high income. b. has a very low income. c. is self-employed. d. invests in a retirement plan. 80. The marginal tax rate for a lump-sum tax a. is always positive. b. is always negative. c. is zero. d. can take on any value but must be greater than the average tax rate. 81. With a lump-sum tax, the a. marginal tax rate is always less than the average tax rate. b. average tax rate is always less than the marginal tax rate. c. marginal tax rate falls as income rises. d. marginal tax rate rises as income rises. 82. Suppose a country imposes a lump-sum tax of $5,000 on each individual in the country. What is the marginal income tax rate for an individual who earns $40,000 during the year? a. 0% b. 10% c. More than 10% d. The marginal tax rate cannot be determined without knowing the entire tax schedule. 83. The concept that people should pay taxes based on the benefits they receive from government services is called a. the ability-to-pay principle. b. the benefits principle. c. horizontal equity. d. vertical equity. .
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Ch 13: The Design of the Tax System 84. If revenue from a gasoline tax is used to build and maintain public roads, the gasoline tax may be justified on the basis of a. the benefits principle. b. the ability-to-pay principle. c. vertical equity. d. horizontal equity. 85. If a poor family has three children in public school and a rich family has two children in private school, the benefits principle would suggest that a. the poor family should pay more in taxes to pay for public education than the rich family. b. the rich family should pay more in taxes to pay for public education than the poor family. c. the benefits of private school exceed those of public school. d. public schools should be financed by property taxes. 86. Some colleges charge all students the same "activity fee." Suppose that students differ by how many campus activities they engage in. This charge is most like a. an excise tax that conforms to the benefits principle. b. an excise tax that violates the benefits principle. c. a lump-sum tax that conforms to the benefits principle. d. a lump-sum tax that violates the benefits principle. 87. The argument that each person should pay taxes according to how well the individual can shoulder the burden is called a. the ability-to-pay principle. b. the equity principle. c. the benefits principle. d. regressive. 88. A tax system based on the ability-to-pay principle claims that all citizens should a. pay taxes based on the benefits they receive from government services. b. pay the same amount in taxes. c. pay taxes based on consumption rather than income. d. make an equal sacrifice. 89. In the 1980s, President Ronald Reagan argued that high tax rates distorted economic incentives to work and save. In the 1990s, President Bill Clinton argued that the rich were not paying their fair share of taxes. Which of the following statements best summarizes the economic theories behind the differing philosophies? a. President Reagan was concerned about vertical equity, whereas President Clinton was concerned about horizontal equity. b. President Reagan was concerned about average tax rates, whereas President Clinton was concerned about horizontal equity. c. President Reagan was concerned about marginal tax rates, whereas President Clinton was concerned about vertical equity. d. President Reagan and President Clinton were both concerned about horizontal equity. 90. The notion that similar taxpayers should pay similar amounts of taxes is known as .
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Ch 13: The Design of the Tax System a. vertical equity. b. the benefits principle. c. horizontal equity. d. taxpayer efficiency. 91. In which of the following tax systems does total tax liability increase as income increases? a. Both proportional and progressive b. Proportional but not progressive c. Progressive but not proportional d. Neither proportional nor progressive 92. Two families who live in Plains, GA have identical incomes. The DeWitts deduct $5,000 from their taxable income for mortgage interest paid during the year. The DeMotts family lives in an apartment and is not eligible for a mortgageinterest deduction. This situation exemplifies a. an application of the benefits principle of taxation. b. a violation of horizontal equity. c. a violation of vertical equity. d. an application of egalitarian tax rules. 93. One of the most difficult issues associated with trying to structure a tax policy to satisfy horizontal equity is determining a. whether or not a taxpayer falls within the highest income quintile. b. the level of transfer payments made to low-income groups. c. the source of income for taxpayers. d. what differences are relevant to a family's ability to pay. 94. Table 13-6 The table below provides information on the four households that make up a small economy and how much they would pay in taxes under three types of taxes.
Household
Ability to Pay
A B C D
low and same as B low and same as A high and same as D high and same as C
Amount of Taxes Paid Under… Tax A Tax B Tax C (Dollars) (Dollars) (Dollars) 100 30 40 100 30 50 100 40 60 100 40 70
Refer to Table 13-6. In this economy Tax A exhibits a. horizontal and vertical equity. b. horizontal equity but not vertical equity. c. vertical equity but not horizontal equity. d. neither horizontal nor vertical equity. .
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Ch 13: The Design of the Tax System 95. Table 13-6 The table below provides information on the four households that make up a small economy and how much they would pay in taxes under three types of taxes.
Household
Ability to Pay
A B C D
low and same as B low and same as A high and same as D high and same as C
Amount of Taxes Paid Under… Tax A Tax B Tax C (Dollars) (Dollars) (Dollars) 100 30 40 100 30 50 100 40 60 100 40 70
Refer to Table 13-6. In this economy Tax B exhibits a. horizontal and vertical equity. b. horizontal equity but not vertical equity. c. vertical equity but not horizontal equity. d. neither horizontal nor vertical equity. 96. Table 13-6 The table below provides information on the four households that make up a small economy and how much they would pay in taxes under three types of taxes.
Household
Ability to Pay
A B C D
low and same as B low and same as A high and same as D high and same as C
Amount of Taxes Paid Under… Tax A Tax B Tax C (Dollars) (Dollars) (Dollars) 100 30 40 100 30 50 100 40 60 100 40 70
Refer to Table 13-6. In this economy Tax C exhibits a. horizontal and vertical equity. b. horizontal equity but not vertical equity. c. vertical equity but not horizontal equity. d. neither horizontal nor vertical equity. 97. Tax incidence refers to a. what product or service the tax is levied on. b. who bears the tax burden. c. what sector of the economy is most affected by the tax. d. the dollar value of the tax revenues. 98. Which tax system requires all taxpayers to pay the same percentage of their income in taxes? .
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Ch 13: The Design of the Tax System a. A regressive tax b. A proportional tax c. A progressive tax d. A horizontal equity tax 99. A country is using a proportional tax when a. its marginal tax rate equals its average tax rate. b. its marginal tax rate is less than its average tax rate. c. its marginal tax rate is greater than its average tax rate. d. it uses a lump-sum tax. 100. Which tax system requires higher-income taxpayers to have lower tax rates, even though they pay a larger amount of tax when compared to lower-income taxpayers? a. A proportional tax b. A progressive tax c. A regressive tax d. A lump-sum tax 101. Table 13-7 Amount of Tax (Dollars) 15,000 30,000 60,000 100,000
Percent of Income 20 30 40 50
Refer to Table 13-7. The tax system is a. proportional. b. regressive. c. progressive. d. lump sum. 102. Table 13-7 Amount of Tax (Dollars) 15,000 30,000 60,000 100,000
.
Percent of Income 20 30 40 50
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Ch 13: The Design of the Tax System Refer to Table 13-7. In this tax system which of the following is possible? a. Vertical and horizontal equity b. Vertical but not horizontal equity c. Horizontal but not vertical equity d. Neither horizontal nor vertical equity 103. Table 13-8 The dollar amounts in the last three columns are the taxes owed under three different tax systems. Income (Dollars) 50,000 100,000 200,000
Tax System A (Dollars) 10,000 25,000 80,000
Taxes Owed Under… Tax System B (Dollars) 25,000 30,000 40,000
Tax System C (Dollars) 10,000 20,000 40,000
Refer to Table 13-8. Which of the three tax systems is proportional? a. Tax System A b. Tax System B c. Tax System C d. Tax Systems B and C 104. Table 13-8 The dollar amounts in the last three columns are the taxes owed under three different tax systems. Income (Dollars) 50,000 100,000 200,000
Tax System A (Dollars) 10,000 25,000 80,000
Taxes Owed Under… Tax System B (Dollars) 25,000 30,000 40,000
Tax System C (Dollars) 10,000 20,000 40,000
Refer to Table 13-8. Which of the three tax systems is regressive? a. Tax System A b. Tax System B c. Tax System C d. Tax Systems B and C 105. Table 13-8 The dollar amounts in the last three columns are the taxes owed under three different tax systems. Income (Dollars) 50,000 .
Tax System A (Dollars) 10,000
Taxes Owed Under… Tax System B (Dollars) 25,000
Tax System C (Dollars) 10,000 Page 21
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Ch 13: The Design of the Tax System 100,000 200,000
25,000 80,000
30,000 40,000
20,000 40,000
Refer to Table 13-8. Which of the three tax systems is progressive? a. Tax System A b. Tax System B c. Tax System C d. Tax Systems B and C 106. The flypaper theory of tax incidence a. suggests that the burden of a tax lands solely on the person from whom the taxes are collected. b. assumes that most taxes should be "stuck on" the rich. c. says that once a tax has been imposed, there is little chance of it changing, so in essence people are stuck with it. d. suggests that taxes are like flies because they are everywhere and will never go away. 107. When the government levies a tax on a corporation, a. all the burden of the tax ultimately falls on the corporation's owners. b. the corporation is more like a tax collector than a taxpayer. c. output must increase to compensate for reduced profits. d. less deadweight loss will occur since corporations are entities and not people who respond to incentives. 108. Many economists believe that a. the corporate income tax satisfies the goal of horizontal equity. b. the corporate income tax does not distort the incentives of customers. c. the corporate income tax is more efficient than the personal income tax. d. workers and customers bear much of the burden of the corporate income tax.
Indicate whether the statement is true or false. 109. The average American pays a higher percent of their income in taxes today than they would have in the late 18th century. a. True b. False 110. The government raises revenue through taxation to pay for the services it provides. a. True b. False 111. The U.S. tax burden is high compared to many European countries. a. True b. False 112. The U.S. federal government collects about one-half of the taxes in our economy. .
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Ch 13: The Design of the Tax System a. True b. False 113. Revenues from social insurance taxes are earmarked to pay for Social Security and Medicare. a. True b. False 114. Government spending is projected to rise over the next few decades. Three of the most important reasons are spending on Social Security, Medicare, and healthcare. a. True b. False 115. Individual income taxes and social insurance taxes generate the highest tax revenue for the federal government. a. True b. False 116. A family’s tax liability is the amount of money it owes in taxes. a. True b. False 117. In the United States, all families pay the same proportion of their income in taxes. a. True b. False 118. A payroll tax is also referred to as a social insurance tax. a. True b. False 119. Individual income taxes generate roughly 25% of the tax revenue for the federal government. a. True b. False 120. Social Security is an income support program, designed primarily to maintain the living standards of the poor. a. True b. False 121. Corporate income taxes are based on the amount of revenue a corporation earns. a. True b. False 122. An excise tax is a tax on a specific good, like gasoline. a. True b. False 123. The largest category of federal spending is national defense. a. True .
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Ch 13: The Design of the Tax System b. False 124. A budget surplus occurs when government receipts fall short of government spending. a. True b. False 125. A budget surplus occurs when government receipts exceed government spending. a. True b. False 126. A budget deficit occurs when government receipts exceed government spending. a. True b. False 127. A budget deficit occurs when government receipts fall short of government spending. a. True b. False 128. One reason for the projected increase, over the next several decades, in government spending as a percentage of GDP is the projected increase in the size of the elderly population. a. True b. False 129. In 2011, state and local government education spending was more than five times highway spending. a. True b. False 130. In 2014, the largest source of receipts for state and local governments was individual income taxes. a. True b. False 131. Income taxes and property taxes generate the highest tax revenue for state and local governments. a. True b. False 132. In 2014, the largest source of receipts for state and local governments was corporate income taxes. a. True b. False 133. Sales taxes generate nearly 50% of the tax revenue for state and local governments. a. True b. False 134. Some states do not have a state income tax. a. True b. False .
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Ch 13: The Design of the Tax System 135. By law, all states must have a state income tax. a. True b. False 136. The administrative burden of any tax system is part of the inefficiency it creates. a. True b. False 137. One characteristic of an efficient tax system is that it minimizes the costs associated with revenue collection. a. True b. False 138. The administrative burden of complying with tax laws is a cost to the government but not to taxpayers. a. True b. False 139. The equity of a tax system concerns whether the tax burden is distributed equally among the population. a. True b. False 140. An efficient tax system is one that imposes small deadweight losses and small administrative burdens. a. True b. False 141. Deadweight losses arise because a tax causes some individuals to change their behavior. a. True b. False 142. European countries tend to rely more on consumption taxes than does the United States. a. True b. False 143. If a tax generates a reduction in surplus that is exactly offset by the tax revenue collected by the government, the tax does not have a deadweight loss. a. True b. False 144. Resources devoted to complying with the tax laws are a type of deadweight loss. a. True b. False 145. An advantage of a consumption tax is that it does not distort the incentive to save. a. True b. False .
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Ch 13: The Design of the Tax System 146. Tax evasion is legal, but tax avoidance is illegal. a. True b. False 147. Tax evasion is illegal, but tax avoidance is legal. a. True b. False 148. In practice, the U.S. income tax system is filled with special provisions that alter a family's tax based on its specific circumstances. a. True b. False 149. If Christopher earns $80,000 in taxable income and pays $20,000 in taxes, his average tax rate is 20 percent. a. True b. False 150. If James earns $80,000 in taxable income and pays $20,000 in taxes, his average tax rate is 25 percent. a. True b. False 151. If Mary earns $80,000 in taxable income and pays $40,000 in taxes, her marginal tax rate must be 50 percent. a. True b. False 152. Many people consider lump-sum taxes to be unfair to low-income taxpayers. a. True b. False 153. Lump-sum taxes are equitable but not efficient. a. True b. False 154. A lump-sum tax would take different amounts from people with low incomes and the rich. a. True b. False 155. A lump-sum tax minimizes deadweight loss. a. True b. False 156. Deadweight losses and administrative burdens are key factors considered when determining the efficiency of the tax system. a. True b. False .
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Ch 13: The Design of the Tax System 157. When the total surplus lost as a result of a tax is less than the amount of tax revenue collected by the government there is a deadweight loss. a. True b. False 158. The marginal tax rate serves as a measure of the extent to which the tax system discourages people from working. a. True b. False 159. Most economists believe that a corporate income tax affects the stockholders of a corporation but not its employees or customers. a. True b. False 160. Antipoverty programs funded by taxes on the wealthy are sometimes advocated on the basis of the benefits principle. a. True b. False 161. According to the benefits principle, it is fair for people to pay taxes based on the benefits they receive from the government. a. True b. False 162. According to the benefits principle, it is fair for people to pay taxes based on their ability to shoulder the tax burden. a. True b. False 163. According to the ability-to-pay principle, it is fair for people to pay taxes based on the amount of government services that they receive. a. True b. False 164. According to the ability-to-pay principle, it is fair for people to pay taxes based on their ability to handle the financial burden. a. True b. False 165. If all taxpayers pay the same percentage of income in taxes, the tax system is progressive. a. True b. False 166. If all taxpayers pay the same percentage of income in taxes, the tax system is proportional. a. True b. False 167. Vertical equity refers to a tax system in which individuals with higher incomes pay more in taxes than individuals with lower incomes. .
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Ch 13: The Design of the Tax System a. True b. False 168. Vertical equity refers to a tax system in which individuals with similar incomes pay similar taxes. a. True b. False 169. Vertical equity is not consistent with a regressive tax structure. a. True b. False 170. Horizontal equity refers to a tax system in which individuals with higher incomes pay more in taxes than individuals with lower incomes. a. True b. False 171. Horizontal equity refers to a tax system in which individuals with similar incomes pay similar taxes. a. True b. False 172. Horizontal and vertical equity are the two primary measures of efficiency of a tax system. a. True b. False 173. A tax system exhibits vertical equity when taxpayers with similar abilities to pay contribute the same amount. a. True b. False 174. To fully understand the progressivity of government policies, one should only look at the proportion of total income that individuals pay in taxes each year. a. True b. False 175. If individuals belonging to higher level income pay more in taxs than the lower level, the tax system must be progressive. a. True b. False 176. Vertical and horizontal equity are widely accepted and applying them to evaluate a tax system is always straightforward. a. True b. False 177. A lump-sum tax can never have horizontal equity. a. True b. False .
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Ch 13: The Design of the Tax System 178. Horizontal equity can be difficult to assess because it is difficult to compare the similarity of tax payers. a. True b. False 179. Economics alone cannot determine the best way to balance the goals of efficiency and equity. a. True b. False 180. Karole’s income rises from $50,000 to $75,000 and her income tax increases from $8,000 to $9,500. Her average tax rate is 6%. a. True b. False 181. A city finances a performing arts center by adding a $2.75 tax to each ticket sold. This is an example of taxation via the benefits principle. a. True b. False 182. Sonja paid $15,000 in taxes after having earned $100,000. Amanda paid $22,000 in taxes after having earned an income of $146,667. This is an example of a proportional tax. a. True b. False 183. A lump-sum tax does not produce a deadweight loss. a. True b. False 184. Rob’s income rises from $50,000 to $60,000 and his income tax increases from $6,000 to $7,500. His marginal tax rate is 12.5%. a. True b. False
185. What has been the relationship over the past century between the U.S. economy’s income and the percentage of that income that the government collects in revenues? 186. Of all the taxes collected in the U.S. economy, what percentage is collected by the federal government? 187. What are the two largest categories of federal tax receipts? 188. What is the current, annual, approximate amount per person paid to the federal government in individual income taxes, social insurance taxes, corporate income taxes, and other taxes? 189. As a person’s or family’s income rises, the marginal federal income tax rate __________. 190. The United States federal government has a large budget deficit. Long-term projections suggest that under current .
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Ch 13: The Design of the Tax System law, taxes, as a percentage of GDP, will __________ and government spending, as a percentage of GDP, will __________. 191. Briefly describe some of the demographic trends that are predicted to increase the government’s budget deficit. 192. The largest category of expenditures for state and local governments is __________. 193. Over the past century in the U.S., what has been federal government revenue as a percentage of GDP? What has been state and local government revenue as a percentage of GDP? 194. In 2014, what were the two largest sources of federal tax revenues, and what were the two largest expenses of the federal government? 195. “Income security” programs comprised 33 percent of the federal government’s spending in 2011. Give a few examples of the programs included in this category. 196. What are the two main sources of tax revenues for state and local governments? 197. What are the characteristic(s) of an efficient tax system? 198. What are the three categories of the costs of taxes to taxpayers? 199. Define the deadweight loss of a tax. 200. Briefly describe why taxes create deadweight loss. 201. Suppose that Deon places a $150 value on a new MP-3 player, and Juanita places a $140 value on it. The cost of the MP-3 player is $130. Suppose the government levies a $15 tax on MP-3 players, which raises the price to $145. What is the deadweight loss created by the tax? 202. List several examples of the administrative burden of the U.S. income tax system. 203. Define the marginal tax rate. 204. Define the average tax rate. 205. What is the most efficient tax and why? 206. Briefly evaluate the advantages and disadvantages of a lump-sum tax. 207. What are the two types of costs that a well-designed tax policy tries to avoid or minimize? 208. Suppose that Kara values a hot fudge sundae at $6 and Stacia values one at $5. The pretax price of a hot fudge sundae is $3. The government imposes a $1 tax on hot fudge sundaes, which raises the price to $4. What is the deadweight loss from the tax? 209. Suppose that Christine values a baseball hat at $20, and Mark values one at $18. The pretax price of a baseball hat is $14. The government imposes a $5 tax on baseball hats, which raises the price to $19. What is the deadweight loss from the tax? 210. Briefly describe why some economists prefer a value-added tax (VAT) to an income tax. .
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Ch 13: The Design of the Tax System 211. Time spent filling out tax forms, time spent keeping tax records, and government resources spent to enforce tax laws are examples of the __________ of the U.S. income tax system. 212. Give an example of a tax system where the marginal tax rate would equal the average tax rate. 213. Suppose the government taxes 10 percent of the first $30,000 in income and 20 percent of all income over $30,000. Calculate the marginal tax rate and the average tax rate for a person who earns $70,000. 214. Suppose the government taxes 10 percent of the first $30,000 in income, 20 percent of the next $20,000 in income, and 30 percent of all income over $50,000. Calculate the marginal tax rate and the average tax rate for a person who earns $70,000. 215. Suppose the government taxes 10 percent of the first $20,000 in income, 20 percent of the next $20,000 in income, and 30 percent of all income over $40,000. Calculate the marginal tax rate and the average tax rate for a person who earns $100,000. 216. What is the marginal tax rate of a lump-sum tax of $5,000? 217. Briefly describe the tradeoff between equity and efficiency of tax systems using a few examples. 218. If tax revenues from a tax on wine, beer, and hard liquor are used to pay for healthcare expenses related to liver damage, the alcohol tax could be justified using the __________. 219. If tax revenues from a tax on fried foods are used to pay for healthcare expenses related to cardio-vascular diseases, the fried foods tax could be justified using the __________. 220. How can a proportional tax achieve vertical equity? 221. If tax revenues from a cigarette tax are used to pay for healthcare expenses related to lung cancer, the cigarette tax could be justified using the __________. 222. Which of the following types of taxes achieves vertical equity: a proportional tax, regressive tax, and/or progressive tax? 223. Define horizontal equity and briefly describe some features of the U.S. federal income tax system that may interfere with achieving it. 224. Table 13-9 Income $50,000 $60,000 $70,000
Amount of Tax $5,000 $5,500 $6,000
Refer to Table 13-9. The tax system is an example of a __________ tax. 225. Table 13-9 Income $50,000 $60,000 .
Amount of Tax $5,000 $5,500 Page 31
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Ch 13: The Design of the Tax System $70,000
$6,000
Refer to Table 13-9. Does the tax system achieve vertical equity? 226. Table 13-9 Income $50,000 $60,000 $70,000
Amount of Tax $5,000 $5,500 $6,000
Refer to Table 13-9. Would the tax system be justified due to the benefits principle? 227. Table 13-10 Plan A Income Amount of Tax Income $40,000 $6,000 $40,000 $60,000 $6,000 $60,000 $80,000 $6,000 $80,000
Plan B Plan C Amount of Tax Income Amount of Tax $6,000 $40,000 $6,000 $9,000 $60,000 $12,000 $12,000 $80,000 $18,000
Refer to Table 13-10. Which plan illustrates a regressive tax? 228. Table 13-10 Plan A Income Amount of Tax Income $40,000 $6,000 $40,000 $60,000 $6,000 $60,000 $80,000 $6,000 $80,000
Plan B Plan C Amount of Tax Income Amount of Tax $6,000 $40,000 $6,000 $9,000 $60,000 $12,000 $12,000 $80,000 $18,000
Refer to Table 13-10. Which plan illustrates a proportional tax? 229. Table 13-10 Plan A Income Amount of Tax Income $40,000 $6,000 $40,000 $60,000 $6,000 $60,000 $80,000 $6,000 $80,000
Plan B Plan C Amount of Tax Income Amount of Tax $6,000 $40,000 $6,000 $9,000 $60,000 $12,000 $12,000 $80,000 $18,000
Refer to Table 13-10. Which plan illustrates a progressive tax? 230. Table 13-10 Plan A Income Amount of Tax Income $40,000 $6,000 $40,000 $60,000 $6,000 $60,000 $80,000 $6,000 $80,000
Plan B Plan C Amount of Tax Income Amount of Tax $6,000 $40,000 $6,000 $9,000 $60,000 $12,000 $12,000 $80,000 $18,000
Refer to Table 13-10. Do any of the plans achieve vertical equity? .
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Ch 13: The Design of the Tax System 231. Table 13-10 Plan A Income Amount of Tax Income $40,000 $6,000 $40,000 $60,000 $6,000 $60,000 $80,000 $6,000 $80,000
Plan B Plan C Amount of Tax Income Amount of Tax $6,000 $40,000 $6,000 $9,000 $60,000 $12,000 $12,000 $80,000 $18,000
Refer to Table 13-10. Which plan represents the best tax? 232. List the three most important expenditure programs of the federal government. How do they differ from the three most important expenditure programs of state and local governments? Explain why it makes more sense for the federal government to purchase "national defense" rather than state governments. 233. Suppose a recent increase in federal gasoline taxes is estimated to cause a $150 million reduction in the total surplus (consumer plus producer surplus) in the gasoline market. If tax revenues increased by $100 million, what is the deadweight loss associated with the tax? As a result of the tax, 10,000 people sold their cars and started riding their bicycles to work. How much of the burden of the deadweight loss is incurred by the bicycle riders? 234. Use the tax rates below to calculate the tax amount and average tax rate for each taxpayer. On Taxable Income The Tax Rate Is Up to $27,050 15.0% From $27,051 to $65,550 27.5% From $65,551 to $136,750 30.5% From $136,751 to $297,350 35.5% Over $297,350 39.1% Taxpayer John Todd Glen Jake
.
Income
Tax Amount
Average Tax Rate
$52,700 $132,500 $237,000 $315,250
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Ch 13: The Design of the Tax System Answer Key 1. c 2. c 3. a 4. c 5. c 6. d 7. c 8. a 9. c 10. a 11. a 12. d 13. b 14. a 15. c 16. b 17. b 18. a 19. a 20. b 21. c 22. a 23. b 24. a 25. a .
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Ch 13: The Design of the Tax System 26. d 27. d 28. c 29. d 30. d 31. c 32. b 33. a 34. a 35. d 36. a 37. c 38. b 39. c 40. b 41. c 42. c 43. a 44. b 45. b 46. c 47. b 48. d 49. a 50. b 51. d .
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Ch 13: The Design of the Tax System 52. c 53. c 54. a 55. b 56. b 57. b 58. b 59. d 60. d 61. d 62. d 63. d 64. c 65. a 66. d 67. c 68. b 69. d 70. a 71. c 72. d 73. a 74. c 75. b 76. b .
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Ch 13: The Design of the Tax System 77. c 78. c 79. b 80. c 81. a 82. a 83. b 84. a 85. a 86. d 87. a 88. d 89. c 90. c 91. a 92. b 93. d 94. b 95. a 96. c 97. b 98. b 99. a 100. c 101. c 102. a .
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Ch 13: The Design of the Tax System 103. c 104. b 105. a 106. a 107. b 108. d 109. True 110. True 111. False 112. False 113. True 114. True 115. True 116. True 117. False 118. True 119. False 120. False 121. False 122. True 123. False 124. False 125. True 126. False 127. True .
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Ch 13: The Design of the Tax System 128. True 129. True 130. False 131. False 132. False 133. False 134. True 135. False 136. True 137. True 138. False 139. False 140. True 141. True 142. True 143. True 144. True 145. True 146. False 147. True 148. True 149. False 150. True 151. False 152. True 153. False .
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Ch 13: The Design of the Tax System 154. False 155. True 156. True 157. False 158. True 159. False 160. True 161. True 162. False 163. False 164. True 165. False 166. True 167. True 168. False 169. False 170. False 171. True 172. False 173. False 174. False 175. False 176. False 177. False 178. True .
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Ch 13: The Design of the Tax System 179. True 180. False 181. True 182. True 183. True 184. False 185. Both have increased over time, but the percentage of income that the government collects in revenues has increased more. For example, in 1902 the government collected 7 percent of total income; recently, that percentage has increased to about 30. 186. about two-thirds 187. individual income taxes (43 percent of 2011 federal tax receipts) and social insurance taxes (36 percent of 2011 federal tax receipts) 188. a little more than $10,000 ($10,235 in 2014) 189. rises 190. remain constant; increase 191. Social Security and Medicare payments will likely rise, in part due to medical advances and greatly increased life expectancies for the elderly. People are having fewer children, which reduces the number of people in the work force. Government expenditures on healthcare will also likely rise, in part because medical advances provide new and better but often more expensive treatment options. 192. education 193. According to Figure 1, in 1913, the federal government collected revenues of a bit less than 5 percent of GDP; today the federal government collects revenues of a bit less than 30 percent of GDP. In 1913, state and local governments collected revenues of about 5 percent of GDP; today state and local governments collects revenues of about 15 percent of GDP. Note that in order to calculate the percents for state and local governments, one must look at the difference between the top line (total government) and the bottom line (federal government). 194. In 2014, individual income taxes and social insurance taxes were the two largest sources of federal tax revenues. Income security and health were the two largest categories of federal government expenditures in 2014. 195. Social Security, unemployment insurance, welfare payments 196. sales taxes and property taxes 197. One tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayers. 198. the tax payment itself, deadweight losses, administrative burdens .
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Ch 13: The Design of the Tax System 199. The deadweight loss of a tax is the reduction in economic well-being of taxpayers in excess of the amount of revenue raised by the tax. 200. When the government imposes a tax on a product, buyers and sellers allocate resources according to the tax incentive rather than the true costs and benefits of the good. 201. Before the tax, the total surplus was $30 ($150-$130=$20 for Deon + $140-$130=$10 for Juanita). After the tax, the consumer surplus is $5 ($150-$145 for Deon; Juanita does not purchase the MP-3 player). The government raises $15 in tax revenues by selling one player to Deon. Tax revenue rises by $15, but consumer surplus falls by $25 ($30-$5), so the deadweight loss is $10. 202. time spent filling out tax forms, time spent keeping tax records, government resources spent to enforce tax laws 203. The marginal tax rate is the extra tax paid on an additional dollar of income. 204. The average tax rate is the total taxes paid divided by total income. 205. A lump-sum tax is the most efficient tax because the tax does not distort incentives; thus, a lump-sum tax does not create a deadweight loss. 206. A lump-sum tax is the most efficient tax because the tax does not distort incentives; thus, a lump-sum tax does not create a deadweight loss. But because a lump-sum tax places the same tax burden on poor people as rich people, most would view it as unfair. 207. 1. the deadweight loss that occurs when taxes distort the decisions that consumers make 2. the administrative burdens that taxpayers pay as they comply with tax laws 208. Prior to the tax, consumer surplus was $5 -- $3 for Kara ($6-$3) and $2 for Stacia ($5-$3). After the tax, consumer surplus shrinks to $3 -- $2 for Kara ($6-$4) and $1 for Stacia ($5-$4), but tax revenue increases by $2 ($1 from Kara and $1 from Stacia). Deadweight loss is $0 because $5-$3-$2=$0. Said another way, the loss in consumer surplus equals the tax revenue raised. 209. Prior to the tax, consumer surplus was $10 -- $6 for Christine ($20-$14) and $4 for Mark ($18-$14). After the tax, consumer surplus shrinks to $1 -- $1 for Christine ($20-$19); Mark no longer buys a hat. Tax revenue increases by $5 (from Christine). Deadweight loss is $4 because $10-$1-$5=$4. 210. Some economists believe that taxing consumption through a VAT would avoid the disincentives to savings created by our current U.S. income tax system. 211. administrative burden 212. The marginal tax rate would equal the average tax rate if the tax system had one rate, such as everyone pays 10% of income in taxes, regardless of total income and without any deductions or exclusions. In other words, the tax must begin with the first dollar earned. 213. The marginal tax rate would be 20 percent because the person earns more than $30,000. The average tax rate would be 15.7%. The person pays $3,000 on the first $30,000 of income and $8,000 on the remaining $40,000 of income. $11,000/$70,000=15.7%. 214. The marginal tax rate would be 30 percent because the person earns more than $50,000. The average tax rate would be 18.6%. The person pays $3,000 on the first $30,000 of income, $4,000 on the next $20,000 in income, and $6,000 on .
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Ch 13: The Design of the Tax System the remaining $20,000 of income. $13,000/$70,000=18.6%. 215. The marginal tax rate would be 30 percent because the person earns more than $40,000. The average tax rate would be 24%. The person pays $2,000 on the first $20,000 of income, $4,000 on the next $20,000 in income, and $18,000 on the remaining $60,000 of income. $24,000/$100,000=24%. 216. The marginal tax rate would be $0 because once a person paid the lump-sum tax of $5,000, she would pay no additional tax on the next dollar earned. 217. Although most Americans agree that equity and efficiency are the two most important goals of a tax system, the two goals often conflict. The most efficient tax is a lump-sum tax, yet many would call it the most unfair tax. Most people would agree that a progressive tax is more fair than a lump-sum tax, yet it distorts decisions and creates deadweight losses. 218. benefits principle 219. benefits principle 220. Vertical equity is the idea that taxpayers with a greater ability to pay taxes should contribute a larger amount, not necessarily a larger percent. If all taxpayers pay 20 percent of their incomes, someone who earns $50,000 pays twice the amount of taxes as someone who earns $25,000. Thus, a proportional tax achieves vertical equity. 221. benefits principle 222. proportional, regressive, and progressive 223. Horizontal equity is the idea that taxpayers with similar abilities to pay taxes should pay the same amount. Many of the deductions allowed in the U.S. federal income tax system for children, medical expenses, and educational expenses could alter the total taxes due for taxpayers with similar income levels. 224. regressive; the percentage of income paid in taxes decreases as income increases 225. Yes. People with higher incomes pay larger amounts of taxes. 226. Based only on the information given, we are unable to determine if the people who benefit more from government services pay more taxes than those who receive fewer benefits from government services. 227. Plan A illustrates a regressive tax because taxpayers who earn higher income levels pay a lower percentage of their income in taxes. The respective percentages are 15, 10, and 7.5. 228. Plan B illustrates a proportional tax because taxpayers pay 15 percent of their income in taxes, regardless of how much money they earn. 229. Plan C illustrates a progressive tax because taxpayers who earn higher income levels pay a higher percentage of their income in taxes. The respective percentages are 15, 20, and 22.5. 230. Yes. People with higher incomes pay larger amounts of taxes under Plan B and Plan C. 231. The best tax depends on the criteria. Plan A is a lump-sum tax. Although it is regressive, so it does not achieve vertical equity, it does not distort incentives, so it creates the least deadweight loss. Plan B is a proportional tax, so some people might view it as the most fair. But some people believe that paying X percent of income is more of a sacrifice for .
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Ch 13: The Design of the Tax System people with lower incomes than for people with higher incomes. People with this belief might choose Plan C as the most fair because the percentage of income paid in taxes rises as income rises. 232. The three most important expenditure programs of the federal government are income security, health, and national defense. The three most important expenditure programs of state and local government are education, health, and public order and safety. It makes sense for the federal government to purchase national defense because national defense is a public good; as such, the federal government can minimize the free-rider problem among states. 233. The direct deadweight loss is $50 million. It is impossible to determine how much of the loss is borne by bicycle riders without more information. For example, some of the deadweight loss may be attributable to walkers or people who switched to public transportation. 234. Taxpayer John Todd Glen Jake
.
Income $52,700 $132,500 $237,000 $315,250
Tax Amount $11,111.25 $35,064.75 $71,949.75 $100,372.90
Average Tax Rate 21% 26% 30% 32%
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Ch 14: The Costs of Production
Indicate the answer choice that best completes the statement or answers the question. 1. Total revenue equals a. price × quantity. b. price/quantity. c. (price × quantity) − total cost. d. output − input. 2. Carol Anne makes candles. If she charges $20 for each candle, her total revenue will be a. $1,000 if she sells 100 candles. b. $500 if she sells 25 candles. c. $20 regardless of how many candles she sells. d. $200 if she sells 5 candles. 3. The Three Amigo's company produced and sold 500 dog beds. The average cost of production per dog bed was $15. Each dog bed can be sold for a price of $65. The Three Amigo's total costs are a. $7,500. b. $25,000. c. $32,500. d. $67,500. 4. Total cost is the a. amount a firm receives for the sale of its output. b. fixed cost less variable cost. c. market value of the inputs a firm uses in production. d. quantity of output minus the quantity of inputs used to make a good. 5. Matius sells 500 candy bars at $0.50 each. His total costs are $125. His profits are a. $25. b. $124.50. c. $125. d. $150. 6. Billy's Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. The price for each of the 275 units sold was $95. Total profit for Billy's Bean Bag Emporium would be a. −$3,875. b. $26,125. c. $28,500. d. $30,000. 7. A firm's opportunity costs of production are equal to its a. explicit costs only. b. implicit costs only. c. explicit costs + implicit costs. .
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Ch 14: The Costs of Production d. explicit costs + implicit costs + total revenue. 8. Kelly has decided to start his own business giving sailing lessons. To purchase equipment for the business, Kelly withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is Kelly's annual opportunity cost of the financial capital that has been invested in the business? a. $30 b. $140 c. $170 d. $300 9. Bubba is a shrimp fisherman who could earn $5,000 as a fishing tour guide. Instead, he is a full-time shrimp fisherman. In calculating the economic profit of his shrimp business, the $5,000 that Bubba gave up is counted as part of the shrimp business's a. total revenue. b. explicit costs. c. implicit costs. d. marginal costs. 10. An example of an explicit cost of production would be the a. cost of forgone labor earnings for an entrepreneur. b. lost opportunity to invest in capital markets when the money is invested in one's business. c. lease payments for the land on which a firm's factory stands. d. value of the time the business could've spent producing something else. 11. Pete owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements? a. Shoe polish and wages Pete could earn delivering newspapers b. Shoe polish and rent on the shoe stand c. Wages Pete could earn delivering newspapers and interest that Pete's money was earning before he spent his savings to set up the shoe-shine business d. Rent on the shoe stand and interest that Pete's money was earning before he spent his savings to set up the shoe-shine business 12. A difference between explicit and implicit costs is that a. explicit costs must be greater than implicit costs. b. explicit costs do not require a direct monetary outlay by the firm, whereas implicit costs do. c. implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do. d. implicit costs must be greater than explicit costs. 13. Which of the following is an example of an implicit cost? a. Interest paid on the firm's debt b. Rent paid by the firm to lease office space c. The owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm d. Wages paid to workers .
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Ch 14: The Costs of Production 14. Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she withdrew $20,000 from her savings, which earned 5 percent interest. She also turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business? a. −$56,000 b. −$6,000 c. $4,000 d. $19,000 15. Bev is opening her own court-reporting business. She financed the business by withdrawing money from her personal savings account. When she closed the account, the bank representative mentioned that she would have earned $300 in interest next year. If Bev hadn't opened her own business, she would have earned a salary of $25,000. In her first year, Bev's revenues were $30,000, and she spent $1,000 on materials and supplies. Which of the following statements is correct? a. Bev's total explicit costs are $26,300. b. Bev's total implicit costs are $300. c. Bev's accounting profits exceed her economic profits by $300. d. Bev's economic profit is $3,700. 16. Walter used to work as a high school teacher for $40,000 per year but quit in order to start his own painting business. To invest in his painting business, he withdrew $20,000 from his savings, which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent interest per year. Last year Walter paid $25,000 for supplies and had revenue of $60,000. Walter asked Tyler the accountant and Greg the economist to calculate his painting business's costs. a. Tyler says his costs are $25,900, and Greg says his costs are $66,500. b. Tyler says his costs are $25,000, and Greg says his costs are $65,000. c. Tyler says his costs are $66,500, and Greg says his costs are $66,500. d. Tyler says his costs are $75,000, and Greg says his costs are $41,500. 17. Which of the following statements is correct? a. Assuming that explicit costs are positive, economic profit is greater than accounting profit. b. Assuming that implicit costs are positive, accounting profit is greater than economic profit. c. Assuming that explicit costs are positive, accounting profit is equal to economic profit. d. Assuming that implicit costs are positive, economic profit is positive. 18. Katherine gives piano lessons for $15 per hour. She also grows flowers, which she arranges and sells at the local farmer's market. One day she spends 5 hours planting $50 worth of seeds in her garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer's market. Katherine's accounting profits are a. $100, and her economic profits are $25. b. $100, and her economic profits are $75. c. $25, and her economic profits are $100. d. $75, and her economic profits are $125. 19. Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law practice. In the first year of business she generated revenues of $347,000 and incurred explicit costs of $163,000. Jane's economic profit from her first year in her own practice is a. −$39,000. .
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Ch 14: The Costs of Production b. $124,000. c. $163,000. d. $184,000. 20. Which of the following expressions is correct? a. accounting profit = economic profit + implicit costs b. accounting profit = total revenue − implicit costs c. economic profit = accounting profit + explicit costs d. economic profit = total revenue − implicit costs 21. Suppose that for a particular business there are no implicit costs. Then a. accounting profit will be greater than economic profit. b. accounting profit will be the same as economic profit. c. accounting profit will be less than economic profit. d. the relationship between accounting profit and economic profit cannot be determined without more information. 22. Scenario 14-1 Korie wants to start her own business making custom furniture. She can purchase a factory that costs $400,000. Korie currently has $500,000 in the bank earning 3 percent interest per year. Refer to Scenario 14-1. Suppose Korie purchases the factory using $200,000 of her own money and $200,000 borrowed from a bank at an interest rate of 6 percent. What is Korie's annual opportunity cost of purchasing the factory? a. $3,000 b. $6,000 c. $15,000 d. $18,000 23. Scenario 14-2 Kachina is a senior majoring in graphic design at Awesome University (AU). While she has been attending college, Kachina started a computer consulting business to help senior citizens learn how to use their iPads. Kachina charges $25 per hour for her consulting services. She also works 5 hours a week for the Economics Department to maintain that department's Web page. The Economics Department pays Kachina $20 per hour. Refer to Scenario 14-2. If Kachina can work additional hours at either job, what is the opportunity cost if she spends one hour reading a novel? a. $20 b. $25 c. $100 d. $125 24. Scenario 14-3 Ziva is an organic lettuce farmer, but she also spends part of her day as a professional organizing consultant. As a consultant, Ziva helps people organize their houses. Due to the popularity of her home-organization services, Farmer Ziva has more clients requesting her services than she has time to help if she maintains her farming business. Farmer Ziva charges $25 an hour for her home-organization services. One spring day, Ziva spends 10 hours in her fields planting $130 worth of seeds on her farm. She expects that the seeds she planted will yield $300 worth of lettuce. .
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Ch 14: The Costs of Production Refer to Scenario 14-3. What is the total opportunity cost of the day that Farmer Ziva spent in the field planting lettuce? a. $130 b. $250 c. $300 d. $380 25. Scenario 14-3 Ziva is an organic lettuce farmer, but she also spends part of her day as a professional organizing consultant. As a consultant, Ziva helps people organize their houses. Due to the popularity of her home-organization services, Farmer Ziva has more clients requesting her services than she has time to help if she maintains her farming business. Farmer Ziva charges $25 an hour for her home-organization services. One spring day, Ziva spends 10 hours in her fields planting $130 worth of seeds on her farm. She expects that the seeds she planted will yield $300 worth of lettuce. Refer to Scenario 14-3. An economist would calculate Ziva's total cost for the day of farming to equal a. $130. b. $250. c. $300. d. $380. 26. Scenario 14-3 Ziva is an organic lettuce farmer, but she also spends part of her day as a professional organizing consultant. As a consultant, Ziva helps people organize their houses. Due to the popularity of her home-organization services, Farmer Ziva has more clients requesting her services than she has time to help if she maintains her farming business. Farmer Ziva charges $25 an hour for her home-organization services. One spring day, Ziva spends 10 hours in her fields planting $130 worth of seeds on her farm. She expects that the seeds she planted will yield $300 worth of lettuce. Refer to Scenario 14-3. Ziva's accountant would calculate the total cost for the day of farming to equal a. $25. b. $130. c. $300. d. $380. 27. Scenario 14-3 Ziva is an organic lettuce farmer, but she also spends part of her day as a professional organizing consultant. As a consultant, Ziva helps people organize their houses. Due to the popularity of her home-organization services, Farmer Ziva has more clients requesting her services than she has time to help if she maintains her farming business. Farmer Ziva charges $25 an hour for her home-organization services. One spring day, Ziva spends 10 hours in her fields planting $130 worth of seeds on her farm. She expects that the seeds she planted will yield $300 worth of lettuce. Refer to Scenario 14-3. Ziva's accounting profit from farming equals a. −$80. b. $130. c. $170. d. $260. 28. Scenario 14-3 Ziva is an organic lettuce farmer, but she also spends part of her day as a professional organizing consultant. As a consultant, Ziva helps people organize their houses. Due to the popularity of her home-organization services, Farmer Ziva .
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Ch 14: The Costs of Production has more clients requesting her services than she has time to help if she maintains her farming business. Farmer Ziva charges $25 an hour for her home-organization services. One spring day, Ziva spends 10 hours in her fields planting $130 worth of seeds on her farm. She expects that the seeds she planted will yield $300 worth of lettuce. Refer to Scenario 14-3. Ziva's economic profit from farming equals a. −$130. b. −$80. c. $130. d. $170. 29. Suppose that a "doggie day care" firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers a. both labor and capital to be fixed. b. both labor and capital to be variable. c. labor to be variable and capital to be fixed. d. capital to be variable and labor to be fixed. 30. If a firm uses labor to produce output, the firm's production function depicts the relationship between a. the number of workers and the quantity of output. b. marginal product and marginal cost. c. the maximum quantity that the firm can produce as it adds more capital to a fixed quantity of labor. d. fixed inputs and variable inputs in the short run. 31. Kate is a florist. Kate can arrange 20 bouquets per day. She is considering hiring her husband William to work for her. Together Kate and William can arrange 35 bouquets per day. What is William's marginal product? a. 55 bouquets b. 35 bouquets c. 22.5 bouquets d. 15 bouquets 32. Kate is a florist. Kate can arrange 20 bouquets per day. She is considering hiring her husband William to work for her. William can arrange 18 bouquets per day. What would be the total daily output of Kate's firm if she hired her husband? a. 18 bouquets b. 19 bouquets c. 20 bouquets d. 38 bouquets 33. Let L represent the number of workers hired by a firm, and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 12, Q = 122) and (L = 13, Q = 130). Then the marginal product of the 13th worker is a. 8 units of output. b. 10 units of output. c. 122 units of output. d. 132 units of output. 34. Suppose a certain firm is able to produce 165 units of output per day when 15 workers are hired. The firm is able to .
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Ch 14: The Costs of Production produce 181 units of output per day when 16 workers are hired, holding other inputs fixed. The marginal product of the 16th worker is a. 10 units of output. b. 11 units of output. c. 16 units of output. d. 181 units of output. 35. Eldin is a house painter. He can paint three houses per week. He is considering hiring his friend Murphy. Murphy can paint five houses per week. What is the maximum total output possible if Eldin hires Murphy? a. 2 houses b. 3 houses c. 5 houses d. 8 houses 36. Table 14-1 Labor (Number of Workers) 0 1 2 3 4 5
Output (Units) 0
Marginal Product (Units) – 30 45 60 50 40
Refer to Table 14-1. What is the total output when 1 worker is hired? a. 10 b. 30 c. 45 d. 75 37. Table 14-2 Labor (Number of workers) 0 1 2 3 4
.
Output (Units) 0 300 500 600 650
Marginal Product (Units) –
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Ch 14: The Costs of Production Refer to Table 14-2. What is the marginal product of the first worker? a. 300 units b. 200 units c. 100 units d. 50 units 38. Table 14-2 Labor (Number of workers) 0 1 2 3 4
Output (Units) 0 300 500 600 650
Marginal Product (Units) –
Refer to Table 14-2. At which number of workers does diminishing marginal product begin? a. 1 b. 2 c. 3 d. 4 39. Table 14-3 Labor (Number of workers) 0 1 2 3 4
Output (Units) 0 90 170 230 240
Fixed Cost (Dollars) 50 50 50 50 50
Variable Cost (Dollars) 0 20 40 60 80
Total Cost (Dollars) 50 70 90 110 130
Refer to Table 14-3. The marginal product of the second worker is a. 90 units. b. 85 units. c. 80 units. d. 20 units. 40. Table 14-3 .
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Ch 14: The Costs of Production Labor (Number of workers) 0 1 2 3 4
Output (Units) 0 90 170 230 240
Fixed Cost (Dollars) 50 50 50 50 50
Variable Cost (Dollars) 0 20 40 60 80
Total Cost (Dollars) 50 70 90 110 130
Refer to Table 14-3. At which number of workers does diminishing marginal product begin? a. 1 b. 2 c. 3 d. 4 41. On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product? a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers. b. The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers. c. The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers. d. The farmer is able to produce 6,200 bushels of wheat when he hires 4 workers. 42. As Bubba's Bubble Gum Company adds workers while using the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Bubba's Bubble Gum Company encounters a. economies of scale. b. diseconomies of scale. c. increasing marginal product. d. diminishing marginal product. 43. Figure 14-1
.
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Ch 14: The Costs of Production
Refer to Figure 14-1. The graph illustrates a typical a. total-cost curve. b. production function. c. production possibilities frontier. d. marginal product of labor curve. 44. Figure 14-1
.
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Ch 14: The Costs of Production
Refer to Figure 14-1. As the number of workers increases, a. marginal product decreases. b. total output decreases. c. marginal product increases but at a decreasing rate. d. total output increases at an increasing rate. 45. Table 14-4 The following table shows the production possibilities for Charles' math tutoring company. Labor (Number of tutors) 0 1 2 3 4
Output (Number of students tutored per week) 0 20 45 60 70
Refer to Table 14-4. Suppose that Charles's math tutoring company has a fixed cost of $50 per month for his cell phone. Each worker costs Charles $60 per day. As output increases from 45 to 70 students, Charles's total cost curve a. increases but gets flatter. .
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Ch 14: The Costs of Production b. increases and gets steeper. c. decreases and gets flatter. d. decreases but gets steeper. 46. Table 14-5 The following table shows the production and costs for the Wooden Chair Factory.
Labor (Number of workers)
Capital (Number of machines)
Output (Chairs produced per hour)
1 2 3 4 5 6 7
2 2 2 2 2 2 2
5 10 20 35 55 70 80
Marginal Product of Labor (Chairs produced per hour)
Cost of Workers (Dollars)
Cost of Total Machines Cost (Dollars (Dollars)
Refer to Table 14-5. Each worker at the Wooden Chair Factory costs $12 per hour. The cost of each machine is $20 per day regardless of the number of chairs produced. What is the total daily cost of producing at a rate of 55 chairs per hour if the factory operates 8 hours per day? a. $480 b. $576 c. $520 d. $616 47. Table 14-5 The following table shows the production and costs for the Wooden Chair Factory.
Labor (Number of workers)
Capital (Number of machines)
Output (Chairs produced per hour)
1 2 3 4 5 6 7
2 2 2 2 2 2 2
5 10 20 35 55 70 80
.
Marginal Product of Labor (Chairs produced per hour)
Cost of Workers (Dollars)
Cost of Total Machines Cost (Dollars (Dollars)
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Ch 14: The Costs of Production
Refer to Table 14-5. Assume the Wooden Chair Factory currently employs 5 workers. What is the marginal product of labor when the factory adds a 6th worker? a. 5 chairs per hour b. 15 chairs per hour c. 25 chairs per hour d. 70 chairs per hour 48. Table 14-5 The following table shows the production and costs for the Wooden Chair Factory.
Labor (Number of workers)
Capital (Number of machines)
Output (Chairs produced per hour)
1 2 3 4 5 6 7
2 2 2 2 2 2 2
5 10 20 35 55 70 80
Marginal Product of Labor (Chairs produced per hour)
Cost of Workers (Dollars)
Cost of Total Machines Cost (Dollars (Dollars)
Refer to Table 14-5. The Wooden Chair Factory experiences diminishing marginal product of labor with the addition of which worker? a. The third worker b. The fourth worker c. The fifth worker d. The sixth worker 49. Scenario 14-4 If Farmer Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 5 bushels of wheat. If he plants 2 bags, he gets 9 bushels. If he plants 3 bags, he gets 12 bushels. A bag of seeds costs $120, and seeds are his only cost. Refer to Scenario 14-4. Farmer Brown's production function exhibits a. increasing marginal product. b. constant marginal product. c. diminishing marginal product. d. The production function is unrelated to the marginal product. 50. Scenario 14-4 If Farmer Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 5 bushels of wheat. If .
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Ch 14: The Costs of Production he plants 2 bags, he gets 9 bushels. If he plants 3 bags, he gets 12 bushels. A bag of seeds costs $120, and seeds are his only cost. Refer to Scenario 14-4. Farmer Brown's total-cost curve is a. increasing at an increasing rate. b. increasing at a decreasing rate. c. increasing at a constant rate. d. decreasing. 51. Which of the following costs of publishing a book is a fixed cost? a. Author royalties of 5 percent per book b. The costs of paper and binding c. Shipping and postage expenses d. Composition, typesetting, and jacket design for the book 52. If a firm produces nothing, which of the following costs will be zero? a. Total cost b. Fixed cost c. Opportunity cost d. Variable cost 53. For a large firm that produces and sells automobiles, which of the following costs would be a variable cost? a. The $20 million payment that the firm pays each year for accounting services b. The cost of the steel that is used in producing automobiles c. The rent that the firm pays for office space in a suburb of St. Louis d. The cost of internet advertising incurred each year 54. Cindy's Car Wash has average variable costs of $2 and average fixed costs of $3 when it produces 100 units of output (car washes). The firm's total cost is a. $100. b. $200. c. $300. d. $500. 55. Tom's Tent Company has total fixed costs of $300,000 per year. The firm's average variable cost is $80 for 10,000 tents. At that level of output, the firm's average total costs equal a. $80 b. $90 c. $100 d. $110 56. Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that the average total cost when 5 units of output are produced is $30, and the marginal cost of the sixth unit of output is $60. What is the average total cost when six units are produced? a. $10 b. $25 .
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Ch 14: The Costs of Production c. $30 d. $35 57. Brady Industries has average variable costs of $1 and average total costs of $3 when it produces 500 units of output. The firm's total fixed costs equal a. $2. b. $4. c. $1,000. d. $2,000. 58. Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when four units of output are produced, the total cost is $175, and the average variable cost is $33.75. What would the average fixed cost be if ten units were produced? a. $4 b. $10 c. $40 d. $135 59. A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000, a. average fixed cost is 50 cents. b. average variable cost is $2. c. average total cost is $2.50. d. average total cost is 50 cents. 60. A firm produces 300 units of output at a total cost of $1,000. If fixed costs are $100, a. average fixed cost is $10. b. average variable cost is $3. c. average total cost is $4. d. average total cost is $5. 61. Table 14-6 Consider the following information about baseball production at Bobby's Baseball Factory. Labor (Number of workers) 1 2 3 4 5 6 7
.
Marginal Product (Baseballs) 3 5 8 10 7 4 2
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Ch 14: The Costs of Production Refer to Table 14-6. Bobby pays all his workers the same wage, and labor is his only variable cost. From this information we can conclude that Bobby's average variable cost decreases a. as output rises from 0 to 10, but rises after that. b. as output rises from 0 to 26, but rises after that. c. as output rises from 0 to 33, but increases after that. d. continually as output rises. 62. Table 14-7 The following table shows the production costs for The Flying Elvis Copter Rides. Average Average Average Output Total Fixed Variable Marginal Variable Fixed Cost Total Cost (Helicopter Cost Cost Cost Cost Cost (Dollars per (Dollars per rides) (Dollars) (Dollars) (Dollars) (Dollars) (Dollars per ride) ride) ride) 0 50 50 0 ----1 150 A B C D E F 2 G H I 120 J K L 3 M N O P Q 120 R
Refer to Table 14-7. What is the value of A? a. $25 b. $50 c. $100 d. $200 63. Table 14-7 The following table shows the production costs for The Flying Elvis Copter Rides. Average Average Average Output Total Fixed Variable Marginal Variable Fixed Cost Total Cost (Helicopter Cost Cost Cost Cost Cost (Dollars per (Dollars per rides) (Dollars) (Dollars) (Dollars) (Dollars) (Dollars per ride) ride) ride) 0 50 50 0 ----1 150 A B C D E F 2 G H I 120 J K L 3 M N O P Q 120 R
Refer to Table 14-7. What is the value of B? .
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Ch 14: The Costs of Production a. $25 b. $50 c. $100 d. $200 64. Table 14-7 The following table shows the production costs for The Flying Elvis Copter Rides. Average Average Average Output Total Fixed Variable Marginal Variable Fixed Cost Total Cost (Helicopter Cost Cost Cost Cost Cost (Dollars per (Dollars per rides) (Dollars) (Dollars) (Dollars) (Dollars) (Dollars per ride) ride) ride) 0 50 50 0 ----1 150 A B C D E F 2 G H I 120 J K L 3 M N O P Q 120 R
Refer to Table 14-7. What is the value of C? a. $25 b. $50 c. $100 d. $200 65. Table 14-7 The following table shows the production costs for The Flying Elvis Copter Rides. Average Average Average Output Total Fixed Variable Marginal Variable Fixed Cost Total Cost (Helicopter Cost Cost Cost Cost Cost (Dollars per (Dollars per rides) (Dollars) (Dollars) (Dollars) (Dollars) (Dollars per ride) ride) ride) 0 50 50 0 ----1 150 A B C D E F 2 G H I 120 J K L 3 M N O P Q 120 R
Refer to Table 14-7. What is the value of D? a. $25 b. $50 .
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Ch 14: The Costs of Production c. $100 d. $200 66. Table 14-7 The following table shows the production costs for The Flying Elvis Copter Rides. Average Average Average Output Total Fixed Variable Marginal Variable Fixed Cost Total Cost (Helicopter Cost Cost Cost Cost Cost (Dollars per (Dollars per rides) (Dollars) (Dollars) (Dollars) (Dollars) (Dollars per ride) ride) ride) 0 50 50 0 ----1 150 A B C D E F 2 G H I 120 J K L 3 M N O P Q 120 R
Refer to Table 14-7. What is the value of E? a. $25 b. $50 c. $100 d. $150 67. Table 14-7 The following table shows the production costs for The Flying Elvis Copter Rides. Average Average Average Output Total Fixed Variable Marginal Variable Fixed Cost Total Cost (Helicopter Cost Cost Cost Cost Cost (Dollars per (Dollars per rides) (Dollars) (Dollars) (Dollars) (Dollars) (Dollars per ride) ride) ride) 0 50 50 0 ----1 150 A B C D E F 2 G H I 120 J K L 3 M N O P Q 120 R
Refer to Table 14-7. What is the value of F? a. $50 b. $100 c. $150 d. $200 .
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Ch 14: The Costs of Production 68. Table 14-8 Output (Units) 0 1 2 3 4 5 6
Fixed Cost (Dollars) 20 20 20 20 20 20 20
Variable Cost (Dollars) 0 10 40 80 130 200 300
Refer to Table 14-8. What is the average fixed cost of producing 5 units of output? a. $4 b. $5 c. $40 d. $44 69. Table 14-8 Output (Units) 0 1 2 3 4 5 6
Fixed Cost (Dollars) 20 20 20 20 20 20 20
Variable Cost (Dollars) 0 10 40 80 130 200 300
Refer to Table 14-8. What is the average variable cost of producing 5 units of output? a. $4 b. $5 c. $40 d. $44 70. Table 14-8 Output (Units) 0 1 2 .
Fixed Cost (Dollars) 20 20 20
Variable Cost (Dollars) 0 10 40 Page 19
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Ch 14: The Costs of Production 3 4 5 6
20 20 20 20
80 130 200 300
Refer to Table 14-8. What is the marginal cost of producing the fifth unit of output? a. $4 b. $40 c. $50 d. $70 71. Table 14-8 Output (Units) 0 1 2 3 4 5 6
Fixed Cost (Dollars) 20 20 20 20 20 20 20
Variable Cost (Dollars) 0 10 40 80 130 200 300
Refer to Table 14-8. What is the shape of the marginal cost curve for this firm? a. constant b. upward-sloping c. downward-sloping d. U-shaped 72. Table 14-9 Labor (Number of workers) 0 1 2 3 4 5
Output (Units) 0 100 180 240 280 300
Fixed Cost (Dollars) 30 30 30 30 30 30
Variable Cost (Dollars) 0 15 30 45 60 75
Refer to Table 14-9. What is the marginal product of the third worker? a. 80 units b. 60 units .
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Ch 14: The Costs of Production c. 40 units d. 20 units 73. Table 14-9 Labor (Number of workers) 0 1 2 3 4 5
Output (Units) 0 100 180 240 280 300
Fixed Cost (Dollars) 30 30 30 30 30 30
Variable Cost (Dollars) 0 15 30 45 60 75
Refer to Table 14-9. The marginal products of hiring additional workers are a. increasing at an increasing rate. b. increasing at a decreasing rate. c. decreasing. d. constant. 74. Table 14-9 Labor (Number of workers) 0 1 2 3 4 5
Output (Units) 0 100 180 240 280 300
Fixed Cost (Dollars) 30 30 30 30 30 30
Variable Cost (Dollars) 0 15 30 45 60 75
Refer to Table 14-9. For the firm whose production function and costs are specified in the table, its total-cost curve is a. constant. b. increasing at a decreasing rate. c. increasing at an increasing rate. d. unknown because there is no relationship between a firm's production function and its total-cost curve. 75. Table 14-9 Labor (Number of workers) 0 1 2 .
Output (Units) 0 100 180
Fixed Cost (Dollars) 30 30 30
Variable Cost (Dollars) 0 15 30 Page 21
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Ch 14: The Costs of Production 3 4 5
240 280 300
30 30 30
45 60 75
Refer to Table 14-9. The average variable cost of producing 240 units is a. $0.13. b. $0.19. c. $0.32. d. $0.80. 76. Table 14-9 Labor (Number of workers) 0 1 2 3 4 5
Output (Units) 0 100 180 240 280 300
Fixed Cost (Dollars) 30 30 30 30 30 30
Variable Cost (Dollars) 0 15 30 45 60 75
Refer to Table 14-9. The average total cost of producing 240 units is a. $0.13. b. $0.19. c. $0.32. d. $0.80. 77. Table 14-9 Labor (Number of workers) 0 1 2 3 4 5
Output (Units) 0 100 180 240 280 300
Fixed Cost (Dollars) 30 30 30 30 30 30
Variable Cost (Dollars) 0 15 30 45 60 75
Refer to Table 14-9. For the firm whose production function and costs are specified in the table, its average-variable-cost curve is a. constant. b. decreasing. c. increasing. .
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Ch 14: The Costs of Production d. U-shaped. 78. Table 14-9 Labor (Number of workers) 0 1 2 3 4 5
Output (Units) 0 100 180 240 280 300
Fixed Cost (Dollars) 30 30 30 30 30 30
Variable Cost (Dollars) 0 15 30 45 60 75
Refer to Table 14-9. For the firm whose production function and costs are specified in the table, its average-total-cost curve is a. constant. b. decreasing. c. increasing. d. U-shaped. 79. Table 14-10 Teacher's Helper is a small company that has a subcontract to produce instructional materials for disabled children in public school districts. The owner rents several small rooms in an office building in the suburbs for $600 a month and has leased computer equipment that costs $480 a month. Average Output Average Average Fixed Variable Total Marginal Variable (Instructional Fixed Cost Total Cost Cost Cost Cost Cost Cost modules per (Dollars (Dollars (Dollars) (Dollars) (Dollars) (Dollars) (Dollars per month) per unit) per unit) unit) 0 1,080 1 1,080 400 1480 400 2 450 965 3 1,350 2,430 4 1,900 475 5 2,500 216 6 4,280 700 7 4,100 8 5,400 135 9 7,300 10 10,880 980
Refer to Table 14-10. What is the marginal cost of creating the tenth instructional module in a given month? .
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Ch 14: The Costs of Production a. $900 b. $1,250 c. $2,500 d. $3,060 80. Table 14-10 Teacher's Helper is a small company that has a subcontract to produce instructional materials for disabled children in public school districts. The owner rents several small rooms in an office building in the suburbs for $600 a month and has leased computer equipment that costs $480 a month. Average Output Average Average Fixed Variable Total Marginal Variable (Instructional Fixed Cost Total Cost Cost Cost Cost Cost Cost modules per (Dollars (Dollars (Dollars) (Dollars) (Dollars) (Dollars) (Dollars per month) per unit) per unit) unit) 0 1,080 1 1,080 400 1480 400 2 450 965 3 1,350 2,430 4 1,900 475 5 2,500 216 6 4,280 700 7 4,100 8 5,400 135 9 7,300 10 10,880 980
Refer to Table 14-10. What is the average variable cost for the month if 6 instructional modules are produced? a. $180.00 b. $533.33 c. $700.00 d. $713.33 81. Table 14-10 Teacher's Helper is a small company that has a subcontract to produce instructional materials for disabled children in public school districts. The owner rents several small rooms in an office building in the suburbs for $600 a month and has leased computer equipment that costs $480 a month. Average Output Average Average Fixed Variable Total Marginal Variable (Instructional Fixed Cost Total Cost Cost Cost Cost Cost Cost modules per (Dollars (Dollars (Dollars) (Dollars) (Dollars) (Dollars) (Dollars per month) per unit) per unit) unit) 0 1,080 .
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Ch 14: The Costs of Production 1 2 3 4 5 6 7 8 9 10
1,080
400 1,350 1,900 2,500
1480
400 450
965
2,430 475 216 4,280
4,100 5,400 7,300
700 135
10,880
980
Refer to Table 14-10. What is the average fixed cost for the month if 9 instructional modules are produced? a. $108.00 b. $120.00 c. $150.00 d. $811.11 82. Table 14-10 Teacher's Helper is a small company that has a subcontract to produce instructional materials for disabled children in public school districts. The owner rents several small rooms in an office building in the suburbs for $600 a month and has leased computer equipment that costs $480 a month. Average Output Average Average Fixed Variable Total Marginal Variable (Instructional Fixed Cost Total Cost Cost Cost Cost Cost Cost modules per (Dollars (Dollars (Dollars) (Dollars) (Dollars) (Dollars) (Dollars per month) per unit) per unit) unit) 0 1,080 1 1,080 400 1480 400 2 450 965 3 1,350 2,430 4 1,900 475 5 2,500 216 6 4,280 700 7 4,100 8 5,400 135 9 7,300 10 10,880 980
Refer to Table 14-10. How many instructional modules are produced when marginal cost is $1,300? .
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Ch 14: The Costs of Production a. 4 b. 5 c. 7 d. 8 83. Table 14-10 Teacher's Helper is a small company that has a subcontract to produce instructional materials for disabled children in public school districts. The owner rents several small rooms in an office building in the suburbs for $600 a month and has leased computer equipment that costs $480 a month. Average Output Average Average Fixed Variable Total Marginal Variable (Instructional Fixed Cost Total Cost Cost Cost Cost Cost Cost modules per (Dollars (Dollars (Dollars) (Dollars) (Dollars) (Dollars) (Dollars per month) per unit) per unit) unit) 0 1,080 1 1,080 400 1480 400 2 450 965 3 1,350 2,430 4 1,900 475 5 2,500 216 6 4,280 700 7 4,100 8 5,400 135 9 7,300 10 10,880 980
Refer to Table 14-10. One month, Teacher's Helper produced 18 instructional modules. What was the average fixed cost for that month? a. $60 b. $108 c. $811 d. It can't be determined from the information given. 84. If marginal cost is rising, a. average variable cost must be falling. b. average fixed cost must be rising. c. marginal product must be falling. d. marginal product must be rising. 85. Figure 14-2
.
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Ch 14: The Costs of Production
Refer to Figure 14-2. Curve A represents which type of cost curve? a. Marginal cost b. Average total cost c. Average variable cost d. Average fixed cost 86. Figure 14-2
.
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Ch 14: The Costs of Production
Refer to Figure 14-2. Which of the curves is most likely to represent average fixed cost? a. A b. B c. C d. D 87. Figure 14-2
.
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Ch 14: The Costs of Production
Refer to Figure 14-2. Curve D is increasing because a. of diminishing marginal product. b. of increasing marginal product. c. marginal product first increases, then decreases. d. marginal product first decreases, then increases. 88. Figure 14-2
.
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Ch 14: The Costs of Production
Refer to Figure 14-2. Curve A is always declining because a. of diminishing marginal product. b. we are dividing fixed costs by higher and higher levels of output. c. marginal product first increases, then decreases. d. marginal product first decreases, then increases. 89. Figure 14-2
.
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Ch 14: The Costs of Production
Refer to Figure 14-2. Curve D intersects curve C a. where the firm maximizes production. b. at the minimum of average fixed cost. c. at the efficient scale. d. where fixed costs equal variable costs. 90. Figure 14-3
.
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Ch 14: The Costs of Production
Refer to Figure 14-3. Which of the following can be inferred from the figure above? a. Marginal cost is increasing at all levels of output, and marginal product is increasing at low levels of output. b. Marginal product is increasing at low level of output and decreasing at high level of output. c. Marginal cost is increasing at all levels of output, and marginal product is decreasing at high level of output. d. Marginal product is increasing at all levels of output. 91. Figure 14-3
.
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Ch 14: The Costs of Production
Refer to Figure 14-3. Why doesn't the total cost curve begin at the origin (the point 0,0)? a. Because variable costs are positive when output is zero b. Because fixed costs are positive when output is zero c. Because the firm is producing at the efficient scale d. Because the firm is maximizing profits 92. Figure 14-4 Figure 1
Figure 2
Figure 3
Figure 4
Refer to Figure 14-4. Which of the figures represents the total cost curve for a typical firm? a. Figure 1 b. Figure 2 .
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Ch 14: The Costs of Production c. Figure 3 d. Figure 4 93. Figure 14-5
Refer to Figure 14-5. The efficient scale of production occurs at which quantity? a. A b. B c. C d. D 94. Figure 14-5
.
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Ch 14: The Costs of Production
Refer to Figure 14-5. Which of the following statements is correct? a. Marginal cost is rising for quantities higher than D because marginal cost is higher than average total cost. b. Average variable cost is declining for quantities less than B because marginal cost is lower than average variable cost. c. Marginal cost is minimized at B because at that quantity, marginal cost equals average variable cost. d. Average total cost is declining for quantities less than C because average variable cost is less than average total cost. 95. The average fixed cost curve a. always declines with increased levels of output. b. always rises with increased levels of output. c. declines as long as it is above marginal cost. d. declines as long as it is below marginal cost. 96. Average total cost is very high when a small amount of output is produced because a. average variable cost is high. b. average fixed cost is high. c. marginal cost is high. d. marginal product is high. 97. When marginal cost is less than average total cost, a. marginal cost must be falling. b. average variable cost must be falling. c. average total cost is falling. .
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Ch 14: The Costs of Production d. average total cost is rising. 98. Average total cost is increasing whenever a. total cost is increasing. b. marginal cost is increasing. c. marginal cost is less than average total cost. d. marginal cost is greater than average total cost. 99. Marginal cost is equal to average total cost when a. average variable cost is falling. b. average fixed cost is rising. c. marginal cost is at its minimum. d. average total cost is at its minimum. 100. The minimum points of the average variable cost and average total cost curves occur where the a. marginal cost curve lies below the average variable cost and average total cost curves. b. marginal cost curve intersects those curves. c. average variable cost and average total cost curves intersect. d. slope of total cost is the smallest. 101. When a factory is operating in the short run, a. it cannot alter variable costs. b. total cost and variable cost are usually the same. c. average fixed cost rises as output increases. d. it cannot adjust the quantity of fixed inputs. 102. In the short run, a firm that produces and sells house paint can adjust a. where to produce along its long-run average-total-cost curve. b. the size of its factories. c. how many workers to hire. d. the location of its factory. 103. A firm that produces and sells furniture gets to choose a. how many workers to hire in both the short run and the long run. b. the size of its factories in the short run but not in the long run. c. which short-run average-total-cost curve to use in both the short run and the long run. d. the number of machines it uses in the short run but not in the long run. 104. In the long run, a. inputs that were fixed in the short run remain fixed. b. inputs that were fixed in the short run become variable. c. inputs that were variable in the short run become fixed. d. variable inputs are rarely used.
.
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Ch 14: The Costs of Production 105. Which of the following explains why long-run average total cost at first decreases as output increases? a. Diseconomies of scale b. Less-efficient use of inputs c. Fixed costs becoming spread out over more units of output d. Gains from specialization of inputs 106. The most likely explanation for economies of scale is a. coordination problems. b. specialization of labor. c. increasing marginal cost. d. decreasing marginal cost. 107. Economies of scale occur when a. long-run average total costs rise as output increases. b. long-run average total costs fall as output increases. c. average fixed costs are falling. d. average fixed costs are constant. 108. A firm that wants to achieve economies of scale could do so by a. assigning limited tasks to its employees, so they can master those tasks. b. employing a smaller number of workers. c. producing a smaller quantity of output. d. producing an output level higher than the efficient scale. 109. If long-run average total cost decreases as the quantity of output increases, the firm is experiencing a. economies of scale. b. diseconomies of scale. c. coordination problems arising from the large size of the firm. d. fixed costs greatly exceeding variable costs. 110. In the long run a company that produces and sells popcorn incurs total costs of $1,050 when output is 90 canisters and $1,200 when output is 120 canisters. The popcorn company exhibits a. diseconomies of scale because total cost is rising as output rises. b. diseconomies of scale because average total cost is rising as output rises. c. economies of scale because total cost is rising as output rises. d. economies of scale because average total cost is falling as output rises. 111. Suppose that a firm's long-run average total costs of producing televisions decreases as it produces between 10,000 and 20,000 televisions. For this range of output, the firm is experiencing a. economies of scale. b. constant returns to scale. c. diseconomies of scale. d. coordination problems. 112. When a firm experiences constant returns to scale, .
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Ch 14: The Costs of Production a. long-run average total cost is unchanged, even when output increases. b. long-run marginal cost is greater than long-run average total cost. c. long-run marginal cost is less than long-run average total cost. d. the firm is experiencing coordination problems. 113. If a firm experiences constant returns to scale at all output levels, then its long-run average total cost curve would a. slope downward. b. be horizontal. c. slope upward. d. slope downward for low output levels and upward for high output levels. 114. When a firm experiences diseconomies of scale, a. short-run average total cost is minimized. b. long-run average total cost is minimized. c. long-run average total cost increases as output increases. d. long-run average total cost decreases as output increases. 115. Firms may experience diseconomies of scale when a. they are too small to take advantage of specialization. b. large management structures are bureaucratic and inefficient. c. there are too few employees, and managers do not have enough to do. d. average fixed costs begin to rise again. 116. Figure 14-6 The following figure depicts average total cost functions for a firm that produces automobiles.
.
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Ch 14: The Costs of Production
Refer to Figure 14-6. Which of the curves is most likely to characterize the short-run average total cost curve of the smallest factory? a. ATCA b. ATCB c. ATCC d. ATCD 117. Figure 14-6 The following figure depicts average total cost functions for a firm that produces automobiles.
Refer to Figure 14-6. The firm experiences economies of scale at which output levels? a. Output levels less than M b. Output levels between M and N c. Output levels greater than N d. Output level greater than M 118. Figure 14-6 The following figure depicts average total cost functions for a firm that produces automobiles.
.
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Ch 14: The Costs of Production
Refer to Figure 14-6. At levels of output less than M, the firm experiences a. economies of scale. b. diseconomies of scale. c. constant returns to scale. d. both diminishing marginal productivity and coordination problems. 119. Figure 14-6 The following figure depicts average total cost functions for a firm that produces automobiles.
.
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Ch 14: The Costs of Production
Refer to Figure 14-6. At levels of output between M and N, the firm experiences a. economies of scale. b. diseconomies of scale. c. constant returns to scale. d. both the benefits of specialization and diminishing marginal productivity. 120. Table 14-11 Quantity 1 2 3 4 5
Long-Run Total Cost (Dollars) Firm A Firm B Firm C 100 100 100 100 200 300 100 300 600 100 400 1,000 100 500 1,500
Refer to Table 14-11. Which firm is experiencing diseconomies of scale? a. Firm A only b. Firm B only c. Firm C only d. Firm A and Firm B only 121. Table 14-12 .
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Ch 14: The Costs of Production
Quantity 1 2 3 4 5 6 7
Firm 1 180 350 510 660 800 930 1,050
Long-Run Total Cost (Dollars) Firm 2 Firm 3 120 150 250 300 390 450 540 600 700 750 870 900 1,050 1,050
Firm 4 210 340 490 660 850 1,060 1,290
Refer to Table 14-12. Which firm has constant returns to scale over the entire range of output? a. Firm 1 b. Firm 2 c. Firm 3 d. Firm 4 122. Table 14-12 Quantity 1 2 3 4 5 6 7
Firm 1 180 350 510 660 800 930 1,050
Long-Run Total Cost (Dollars) Firm 2 Firm 3 120 150 250 300 390 450 540 600 700 750 870 900 1,050 1,050
Firm 4 210 340 490 660 850 1,060 1,290
Refer to Table 14-12. Which firm has economies of scale and then diseconomies of scale as output increases from 1 to 7? a. Firm 1 b. Firm 2 c. Firm 3 d. Firm 4 123. Table 14-12 Quantity 1 2 3 4 .
Firm 1 180 350 510 660
Long-Run Total Cost (Dollars) Firm 2 Firm 3 120 150 250 300 390 450 540 600
Firm 4 210 340 490 660 Page 42
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Ch 14: The Costs of Production 5 6 7
800 930 1,050
700 870 1,050
750 900 1,050
850 1,060 1,290
Refer to Table 14-12. Which firm's long-run marginal cost decreases as output increases? a. Firm 1 b. Firm 2 c. Firm 3 d. Firm 4 124. Table 14-12 Quantity 1 2 3 4 5 6 7
Firm 1 180 350 510 660 800 930 1,050
Long-Run Total Cost (Dollars) Firm 2 Firm 3 120 150 250 300 390 450 540 600 700 750 870 900 1,050 1,050
Firm 4 210 340 490 660 850 1,060 1,290
Refer to Table 14-12. Firm 4's efficient scale occurs at what quantity? a. 2 b. 3 c. 4 d. 5
Indicate whether the statement is true or false. 125. The economic field of industrial organization examines how firms’ decisions about prices and quantities depend on the market conditions they face. a. True b. False 126. The field of industrial organization addresses how the number of firms affects prices in a market and the efficiency of the market outcome. a. True b. False 127. A firm’s total profit equals its marginal revenue minus its marginal cost. a. True .
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Ch 14: The Costs of Production b. False 128. Profit equals total revenue minus total cost. a. True b. False 129. The difference between economic profit and accounting profit is that economic profit is calculated based on both implicit and explicit costs whereas accounting profit is calculated based on explicit costs only. a. True b. False 130. Accounting profit is greater than or equal to economic profit. a. True b. False 131. Economic profit is greater than or equal to accounting profit. a. True b. False 132. Although economists and accountants treat many costs differently, they both treat the cost of capital the same. a. True b. False 133. Accountants keep track of the money that flows into and out of firms. a. True b. False 134. When economists speak of a firm's costs, they are usually excluding the opportunity costs. a. True b. False 135. Economists and accountants both include forgone income as a cost to a small business owner. a. True b. False 136. Anna borrows $5,000 from a bank and withdraws $1,000 from her personal savings to start a coffee shop. The interest rate is 5 percent for both the bank loan and her personal savings. Her opportunity cost of capital is $250. a. True b. False 137. Economists and accountants usually disagree on the inclusion of implicit costs into the cost analysis of a firm. a. True b. False 138. Implicit costs are costs that do not require an outlay of money by the firm. a. True .
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Ch 14: The Costs of Production b. False 139. Accountants often ignore implicit costs. a. True b. False 140. The opportunity cost of capital is an implicit cost almost every business incurs. a. True b. False 141. An example of an explicit cost would be the wages that a business owner pays their employees. a. True b. False 142. An example of an explicit cost for the owner of a tattoo parlor would be the wages that they could earn if they worked as a graphic artist for an advertising agency. a. True b. False 143. Diminishing marginal productivity implies decreasing total product. a. True b. False 144. Diminishing marginal product exists when the total cost curve becomes horizontal as outputs increases. a. True b. False 145. Diminishing marginal product exists when the production function becomes flatter as inputs increase. a. True b. False 146. A second or third worker may have a higher marginal product than the first worker in certain circumstances. a. True b. False 147. The typical total-cost curve is U-shaped. a. True b. False 148. The average-fixed-cost curve is constant. a. True b. False 149. In the short run, if a firm produces nothing, total costs are zero. a. True b. False .
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Ch 14: The Costs of Production 150. If a firm produces nothing, it still incurs its fixed costs. a. True b. False 151. For a typical firm, fixed costs increase in direct proportion to the increases in output. a. True b. False 152. The shape of the total-cost curve is unrelated to the shape of the production function. a. True b. False 153. The shape of the total-cost curve is inversely related to the shape of the production function. a. True b. False 154. The graph of the production function plots total cost versus quantity of output. a. True b. False 155. Suppose that a worker can produce 100 units of output in 7 hours. In the 8th hour, they can produce 12 units of output. The worker can produce 112 units of output in 8 hours. a. True b. False 156. Marginal costs are costs that do not vary with the quantity of output produced. a. True b. False 157. Several related measures of cost can be derived from a firm's total cost. a. True b. False 158. Variable costs usually change as the firm alters the quantity of output produced. a. True b. False 159. Variable costs equal fixed costs when nothing is produced. a. True b. False 160. The cost of producing an additional unit of a good is not the same as the average cost of the good. a. True b. False .
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Ch 14: The Costs of Production 161. Average variable cost is equal to total variable cost divided by quantity of output. a. True b. False 162. The average-total-cost curve is unaffected by diminishing marginal product. a. True b. False 163. The average-total-cost curve reflects the shape of both the average-fixed-cost and average-variable-cost curves. a. True b. False 164. If the marginal-cost curve is rising, then so is the average-total-cost curve. a. True b. False 165. The marginal-cost curve intersects the average-total-cost curve at the minimum point of the average-total-cost curve. a. True b. False 166. The marginal-cost curve intersects the average-total-cost curve at the minimum point of the marginal-cost curve. a. True b. False 167. The marginal-cost curve intersects the average-total-cost curve at the output level where average fixed costs are zero. a. True b. False 168. Assume Jack received all As in his classes last semester. If Jack gets all Bs in his classes this semester, his GPA may or may not fall. a. True b. False 169. Average total cost and marginal cost express information that is already contained in a firm's total cost. a. True b. False 170. Average total cost reveals how much total cost will change as the firm alters its level of production. a. True b. False 171. If the marginal cost of producing the tenth unit of output is $3, and if the average total cost of producing the tenth unit of output is $2, then at ten units of output, average total cost is rising. a. True b. False .
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Ch 14: The Costs of Production 172. If the marginal cost of producing the tenth unit of output is $2.50, and if the average total cost of producing the tenth unit of output is $3, then at ten units of output, average total cost is rising. a. True b. False 173. If the marginal cost of producing the fifth unit of output is higher than the marginal cost of producing the fourth unit of output, then at five units of output, average total cost must be rising. a. True b. False 174. The shape of the marginal cost curve tells a producer something about the marginal product of their workers. a. True b. False 175. The marginal-cost curve intersects the average-fixed-cost curve at the minimum of marginal cost. a. True b. False 176. When average total cost is above marginal cost, average total cost is rising. a. True b. False 177. When average total cost rises if a producer either increases or decreases production, then the firm is said to be operating at efficient scale. a. True b. False 178. In the long run, a factory is usually considered a fixed input. a. True b. False 179. Fixed costs are those costs that remain fixed no matter how long the time horizon is. a. True b. False 180. The fact that many inputs are fixed in the short run but variable in the long run has little impact on the firm's cost curves. a. True b. False 181. There is general agreement among economists that the long-run time period exceeds one year. a. True b. False 182. As a firm moves along its long-run average cost curve, it is adjusting the size of its factory to the quantity of production. .
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Ch 14: The Costs of Production a. True b. False 183. Because of the greater flexibility that firms have in the long run, all short-run cost curves lie on or above the long-run curve. a. True b. False 184. Economies of scale often arise because higher production levels allow specialization among workers. a. True b. False 185. If long-run average total cost is rising, then the firm is experiencing economies of scale. a. True b. False 186. In some cases, specialization allows larger factories to produce goods at a lower average cost than smaller factories. a. True b. False 187. The use of specialization to achieve economies of scale is one reason modern societies are as prosperous as they are. a. True b. False 188. When a firm experiences economies of scale, long-run average total cost falls as the quantity of output increases. a. True b. False 189. Diseconomies of scale often arise because higher production levels allow specialization among workers. a. True b. False 190. Table 14-13 Listed in the table are the long-run total costs for three different firms. Quantity Firm A Firm B Firm C
1 100 100 100
2 100 200 300
3 100 300 600
4 100 400 1,000
5 100 500 1,500
Refer to Table 14-20. Firm A is experiencing economies of scale. a. True b. False 191. Table 14-13 Listed in the table are the long-run total costs for three different firms. .
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Ch 14: The Costs of Production Quantity Firm A Firm B Firm C
1 100 100 100
2 100 200 300
3 100 300 600
4 100 400 1,000
5 100 500 1,500
Refer to Table 14-13. Firm A is experiencing constant returns to scale. a. True b. False 192. Table 14-13 Listed in the table are the long-run total costs for three different firms. Quantity Firm A Firm B Firm C
1 100 100 100
2 100 200 300
3 100 300 600
4 100 400 1,000
5 100 500 1,500
Refer to Table 14-13. Firm B is experiencing constant returns to scale. a. True b. False 193. Table 14-13 Listed in the table are the long-run total costs for three different firms. Quantity Firm A Firm B Firm C
1 100 100 100
2 100 200 300
3 100 300 600
4 100 400 1,000
5 100 500 1,500
Refer to Table 14-13. Firm B is experiencing diseconomies of scale. a. True b. False 194. Table 14-13 Listed in the table are the long-run total costs for three different firms. Quantity Firm A Firm B Firm C
1 100 100 100
2 100 200 300
3 100 300 600
4
5
100 400 1,000
100 500 1,500
Refer to Table 14-13. Firm C is experiencing diseconomies of scale. a. True b. False 195. Table 14-13 Listed in the table are the long-run total costs for three different firms. .
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Ch 14: The Costs of Production Quantity Firm A Firm B Firm C
1 100 100 100
2 100 200 300
3 100 300 600
4 100 400 1,000
5 100 500 1,500
Refer to Table 14-13. Firm C is experiencing economies of scale. a. True b. False 196. Adam Smith's example of the pin factory demonstrates that economies of scale result from specialization. a. True b. False 197. Adam Smith describes a visit to a car factory when discussing economies of scale in his book An Inquiry into the Nature and Causes of the Wealth of Nations. a. True b. False 198. Economists include both explicit and implicit costs while accountants include only implicit costs. a. True b. False 199. Jaxon borrows $10,000 from a bank and withdraws $20,000 from his personal savings to open a tattoo parlor. The interest rate is 3 percent for both the bank loan and his personal savings. Jaxon’s implicit costs are $900. a. True b. False 200. Jaxon borrows $10,000 from a bank and withdraws $20,000 from his personal savings to open a tattoo parlor. The interest rate is 3 percent for both the bank loan and his personal savings. Jaxon also quit his job as a waiter, which paid $20,000. According to an economist, Jaxon’s opportunity cost of opening the tattoo parlor equals $20,900. a. True b. False 201. If the production function exhibits diminishing marginal product, the total cost function gets steeper as the quantity of output increases. a. True b. False 202. A firm produces 60 units of output with 5 workers, 65 units with 6 workers, and 68 units with 7 workers. The firm's production function exhibits diminishing marginal productivity between 5 and 7 workers. a. True b. False 203. The U-shaped average-total-cost curve reflects the U-shaped average-fixed-cost curve. a. True b. False .
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Ch 14: The Costs of Production 204. If the average-total-cost curve is falling, then the marginal-cost curve must also be falling. a. True b. False 205. If the average-total-cost of producing five units is $10, and the marginal-cost of producing the fifth unit is $10, then the average-total-cost curve is at its minimum at five units. a. True b. False 206. If an industry exhibits economies of scale, one larger firm may be able to produce goods at a lower long-run average cost than two smaller firms. a. True b. False 207. Economies of scale commonly arise because of coordination problems. a. True b. False
208. Define profit. 209. Consider a small family wheat farm. List some examples of explicit costs of farming. 210. Consider a small family wheat farm. List some examples of implicit costs of farming. 211. Can economic profit ever exceed accounting profit? 212. Briefly describe why measuring a firm’s costs is more complicated than measuring its revenues. 213. Consider a small hair styling salon. List some examples of explicit costs of this business. 214. Consider a small hair styling salon. List some examples of implicit costs of this business. 215. Which is greater -- economic profit or accounting profit? 216. Scenario 14-5 Suppose that a small family farm sold its output for $100,000 in a given year. The family spent $25,000 on fuel, $40,000 on seed, fertilizer, and pesticides, and $25,000 on equipment, including maintenance. The family members could have earned $20,000 working at other occupations. Refer to Scenario 14-5. What is the accounting profit for the family farm? 217. Scenario 14-5 Suppose that a small family farm sold its output for $100,000 in a given year. The family spent $25,000 on fuel, $40,000 on seed, fertilizer, and pesticides, and $25,000 on equipment, including maintenance. The family members could have earned $20,000 working at other occupations. Refer to Scenario 14-5. What is the economic profit for the family farm? .
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Ch 14: The Costs of Production 218. Scenario 14-6 Suppose that a small hair styling salon had revenues of $150,000 in a given year. The owner spent $10,000 on utilities, $60,000 on supplies (shampoo, conditioner, hair coloring and other chemicals, etc.), and $50,000 on equipment (mirrors, chairs, scissors, curling irons, etc.), including maintenance. The owner could have earned $50,000 working at another salon. Refer to Scenario 14-6. What is the accounting profit for the hair styling salon? 219. Scenario 14-6 Suppose that a small hair styling salon had revenues of $150,000 in a given year. The owner spent $10,000 on utilities, $60,000 on supplies (shampoo, conditioner, hair coloring and other chemicals, etc.), and $50,000 on equipment (mirrors, chairs, scissors, curling irons, etc.), including maintenance. The owner could have earned $50,000 working at another salon. Refer to Scenario 14-6. What is the economic profit for the hair styling salon? 220. Table 14-14 Labor 0 1 2 3 4 5 6
Output 0 200 350 450
Marginal Product -200
50 25 530
Variable Cost $0 $20 $40 $60 $80 $100 $120
Fixed Cost $10 $10 $10 $10 $10 $10 $10
Refer to Table 14-14. What is the marginal product of the third worker? 221. Table 14-14 Labor 0 1 2 3 4 5 6
Output 0 200 350 450
Marginal Product -200
50 25 530
Variable Cost $0 $20 $40 $60 $80 $100 $120
Fixed Cost $10 $10 $10 $10 $10 $10 $10
Refer to Table 14-14. What is the total output of four workers? 222. Table 14-14 Labor 0 1 2 3 4 .
Output 0 200 350 450
Marginal Product -200
50
Variable Cost $0 $20 $40 $60 $80
Fixed Cost $10 $10 $10 $10 $10 Page 53
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Ch 14: The Costs of Production 5 6
25 530
$100 $120
$10 $10
Refer to Table 14-14. What is the total output of five workers? 223. Table 14-14 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 200 350 450
-200
50 25 530
Variable Cost $0 $20 $40 $60 $80 $100 $120
Fixed Cost $10 $10 $10 $10 $10 $10 $10
Refer to Table 14-14. What is the marginal product of the sixth worker? 224. Table 14-14 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 200 350 450
-200
50 25 530
Variable Cost $0 $20 $40 $60 $80 $100 $120
Fixed Cost $10 $10 $10 $10 $10 $10 $10
Refer to Table 14-14. What is the shape of the firm’s total-cost curve? 225. Table 14-14 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 200 350 450
-200
50 25 530
Variable Cost $0 $20 $40 $60 $80 $100 $120
Fixed Cost $10 $10 $10 $10 $10 $10 $10
Refer to Table 14-14. What is the average total cost of producing 525 units of output? 226. Table 14-14 Labor 0 .
Marginal Product
Output 0
--
Variable Cost $0
Fixed Cost $10 Page 54
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Ch 14: The Costs of Production 1 2 3 4 5 6
200 350 450
200
50 25 530
$20 $40 $60 $80 $100 $120
$10 $10 $10 $10 $10 $10
Refer to Table 14-14. What is the average variable cost of producing 500 units of output? 227. Table 14-14 Labor 0 1 2 3 4 5 6
Output 0 200 350 450
Marginal Product -200
50 25 530
Variable Cost $0 $20 $40 $60 $80 $100 $120
Fixed Cost $10 $10 $10 $10 $10 $10 $10
Refer to Table 14-14. What is the average fixed cost of producing 450 units of output? 228. Table 14-14 Labor 0 1 2 3 4 5 6
Output 0 200 350 450
Marginal Product -200
50 25 530
Variable Cost $0 $20 $40 $60 $80 $100 $120
Fixed Cost $10 $10 $10 $10 $10 $10 $10
Refer to Table 14-14. What is the shape of the average-fixed-cost curve? 229. Table 14-14 Labor 0 1 2 3 4 5 6
Output 0 200 350 450
Marginal Product -200
50 25 530
Variable Cost $0 $20 $40 $60 $80 $100 $120
Fixed Cost $10 $10 $10 $10 $10 $10 $10
Refer to Table 14-14. What is the shape of the average-variable-cost curve? .
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Ch 14: The Costs of Production 230. Table 14-14 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 200 350 450
-200
50 25 530
Variable Cost $0 $20 $40 $60 $80 $100 $120
Fixed Cost $10 $10 $10 $10 $10 $10 $10
Refer to Table 14-14. What is the shape of the average-total-cost curve? 231. Table 14-14 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 200 350 450
-200
50 25 530
Variable Cost $0 $20 $40 $60 $80 $100 $120
Fixed Cost $10 $10 $10 $10 $10 $10 $10
Refer to Table 14-14. What is the shape of the marginal-cost curve? 232. Table 14-15 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 100 250 350
-100
50 25 430
Variable Cost $0 $5 $10 $15 $20 $25 $30
Fixed Cost $5 $5 $5 $5 $5 $5 $5
Refer to Table 14-15. What is the marginal product of the second worker? 233. Table 14-15 Labor 0 1 2 3 4 5 .
Marginal Product
Output 0 100 250 350
-100
50 25
Variable Cost $0 $5 $10 $15 $20 $25
Fixed Cost $5 $5 $5 $5 $5 $5 Page 56
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Ch 14: The Costs of Production 6
430
$30
$5
Refer to Table 14-15. What is the total output of five workers? 234. Table 14-15 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 100 250 350
-100
50 25 430
Variable Cost $0 $5 $10 $15 $20 $25 $30
Fixed Cost $5 $5 $5 $5 $5 $5 $5
Refer to Table 14-15. What is the marginal product of the sixth worker? 235. Table 14-15 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 100 250 350
-100
50 25 430
Variable Cost $0 $5 $10 $15 $20 $25 $30
Fixed Cost $5 $5 $5 $5 $5 $5 $5
Refer to Table 14-15. What is the shape of the marginal-cost curve? 236. Table 14-15 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 100 250 350
-100
50 25 430
Variable Cost $0 $5 $10 $15 $20 $25 $30
Fixed Cost $5 $5 $5 $5 $5 $5 $5
Refer to Table 14-15. What is the shape of this firm’s total-cost curve? 237. Table 14-15 Labor 0 1 .
Output 0 100
Marginal Product -100
Variable Fixed Cost Cost $0 $5 $5 $5 Page 57
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Ch 14: The Costs of Production 2 3 4 5 6
250 350
$10 $15 $20 $25 $30
50 25 430
$5 $5 $5 $5 $5
Refer to Table 14-15. What is the average total cost of producing 425 units of output? 238. Table 14-15 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 100 250 350
-100
50 25 430
Variable Cost $0 $5 $10 $15 $20 $25 $30
Fixed Cost $5 $5 $5 $5 $5 $5 $5
Refer to Table 14-15. What is the average variable cost of producing 400 units of output? 239. Table 14-15 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 100 250 350
-100
50 25 430
Variable Cost $0 $5 $10 $15 $20 $25 $30
Fixed Cost $5 $5 $5 $5 $5 $5 $5
Refer to Table 14-15. What is the average fixed cost of producing 430 units of output? 240. Table 14-15 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 100 250 350
-100
50 25 430
Variable Cost $0 $5 $10 $15 $20 $25 $30
Fixed Cost $5 $5 $5 $5 $5 $5 $5
Refer to Table 14-15. What is the shape of the average-fixed-cost curve? 241. Table 14-15 .
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Ch 14: The Costs of Production Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 100 250 350
-100
50 25 430
Variable Cost $0 $5 $10 $15 $20 $25 $30
Fixed Cost $5 $5 $5 $5 $5 $5 $5
Refer to Table 14-15. What is the shape of the average-variable-cost curve? 242. Table 14-15 Labor 0 1 2 3 4 5 6
Marginal Product
Output 0 100 250 350
-100
50 25 430
Variable Cost $0 $5 $10 $15 $20 $25 $30
Fixed Cost $5 $5 $5 $5 $5 $5 $5
Refer to Table 14-15. What is the shape of the average-total-cost curve? 243. Describe the relationship between average total cost and marginal cost. 244. Describe the relationship between average variable cost and marginal cost. 245. Describe the general shape of the average-fixed-cost curve. 246. Describe the relationship between average variable cost and average total cost. How are the general shapes of the AVC and ATC curves related? 247. Average variable cost will decrease if __________. 248. Average total cost will increase if __________. 249. How can the average-fixed-cost curve be declining when fixed cost is constant? 250. The average-fixed-cost curve is always declining. How does this affect the relationship between the AVC and ATC curves? 251. Describe the difference between the short run and the long run. 252. What might cause economies of scale? 253. What might cause diseconomies of scale? .
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Ch 14: The Costs of Production 254. Suppose that Danita owns a cupcake bakery. In the short run, at least one of her inputs is fixed. Provide one or two examples of the types of inputs that could be fixed in the short run. 255. Describe how an accounting firm could experience economies of scale. 256. Describe how a study group of economics students could experience economies of scale as they study for an economics exam. 257. Describe how an accounting firm could experience diseconomies of scale. 258. What are opportunity costs? How do explicit and implicit costs relate to opportunity costs? 259. A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate? Explain. 260. The production function depicts a relationship between which two variables? Also, draw a production function that exhibits diminishing marginal product. 261. How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph. 262. What effect, if any, does diminishing marginal product have on the shape of the marginal cost curve? 263. Bob Edwards owns a bagel shop. Bob hires an economist who assesses the shape of the bagel shop's average total cost (ATC) curve as a function of the number of bagels produced. The results indicate a U-shaped average total cost curve. Bob's economist explains that ATC is U-shaped for two reasons. The first is the existence of diminishing marginal product, which causes it to rise. What would be the second reason? Assume that the marginal cost curve is linear. (Hint: The second reason relates to average fixed cost) 264. If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the average total cost curve is rising, what is necessarily true of the marginal cost curve? 265. According to the mathematical laws that govern the relationship between average total cost and marginal cost, where must these two curves intersect?
.
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Ch 14: The Costs of Production Answer Key 1. a 2. b 3. a 4. c 5. c 6. a 7. c 8. c 9. c 10. c 11. b 12. c 13. c 14. c 15. d 16. a 17. b 18. a 19. a 20. a 21. b 22. d 23. b 24. d 25. d .
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Ch 14: The Costs of Production 26. b 27. c 28. b 29. c 30. a 31. d 32. d 33. a 34. c 35. d 36. b 37. a 38. b 39. c 40. b 41. a 42. d 43. b 44. a 45. b 46. c 47. b 48. d 49. c 50. a 51. d .
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Ch 14: The Costs of Production 52. d 53. b 54. d 55. d 56. d 57. c 58. a 59. a 60. b 61. b 62. b 63. c 64. c 65. b 66. c 67. c 68. a 69. c 70. d 71. b 72. b 73. c 74. c 75. b 76. c .
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Ch 14: The Costs of Production 77. c 78. d 79. c 80. b 81. b 82. d 83. a 84. c 85. d 86. a 87. a 88. b 89. c 90. b 91. b 92. b 93. c 94. b 95. a 96. b 97. c 98. d 99. d 100. b 101. d 102. c .
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Ch 14: The Costs of Production 103. a 104. b 105. d 106. b 107. b 108. a 109. a 110. d 111. a 112. a 113. b 114. c 115. b 116. a 117. a 118. a 119. c 120. c 121. c 122. d 123. a 124. b 125. True 126. True 127. False .
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Ch 14: The Costs of Production 128. True 129. True 130. True 131. False 132. False 133. True 134. False 135. False 136. False 137. True 138. True 139. True 140. True 141. True 142. False 143. False 144. False 145. True 146. True 147. False 148. False 149. False 150. True 151. False 152. False 153. True .
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Ch 14: The Costs of Production 154. False 155. True 156. False 157. True 158. True 159. False 160. True 161. True 162. False 163. True 164. False 165. True 166. False 167. False 168. True 169. True 170. False 171. True 172. False 173. False 174. True 175. False 176. False 177. True 178. False .
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Ch 14: The Costs of Production 179. False 180. False 181. False 182. True 183. True 184. True 185. False 186. True 187. True 188. True 189. False 190. True 191. False 192. True 193. False 194. True 195. False 196. True 197. False 198. False 199. False 200. True 201. True 202. True 203. False 204. False .
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Ch 14: The Costs of Production 205. True 206. True 207. False 208. Profit = Total revenue - Total cost. 209. seeds, fertilizer, pesticide, fuel for machinery, machinery, hired help (if applicable), crop insurance 210. the lost earnings of any family member who engages in farming but who could work at a different occupation, the forgone interest on any family monies invested in the farm 211. No. Economic profit = Accounting profit - Implicit costs. Economic profit could be equal to accounting profit if there were no implicit costs, but in the presence of implicit costs, economic profit will be less than accounting profit. 212. A firm’s revenues can be calculated by multiplying the number of units it sells by the price for which it sells each unit. Costs, on the other hand, can include both implicit and explicit costs. Explicit costs are the costs for which the firm spends money. Implicit costs include opportunity costs; they do not require an outlay of money but represent foregone opportunities. 213. shampoo, conditioner, other products for giving perms and color treatments, scissors, hair dryers, curling irons, flat irons, mirrors, barber chairs, combs, brushes, electricity, hired help, various types of insurance 214. the lost earnings of the owner who could work at a different occupation, the forgone interest on any monies invested in the business 215. Economic profit = Accounting profit - Implicit costs. Economic profit could be equal to accounting profit if there were no implicit costs, but in the presence of implicit costs, accounting profit will be greater than economic profit. 216. Accounting profit = Total revenue - explicit costs = $100,000 - ($25,000 + $40,000 + $25,000) = $100,000 - $90,000 = $10,000. 217. Accounting profit = Total revenue - explicit costs - implicit costs = $100,000 - ($25,000 + $40,000 + $25,000) $20,000 = $100,000 - $90,000 - $20,000 = -$10,000. 218. Accounting profit = Total revenue - explicit costs = $150,000 - ($10,000 + $60,000 + $50,000) = $150,000 $120,000 = $30,000. 219. Economic profit = Total revenue - explicit costs - implicit costs = $150,000 - ($10,000 + $60,000 + $50,000) $50,000 = $150,000 - $120,000 - $50,000 = -$20,000. 220. 450 - 350 = 100 units 221. 450 + 50 = 500 units 222. Total output of four workers = 450 + 50 = 500 units. Total output of five workers = 500 + 25 = 525 units. 223. Total output of four workers = 450 + 50 = 500 units. Total output of five workers = 500 + 25 = 525 units. 530 - 525 = 5 units. .
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Ch 14: The Costs of Production 224. The firm’s total-cost curve would be increasing at an increasing rate. Total cost is graphed on the vertical axis, while output (not labor) is graphed on the horizontal axis. 225. ATC = TC/Q = $110/525 = $0.21. 226. AVC = VC/Q = $80/500 = $0.16. 227. AFC = FC/Q = $10/450 = $0.02. 228. AFC is always declining as output increases because the $10 is divided by larger and larger quantities of output. 229. AVC = VC/Q, where VC is graphed on the vertical axis and Q (not labor) is graphed on the horizontal axis. For the range of output specified in the table, as output increases, AVC increases (0.1, 0.11, 0.13, 0.16, 0.19, 0.23). 230. ATC = TC/Q, where TC is graphed on the vertical axis and Q (not labor) is graphed on the horizontal axis. For the range of output specified in the table, as output increases, ATC first decreases, then increases (0.15, 0.14, 0.16, 0.18, 0.21, 0.25), so ATC is U-shaped. 231. MC = change in TC / change in Q, so although the numerator is 20 for each level of output, the denominator is the marginal productivity, which is always decreasing for the range of output specified in the table. Thus, marginal cost is increasing or upward sloping. 232. 250 - 100 = 150 units 233. Total output of four workers = 350 + 50 = 400 units. Total output of five workers = 400 + 25 = 425 units. 234. Total output of four workers = 350 + 50 = 400 units. Total output of five workers = 400 + 25 = 425 units. 430 - 425 = 5 units. 235. MC = change in TC/change in Q, so although the numerator is $5 for each level of output, the denominator is the marginal productivity, which first increases then decreases. Thus, marginal cost first decreases, then increases; marginal cost is U-shaped. 236. This firm’s total-cost curve would be increasing at a decreasing rate from 0 to 250 units of output, then increasing at an increasing rate. Total cost is graphed on the vertical axis, while output (not labor) is graphed on the horizontal axis. From 0 through 250 units of output, the marginal product is rising, so the marginal cost is falling. From 250 units of output on (through 430 units), marginal product is falling so the marginal cost is rising. Marginal cost is the slope of the total cost function, so total cost first increases at a decreasing rate, then increases at an increasing rate. 237. ATC = TC/Q = $30/425 = $0.07. 238. AVC = VC/Q = $20/400 = $0.05. 239. AFC = FC/Q = $5/430 = $0.01. 240. AFC is always declining as output increases because the $5 is divided by larger and larger quantities of output. 241. AVC = VC/Q, where VC is graphed on the vertical axis and Q (not labor) is graphed on the horizontal axis. For the range of output specified in the table, as output increases, AVC first decreases, then increases ($0.05, $0.04, $0.04, $0.05, $0.06, $0.07). AVC is U-shaped. .
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Ch 14: The Costs of Production 242. ATC = TC/Q, where TC is graphed on the vertical axis and Q (not labor) is graphed on the horizontal axis. For the range of output specified in the table, as output increases, ATC first decreases, then increases ($0.10, $0.06, $0.06, $0.06, $0.07, $0.08). ATC is U-shaped. 243. If marginal cost (MC) is greater than average total cost (ATC), then ATC will increase. If MC is less than ATC, then ATC will decrease. If MC equals ATC, then ATC is unchanged. The minimum of ATC curve will intersect with the MC curve. 244. If marginal cost (MC) is greater than average variable cost (AVC), then AVC will increase. If MC is less than AVC, then AVC will decrease. If MC equals AVC, then AVC is unchanged. The minimum of AVC curve will intersect with the MC curve. 245. AFC = FC/Q. Fixed cost is unchanged while output increases. Thus, AFC is always declining as output increases. 246. ATC = AVC + AFC, so the vertical distance between the AVC and ATC curves is the value of AFC for that level of output. Both AVC and ATC are typically U-shaped. The vertical distance between the two curves, however, is steadily declining as output increases because AFC is steadily declining. 247. marginal cost is less than AVC 248. marginal cost exceeds ATC. 249. Although fixed cost is unchanged as output increases, AFC = FC/Q. Thus, AFC is always declining as output increases. 250. ATC = AVC + AFC, so the vertical distance between the AVC and ATC curves is the value of AFC for that level of output. Both AVC and ATC are typically U-shaped. The vertical distance between the two curves is steadily declining as output increases because AFC is steadily declining. Said another way, the two curves move closer together as output increases. 251. In the short run, the firm considers at least one factor of production to be fixed (factory size, for example). In the long run, the firm considers all factors of production to be variable. 252. specialization of labor 253. coordination problems 254. Danita’s store size is likely to be fixed in the short run. Depending on how quickly she can purchase or lease additional capital such as mixers and ovens, some of her capital may be fixed in the short run. Danita can likely order more cupcake ingredients and hire more workers easily, so these types of inputs are likely to be variable in the short run. 255. Specialization of labor can produce economies of scale. Specialization of labor could occur if the firm hires new workers with different areas of expertise. Suppose that the first person specializes in individual tax returns, the second person specializes in small business tax returns, and the third person specializes in farm tax returns. The three employees together could produce more than triple the number of tax returns that the first person could produce. 256. In this example, the costs of production could be the costs of studying the material, measured in time spent per chapter. Specialization of labor can produce economies of scale. Specialization of labor could occur if each member of the study group focuses on a different chapter and explains that material to the group so that each member of the group learns the material in less time than she would if she were studying alone. .
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Ch 14: The Costs of Production 257. Problems with coordination can cause diseconomies of scale. Suppose the firm hires so many new workers that management is unable to monitor the number of tax returns they can produce (output). Suppose the additional employees are not as productive as the previous employees; perhaps they spend too much time chatting with each other or checking their email and Facebook pages. As the firm expands, output increases but at a decreasing rate. At some point, long-run average total costs can increase. 258. The opportunity cost of an item refers to all those things that must be forgone to acquire that item. Both explicit and implicit costs are included as opportunity costs. 259. An accountant would not include the forgone interest income that the money could have earned elsewhere if it had not been invested in the business. Therefore, an accountant's estimate of total cost will be less than an economist's. 260. The production function depicts the relationship between output and a given input. The graph below shows output increasing but at a decreasing rate as the quantity of inputs increases.
261. The total cost curve will increase at an increasing rate, or in other words, the total cost curve gets steeper as the amount produced rises.
262. Diminishing marginal product causes the marginal cost curve to rise. 263. Average fixed cost always declines as output rises because fixed cost is being spread over a larger number of units, thus causing the average total cost curve to fall. 264. When average total cost curve is falling, marginal cost is below ATC. If the average total cost curve is rising, .
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Ch 14: The Costs of Production marginal cost is above ATC. 265. The two curves will cross at the minimum point on the average total cost curve.
.
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Ch 15: Firms in Competitive Markets
Indicate the answer choice that best completes the statement or answers the question. 1. The analysis of competitive firms sheds light on the decisions that lie behind the a. market demand curve. b. market supply curve. c. way firms make pricing decisions in the not-for-profit sector of the economy. d. way financial markets set interest rates. 2. Suppose a firm in each of the two markets listed below were to increase its price by 25 percent. In which pair would the firm in the first market listed experience a dramatic decline in sales, but the firm in the second market listed might not? a. Restaurants and smartphones b. Electricity and natural gas c. Corn and satellite radio d. Rice and soybeans 3. A key characteristic of a competitive market is that a. government antitrust laws regulate competition. b. producers sell nearly identical products. c. firms minimize total costs. d. firms have price setting power. 4. Free entry means that a. the government pays any entry costs for individual firms. b. government-funded research lowers the costs of patents and other barriers to entry. c. a firm's marginal cost is zero. d. no legal barriers prevent a firm from entering an industry. 5. Which of the following industries is most likely to exhibit the characteristic of free entry? a. Nuclear power b. Municipal water and sewer c. Dairy farming d. Airport security 6. When firms are said to be price takers, it implies that if a firm raises its price, a. buyers will go elsewhere. b. buyers will pay the higher price in the short run. c. competitors will also raise their prices. d. firms in the industry will exercise market power. 7. Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to a. increase. b. remain unchanged. c. decrease by less than 20 percent. d. decrease by more than 20 percent. .
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Ch 15: Firms in Competitive Markets 8. Which of the following firms is the closest to being a perfectly competitive firm? a. A grain farmer in Illinois b. Microsoft Corporation c. Ford Motor Company d. The campus bookstore 9. If Brunhilda's Butcher Shop sells its product in a competitive market, then a. the price of that product depends on the quantity of the product that Brunhilda's Butcher Shop produces and sells because the firm's demand curve is downward sloping. b. Brunhilda's Butcher Shop's total cost must be a constant multiple of its quantity of output. c. Brunhilda's Butcher Shop's total revenue must be proportional to its quantity of output. d. Brunhilda's Butcher Shop's total revenue must be equal to its average revenue. 10. If a firm in a perfectly competitive market triples the quantity of output sold, then total revenue will a. more than triple. b. less than triple. c. exactly triple. d. be reduced by one third. 11. Table 15-1 Price Quantity Demanded (Dollars per unit) (Units) 5 0 5 1 5 2 5 3 5 4 5 5 5 6 5 7 5 8 5 9
Refer to Table 15-1. The price and quantity relationship in the table is most likely a demand curve faced by a firm in a a. monopoly. b. concentrated market. c. competitive market. d. strategic market. 12. Table 15-1 Price Quantity Demanded (Dollars per unit) (Units) .
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Ch 15: Firms in Competitive Markets 5 5 5 5 5 5 5 5 5 5
0 1 2 3 4 5 6 7 8 9
Refer to Table 15-1. Over which range of output is average revenue equal to price? a. 1 to 5 units b. 3 to 7 units c. 5 to 9 units d. Average revenue is equal to price over the entire range of output. 13. Table 15-1 Price Quantity Demanded (Dollars per unit) (Units) 5 0 5 1 5 2 5 3 5 4 5 5 5 6 5 7 5 8 5 9
Refer to Table 15-1. Over what range of output is marginal revenue declining? a. 1 to 6 units b. 3 to 7 units c. 7 to 9 units d. Marginal revenue is constant over the entire range of output. 14. Table 15-1 Price Quantity Demanded (Dollars per unit) (Units) .
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Ch 15: Firms in Competitive Markets 5 5 5 5 5 5 5 5 5 5
0 1 2 3 4 5 6 7 8 9
Refer to Table 15-1. If the firm doubles its output from 3 to 6 units, total revenue will a. increase by less than $15. b. increase by exactly $15. c. increase by more than $15. d. Total revenue cannot be determined from the information provided. 15. Table 15-2 The table represents a demand curve faced by a firm in a competitive market. Price (Dollars per unit) 3 3 3 3 3 3
Quantity Demanded (Units) 0 1 2 3 4 5
Refer to Table 15-2. This firm maximizes total revenue by producing a. 1 unit. b. 3 units. c. 5 units. d. as many units as possible. 16. Table 15-2 The table represents a demand curve faced by a firm in a competitive market. Price (Dollars per unit) 3 3 .
Quantity Demanded (Units) 0 1 Page 4
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2 3 4 5
Refer to Table 15-2. For this firm, the average revenue from selling 3 units is a. $12. b. $4. c. $3. d. $1. 17. Table 15-2 The table represents a demand curve faced by a firm in a competitive market. Price (Dollars per unit) 3 3 3 3 3 3
Quantity Demanded (Units) 0 1 2 3 4 5
Refer to Table 15-2. For this firm, the marginal revenue from selling the 3rd unit is a. $12. b. $4. c. $3. d. $1. 18. Table 15-3 The table represents a demand curve faced by a firm in a competitive market. Quantity Demanded (Units) 12 13 14 15 16
.
Total Revenue (Dollars) 132 143 154 165 176
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Ch 15: Firms in Competitive Markets Refer to Table 15-3. For this firm, the average revenue when 14 units are produced and sold is a. $9. b. $11. c. $13. d. $15. 19. Table 15-3 The table represents a demand curve faced by a firm in a competitive market. Quantity Demanded (Units) 12 13 14 15 16
Total Revenue (Dollars) 132 143 154 165 176
Refer to Table 15-3. For this firm, the marginal revenue of the 13th unit is a. $9. b. $10. c. $11 d. The marginal revenue cannot be determined without knowing the total revenue when 11 units are sold. 20. Table 15-4 The following table presents cost and revenue information for a firm operating in a competitive industry. Revenues Costs Quantity Price Total Quantity Total Marginal Demanded Revenue Supplied Cost Cost (Units) (Dollars) (Dollars) (Units) (Dollars per unit) (Dollars) 0 1 2 3 4 5 6 7 8
100 150 202 257 317 385 465 562 682
--
0 1 2 3 4 5 6 7 8
120 120 120 120 120 120 120 120 120
Marginal Revenue (Dollars) --
Refer to Table 15-4. What is the total revenue from selling 4 units? .
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Ch 15: Firms in Competitive Markets a. $120 b. $257 c. $317 d. $480 21. Table 15-4 The following table presents cost and revenue information for a firm operating in a competitive industry. Revenues Costs Quantity Price Total Quantity Total Marginal Demanded Revenue Supplied Cost Cost (Units) (Dollars) (Dollars) (Units) (Dollars per unit) (Dollars) 0 1 2 3 4 5 6 7 8
100 150 202 257 317 385 465 562 682
--
0 1 2 3 4 5 6 7 8
120 120 120 120 120 120 120 120 120
Marginal Revenue (Dollars) --
Refer to Table 15-4. What is the marginal revenue from selling the 3rd unit? a. $55 b. $120 c. $137 d. $140 22. Table 15-4 The following table presents cost and revenue information for a firm operating in a competitive industry. Revenues Costs Quantity Price Total Quantity Total Marginal Demanded Revenue Supplied Cost Cost (Units) (Dollars) (Dollars) (Units) (Dollars per unit) (Dollars) 0 1 2 3 4 5 .
100 150 202 257 317 385
--
0 1 2 3 4 5
120 120 120 120 120 120
Marginal Revenue (Dollars) --
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465 562 682
6 7 8
120 120 120
Refer to Table 15-4. What is the average revenue when 4 units are sold? a. $60 b. $120 c. $125 d. $197 23. Which of the following statements is correct? a. For all firms, marginal revenue equals the price of the good. b. Only for competitive firms does average revenue equal the price of the good. c. Marginal revenue can be calculated as total revenue divided by the quantity sold. d. Only for competitive firms does average revenue equal marginal revenue. 24. Suppose a firm in a competitive market earned $1,000 in total revenue and had a marginal revenue of $10 for the last unit produced and sold. What is the average revenue per unit, and how many units were sold? a. $5 and 50 units b. $5 and 100 units c. $10 and 50 units d. $10 and 100 units 25. Which of the following statements regarding a competitive firm is correct? a. Because each firm faces a downward sloping demand, if a firm increases its level of output, the firm will have to charge a lower price to sell the additional output. b. If a firm raises its price, the firm may be able to increase its total revenue even though it will sell fewer units. c. By lowering its price below the market price, the firm will benefit from selling more units at the lower price than it could have sold by charging the market price. d. For all firms, average revenue equals the price of the good. 26. Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, the average revenue of the 200th unit will be a. less than $12. b. more than $12. c. $12. d. zero. 27. Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue a. increases if MR < ATC and decreases if MR > ATC. b. does not change. c. always increases. d. always decreases. .
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Ch 15: Firms in Competitive Markets 28. Suppose that in a competitive market the equilibrium price is $2.50. What is the marginal revenue for the last unit sold by the typical firm in this market? a. Less than $2.50 b. More than $2.50 c. Exactly $2.50 d. The marginal revenue cannot be determined without knowing the actual quantity sold by the typical firm. 29. For an individual firm operating in a competitive market, marginal revenue equals a. average revenue and the price for all levels of output. b. average revenue, which is greater than the price for all levels of output. c. average revenue, the price, and marginal cost for all levels of output. d. marginal cost, which is greater than average revenue for all levels of output. 30. Table 15-5 Suppose that a firm in a competitive market faces the following revenues and costs: Quantity (Units) 12 13 14 15 16 17
Marginal Cost (Dollars) 5 6 7 8 9 10
Marginal Revenue (Dollars) 7 7 7 7 7 7
Refer to Table 15-5. If the firm is currently producing 14 units, what would you advise the owners? a. Decrease quantity to 13 units b. Increase quantity to 15 units c. Continue to operate at 14 units d. Increase quantity to 16 units 31. Table 15-5 Suppose that a firm in a competitive market faces the following revenues and costs: Quantity (Units) 12 13 14 15 16 17
.
Marginal Cost (Dollars) 5 6 7 8 9 10
Marginal Revenue (Dollars) 7 7 7 7 7 7
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Refer to Table 15-5. If the firm is maximizing profit, how much profit is it earning? a. $0.50 b. $7.50 c. $10 d. There is insufficient data to determine the firm's profit. 32. Tom produces commemorative t-shirts in a competitive market. If Tom decides to decrease his output, this will a. increase his revenue, since the output decrease leads to a higher market price. b. increase his revenue, since Tom's competitors will also decrease their output, so that price rises to offset the drop in Tom's output. c. decrease his revenue, since his output has decreased and the price remains the same. d. decrease his revenue, since the price falls as competitors increase their output to make up for his decrease in output. 33. If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue. 34. The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which a. total revenue is equal to variable cost. b. total revenue is equal to fixed cost. c. total revenue is equal to total cost. d. profit is maximized. 35. For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $11 and a marginal cost of $10. It follows that the a. production of the 100th unit of output increases the firm's profit by $1. b. production of the 100th unit of output increases the firm's average total cost by $1. c. firm's profit-maximizing level of output is less than 100 units. d. production of the 101st unit of output must increase the firm's profit by more than $1. 36. If a competitive firm is selling 900 units of its product at a price of $10 per unit and earning a positive profit, then a. its total cost is more than $9,000. b. its marginal revenue is less than $10. c. its average total cost is less than $10. d. the firm cannot be a competitive firm because competitive firms cannot earn positive profits. 37. Farmer McDonald sells wheat to a broker in Kansas City, Missouri. Because the market for wheat is generally considered to be competitive, Mr. McDonald maximizes his profit by choosing a. to produce the quantity at which average variable cost is minimized. b. to produce the quantity at which average fixed cost is minimized. c. the quantity at which market price is equal to Mr. McDonald's marginal cost of production. .
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Ch 15: Firms in Competitive Markets d. the quantity at which market price exceeds Mr. McDonald's marginal cost of production by the greatest amount. 38. Ms. Joplin sells colored pencils. The colored-pencil industry is competitive. Ms. Joplin hires a business consultant to analyze her company's financial records. The consultant recommends that Ms. Joplin increase her production. The consultant must have concluded that, at her current level of production, Ms. Joplin's a. total revenues equal her total economic costs. b. marginal revenue exceeds her total cost. c. marginal revenue exceeds her marginal cost. d. marginal cost exceeds her marginal revenue. 39. Robin owns a horse stable and riding academy and gives riding lessons for children at "pony camp." His business operates in a competitive industry. Robin gives riding lessons to 20 children per month. His monthly total revenue is $4,000. The marginal cost of pony camp is $250 per child. In order to maximize profits, Robin should a. give riding lessons to more than 20 children per month. b. give riding lessons to fewer than 20 children per month. c. continue to give riding lessons to 20 children per month. d. We do not have enough information to answer the question. 40. When profit-maximizing firms in competitive markets are earning profits, a. market demand must exceed market supply at the market equilibrium price. b. market supply must exceed market demand at the market equilibrium price. c. new firms will enter the market. d. the most inefficient firms will be encouraged to leave the market. 41. Table 15-6 Suppose that a firm in a competitive market faces the following revenues and costs: Quantity (Units) 0 1 2 3 4 5 6 7
Total Revenue (Dollars) 0 6 12 18 24 30 36 42
Total Cost (Dollars) 3 5 8 12 17 23 30 38
Refer to Table 15-6. The firm should not produce an output level beyond a. 4 units. b. 5 units. c. 6 units. d. 7 units. .
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Ch 15: Firms in Competitive Markets 42. Table 15-6 Suppose that a firm in a competitive market faces the following revenues and costs: Quantity (Units) 0 1 2 3 4 5 6 7
Total Revenue (Dollars) 0 6 12 18 24 30 36 42
Total Cost (Dollars) 3 5 8 12 17 23 30 38
Refer to Table 15-6. The firm will produce a quantity greater than three because at 3 units of output, marginal cost a. is greater than marginal revenue. b. equals marginal revenue. c. is less than marginal revenue. d. is minimized. 43. Table 15-6 Suppose that a firm in a competitive market faces the following revenues and costs: Quantity (Units) 0 1 2 3 4 5 6 7
Total Revenue (Dollars) 0 6 12 18 24 30 36 42
Total Cost (Dollars) 3 5 8 12 17 23 30 38
Refer to Table 15-6. In order to maximize profits, the firm will produce a. 1 unit of output because marginal cost is minimized. b. 4 units of output because marginal revenue exceeds marginal cost. c. 5 units of output because marginal revenue equals marginal cost. d. 7 units of output because total revenue is maximized. 44. When marginal revenue equals marginal cost, the firm a. should increase the level of production to maximize its profit. .
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Ch 15: Firms in Competitive Markets b. may be minimizing its losses rather than maximizing its profit. c. must be generating positive economic profits. d. must be generating positive accounting profits. 45. Profit-maximizing firms enter a competitive market when existing firms in that market have a. total revenues that exceed fixed costs. b. total revenues that exceed total variable costs. c. average total costs that exceed average revenue. d. average total costs that are less than market price. 46. Table 15-7 A firm in a competitive market has the following cost structure: Quantity (Units) 0 1 2 3 4 5
Total Cost (Dollars) 5 10 12 15 24 40
Refer to Table 15-7. If the market price is $16, this firm will a. produce 4 units of output in the short run and exit in the long run. b. produce 5 units of output in the short run and exit in the long run. c. produce 5 units of output in the short run and face competition from new market entrants in the long run. d. shut down in the short run and exit in the long run. 47. Table 15-8 A firm in a competitive market has the following cost structure. Quantity (Units) 0 1 2 3 4 5
Average Total Cost (Dollars) -10 8 7 8 10
Refer to Table 15-8. If the firm's fixed cost of production is $3, and the market price is $10, how many units should the firm produce to maximize profit? a. 1 unit .
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Ch 15: Firms in Competitive Markets b. 2 units c. 3 units d. 4 units 48. Table 15-9 A firm in a competitive market has the following cost structure: Quantity (Units) 0 1 2 3 4 5
Marginal Cost (Dollars) -5 10 15 20 25
Refer to Table 15-9. Consider a competitive market with 50 identical firms. Suppose the market demand is given by the equation QD = 200 − 10P and the market supply is given by the equation QS = 10P. How many units should a firm in this market produce to maximize profit? a. 1 unit b. 2 units c. 3 units d. 4 units 49. The accountants hired by Forever Fitness have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $125,000. Because of this information, in the short run, Forever Fitness should a. shut down because staying open would be more expensive. b. lower their prices to increase their profits. c. stay open because shutting down would be more expensive. d. stay open because the firm is making an economic profit. 50. Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should a. drop the flight immediately. b. continue the flight. c. continue flying until the lease expires and then drop the run. d. drop the flight now but renew the lease if conditions improve. 51. Raiman's Shoe Repair produces custom-made shoes. When Mr. Raiman produces 12 pairs per week, the marginal cost of the 12th pair is $84, and the marginal revenue of the 12th pair is $70. What would you advise Mr. Raiman to do? a. Shut down the business b. Produce more custom-made shoes .
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Ch 15: Firms in Competitive Markets c. Decrease the price d. Produce fewer custom-made shoes 52. Winona's Fudge Shoppe is maximizing profits by producing 1,000 pounds of fudge per day. If Winona's fixed costs unexpectedly increase and the market price remains constant, then the short run profit-maximizing level of output a. is less than 1,000 pounds. b. is still 1,000 pounds. c. is more than 1,000 pounds. d. becomes zero. 53. For a firm, marginal revenue minus marginal cost is equal to a. profit. b. average total cost. c. change in profit. d. change in average revenue. 54. Scenario 15-1 Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. Refer to Scenario 15-1. At Q = 1,000, the firm's profits equal a. −$200. b. $1,000. c. $3,000. d. $4,000. 55. Scenario 15-1 Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. Refer to Scenario 15-1. To maximize its profit, the firm should a. increase its output. b. continue to produce 1,000 units. c. decrease its output but continue to produce. d. shut down. 56. Scenario 15-2 The information below applies to a competitive firm that sells its output for $40 per unit. • When the firm produces and sells 150 units of output, its average total cost is $24.50. • When the firm produces and sells 151 units of output, its average total cost is $24.55. Refer to Scenario 15-2. When the firm produces 150 units of output, its total cost is a. $3,450.00. b. $3,525.75. c. $3,675.00. d. $3,850.25. .
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Ch 15: Firms in Competitive Markets 57. Scenario 15-2 The information below applies to a competitive firm that sells its output for $40 per unit. • When the firm produces and sells 150 units of output, its average total cost is $24.50. • When the firm produces and sells 151 units of output, its average total cost is $24.55. Refer to Scenario 15-2. Let Q represent the quantity of output. Which of the following magnitudes has the same value at Q = 150 and at Q = 151? a. Average fixed cost b. Average revenue c. Total cost d. Total revenue 58. Scenario 15-2 The information below applies to a competitive firm that sells its output for $40 per unit. • When the firm produces and sells 150 units of output, its average total cost is $24.50. • When the firm produces and sells 151 units of output, its average total cost is $24.55. Refer to Scenario 15-2. When the firm produces 150 units of output, its profit is a. $2,150.00. b. $2,325.00. c. $3,100.75. d. $3,675.00. 59. Scenario 15-2 The information below applies to a competitive firm that sells its output for $40 per unit. • When the firm produces and sells 150 units of output, its average total cost is $24.50. • When the firm produces and sells 151 units of output, its average total cost is $24.55. Refer to Scenario 15-2. Suppose the firm is producing 150 units of output and its fixed cost is $975. Then its variable cost amounts to a. $2,360.25. b. $2,500.00. c. $2,612.75. d. $2,700.00. 60. Scenario 15-2 The information below applies to a competitive firm that sells its output for $40 per unit. • When the firm produces and sells 150 units of output, its average total cost is $24.50. • When the firm produces and sells 151 units of output, its average total cost is $24.55. Refer to Scenario 15-2. Suppose the firm is producing 150 units of output and its fixed cost is $975. Then its average variable cost amounts to a. $16.40. b. $17.00. c. $18.00. d. $19.60. 61. Scenario 15-2 The information below applies to a competitive firm that sells its output for $40 per unit. .
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Ch 15: Firms in Competitive Markets • When the firm produces and sells 150 units of output, its average total cost is $24.50. • When the firm produces and sells 151 units of output, its average total cost is $24.55. Refer to Scenario 15-2. How does the firm's marginal revenue (MR) compare to its marginal cost (MC) when it increases its output from 150 units to 151 units? a. MR exceeds MC by $7.95. b. MR exceeds MC by $11.05. c. MC exceeds MR by $11.05. d. MC exceeds MR by $13.50. 62. Scenario 15-2 The information below applies to a competitive firm that sells its output for $40 per unit. • When the firm produces and sells 150 units of output, its average total cost is $24.50. • When the firm produces and sells 151 units of output, its average total cost is $24.55. Refer to Scenario 15-2. Suppose the firm is currently producing and selling 150 units of output. Should the firm increase its output to 151 units? a. Yes, because the marginal revenue exceeds the marginal cost. b. Yes, because the marginal revenue exceeds the average total cost. c. No, because the marginal cost exceeds the marginal revenue. d. No, because the average total cost exceeds the marginal revenue. 63. Which of the following expressions is correct for a competitive firm? a. Profit = (quantity of output) × (price − average total cost) b. Marginal revenue = (change in total revenue)/(quantity of output) c. Average total cost = total variable cost/quantity of output d. Average revenue = (marginal revenue) × (quantity of output) 64. Assume a firm in a competitive industry is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its profit is a. −$1,600. b. $1,600. c. $3,200. d. $8,000. 65. In a competitive market the price is $8. A typical firm in the market has ATC = $6, AVC = $5, and MC = $8. How much economic profit is the firm earning in the short run? a. $0 per unit b. $1 per unit c. $2 per unit d. $3 per unit 66. The short-run supply curve for a firm in a perfectly competitive market is a. horizontal. b. likely to slope downward. c. determined by forces external to the firm. .
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Ch 15: Firms in Competitive Markets d. the portion of its marginal cost curve that lies above its average variable cost. 67. Figure 15-1 Suppose that a firm in a competitive market has the following cost curves:
Refer to Figure 15-1. The firm's short-run supply curve is its marginal cost curve above a. $4. b. $10. c. $6. d. $13. 68. Figure 15-1 Suppose that a firm in a competitive market has the following cost curves:
.
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Refer to Figure 15-1. The firm should shut down if the market price is a. above $13. b. above $6 but less than $18. c. above $6 but less than $13. d. less than $6. 69. Figure 15-1 Suppose that a firm in a competitive market has the following cost curves:
.
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Refer to Figure 15-1. If the market price falls below $6, the firm will earn a. positive economic profits in the short run. b. negative economic profits in the short run but remain in business. c. negative economic profits in the short run and shut down. d. zero economic profits in the short run. 70. Figure 15-1 Suppose that a firm in a competitive market has the following cost curves:
.
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Refer to Figure 15-1. The firm will earn a negative economic profit but remain in business in the short run if the market price is a. above $13 but less than $18. b. above $13. c. less than $13 but more than $6. d. less than $6. 71. Figure 15-1 Suppose that a firm in a competitive market has the following cost curves:
.
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Refer to Figure 15-1. The firm will earn a positive economic profit in the short run if the market price is a. above $13. b. less than $13 but more than $6. c. less than $6. d. exactly $13. 72. Figure 15-1 Suppose that a firm in a competitive market has the following cost curves:
.
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Ch 15: Firms in Competitive Markets
Refer to Figure 15-1. If the market price rises above $13, the firm will earn a. positive economic profits in the short run. b. negative economic profits in the short run but remain in business. c. negative economic profits and shut down. d. zero economic profits in the short run. 73. Figure 15-1 Suppose that a firm in a competitive market has the following cost curves:
.
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Ch 15: Firms in Competitive Markets
Refer to Figure 15-1. If the market price is $13, the firm will earn a. positive economic profits in the short run. b. negative economic profits in the short run but remain in business. c. negative economic profits and shut down. d. zero economic profits in the short run. 74. Figure 15-1 Suppose that a firm in a competitive market has the following cost curves:
.
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Ch 15: Firms in Competitive Markets
Refer to Figure 15-1. If the market price is $10, the firm will earn a. positive economic profits in the short run. b. negative economic profits in the short run but remain in business. c. negative economic profits and shut down. d. zero economic profits in the short run. 75. Figure 15-1 Suppose that a firm in a competitive market has the following cost curves:
.
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Ch 15: Firms in Competitive Markets
Refer to Figure 15-1. If the market price is $5, the firm will earn a. positive economic profits in the short run. b. negative economic profits in the short run but remain in business. c. negative economic profits and shut down. d. zero economic profits in the short run. 76. Figure 15-2 Suppose a firm operating in a competitive market has the following cost curves:
.
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Ch 15: Firms in Competitive Markets
Refer to Figure 15-2. If the market price is $10, what is the firm's short-run economic profit? a. $9 b. $15 c. $30 d. $50 77. Figure 15-2 Suppose a firm operating in a competitive market has the following cost curves:
.
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Refer to Figure 15-2. If the market price is $6, what is the firm's short-run economic profit? a. $0 b. $12 c. $15 d. $18 78. Figure 15-2 Suppose a firm operating in a competitive market has the following cost curves:
.
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Refer to Figure 15-2. If the market price is $10, what is the firm's total cost? a. $15 b. $30 c. $35 d. $50 79. Figure 15-2 Suppose a firm operating in a competitive market has the following cost curves:
.
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Refer to Figure 15-2. If the market price is $10, what is the firm's total revenue? a. $15 b. $30 c. $35 d. $50 80. Figure 15-2 Suppose a firm operating in a competitive market has the following cost curves:
.
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Refer to Figure 15-2. The firm will earn zero economic profit if the market price is a. $0. b. $6. c. $7. d. $10. 81. Figure 15-3 Suppose a firm operating in a competitive market has the following cost curves:
.
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Ch 15: Firms in Competitive Markets
Refer to Figure 15-3. When market price is P7, a profit-maximizing firm's short-run profits can be represented by the area a. P7 × Q5. b. P7 × Q3. c. (P7 − P5) × Q3. d. We are unable to determine the firm's profits because the quantity that the firm would produce is not labeled on the graph. 82. Figure 15-3 Suppose a firm operating in a competitive market has the following cost curves:
.
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Refer to Figure 15-3. In the short run, if the market price is higher than P4 but less than P6, individual firms in a competitive industry will earn a. positive profits. b. zero profits. c. losses but will remain in business. d. losses and will shut down. 83. Figure 15-3 Suppose a firm operating in a competitive market has the following cost curves:
.
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Refer to Figure 15-3. In the short run, if the market price is P4, individual firms in a competitive industry will earn a. positive profits. b. zero profits. c. losses but will remain in business. d. losses and will shut down. 84. Figure 15-3 Suppose a firm operating in a competitive market has the following cost curves:
.
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Refer to Figure 15-3. Firms would be encouraged to enter this market for all prices that exceed a. P1. b. P2. c. P3. d. P4. 85. Figure 15-3 Suppose a firm operating in a competitive market has the following cost curves:
.
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Refer to Figure 15-3. When market price is P2, a profit-maximizing firm's losses can be represented by the area a. (P4 − P2) × Q2. b. (P2 − P1) × (Q2 − Q1). c. At a market price of P2, the firm earns profits, not losses. d. At a market price of P2 the firm has losses, but the reference points in the figure don't identify the losses. 86. A firm that shuts down temporarily has to pay a. its variable costs but not its fixed costs. b. its fixed costs but not its variable costs. c. both its variable costs and its fixed costs. d. neither its variable costs nor its fixed costs. 87. Which of the following represents the firm's short-run condition for shutting down? a. Shut down if TR < TC b. Shut down if TR < FC c. Shut down if P < ATC d. Shut down if TR < VC 88. When fixed costs are ignored because they are irrelevant to a business's production decision, they are called a. explicit costs. b. implicit costs. c. sunk costs. .
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Ch 15: Firms in Competitive Markets d. opportunity costs. 89. You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show you realize that it is not a very good show and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the theater and go home and watch TV or read a book. You place an $8 value on watching TV and a $12 value on reading a book. a. You should stay and watch the remainder of the show. b. You should go home and watch TV. c. You should go home and read a book. d. You should go home and either watch TV or read a book. 90. The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average a. fixed cost. b. variable cost. c. total cost. d. revenue. 91. Figure 15-4 In the following figure, graph (a) depicts the linear marginal cost (MC) of a firm in a competitive market, and graph (b) depicts the linear market supply curve for a market with a fixed number of identical firms. Graph (a): Firm
Graph (b): Market
Refer to Figure 15-4. If there are 300 identical firms in this market, what level of output will be supplied to the market when price is $1.00? a. 300 .
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Ch 15: Firms in Competitive Markets b. 6,000 c. 30,000 d. 60,000 92. Figure 15-4 In the following figure, graph (a) depicts the linear marginal cost (MC) of a firm in a competitive market, and graph (b) depicts the linear market supply curve for a market with a fixed number of identical firms. Graph (a): Firm
Graph (b): Market
Refer to Figure 15-4. If there are 100 identical firms in this market, what is the value of Q2? a. 10,000 b. 20,000 c. 40,000 d. 80,000 93. Figure 15-4 In the following figure, graph (a) depicts the linear marginal cost (MC) of a firm in a competitive market, and graph (b) depicts the linear market supply curve for a market with a fixed number of identical firms. Graph (a): Firm
.
Graph (b): Market
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Refer to Figure 15-4. When 100 identical firms participate in this market, at what price will 15,000 units be supplied to this market? a. $1.00 b. $1.50 c. $2.00 d. The price cannot be determined from the information provided. 94. Figure 15-4 In the following figure, graph (a) depicts the linear marginal cost (MC) of a firm in a competitive market, and graph (b) depicts the linear market supply curve for a market with a fixed number of identical firms. Graph (a): Firm
.
Graph (b): Market
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Refer to Figure 15-4. If at a market price of $1.75, 52,500 units of output are supplied to this market, how many identical firms are participating in this market? a. 75 b. 100 c. 250 d. 300 95. Figure 15-5
.
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Refer to Figure 15-5. The figure above is for a firm operating in a competitive industry. If there were four identical firms in the industry, which of the following price-quantity combinations would be on the market supply curve? Point A B C D
Price (Dollars) 4 4 6 8
Quantity (Units) 16 32 6 64
a. A only b. A and C only c. B only d. B and D only 96. Figure 15-6 Graph (a)
.
Graph (b)
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Refer to Figure 15-6. If the figure in graph (a) reflects the long-run equilibrium of a profit-maximizing firm in a competitive market, the figure in graph (b) most likely reflects a. perfectly inelastic long-run market supply. b. perfectly elastic long-run market supply. c. the entry of firms into the industry when some resources used in production are available only in limited quantities. d. the fact that zero profits cannot be sustained in the long run. 97. When new firms enter a perfectly competitive market, a. economic profits of existing firms will continue to be zero. b. entering firms will earn zero economic profit upon entry into the market. c. existing firms may see their costs rise if more firms compete for limited resources. d. prices will rise as existing firms raise prices to keep new firms out of the market. 98. If there is an increase in market demand in a perfectly competitive market, then in the short run a. there will be no change in the demand curves faced by individual firms in the market. b. the demand curves facing firms will shift downward. c. the demand curves facing firms will become more elastic. d. profits will rise. 99. Scenario 15-3 Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a riskfree bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a .
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Ch 15: Firms in Competitive Markets market analyst with Research, Inc., where he used to earn $75,000 per year. Refer to Scenario 15-3. What is Victor's opportunity costs of operating his new business? a. $25,000 b. $75,000 c. $100,000 d. $175,000 100. Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In this market, an increase in demand will a. increase price in the short run but not in the long run. b. increase price in the long run but not in the short run. c. increase price both in the short and the long run. d. not affect price in either the short or the long run. 101. A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will a. fall in the short run. All firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. b. fall in the short run. No firms will shut down, but some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. c. fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. d. not fall in the short run because firms will exit to maintain the price. 102. When some resources used in production are only available in limited quantities, it is likely that the long-run supply curve in a competitive market is a. downward sloping. b. upward sloping. c. horizontal. d. vertical. 103. The long-run market supply curve in a competitive market will a. always be horizontal. b. be the portion of the MC that lies above the minimum of AVC for the marginal firm. c. typically be more elastic than the short-run supply curve. d. be above the competitive firm's efficient scale. 104. Figure 15-7 Graph (a)
.
Graph (b)
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Refer to Figure 15-7. When the market is in long-run equilibrium at point W in graph (b), the firm represented in graph (a) will a. have a zero economic profit. b. have a negative accounting profit. c. exit the market. d. choose to increase production to increase profit. 105. Figure 15-7 Graph (a)
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Graph (b)
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Refer to Figure 15-7. Assume that the market starts in equilibrium at point W in graph (b). An increase in demand from D0 to D1 will result in a. a new market equilibrium at point X. b. an eventual increase in the number of firms in the market and a new long-run equilibrium at point Z. c. rising prices and falling profits for existing firms in the market. d. falling prices and falling profits for existing firms in the market. 106. Figure 15-7 Graph (a)
.
Graph (b)
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Refer to Figure 15-7. Assume that the market starts in equilibrium at point W in graph (b) and that graph (a) illustrates the cost curves facing individual firms. Suppose that demand increases from D0 to D1. Which of the following statements is correct? a. Points W, Y, and Z represent both short-run and long-run equilibria. b. Points W, Y, Z, and X represent short-run equilibria. c. Points W, Y, and Z represent long-run equilibria. d. Points W and Z represent long-run equilibria. 107. Figure 15-7 Graph (a)
.
Graph (b)
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Refer to Figure 15-7. Assume that the market starts in equilibrium at point W in graph (b) and that graph (a) illustrates the cost curves facing individual firms. Suppose that demand increases from D0 to D1. Which of the following statements is not correct? a. Point W is a long-run equilibrium point. b. Points W, Y, and Z are short-run equilibria points. c. Point Y is a long-run equilibrium point. d. Point Z is a long-run equilibrium point. 108. Figure 15-7 Graph (a)
.
Graph (b)
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Refer to Figure 15-7. If the market starts in equilibrium at point Z in graph (b), a decrease in demand will ultimately lead to a. more firms in the industry but lower levels of output for each firm. b. fewer firms in the market. c. a new long-run equilibrium at point X in graph (b). d. lower prices once the new long-run equilibrium is reached. 109. Figure 15-7 Graph (a)
.
Graph (b)
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Refer to Figure 15-7. Suppose a firm in a competitive market, like the one depicted in graph (a), observes market price rising from P1 to P2. Which of the following could explain this observation? a. The entry of new firms into the market. b. The exit of existing consumers from the market. c. An increase in market supply from S0 to S1. d. An increase in market demand from D0 to D1.
Indicate whether the statement is true or false. 110. For a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all equal. a. True b. False 111. For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal. a. True b. False 112. If a firm notices that its average revenue equals the current market price, that firm must be participating in a competitive market. a. True b. False 113. For a firm operating in a competitive market, both marginal revenue and average revenue exceed the market price. .
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Ch 15: Firms in Competitive Markets a. True b. False 114. A profit-maximizing firm in a competitive market will increase production when average revenue exceeds marginal cost. a. True b. False 115. A profit-maximizing firm in a competitive market will decrease production when marginal cost exceeds average revenue. a. True b. False 116. Because there are many buyers and sellers in a perfectly competitive market, no one seller can influence the market price. a. True b. False 117. In competitive markets, firms that raise their prices are typically rewarded with larger profits. a. True b. False 118. When an individual firm in a competitive market increases its production, it is likely that the market price will fall. a. True b. False 119. When an individual firm in a competitive market decreases its production, it is likely that the market price will rise. a. True b. False 120. In a competitive market, firms are unable to differentiate their product from that of other producers. a. True b. False 121. Firms in a competitive market are said to be price takers because there are many sellers in the market, and the goods offered by the firms are very similar if not identical. a. True b. False 122. The two characteristics of a competitive market are 1) many buyers and sellers in the market and 2) the goods offered by the various sellers are highly differentiated. a. True b. False 123. Firms operating in perfectly competitive markets try to maximize profits. a. True .
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Ch 15: Firms in Competitive Markets b. False 124. Because there are many sellers in a competitive market, individual firms are unable to maximize profits. a. True b. False 125. A firm's incentive to compare marginal revenue and marginal cost is an application of the principle that rational people think at the margin. a. True b. False 126. By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can determine the profit-maximizing level of production. a. True b. False 127. Firms operating in perfectly competitive markets produce an output level where marginal revenue equals marginal cost. a. True b. False 128. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $4.75. The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses). a. True b. False 129. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $5. The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses). a. True b. False 130. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the unit for $6. The firm should produce more than 100 units in order to maximize its profits (or minimize its losses). a. True b. False 131. All firms maximize profits by producing an output level where marginal revenue equals marginal cost; for firms operating in perfectly competitive industries, maximizing profits also means producing an output level where price equals marginal cost. a. True b. False 132. When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an increase in production. .
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Ch 15: Firms in Competitive Markets a. True b. False 133. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm’s average total cost but greater than the firm’s average variable cost. a. True b. False 134. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm’s average variable cost but greater than the firm’s average fixed cost. a. True b. False 135. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm’s average variable cost. a. True b. False 136. A firm operating in a perfectly competitive industry will shut down in the short run but earn losses if the market price is less than that firm’s average variable cost. a. True b. False 137. In the short run, a firm should exit the industry if its marginal cost exceeds its marginal revenue. a. True b. False 138. The supply curve of a firm in a competitive market is the average variable cost curve above the minimum of marginal cost. a. True b. False 139. A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production. a. True b. False 140. Suppose a firm is considering producing zero units of output. We call this shutting down in the short run and exiting an industry in the long run. a. True b. False 141. Suppose a firm is considering producing zero units of output. We call this exiting an industry in the short run and shutting down in the long run. a. True b. False 142. A firm will shut down in the short run if revenue is not sufficient to cover all of its fixed costs of production. .
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Ch 15: Firms in Competitive Markets a. True b. False 143. A firm operating in a competitive market will stay in business in the short run so long as the market price exceeds the firm’s average total cost; otherwise, the firm will shut down. a. True b. False 144. In the short run, if the market price is below the firm’s average total cost of production, the firm will always shut down. a. True b. False 145. The marginal firm in a competitive market will earn zero economic profit in the long run. a. True b. False 146. A profit-maximizing firm in a competitive market will earn zero accounting profits in the long run. a. True b. False 147. A miniature golf course is a good example of where fixed costs become relevant to the decision of when to open and when to close for the season. a. True b. False 148. A popular resort restaurant will maximize profits if it chooses to stay open during the less-crowded “off season” when its total revenues exceed its variable costs. a. True b. False 149. A popular resort restaurant will maximize profits if it chooses to stay open during the less-crowded “off season” when its total revenues exceed its fixed costs. a. True b. False 150. A dairy farmer must be able to calculate sunk costs in order to determine how much revenue the farm receives for the typical gallon of milk. a. True b. False 151. Because nothing can be done about sunk costs, they are irrelevant to decisions about business strategy. a. True b. False 152. The manager of a firm operating in a competitive market can ignore sunk costs when making business decisions. .
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Ch 15: Firms in Competitive Markets a. True b. False 153. In the long run, when price is less than average total cost for all possible levels of production, a firm in a competitive market will choose to exit (or not enter) the market. a. True b. False 154. In the long run, when price is greater than average total cost, some firms in a competitive market will choose to enter the market. a. True b. False 155. In the long run, a firm should exit the industry if its total costs exceed its total revenues. a. True b. False 156. A competitive firm’s profit will be increasing as long as marginal revenue is greater than marginal cost. a. True b. False 157. In making a short-run profit-maximizing production decision, the firm must consider both fixed and variable cost. a. True b. False 158. A firm operating in a perfectly competitive industry will continue to operate if it earns zero economic profits because it is likely to be earning positive accounting profits. a. True b. False 159. A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the long run. a. True b. False 160. A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the short run. a. True b. False 161. A firm operating in a perfectly competitive industry will shut down in the short run if its economic profits fall to zero because it is likely to be earning negative accounting profits. a. True b. False 162. A firm operating in a perfectly competitive market earns zero economic profit in the long run but remains in business because the firm’s revenues cover the business owners’ opportunity costs. .
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Ch 15: Firms in Competitive Markets a. True b. False 163. A competitive market will typically experience entry and exit until accounting profits are zero. a. True b. False 164. The long-run equilibrium in a competitive market characterized by firms with identical costs is generally characterized by firms operating at efficient scale. a. True b. False 165. In the long run, a competitive market with 1,000 identical firms will experience an equilibrium price equal to the minimum of each firm's average total cost. a. True b. False 166. In a long-run equilibrium where firms have identical costs, it is possible that some firms in a competitive market are making a positive economic profit. a. True b. False 167. When economic profits are zero in equilibrium, the firm's revenue must be sufficient to cover all opportunity costs. a. True b. False 168. The stable, long-run equilibrium in a competitive market occurs when the market price equals the lowest point on a firm’s average total cost curve. a. True b. False 169. All competitive firms earn zero economic profit in both the short run and the long run. a. True b. False 170. When a resource used in the production of a good sold in a competitive market is available in only limited quantities, the long-run supply curve is likely to be upward sloping. a. True b. False 171. The short-run supply curve in a competitive market must be more elastic than the long-run supply curve. a. True b. False 172. The long-run supply curve in a competitive market is more elastic than the short-run supply curve. a. True .
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Ch 15: Firms in Competitive Markets b. False 173. If some resources used in the production of a good are only available in limited quantities, then the long run market supply curve will be perfectly elastic. a. True b. False 174. For firms operating in a perfectly competitive market, price must always be greater than marginal revenue. a. True b. False 175. Firms operating in a perfectly competitive market have an incentive to advertise their products since this will increase the demand for their products. a. True b. False 176. All firms operating in a perfectly competitive market produce unique goods. a. True b. False 177. Whenever firms in a perfectly competitive market produce the output level where marginal revenue equals marginal cost, we know that the firm is earning an economic profit. a. True b. False 178. If a firm observes that the price of its product is above average variable cost, it would choose to continue to produce the good in the short run, even if that firm experiences economic losses. a. True b. False 179. A restaurant, which operates in a perfectly competitive market, is evaluating whether it should serve breakfast on a daily basis. It would choose to do this when its revenues cover its variable costs. a. True b. False 180. A ski resort will choose to remain open in the summer whenever its fixed costs are low enough. a. True b. False 181. In the long run, if we observe firms in a competitive market earning economic profits, we know that this market is in long-run equilibrium. a. True b. False 182. In competitive markets where firms are observed to be exiting the market, the firms that remain will obtain economic profits in the long run. a. True .
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Ch 15: Firms in Competitive Markets b. False 183. Firms in competitive markets can only earn economic profits in the long run, once the market is in equilibrium. a. True b. False
184. If a firm can influence the market price of the good it sells, then it is said to have __________. 185. A firm lacks market power if it cannot influence __________. 186. “The water that comes out of your faucets at home is not supplied by a competitive firm.” Explain why this statement is correct. 187. A competitive market has two basic characteristics. What are those two characteristics? 188. What does it mean for a buyer or seller to be a price taker? 189. When a firm sells 1 million coat hangers, its total revenue is $2 million. When it sells 2 million coat hangers, its total revenue is $3.5 million. Is this firm a price taker? Explain. 190. A competitive firm sells its output for $10 per unit. Is the firm’s average revenue less than, equal to, or greater than $10? 191. A competitive firm sells its output for $30 per unit. Is the firm’s marginal revenue less than, equal to, or greater than $30? 192. In a certain market there are many buyers and many sellers. It is easy to distinguish the product sold by one firm from the products sold by other firms. Is the market competitive? 193. In a certain large city there are two firms that supply concrete. The concrete sold by the first firm is indistinguishable from the concrete sold by the second firm. Is the market competitive? 194. Does a competitive firm have the ability to influence the quantity of output it supplies? Does it have the ability to influence its average revenue? 195. What is the relationship between price and marginal revenue for a competitive firm? 196. A competitive firm sells 100 units of output for $5 per unit. The firm’s marginal revenue amounts to __________. 197. When a certain competitive firm produces and sells 40 units of output, its total revenue is $740. If there is no change in price, then what is the amount of the firm’s total revenue if it produces and sells 45 units of output? 198. A firm maximizes its profit by selling 2,500 units of output with an average revenue of $6.99. The firm’s marginal cost at 2,500 units of output is __________. 199. A firm sells 100 units of output and its total revenue is $800. The firm’s average revenue amounts to __________. 200. A competitive firm sells 500 units of output and its marginal revenue at 500 units of output is $35. The firm’s total revenue amounts to __________. .
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Ch 15: Firms in Competitive Markets 201. A competitive firm is maximizing its profit by selling 150 units of output. The firm’s marginal cost is $8 and its average total cost is $6. The firm’s profit amounts to __________. 202. A profit-maximizing competitive firm is earning a profit of $24,000. Its marginal cost is $17 and its average total cost is $13. How many units of output is the firm producing and selling? 203. A competitive firm currently produces and sells 500 units of output. Its total revenue is $3,500; the marginal cost of producing the 500th unit of output is $5.75; and the average total cost of producing the 500th unit of output is $4.00. Is the firm maximizing its profit, or should it increase or decrease output in order to increase its profit? 204. A competitive firm currently produces and sells 500 units of output. Its total revenue is $6,000; the marginal cost of producing the 500th unit of output is $14.50; and the average total cost of producing the 500th unit of output is $9.50. Is the firm maximizing its profit, or should it increase or decrease output in order to increase its profit? 205. A competitive firm currently produces and sells 800 units of output at a price of $10 per unit. The firm’s fixed cost is $4,000 and its variable cost is $8,300. In the short run, should the firm continue to operate? 206. A competitive firm currently produces and sells 7,500 units of output at a price of $2.50 per unit. The firm’s average fixed cost is $0.75 and its average total cost is $2.80. In the short run, should the firm continue to operate? 207. When a competitive firm produces and sells 600 units of output, its total revenue is $35,970. What is the firm’s total revenue when it produces and sells 620 units of output? 208. When a firm produces 2,000 units of output, its average total cost is $3.00 and its average revenue is $2.90. What is the firm’s profit or loss? 209. When it produces 500 units of output, a firm earns a profit of $20,000. If the firm sells its output for $65 per unit, then what is its average total cost? 210. When it produces and sells 80 units of output, a competitive firm’s average total cost is $25 and its profit is $480. What is the firm’s total revenue if it sells 85 units of output? 211. When it produces and sells 90 units of output, a competitive firm’s average total cost is $42 and its profit is $360. What is the firm’s marginal revenue if it sells 100 units of output? 212. A competitive firm maximizes its profit by producing output up to the point at which price is equal to ______. 213. Scenario 15-4 A competitive firm sells its output for $20 per unit. When the firm produces 200 units of output, average variable cost is $16, marginal cost is $18, and average total cost is $23. Refer to Scenario 15-4. Calculate the firm’s total revenue, total cost, and profit at 200 units of output. 214. Scenario 15-4 A competitive firm sells its output for $20 per unit. When the firm produces 200 units of output, average variable cost is $16, marginal cost is $18, and average total cost is $23. Refer to Scenario 15-4. Calculate the firm’s fixed cost at 200 units of output. 215. Scenario 15-4 .
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Ch 15: Firms in Competitive Markets A competitive firm sells its output for $20 per unit. When the firm produces 200 units of output, average variable cost is $16, marginal cost is $18, and average total cost is $23. Refer to Scenario 15-4. Is the firm maximizing its profit (or minimizing its loss) by producing 200 units of output? 216. Scenario 15-4 A competitive firm sells its output for $20 per unit. When the firm produces 200 units of output, average variable cost is $16, marginal cost is $18, and average total cost is $23. Refer to Scenario 15-4. Compare the firm’s profit or loss at 200 units of output with its profit or loss if it were to shut down. 217. A competitive firm’s short-run supply curve intersects its average-total-cost curve at the point (Q = 450, P = $22). What is the value of marginal cost at Q = 450? 218. The idea of “spilt milk” is associated with what type of cost? 219. What name do economists have for a cost that has already been committed and cannot be recovered? 220. The expression “Let bygones be bygones” is associated with what type of cost? 221. A golf course in Fargo, North Dakota — where it is very cold in the winter — is closed between November 1 and April 1. If the owner of the golf course is rational, what criterion does he or she use in deciding to close the course for this extended period of time? 222. In a shopping mall in a large city, the Rudolph the Reindeer store sells only merchandise for the Christmas holiday season. Most of the store’s revenue and profit are attributable to the months of October, November, and December. However, the store is open throughout the year. If the owner of the store is rational, what criterion does he or she use in deciding to keep the store open year-round? 223. Explain the difference between the short run and the long run in terms of the number of firms in a competitive market. 224. When the process of entry and exit has ended in a competitive market, are firms’ profits positive, negative, or zero? 225. A competitive firm is producing 500 units of output and its efficient scale is 400 units of output. Can the market in which this firm operates be in a long-run equilibrium? Briefly explain. 226. A competitive firm is producing 1,000 units of output with average total cost equal to $35 and marginal cost equal to $40. Can the market in which this firm operates be in a long-run equilibrium? Briefly explain. 227. A competitive market begins in a situation of long-run equilibrium. Then, there is an increase in demand. Describe the process that eventually leads to a new long-run equilibrium. 228. A competitive market begins in a situation of long-run equilibrium. Then, there is a decrease in demand. Describe the process that eventually leads to a new long-run equilibrium. 229. In the long run with free entry and exit and identical firms, are competitive firms’ profits positive, zero, or negative? 230. In the long-run equilibrium of a competitive market with free entry and exit, firms operate at their __________ scale. 231. If a competitive firm is operating at its efficient scale, then is the firm’s profit positive, zero, or negative? .
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Ch 15: Firms in Competitive Markets 232. Under what condition is the long-run market supply curve for a competitive market perfectly elastic? 233. In a competitive market, is the long-run supply curve typically more elastic than the short-run supply curve, or is it less elastic than the short-run supply curve? 234. Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximizing firm? 235. List and describe the characteristics of a perfectly competitive market. 236. Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If a firm set its price below the current market price, what effect would this have on the market? 237. Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run? Explain your answer. 238. Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the firm raise production, and when should the firm lower production? 239. News reports from the western United States occasionally report incidents of cattle ranchers slaughtering a large number of newborn calves and burying them in mass graves rather than transporting them to markets. Assuming that this is rational behavior by profit-maximizing "firms," explain what economic factors may influence such behavior. 240. Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether an individual firm will shut down in the short run, or choose to remain in the market. Explain your answer. 241. At its current level of production a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces and faces an average total cost of $10. At the market price of $12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1,000 units. What is the firm's current profit? What is likely to occur in this market and why? 242. Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your reasons. 243. If identical firms that remain in a competitive market over the long run make zero economic profit, why do these firms choose to remain in the market?
.
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Ch 15: Firms in Competitive Markets Answer Key 1. b 2. c 3. b 4. d 5. c 6. a 7. b 8. a 9. c 10. c 11. c 12. d 13. d 14. b 15. d 16. c 17. c 18. b 19. c 20. d 21. b 22. b 23. d 24. d 25. d .
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Ch 15: Firms in Competitive Markets 26. c 27. b 28. c 29. a 30. c 31. d 32. c 33. b 34. d 35. a 36. c 37. c 38. c 39. b 40. c 41. b 42. c 43. c 44. b 45. d 46. c 47. c 48. b 49. a 50. c 51. d .
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Ch 15: Firms in Competitive Markets 52. b 53. c 54. b 55. c 56. c 57. b 58. b 59. d 60. c 61. a 62. a 63. a 64. b 65. c 66. d 67. c 68. d 69. c 70. c 71. a 72. a 73. d 74. b 75. c 76. b .
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Ch 15: Firms in Competitive Markets 77. a 78. c 79. d 80. b 81. c 82. a 83. b 84. d 85. d 86. b 87. d 88. c 89. c 90. c 91. c 92. b 93. b 94. d 95. a 96. b 97. c 98. d 99. d 100. a 101. c 102. b .
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Ch 15: Firms in Competitive Markets 103. c 104. a 105. b 106. d 107. c 108. b 109. d 110. False 111. True 112. False 113. False 114. True 115. True 116. True 117. False 118. False 119. False 120. True 121. True 122. False 123. True 124. False 125. True 126. True 127. True .
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Ch 15: Firms in Competitive Markets 128. False 129. True 130. True 131. True 132. True 133. True 134. False 135. False 136. True 137. False 138. False 139. True 140. True 141. False 142. False 143. False 144. False 145. True 146. False 147. False 148. True 149. False 150. False 151. True 152. True 153. True .
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Ch 15: Firms in Competitive Markets 154. True 155. True 156. True 157. False 158. True 159. False 160. True 161. False 162. True 163. False 164. True 165. True 166. False 167. True 168. True 169. False 170. True 171. False 172. True 173. False 174. False 175. False 176. False 177. False 178. True .
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Ch 15: Firms in Competitive Markets 179. True 180. False 181. False 182. False 183. False 184. market power 185. the price of the good it sells 186. In order to be a competitive firm, the supplier of your water would have to be one of many sellers of water. In fact, it is likely that there is only one firm (or governmental unit) that supplies water to homes in your community. 187. In a competitive market, there are many buyers and sellers and the goods offered by the various sellers are essentially the same. 188. A buyer or seller is a price taker if he or she has little or no control over the price; that is, the buyer or seller must accept the price determined in the market. 189. No. When the firm sells 1 million coat hangers its average revenue (price) is $2. When it sells 2 million coat hangers its average revenue is $1.75. Because the firm’s average revenue is not constant at the two different levels of output, it is not a price taker. 190. For a competitive firm, price is equal to average revenue for all levels of output. Therefore, the firm’s average revenue is equal to $10. 191. For a competitive firm, price is equal to marginal revenue for all levels of output. Therefore, the firm’s marginal revenue is equal to $30. 192. The market is not competitive because the goods offered by the various sellers are not largely the same. 193. The market is not competitive because there are only two sellers. 194. A competitive firm has the ability to influence the quantity of output it supplies, but it does not have the ability to influence the price (average revenue). 195. Price and marginal revenue are the same for a competitive firm. 196. $5 197. At 45 units of output the firm’s total revenue amounts to ($18.50)(45) = $832.50. 198. $6.99 199. $8 200. $17,500 .
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Ch 15: Firms in Competitive Markets 201. $300 202. Profit = ($17 – $13)(Q) = $24,000, so Q = 6,000. 203. For this firm, price = marginal revenue = $7. Since marginal revenue exceeds marginal cost, the firm should increase its output in order to increase its profit. 204. For this firm, price = marginal revenue = $12. Since marginal cost exceeds marginal revenue, the firm should decrease its output in order to increase its profit. 205. No, the firm should shut down, since the price of $10 falls short of average variable cost, which is $10.375. 206. Yes, the firm should continue to operate since the price of $2.50 exceeds the average variable cost, which is $2.05. 207. The price (average revenue) is $35,970/600 = $59.95. On 620 units of output, total revenue is $59.95 X 620 = $37.169. 208. The firm’s profit is ($2.90 - $3.00) X 2,000 = $-200. That is, its loss is $200. 209. Profit = $20,000 = ($65 - ATC) X 500, so ATC = $25. 210. At Q = 80, profit is $480 = (P - $25) X 80, so P = $31. At Q = 85, TR = $31 X 85 = $2.635. 211. At Q = 9, profit is $360 = (P - $42) X 90, so P = $46. The firm’s marginal revenue, including that on the 100th unit, is $46. 212. marginal cost 213. TR = $20 X 200 = $4,000, TC = $23 X 200 = $4,600, Profit = $4,000 - $4,600 = $-600. 214. FC = (ATC - AVC) X Q = ($23 - $16) X 200 = $1,400. 215. No, since P > MC and P > AVC on the 200th unit. 216. At Q = 200, Profit = ($20 - $23) X 200 + $ -600. The firm’s fixed cost is FC = (ATC - AVC) X Q = ($23 - $16) X 200 = $1,400, so at Q = 0, Profit $-1,400. 217. The firm’s marginal cost at Q = 450 is $22. 218. The idea of “spilt milk” is associated with sunk cost. 219. Economists call such a cost a sunk cost. 220. The expression is associated with sunk cost. 221. The owner has determined that total revenue would fall short of variable cost during the November 1 – April 1 period. 222. The owner has determined that total revenue exceeds variable cost during the months January through September. .
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Ch 15: Firms in Competitive Markets 223. In the short run, the number of firms is fixed. In the long run, the number of firms can change due to entry and exit. 224. At the end of the entry/exit process, firms’ profits are zero. 225. No, the market cannot be in a long-run equilibrium because in such an equilibrium firms produce at their efficient scale. 226. No, the market cannot be in a long-run equilibrium because average total cost and marginal cost must equal one another in such an equilibrium. 227. The increase in demand results in firms earning positive profits. In response to the positive profits, new firms enter the market, increasing short-run supply. Eventually, short-run supply has increased sufficiently to restore zero profits. At that point the market has reached a new long-run equilibrium. 228. The decrease in demand results in firms sustaining losses. In response to the losses, some firms exit the market, decreasing short-run supply. Eventually, short-run supply has decreased sufficiently to restore zero profits. At that point the market has reached a new long-run equilibrium. 229. Long-run profits are zero under these conditions. 230. efficient 231. Profit is zero for a competitive firm operating at its efficient scale. 232. There must exist a large number of potential entrants, each with the same costs. 233. The long-run supply curve is typically more elastic than the short-run supply curve. 234. Average revenue is total revenue divided by the quantity of output. Marginal revenue is the change in total revenue from the sale of each additional unit of output. Marginal revenue is used to determine the profit-maximizing level of production, and average revenue is used to help determine the level of profits. Note that for all firms, price equals average revenue because AR=(PxQ)/Q=P. But only for a firm operating in a perfectly competitive industry does price also equal marginal revenue. 235. There are many buyers and sellers in the market. The goods offered by the various sellers are largely the same. Firms can freely enter or exit the market. 236. The firm could not sell any more of its product at a lower price than it could sell at the market price. As a result, it would needlessly forgo revenue if it set a price below the market price. If the firm set a higher price, it would not sell anything at all because a competitive market has many sellers who would supply the product at the market price. 237. In a competitive market where firms are earning economic profits, new firms will have an incentive to enter the market. This entry will expand the number of firms, increase the quantity of the good supplied, and drive down prices and profits. Entry will cease once firms are producing the output level where price equals the minimum of the average total cost curve, meaning that each firm earns zero economic profits in the long run.
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Ch 15: Firms in Competitive Markets
238. The firm selects the level of output at which marginal revenue is equal to marginal cost. If MR > MC, profit will increase if the firm increases Q. If MR < MC, profit will increase if the firm decreases Q. 239. If the selling price is not sufficient to cover the variable cost of sending the calves to market, this (potentially emotionally upsetting) behavior makes economic sense. 240. The losses and revenues are identified on the individual firm's graph. Total cost is equal to the sum of the losses and revenue (because profit/loss=TR-TC, so TC=TR+profit/loss). The decision about whether this firm shuts down or remains in the market depends upon the position of average variable cost. If average variable cost is below P0 at output level Q0, the firm will remain in the market. If average variable cost is above P0 at output level Q0 the firm will shut down in the short run.
241. Profit can be calculated as (P-ATC)xQ. ($12.50-10)x1,000 = $2,500. Firms are likely to enter this market because existing firms are earning economic profits. 242. 1) Some resource used in production may be available only in limited quantities. 2) Firms may have different cost structures. The example provided in the text for the first reason is the market for farm products. As more people become farmers, the price of land is bid up since its supply is limited. As the price of farm land is bid up, the costs to all farmers in the market rise. The example used to support the second reason is the market for painters. Anyone can enter the market for .
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Ch 15: Firms in Competitive Markets painting services, but not everyone has the same costs because some painters work faster than others. 243. Because a normal rate of return on their investment is included as part of the opportunity cost of production.
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Ch 16: Monopoly
Indicate the answer choice that best completes the statement or answers the question. 1. A monopoly can earn positive profits because it a. can sell unlimited quantities at any price it chooses. b. takes the market price as given and can sell unlimited quantities. c. can set the price it charges for its output but faces a horizontal demand curve. d. can maintain a price such that total revenues will exceed total costs. 2. The fundamental source of monopoly power is a. barriers to entry. b. profit. c. increasing average total cost. d. a product without close substitutes. 3. Which of the following is a necessary characteristic of a monopoly? a. The firm is the sole seller of its product. b. The firm's product has many close substitutes. c. The firm generates a large economic profit. d. The firm is located in a small geographic market. 4. Suppose most people regard emeralds, rubies, and sapphires as close substitutes for diamonds. Then DeBeers, a large diamond company, has a. less incentive to advertise than it would otherwise have. b. less market power than it would otherwise have. c. more control over the price of diamonds than it would otherwise have. d. higher profits than it would otherwise have. 5. Which of the following would be most likely to have monopoly power? a. A long-distance telephone service provider b. A local cable TV provider c. A large department store d. A gas station 6. Which of the following is not an example of a barrier to entry? a. Mighty Mitch's Mining Company owns a unique plot of land in Tanzania, under which lies the only large deposit of Tanzanite in the world. b. A pharmaceutical company obtains a patent for a specific high blood pressure medication. c. A musician obtains a copyright for their original song. d. An entrepreneur opens a popular new restaurant. 7. A government-created monopoly arises when a. government spending in a certain industry gives rise to monopoly power. b. the government exercises its market control by encouraging competition among sellers. c. the government gives a firm the exclusive right to sell some good or service. d. the government collects taxes in a particular industry. .
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Ch 16: Monopoly 8. A benefit to society of the patent and copyright laws is that those laws a. help to keep prices down. b. help to prevent a single firm from acquiring ownership of a key resource. c. encourage creative activity. d. discourage the production of inefficient products. 9. Granting a pharmaceutical company a patent for a new medicine will lead to a. a product that is priced higher than it would be without the exclusive rights. b. reduced incentives for pharmaceutical companies to invest in research and development. c. lower quantities of output than without the patent. d. lower prices than without the patent. 10. Figure 16-1
Refer to Figure 16-1. The shape of the average total cost curve reveals information about the nature of the barrier to entry that might exist in a monopoly market. Which of the following monopoly types best coincides with the figure? a. Ownership of a key resource by a single firm b. Natural monopoly c. Government-created monopoly d. A patent or copyright monopoly 11. Figure 16-1
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Ch 16: Monopoly
Refer to Figure 16-1. The shape of the average total cost curve in the figure suggests an opportunity for a profitmaximizing monopolist to take advantage of a. economies of scale. b. diseconomies of scale. c. diminishing marginal product. d. increasing marginal cost. 12. A natural monopoly occurs when a. the product is sold in its natural state, such as water or diamonds. b. there are economies of scale over the relevant range of output. c. the firm is characterized by a rising marginal cost curve. d. production requires the use of free natural resources, such as water or air. 13. When an industry is a natural monopoly, a. it is characterized by constant returns to scale. b. it is characterized by diseconomies of scale. c. a larger number of firms may lead to a lower average total cost. d. a larger number of firms will lead to a higher average total cost. 14. If the distribution of water is a natural monopoly, then a. a single firm cannot serve the market at the lowest possible average total cost. b. allowing for competition among different firms in the water-distribution industry is efficient. c. multiple firms would likely each have to pay large fixed costs to develop their own network of pipes. .
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Ch 16: Monopoly d. average cost increases as the quantity of water produced increases. 15. When a firm has a natural monopoly, the firm's a. marginal cost always exceeds its average total cost. b. total cost curve is horizontal. c. average total cost curve is downward sloping. d. marginal cost curve must lie above the firm's average total cost curve. 16. When a firm operates under conditions of monopoly, its price is a. not constrained. b. constrained by marginal cost. c. constrained by demand. d. constrained only by its social agenda. 17. In order to sell more of its product, a monopolist must a. lobby the government for a subsidy. b. lower its price. c. advertise. d. enact barriers to entry in related markets. 18. Monopoly firms face a. downward-sloping demand curves, so they can sell as much output as they desire at the market price. b. downward-sloping demand curves, so they can sell only the specific price-quantity combinations that lie on the demand curve. c. horizontal demand curves, so they can sell as much output as they desire at the market price. d. horizontal demand curves, so they can sell only a limited quantity of output at each price. 19. The profit-maximization problem for a monopolist differs from that of a competitive firm in which of the following ways? a. A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a monopolist maximizes profit at the point where marginal revenue exceeds marginal cost. b. A competitive firm maximizes profit at the point where average revenue equals marginal cost; a monopolist maximizes profit at the point where average revenue exceeds marginal cost. c. For a competitive firm, marginal revenue at the profit-maximizing level of output is equal to marginal revenue at all other levels of output; for a monopolist, marginal revenue at the profit-maximizing level of output is smaller than it is for larger levels of output. d. For a profit-maximizing competitive firm, thinking at the margin is much more important than it is for a profitmaximizing monopolist. 20. If a profit-maximizing monopolist faces a downward-sloping market demand curve, its a. average revenue is less than the price of the product. b. average revenue is less than marginal revenue. c. marginal revenue is less than the price of the product. d. marginal revenue is greater than the price of the product.
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Ch 16: Monopoly 21. When a monopolist increases the amount of output that it produces and sells, average revenue a. increases, and marginal revenue increases. b. increases, and marginal revenue decreases. c. decreases, and marginal revenue increases. d. decreases, and marginal revenue decreases. 22. Which of the following statements is true? a. When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. b. Average revenue is the same as price for monopoly firms but not competitive firms. c. Average revenue is the same as price for competitive firms but not monopoly firms. d. When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. 23. For a monopolist, when the price effect is greater than the output effect, an increase in output sold causes marginal revenue to be a. positive. b. negative. c. zero. d. maximized. 24. A monopolist can sell 300 units of output for $45 per unit. Alternatively, it can sell 301 units of output for $44.60 per unit. The marginal revenue of the 301st unit of output is a. -$120.00. b. -$75.40. c. -$0.40. d. $75.40. 25. Bob's Butcher Shop is the only place within 100 miles that sells bison burgers. Assuming that Bob is a monopolist and maximizing his profit, which of the following statements is true? a. The price of Bob's bison burgers will be less than Bob's marginal cost. b. The price of Bob's bison burgers will exceed Bob's marginal cost. c. The price of Bob's bison burgers will equal Bob's marginal cost. d. Costs are irrelevant to Bob because he is a monopolist. 26. Figure 16-2
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Ch 16: Monopoly
Refer to Figure 16-2. The demand curve for a monopoly firm is depicted by curve a. A. b. B. c. C. d. D. 27. Figure 16-2
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Ch 16: Monopoly
Refer to Figure 16-2. If the monopoly firm is currently producing Q4 units of output, then a decrease in output will necessarily cause profit to a. remain unchanged. b. decrease. c. increase if the output is between Q3 and Q4. d. increase regardless of the new level of output. 28. Figure 16-2
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Ch 16: Monopoly
Refer to Figure 16-2. Profit can always be increased by increasing the level of output by one unit if the monopolist is currently operating at a. Q2 only. b. Q1 or Q2 only. c. Q1 only. d. Q1, Q2, or Q3 only. 29. Figure 16-2
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Ch 16: Monopoly
Refer to Figure 16-2. A profit-maximizing monopoly's total revenue is equal to a. P5 × Q3. b. P4 × Q5. c. (P5 − P3) × Q3. d. (P5 − P4) × Q3. 30. Figure 16-3
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Refer to Figure 16-3. A profit-maximizing monopoly will produce an output level of a. Q1. b. Q2. c. Q3. d. Q4. 31. Figure 16-4
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Refer to Figure 16-4. What price will the monopolist charge in order to maximize profit? a. A b. C c. K d. L 32. Figure 16-4
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Ch 16: Monopoly
Refer to Figure 16-4. How much output will the monopolist produce in order to maximize profit? a. O b. T c. W d. Z 33. Figure 16-4
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Ch 16: Monopoly
Refer to Figure 16-4. What area measures the monopolist's profit? a. (K − C) × W b. (L − A) × T c. (K − B) × W d. 0.5[(K − C) × (Z − T)] 34. Table 16-1 The following table provides information on the price, quantity, and average total cost for a monopoly. Price (Dollars per unit) 24 18 12 6 0
Quantity (Units) 0 5 10 15 20
Average Total Cost (Dollars per unit) – 14.00 11.00 10.67 11.00
Refer to Table 16-1. At what price will the monopolist maximize their profit? a. $6 b. $12 c. $18 d. $24 .
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Ch 16: Monopoly 35. Table 16-1 The following table provides information on the price, quantity, and average total cost for a monopoly. Price (Dollars per unit) 24 18 12 6 0
Quantity (Units) 0 5 10 15 20
Average Total Cost (Dollars per unit) – 14.00 11.00 10.67 11.00
Refer to Table 16-1. What is the maximum profit that the monopolist can earn? a. $10 b. $20 c. $30 d. $40 36. Scenario 16-1 A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its marginal revenue is $30, its average revenue is $60, and its average total cost is $34. Refer to Scenario 16-1. At Q = 500, the firm's total revenue is a. $13,000. b. $15,000. c. $17,000. d. $30,000. 37. Scenario 16-1 A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its marginal revenue is $30, its average revenue is $60, and its average total cost is $34. Refer to Scenario 16-1. At Q = 500, the firm's profit is a. $13,000. b. $15,000. c. $17,000. d. $30,000. 38. Scenario 16-1 A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its marginal revenue is $30, its average revenue is $60, and its average total cost is $34. Refer to Scenario 16-1. At Q = 500, the firm's marginal cost is a. less than $30. b. $30. c. $34. d. greater than $34. .
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Ch 16: Monopoly 39. If a pharmaceutical company discovers a new drug and successfully patents it, patent law gives the firm a. partial ownership of the right to sell the drug for a limited number of years. b. partial ownership of the right to sell the drug for an unlimited number of years. c. sole ownership of the right to sell the drug for a limited number of years. d. sole ownership of the right to sell the drug for an unlimited number of years. 40. Figure 16-5 The following graph depicts the market situation for a monopoly pastry shop called Bearclaws.
Refer to Figure 16-5. Based upon the information shown, what price will Bearclaws charge to maximize profits? a. $7. b. $10.50. c. $14. d. $12. 41. Figure 16-5 The following graph depicts the market situation for a monopoly pastry shop called Bearclaws.
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Ch 16: Monopoly
Refer to Figure 16-5. Based upon the information shown, how many units will Bearclaws produce to maximize profits? a. 70. b. 90. c. 105. d. 130. 42. Figure 16-5 The following graph depicts the market situation for a monopoly pastry shop called Bearclaws.
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Refer to Figure 16-5. Based upon the information shown, what is total revenue for Bearclaws, given that it maximizes profits? a. $900. b. $980. c. $490. d. $1,080. 43. Figure 16-5 The following graph depicts the market situation for a monopoly pastry shop called Bearclaws.
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Ch 16: Monopoly
Refer to Figure 16-5. Based upon the information shown, what are total costs for Bearclaws, given that it maximizes profits? a. $700. b. $980. c. $490. d. $784. 44. Figure 16-5 The following graph depicts the market situation for a monopoly pastry shop called Bearclaws.
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Ch 16: Monopoly
Refer to Figure 16-5. Given that Bearclaws chooses the profit-maximizing price and quantity, what profit level will it obtain? a. $700. b. $980. c. $490. d. $280. 45. The deadweight loss associated with a monopoly occurs because the monopolist a. maximizes profits. b. produces an output level less than the socially optimal level. c. produces an output level greater than the socially optimal level. d. equates marginal revenue with marginal cost. 46. The social cost of a monopoly is equal to its a. economic profit. b. fixed cost. c. deadweight loss. d. variable cost. 47. Monopolies are socially inefficient because the price they charge is a. equal to marginal revenue. b. above marginal cost. .
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Ch 16: Monopoly c. equal to demand. d. above demand. 48. For a monopoly, the socially efficient level of output occurs where a. marginal revenue equals marginal cost. b. price equals marginal cost. c. marginal revenue equals average total cost. d. price equals average total cost. 49. To maximize total surplus with a monopoly firm, a benevolent social planner would choose the level of output where a. MR = MC. b. MR intersects the demand curve. c. MC intersects the demand curve. d. MR exceeds MC by the greatest amount. 50. Figure 16-6
Refer to Figure 16-6. What is the socially efficient price and quantity? a. Price = A; quantity = X b. Price = B; quantity = Y c. Price = B; quantity = X d. Price = C; quantity = Y 51. Figure 16-6 .
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Refer to Figure 16-6. What is the monopoly price and quantity? a. Price = A; quantity = X b. Price = B; quantity = Y c. Price = B; quantity = X d. Price = C; quantity = X 52. Figure 16-6
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Ch 16: Monopoly
Refer to Figure 16-6. What is the area of deadweight loss? a. The rectangle (A − C) × X b. The triangle 1/2[(A − C) × (Y − X)] c. The triangle 1/2[(A − B) × (Y − X)] d. The rectangle (A − C) × X plus the triangle 1/2[(A − C) × (Y − X)] 53. Figure 16-7
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Ch 16: Monopoly
Refer to Figure 16-7. To maximize total surplus, a benevolent social planner would choose which of the following outcomes? a. Q = 30 and P = 30 b. Q = 30 and P = 60 c. Q = 45 and P = 45 d. Q = 60 and P = 30 54. Figure 16-7
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Refer to Figure 16-7. To maximize its profit, a monopolist would choose which of the following outcomes? a. Q = 30 and P = 30 b. Q = 30 and P = 60 c. Q = 45 and P = 45 d. Q = 60 and P = 30 55. Price discrimination a. is illegal in the United States and Europe. b. can occur in both perfectly competitive and monopoly markets. c. is illogical because it does not maximize profits. d. can maximize profits if the seller can prevent the resale of goods between customers. 56. Price discrimination is the business practice of a. bundling related products to increase total sales. b. selling the same good at different prices to different customers. c. pricing above marginal cost. d. hiring marketing experts to increase consumers' brand loyalty. 57. For a firm to price discriminate, a. it must be a natural monopoly. b. it must be regulated by the government. c. it must have some market power. d. consumers must tell the firm what they are willing to pay for the product. .
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Ch 16: Monopoly 58. Which of the following can eliminate the inefficiency inherent in monopoly pricing? a. Arbitrage b. Cost-plus pricing c. Price discrimination d. Regulations that force monopolies to reduce their levels of output 59. A firm cannot price discriminate if a. it has declining marginal revenue. b. it operates in a competitive market. c. buyers only reveal the price they are willing to pay for the product. d. it has a constant marginal cost. 60. Price discrimination adds to social welfare in the form of a. increased total surplus. b. decreased total surplus. c. reduced costs of production. d. increased consumer surplus and decreased producer surplus. 61. A monopolist's profits with price discrimination will be a. lower than if the firm charged a single, profit-maximizing price. b. the same as if the firm charged a single, profit-maximizing price. c. higher than if the firm charged just one price because the firm will capture more consumer surplus. d. higher than if the firm charged a single price because the costs of selling the good will be lower. 62. Which of the following is not an example of price discrimination? a. A movie theater charges a lower price for a child's ticket than for an adult's ticket. b. A university rebates part of the cost of tuition in the form of financial aid for economically marginalized students. c. A local pizza chain offers a "buy three get one free" deal. d. An ice cream parlor charges a higher price for ice cream than for sherbet. 63. A movie theater can increase its profits through price discrimination by charging a higher price to adults and a lower price to children if it a. only shows G-rated movies. b. has no monopoly pricing power. c. cannot easily distinguish between the two groups of customers. d. can prevent children from buying the lower-priced tickets and selling them to adults. 64. When deciding what price to charge consumers, the monopolist may choose to charge them different prices based on the customers' a. favorite color. b. favorite school subject. c. marital status. d. geographical location. .
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Ch 16: Monopoly 65. Which of the following is not an example of price discrimination by a firm? a. Children's meals at a restaurant b. A natural gas company charging all customers a higher rate in the winter than in the summer c. A senior citizens' discount d. Coupons in the Sunday newspaper 66. Suppose a monopolist is able to charge each customer a price equal to that customer's willingness-to-pay for the product. Then the monopolist is engaging in a. marginal cost pricing. b. arbitrage pricing. c. voodoo economics. d. perfect price discrimination. 67. Scenario 16-2 Vincent operates a scenic tour business in Boston. He has one bus that can fit 50 people per tour and each tour lasts 2 hours. His total cost of operating one tour is fixed at $450. Vincent's cost is not reduced if he runs a tour with a partially full bus. While his cost is the same for all tours, Vincent charges each passenger their willingness to pay: adults $18 per trip, children $10 per trip, and senior citizens $12 per trip. At those rates, on a typical day Vincent's demand is: Passenger Type Adult Children Senior Citizens
Willingness to Pay (Dollars per unit) 18 10 12
Quantity Demanded (Units) 70 25 55
Assume that Vincent's customers are always available for the tour; therefore, he can fill his bus for each tour as long as there is sufficient total demand for the day.
Refer to Scenario 16-2. What is Vincent's total revenue on a typical day? a. $1,500 b. $1,800 c. $2,170 d. $2,700 68. Scenario 16-2 Vincent operates a scenic tour business in Boston. He has one bus that can fit 50 people per tour and each tour lasts 2 hours. His total cost of operating one tour is fixed at $450. Vincent's cost is not reduced if he runs a tour with a partially full bus. While his cost is the same for all tours, Vincent charges each passenger their willingness to pay: adults $18 per trip, children $10 per trip, and senior citizens $12 per trip. At those rates, on a typical day Vincent's demand is: Passenger Type Adult Children Senior Citizens
Willingness to Pay (Dollars per unit) 18 10 12
Quantity Demanded (Units) 70 25 55
Assume that Vincent's customers are always available for the tour; therefore, he can fill his bus for each tour as long as .
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Ch 16: Monopoly there is sufficient total demand for the day.
Refer to Scenario 16-2. What is Vincent's profit on a typical day? a. $660 b. $820 c. $1,350 d. $2,170 69. Which of the following can defeat the profit-maximizing strategy of price discrimination? a. Consumer surplus b. Deadweight loss c. Market power d. Arbitrage 70. Price discrimination is a rational strategy for a profit-maximizing monopolist when a. the monopolist finds itself able to produce only limited quantities of output. b. consumers are unable to be segmented into identifiable markets. c. the monopolist wishes to increase the deadweight loss that results from profit-maximizing behavior. d. there is no opportunity for arbitrage across market segments. 71. The process of buying a good in one market at a low price and selling the good in another market for a higher price in order to profit from the price difference is known as a. sabotage. b. conspiracy. c. arbitrage. d. collusion. 72. A perfectly price-discriminating monopolist is able to a. maximize profit and produce a socially optimal level of output. b. maximize profit, but not produce a socially optimal level of output. c. produce a socially optimal level of output, but not maximize profit. d. exercise illegal preferences regarding the race and/or gender of its employees. 73. If a monopolist is able to perfectly price discriminate, a. consumer surplus is always increased. b. total surplus is always decreased. c. consumer surplus and deadweight losses are transformed into monopoly profits. d. the price effect dominates the output effect on monopoly revenue. 74. Table 16-2 Suppose a monopolist faces the following demand curve: Price (Dollars per unit) .
Quantity (Units) Page 27
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Ch 16: Monopoly 8 7 6 5 4 3 2 1
300 400 500 600 700 800 900 1,000
Refer to Table 16-2. The monopolist has fixed costs of $1,000 and has a constant marginal cost of $2 per unit. If the monopolist were able to perfectly price discriminate, how many units would it sell? a. 400 b. 500 c. 900 d. 4,200 75. Which of the following is not one of the ways that antitrust laws promote competition? a. Antitrust laws allow the government to prevent mergers. b. Antitrust laws allow the government to break up big companies into smaller ones. c. Antitrust laws prevent companies from coordinating their activities in ways that make markets less competitive. d. Antitrust laws allow the government to shut down a firm if the government believes the firm has monopoly power. 76. Table 16-3 Tommy's Tie Company, a monopolist, has the following cost and revenue information. Assume that Tommy's is able to engage in perfect price discrimination. Costs Quantity Total Marginal Produced Cost Cost (Units) (Dollars) (Dollars) 0 1 2 3 4 5 6 7 8
.
100 140 184 230 280 335 395 475 575
–
Revenues Quantity Demanded
(Units) 0 1 2 3 4 5 6 7 8
Marginal Price (Dollars per unit) 170 160 150 140 130 120 110 100 95
Total Revenue Revenue (Dollars) (Dollars)
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Ch 16: Monopoly Refer to Table 16-3. If the monopolist can engage in perfect price discrimination, what is the marginal revenue from selling the 5th tie? a. $80 b. $100 c. $110 d. $120 77. Table 16-3 Tommy's Tie Company, a monopolist, has the following cost and revenue information. Assume that Tommy's is able to engage in perfect price discrimination. Costs Quantity Total Marginal Produced Cost Cost (Units) (Dollars) (Dollars) 0 1 2 3 4 5 6 7 8
100 140 184 230 280 335 395 475 575
–
Revenues Quantity Demanded
(Units) 0 1 2 3 4 5 6 7 8
Total
Marginal Price (Dollars per unit) 170 160 150 140 130 120 110 100 95
Revenue Revenue (Dollars) (Dollars)
Refer to Table 16-3. If the monopolist can engage in perfect price discrimination, what is the total revenue when 3 ties are sold? a. $140 b. $420 c. $450 d. $620 78. Table 16-3 Tommy's Tie Company, a monopolist, has the following cost and revenue information. Assume that Tommy's is able to engage in perfect price discrimination. Costs Quantity Total Marginal Produced Cost Cost (Units) (Dollars) (Dollars) 0 1 2 .
100 140 184
–
Revenues Quantity Demanded
(Units) 0 1 2
Marginal Price (Dollars per unit) 170 160 150
Total Revenue Revenue (Dollars) (Dollars)
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230 280 335 395 475 575
3 4 5 6 7 8
140 130 120 110 100 95
Refer to Table 16-3. If the monopolist can engage in perfect price discrimination, what is the average revenue when 7 ties are sold? a. $90 b. $100 c. $110 d. $130 79. Which of the following statements is not correct? a. The government may use antitrust laws to break up an existing company to improve competition. b. The government may break up a natural monopoly to lower the price charged to customers. c. Economists usually prefer private ownership to public ownership of natural monopolies. d. Sometimes the best strategy is for the government to do nothing about monopoly inefficiency because the "fix" may be worse than the problem. 80. Which of the following governmental actions would eliminate some or all of the inefficiency that results from monopoly pricing? a. Policymakers can regulate prices that the monopoly charges. b. Prohibit the monopoly from price discriminating. c. Force the monopoly to operate at a point where its marginal revenue is equal to its marginal cost. d. There is nothing the government can do to eliminate any inefficiency associated with a monopoly. 81. Antitrust laws have economic benefits that outweigh the costs if they a. prevent mergers that would decrease competition and lower the costs of production. b. prevent mergers that would decrease competition and raise the costs of production. c. allow mergers that would decrease competition and raise the costs of production. d. allow mergers that would decrease competition regardless of what happens to the costs of production. 82. Which of the following statements is not correct? a. Two examples of early antitrust laws are the Sherman and Clayton Antitrust Acts. b. Antitrust laws automatically prevent mergers between companies that produce similar products. c. Antitrust laws give the government power to increase competition. d. Antitrust laws can reduce social welfare if they prevent mergers that would lower costs through more efficient joint production. 83. The collection of statutes aimed at curbing monopoly power is called a. the 14th Amendment. .
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Ch 16: Monopoly b. the Clayton Antitrust Act. c. the Sherman Antitrust Act. d. antitrust law. 84. In order for antitrust laws to raise social welfare, the government must a. disallow synergy benefits from accruing to monopolists. b. disallow any mergers from taking place. c. be able to determine which mergers are desirable and which are not. d. always attempt to keep markets in their most competitive form. 85. Reduced competition through merging of companies will raise social welfare a. if the social cost from the synergies exceeds the benefit of increased market power. b. if the benefit from the synergies exceeds the social cost of increased market power. c. always. d. never. 86. One problem with government operation of monopolies is that a. a benevolent government is likely to be interested in generating profits for political gain. b. monopolies typically have rising average costs. c. the government typically has little incentive to reduce costs. d. a government-regulated outcome will increase the profitability of the monopoly. 87. If government regulation sets the maximum price for a natural monopoly equal to its marginal cost, then the natural monopolist will a. earn economic losses. b. earn economic profits. c. earn zero economic profits. d. produce a lower quantity of output than is socially optimal. 88. When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, the regulated monopoly a. will experience positive profit. b. will experience a price above average total cost. c. does not need a government subsidy to remain in business. d. will experience a loss. 89. In a natural monopoly, a. society would be better off if antitrust laws were used to create many different firms in the market. b. the marginal cost curve is positively sloped. c. if the government requires marginal cost pricing, it will likely have to subsidize the firm. d. the marginal revenue curve is horizontal. 90. For a long while, electricity producers were thought to be a classic example of a natural monopoly. People held this view because a. the average cost of producing units of electricity by one producer in a specific region was lower than if the same quantity were produced by two or more producers in the same region. .
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Ch 16: Monopoly b. the average cost of producing units of electricity by one producer in a specific region was higher than if the same quantity were produced by two or more produced in the same region. c. the marginal cost of producing units of electricity by one producer in a specific region was higher than if the same quantity were produced by two or more producers in the same region. d. electricity producers have sharply increasing costs as production rises. 91. Figure 16-8
Refer to Figure 16-8. What is the socially efficient price and quantity for this natural monopolist? a. A and J b. D and J c. F and K d. H and L 92. Which of the following is an example of public ownership of a monopoly? a. DeBeers b. Microsoft c. U.S. Postal Service d. AT&T
Indicate whether the statement is true or false. 93. Monopolists can achieve any level of profit they desire because they have unlimited market power. a. True b. False .
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Ch 16: Monopoly 94. Even with market power, monopolists cannot achieve any level of profit they desire because they will sell lower quantities at higher prices. a. True b. False 95. The three main sources of barriers to entry are monopoly resources, government regulation, and the firm’s production process. a. True b. False 96. One characteristic of a monopoly market is that the product is virtually identical to products produced by competing firms. a. True b. False 97. The fundamental cause of monopolies is barriers to entry. a. True b. False 98. The De Beers Diamond company advertises heavily to promote the sale of all diamonds, not just its own. This is evidence that it has a monopoly position to some degree. a. True b. False 99. The De Beers Diamond company is not worried about differentiating its product from all other gemstones. a. True b. False 100. The amount of power that a monopoly has depends on whether there are close substitutes for its product. a. True b. False 101. If the ABC company owns the exclusive rights to mine land in Afghanistan for Lapis Lazuli, a rare stone used in jewelry which is found only in Afghanistan, the company benefits from a barrier to entry. a. True b. False 102. Copyrights and patents are examples of barriers to entry that give firms monopoly pricing powers. a. True b. False 103. If the government deems a newly-invented drug to be truly original, the pharmaceutical company is given the exclusive right to manufacture and sell the drug for 50 years. a. True b. False .
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Ch 16: Monopoly 104. A patent gives a single person or firm the exclusive right to sell some good or service forever. a. True b. False 105. A patent gives a single person or firm the exclusive right to sell some good or service for a specific period of time. a. True b. False 106. A natural monopoly has economies of scale for most if not all of its range of output. a. True b. False 107. If a product can be produced by a natural monopoly, society will benefit in the form of lower prices if the monopolist is broken up into several smaller firms. a. True b. False 108. Declining average total cost with increased production is one of the defining characteristics of a natural monopoly. a. True b. False 109. Average revenue for a monopoly is the total revenue divided by the quantity produced. a. True b. False 110. For a monopoly, marginal revenue is often greater than the price it charges for its good. a. True b. False 111. When a monopolist increases the quantity that it sells, all else equal, total revenue increases, which is called the output effect. a. True b. False 112. When a monopolist increases the quantity that it sells, price decreases, which, all else equal, decreases total revenue; this is called the price effect. a. True b. False 113. A monopolist maximizes profit by producing an output level where marginal cost equals price. a. True b. False 114. A monopolist produces an output level where marginal revenue equals marginal cost and charges a price where marginal cost equals average total cost. a. True .
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Ch 16: Monopoly b. False 115. Like competitive firms, monopolies choose to produce a quantity in which marginal revenue equals marginal cost. a. True b. False 116. Like competitive firms, monopolies charge a price equal to marginal cost. a. True b. False 117. A monopolist produces where P > MC = MR. a. True b. False 118. A monopolist produces where P = MC = MR. a. True b. False 119. During the life of a drug patent, the monopoly pharmaceutical firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. a. True b. False 120. At the profit-maximizing quantity of output for a monopolist, average revenue, marginal revenue, and price are all equal. a. True b. False 121. A monopolist’s profit is equal to (Price – Marginal Cost) × Quantity. a. True b. False 122. A monopolist does not have a supply curve because the firm’s decision about how much to supply is impossible to separate from the demand curve it faces. a. True b. False 123. A monopolist’s supply curve is vertical. a. True b. False 124. A monopolist’s supply curve is horizontal. a. True b. False 125. The socially efficient quantity is found where the demand curve intersects the marginal cost curve. .
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Ch 16: Monopoly a. True b. False 126. The profit that a monopolist earns represents a loss to society that is measured through deadweight loss. a. True b. False 127. Deadweight loss measures the loss in society’s welfare that occurs because a monopolist does not produce the socially efficient level of output. a. True b. False 128. Deadweight loss measures the loss in society’s welfare that occurs because a monopolist can earn profits without the concern of new firms entering its industry. a. True b. False 129. The deadweight loss for a monopolist equals one-half of its profits for any given level of output. a. True b. False 130. In a monopoly market, the socially efficient quantity of output is typically higher than the profit-maximizing quantity of output for the monopolist. a. True b. False 131. A monopoly creates a deadweight loss to society because it earns both short-run and long-run positive economic profits. a. True b. False 132. A monopoly creates a deadweight loss to society because it produces less output than the socially efficient level. a. True b. False 133. Suppose a profit-maximizing monopolist faces a constant marginal cost of $10, produces an output level of 100 units, and charges a price of $50. The socially efficient level of output is 200 units. Assume that the demand curve and marginal revenue curve are the typical downward-sloping straight lines. The monopoly deadweight loss equals $4,000. a. True b. False 134. Suppose a profit-maximizing monopolist faces a constant marginal cost of $10, produces an output level of 100 units, and charges a price of $50. The socially efficient level of output is 200 units. Assume that the demand curve and marginal revenue curve are the typical downward-sloping straight lines. The monopoly deadweight loss equals $2,000. a. True b. False .
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Ch 16: Monopoly 135. Suppose a profit-maximizing monopolist faces a constant marginal cost of $20, produces an output level of 100 units, and charges a price of $50. The socially efficient level of output is 200 units. Assume that the demand curve and marginal revenue curve are the typical downward-sloping straight lines. The monopoly deadweight loss equals $1,500. a. True b. False 136. Goods that do not have close substitutes have downward-sloping demand curves. a. True b. False 137. Price discrimination can increase both the monopolist’s profits and society’s welfare. a. True b. False 138. In order for a firm to maximize profits through price discrimination, the firm must have some market power and be able to prevent arbitrage. a. True b. False 139. Price discrimination is prohibited by antitrust laws. a. True b. False 140. A monopolist earns higher profits by charging one price than by practicing price discrimination. a. True b. False 141. By selling hardcover books to die-hard fans and paperback books to less enthusiastic readers, the publisher is able to price discriminate and raise its profits. a. True b. False 142. Movie theatres charge different prices to different groups of people based on the differing marginal costs that exist from group to group. a. True b. False 143. Airlines often separate their customers into business travelers and personal travelers by giving a discount to those travelers who stay over a Saturday night. a. True b. False 144. University financial aid can be viewed as a type of price discrimination. a. True b. False 145. By offering lower prices to customers who buy a large quantity, a monopoly is price discriminating. .
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Ch 16: Monopoly a. True b. False 146. A monopolist that can practice perfect price discrimination will not impose a deadweight loss on society. a. True b. False 147. Antitrust laws give the Justice Department the authority to challenge potential mergers between companies in an effort to safeguard society from monopoly power. a. True b. False 148. Some companies merge in order to lower costs through efficient joint production. a. True b. False 149. If the government regulates the price a natural monopolist can charge to be equal to the firm’s average total cost, the firm has no incentive to reduce costs. a. True b. False 150. If the government regulates the price a natural monopolist can charge to be equal to the firm’s marginal cost, the government will likely need to subsidize the firm. a. True b. False 151. The proper level of government intervention is unclear when dealing with a monopoly. a. True b. False 152. A common solution to monopoly in European countries is public ownership. a. True b. False 153. The best solution to the problem of welfare loss from monopoly is public ownership. a. True b. False 154. The government may choose to do nothing to reduce monopoly inefficiency because the “fix” may be worse than the problem. a. True b. False 155. Government intervention always reduces monopoly deadweight loss. a. True b. False .
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Ch 16: Monopoly 156. Government intervention is always preferable to doing nothing when reducing the social inefficiencies of monopoly. a. True b. False 157. Firms with substantial monopoly power are quite common because many goods are unique. a. True b. False 158. Barriers to entry only exist for monopoly markets. a. True b. False 159. A monopolist is able to choose whatever price that it wishes and is only constrained by its greed. a. True b. False 160. The supply curve for a monopolist, in the short run, is defined in the same way as that for a competitive firm: it is the portion of the marginal cost curve above average variable cost. a. True b. False 161. Monopolists can practice price discrimination in all monopoly markets. a. True b. False 162. As long as as a monopolist is able to control the resale of its product, then it can successfully practice price discrimination. a. True b. False 163. A key for a monopoly that wants to practice price discrimination is to be able to control the resale of its product. a. True b. False 164. Since monopolists that practice price discrimination generally increase market output, compared to a monopoly that charges a single price, practicing price discrimination generally leads to a smaller deadweight loss. a. True b. False 165. It is difficult in a natural monopoly market for the firm to achieve both efficiency and zero economic profit simultaneously, even with regulation. a. True b. False 166. A natural monopoly will always operate in the region of the long run average total cost curve where the cost per unit .
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Ch 16: Monopoly is constant. a. True b. False 167. The best option to control the behavior of a natural monopoly is to use public ownership of the monopoly. a. True b. False
168. What are the three main sources of barriers to entry for monopolies? 169. State two examples of government-created monopolies. 170. Comparing firms in perfectly competitive markets to monopoly firms, which charges higher prices? 171. Comparing firms in perfectly competitive markets to monopoly firms, which produces more output? 172. Comparing firms in perfectly competitive markets to monopoly firms, which charges a price equal to marginal cost? 173. Comparing firms in perfectly competitive markets to monopoly firms, which can earn economic profits in the long run? 174. Comparing firms in perfectly competitive markets to monopoly firms, which results in a deadweight loss? 175. Figure 16-9
Refer to Figure 16-9. How much consumer surplus results if this single-price monopolist profit-maximizes? 176. Figure 16-9
.
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Ch 16: Monopoly
Refer to Figure 16-9. How much profit will this monopolist earn if it charges each consumer the same price? 177. Figure 16-9
Refer to Figure 16-9. How much deadweight loss results if this single-price monopolist profit-maximizes? 178. Figure 16-9
.
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Ch 16: Monopoly
Refer to Figure 16-9. If the monopolist uses perfect price discrimination, how much output does the firm produce? 179. Figure 16-9
Refer to Figure 16-9. If the monopolist uses perfect price discrimination, what price will it charge? 180. Figure 16-9
.
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Refer to Figure 16-9. If the monopolist uses perfect price discrimination, how much profit does the firm earn? 181. Figure 16-9
Refer to Figure 16-9. If the monopolist uses perfect price discrimination, how much deadweight loss results? 182. Figure 16-9
.
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Ch 16: Monopoly
Refer to Figure 16-9. Which is more efficient, single price profit maximization or perfect price discrimination? 183. Figure 16-10
Refer to Figure 16-10. What type of monopoly is shown in the figure? 184. Figure 16-10
.
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Ch 16: Monopoly
Refer to Figure 16-10. If the firm profit-maximizes, what amount of output will it produce? 185. Figure 16-10
Refer to Figure 16-10. If the firm profit-maximizes, what price will it charge? 186. Figure 16-10
.
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Refer to Figure 16-10. If the firm profit-maximizes, how much profit will it earn? 187. Figure 16-10
Refer to Figure 16-10. If a regulator requires the firm to charge a marginal cost price, what price will the firm charge? 188. Figure 16-10
.
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Ch 16: Monopoly
Refer to Figure 16-10. If a regulator requires the firm to charge a marginal cost price, what quantity will the firm produce? 189. Figure 16-10
Refer to Figure 16-10. If a regulator requires the firm to charge a marginal cost price, what is the amount of profit or loss earned by the firm? 190. Figure 16-10
.
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Ch 16: Monopoly
Refer to Figure 16-10. If a regulator requires the firm to charge an average cost price, what is the amount of profit or loss earned by the firm? 191. Figure 16-10
Refer to Figure 16-10. If a regulator requires the firm to charge an average cost price, what price will the firm charge? 192. Figure 16-10
.
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Refer to Figure 16-10. If a regulator requires the firm to charge an average cost price, what quantity will the firm produce? 193. Microsoft’s government-granted exclusive right to make and sell the Windows operating system is called a 194. The fundamental cause of monopoly is 195. In both perfectly competitive and monopoly markets, the price per unit of a good is equal to the 196. Table 16-4 Quantity Price 10 $46 20 $42 30 $38 40 $34 50 $30 60 $26 70 $22 80 $18 90 $14 100 $10 Refer to Table 16-4. The average revenue of the 50th unit of output is 197. Table 16-4 Quantity Price 10 $46 20 $42 30 $38 40 $34 50 $30 60 $26 70 $22 80 $18 .
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Ch 16: Monopoly 90 100
$14 $10
Refer to Table 16-4. The marginal revenue, when the quantity changes from 30 to 40 units, is 198. Table 16-4 Quantity Price 10 $46 20 $42 30 $38 40 $34 50 $30 60 $26 70 $22 80 $18 90 $14 100 $10 Refer to Table 16-4. The marginal revenue becomes negative with the production of which unit of output? 199. State one benefit of government-granted monopolies like patents and copyrights. 200. When a single firm can supply a good or service to an entire market at a lower cost than could two or more firms, the industry is known as a 201. The distribution of water to residents of a town and an infrequently used bridge are examples of 202. Figure 16-11
Refer to Figure 16-11. Which letter represents the profit-maximizing quantity chosen by the single price monopolist? 203. Figure 16-11
.
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Ch 16: Monopoly
Refer to Figure 16-11. Which letter represents the profit-maximizing price chosen by the single price monopolist? 204. Figure 16-11
Refer to Figure 16-11. Use the letters in the figure to identify the profit area for the single price monopolist. 205. Figure 16-11
.
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Ch 16: Monopoly
Refer to Figure 16-11. Use the letters in the figure to identify the area of deadweight loss for the single price monopolist. 206. Figure 16-11
Refer to Figure 16-11. If this firm were able to perfectly price discriminate, which letter represents the amount of output it would produce? 207. Figure 16-11
.
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Refer to Figure 16-11. Use the letters in the figure to identify the profit area if this firm were able to perfectly price discriminate. 208. Scenario 16-3 Vincent operates a scenic tour business in Boston. He has one bus which can fit 50 people per tour and each tour lasts 2 hours. His total cost of operating one tour is fixed at $450. Vincent’s cost is not reduced if he runs a tour with a partially full bus. While his cost is the same for all tours, Vincent charges each passenger their willingness to pay: adults $18 per trip, children $10 per trip, and senior citizens $12 per trip. At those rates, on a typical day Vincent’s demand is: Passenger Type Willingness to Pay Demand per day Adults $18 70 Children $10 25 Senior Citizens $12 55 Assume that Vincent’s customers are always available for the tour; therefore, he can fill his bus for each tour as long as there is sufficient total demand for the day. Refer to Scenario 16-3. Vincent uses a pricing practice called 209. Scenario 16-3 Vincent operates a scenic tour business in Boston. He has one bus which can fit 50 people per tour and each tour lasts 2 hours. His total cost of operating one tour is fixed at $450. Vincent’s cost is not reduced if he runs a tour with a partially full bus. While his cost is the same for all tours, Vincent charges each passenger their willingness to pay: adults $18 per trip, children $10 per trip, and senior citizens $12 per trip. At those rates, on a typical day Vincent’s demand is: Passenger Type Willingness to Pay Demand per day Adults $18 70 Children $10 25 Senior Citizens $12 55 Assume that Vincent’s customers are always available for the tour; therefore, he can fill his bus for each tour as long as there is sufficient total demand for the day. Refer to Scenario 16-3. What is Vincent’s cost of serving all passengers demanding a tour on a typical day? 210. Scenario 16-3 Vincent operates a scenic tour business in Boston. He has one bus which can fit 50 people per tour and each tour lasts 2 hours. His total cost of operating one tour is fixed at $450. Vincent’s cost is not reduced if he runs a tour with a partially .
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Ch 16: Monopoly full bus. While his cost is the same for all tours, Vincent charges each passenger their willingness to pay: adults $18 per trip, children $10 per trip, and senior citizens $12 per trip. At those rates, on a typical day Vincent’s demand is: Passenger Type Willingness to Pay Demand per day Adults $18 70 Children $10 25 Senior Citizens $12 55 Assume that Vincent’s customers are always available for the tour; therefore, he can fill his bus for each tour as long as there is sufficient total demand for the day. Refer to Scenario 16-3. What is Vincent’s profit on a typical day? 211. Scenario 16-3 Vincent operates a scenic tour business in Boston. He has one bus which can fit 50 people per tour and each tour lasts 2 hours. His total cost of operating one tour is fixed at $450. Vincent’s cost is not reduced if he runs a tour with a partially full bus. While his cost is the same for all tours, Vincent charges each passenger their willingness to pay: adults $18 per trip, children $10 per trip, and senior citizens $12 per trip. At those rates, on a typical day Vincent’s demand is: Passenger Type Willingness to Pay Demand per day Adults $18 70 Children $10 25 Senior Citizens $12 55 Assume that Vincent’s customers are always available for the tour; therefore, he can fill his bus for each tour as long as there is sufficient total demand for the day. Refer to Scenario 16-3. One of Vincent’s friends tells him he would be more profitable if he charged a single price of $18. Assuming no changes in consumer demand, what would Vincent’s profit be if he charged every customer $18? 212. Scenario 16-3 Vincent operates a scenic tour business in Boston. He has one bus which can fit 50 people per tour and each tour lasts 2 hours. His total cost of operating one tour is fixed at $450. Vincent’s cost is not reduced if he runs a tour with a partially full bus. While his cost is the same for all tours, Vincent charges each passenger their willingness to pay: adults $18 per trip, children $10 per trip, and senior citizens $12 per trip. At those rates, on a typical day Vincent’s demand is: Passenger Type Willingness to Pay Demand per day Adults $18 70 Children $10 25 Senior Citizens $12 55 Assume that Vincent’s customers are always available for the tour; therefore, he can fill his bus for each tour as long as there is sufficient total demand for the day. Refer to Scenario 16-3. One of Vincent’s friends tells him he would be more profitable if he charged a single price of $12. Assuming no changes in consumer demand, what would Vincent’s profit be if he charged every customer $12? 213. Figure 16-12
.
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Refer to Figure 16-12. If this firm profit maximizes, which letter represents the price it will charge? 214. Figure 16-12
Refer to Figure 16-12. If this firm profit maximizes, which letter represents the quantity it will produce? 215. Figure 16-12
.
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Refer to Figure 16-12. If a regulator requires this firm to charge a socially optimal price, which letter represents the amount of output it will produce? 216. Figure 16-12
Refer to Figure 16-12. If a regulator requires this firm to charge a fair return price, which letter represents the amount of output it will produce? 217. Figure 16-12
.
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Ch 16: Monopoly
Refer to Figure 16-12. If a regulator requires this firm to charge a socially optimal price, how much deadweight loss results? 218. Describe how government is involved in creating a monopoly. Why might the government create one? Give an example. 219. What is the defining characteristic of a natural monopoly? Give an example of a natural monopoly. 220. In the market for "home heating" consumers typically have several options (e.g., electricity, heating fuel, natural gas, propane, etc.), yet we often think of firms in this industry as behaving like monopolists. Discuss the context in which your electricity provider is a monopolist. Is this characterization universally applicable? Explain your answer. 221. There has been much discussion of deregulating electricity and natural gas delivery companies in the United States. Discuss the likely effect of deregulation on prices in these two industries. 222. Explain how a profit-maximizing monopolist chooses its level of output and the price of its goods. 223. Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight loss from taxation? 224. What is the deadweight loss due to profit-maximizing monopoly pricing under the following conditions: The price charged for goods produced is $10. The intersection of the marginal revenue and marginal cost curves occurs where output is 100 units and marginal revenue is $5. The socially efficient level of production is 110 units. The demand curve is linear and downward sloping, and the marginal cost curve is constant. 225. Assume that a monopolist decides to maximize revenue rather than profit. How does this operating objective change the size of the deadweight loss? If you are a "benevolent" manager of a monopoly firm and are interested in reducing the deadweight loss of monopoly, should you maximize profits or maximize revenue? Explain your answer. 226. One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive hardcover edition of a popular novel and later releases a cheaper paperback edition. Use this example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy. 227. What are the four ways that government policymakers can respond to the problem of monopoly? 228. Give some examples of the benefits and costs of antitrust laws. .
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Ch 16: Monopoly 229. In many countries, the government chooses to "internalize" the monopoly by owning monopoly providers of goods and services. (In some cases these firms are "nationalized," and the government actually buys or confiscates firms that operate in monopoly markets). What would be the advantages and disadvantages of such an approach to ensure that the "best interest of society" is promoted in these markets? Explain your answer. 230. Why might economists prefer private ownership of monopolies over public ownership of monopolies? 231. One solution to the problems of marginal-cost pricing of a regulated natural monopolist is average cost pricing. In this model, the monopolist is allowed to price its production at average total cost. How does average-cost pricing differ from marginal-cost pricing? Does this solution maximize social well-being?
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Ch 16: Monopoly Answer Key 1. d 2. a 3. a 4. b 5. b 6. d 7. c 8. c 9. a 10. b 11. a 12. b 13. d 14. c 15. c 16. c 17. b 18. b 19. b 20. c 21. d 22. d 23. b 24. b 25. b .
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Ch 16: Monopoly 26. b 27. c 28. b 29. a 30. c 31. c 32. c 33. c 34. c 35. b 36. d 37. a 38. b 39. c 40. c 41. a 42. b 43. a 44. d 45. b 46. c 47. b 48. b 49. c 50. b 51. a .
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Ch 16: Monopoly 52. b 53. c 54. b 55. d 56. b 57. c 58. c 59. b 60. a 61. c 62. d 63. d 64. d 65. b 66. d 67. c 68. b 69. d 70. d 71. c 72. a 73. c 74. c 75. d 76. d .
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Ch 16: Monopoly 77. c 78. d 79. b 80. a 81. b 82. b 83. d 84. c 85. b 86. c 87. a 88. d 89. c 90. a 91. d 92. c 93. False 94. True 95. True 96. False 97. True 98. True 99. False 100. True 101. True 102. True .
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Ch 16: Monopoly 103. False 104. False 105. True 106. True 107. False 108. True 109. True 110. False 111. True 112. True 113. False 114. False 115. True 116. False 117. True 118. False 119. True 120. False 121. False 122. True 123. False 124. False 125. True 126. False 127. True .
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Ch 16: Monopoly 128. False 129. False 130. True 131. False 132. True 133. False 134. True 135. True 136. True 137. True 138. True 139. False 140. False 141. True 142. False 143. True 144. True 145. True 146. True 147. True 148. True 149. True 150. True 151. True 152. True 153. False .
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Ch 16: Monopoly 154. True 155. False 156. False 157. False 158. False 159. False 160. False 161. False 162. True 163. True 164. True 165. True 166. False 167. False 168. monopoly resources government regulation the production process 169. patents copyright laws 170. monopoly firms 171. perfectly competitive firms 172. perfectly competitive firms 173. monopoly firms 174. monopoly firms 175. $306.25 176. $612.50 177. $306.25 .
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Ch 16: Monopoly 178. 35 units 179. The amount that each buyer is willing to pay. 180. $1225 181. $0 182. perfect price discrimination; no deadweight loss 183. natural monopoly 184. 3 units 185. $7 186. $5.25 187. $1 188. 9 units 189. $9 loss 190. $0 191. $2.5 192. 7.5 193. copyright. 194. barriers to entry. 195. average revenue. 196. $30. 197. $22. 198. 70th 199. increased incentives for creative activity 200. natural monopoly. 201. natural monopolies. 202. I .
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Ch 16: Monopoly 203. B 204. BCFE 205. EFG 206. J 207. ACG 208. price discrimination. 209. $1350 210. $820. 211. $360. 212. $150. 213. A 214. J 215. L 216. K 217. none 218. The government can create a monopoly by giving a single firm the exclusive right to produce some good. Monopolies are created for many reasons. When an industry is characterized by high fixed costs, a single firm can usually supply the entire market at a lower cost than having multiple firms in the industry. Examples include most utility companies. The government also grants sole ownership of inventions through patent laws in order to help eliminate the market failure that is likely to otherwise occur in the markets for those goods. Patents encourage creativity and research and development. 219. The defining characteristic of a natural monopoly is when a firm can supply a good or service to an entire market at a lower cost than could two or more firms. The example in the text is a bridge. 220. In this case, the firms are monopolists in the short run when consumers are unable to change their "home heating" systems. In the long run, consumers can change from electric appliances to natural gas appliances and thus lessen the monopoly power of utility providers. As long as consumers are able to substitute, in the long run the monopoly pricing power is reduced. 221. If deregulation leads to increased competition, then production and prices should move toward the competitive equilibrium. If deregulation does not lead to increased competition, then the monopoly production and price outcome is likely. If the industries are characterized by economies of scale, then costs and prices could rise if more than one firm supplies output to the market. Because the industries are likely to have economies of scale, consumers may be better off having one firm supply the product in order for that firm to achieve lower average total costs by producing more output than by having two or more firms share the total output demanded in the market. If the regulators set the price at the .
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Ch 16: Monopoly average total cost, consumers likely benefit from the characteristics of a natural monopoly, but the firm does not have an incentive to minimize costs. Thus, there is a tradeoff between the advantage of lower costs that arise from having one firm versus the disadvantage of having a firm that may not minimize the costs of production. 222. A profit-maximizing monopolist produces the output level where marginal revenue equals marginal cost and charges the corresponding price from the market demand curve. Note that a monopolist charges a price that exceeds marginal cost, unlike a competitive firm, for which price equals marginal cost. 223. A profit-maximizing monopolist will choose to produce Q0 units of output and sell at price P0. However, marginal cost is MC0. This is identical to the deadweight loss of taxation when the tax forces a wedge between market price and marginal cost.
224. 1/2*(110-100)*($10-$5) = $25 225. A revenue maximizer operates where MR = 0. This solution moves the monopolist closer to the socially optimal competitive outcome and reduces deadweight loss. Revenue maximization is potentially a more "socially" optimal objective for monopoly markets than profit maximization. 226. The answer should address the three basic lessons of price discrimination. First, price discrimination is a rational strategy that can lead to higher monopoly profits. Second, price discrimination requires an ability to separate customers according to their willingness to pay. Third, price discrimination can raise economic welfare. 227. First, the government can try to make monopolized industries more competitive by using the power of antitrust laws. Second, the government can regulating the behavior of monopolies, which usually occurs with natural monopolies. Third, the government can own and run a monopoly. Four, the government can do nothing. 228. Benefits include promoting competition by preventing mergers and breaking-up companies. Costs are that they may increase cost of operating if they restrict synergy mergers. 229. As long as the government "owner" pursues a production and pricing policy that approaches a competitive outcome, social well-being can be enhanced. In this case the government ownership would benefit society. However, in most cases, government owners operate much like private sector monopolists. The political economy of government institutions does .
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Ch 16: Monopoly not ensure that government owners will pursue socially optimal policy. Also, governments have no incentive to reduce costs or innovate. 230. The private monopolist is governed by the market. Even though the market solution is sub-optimal, it may be better than outcomes generated by publicly owned monopolies. Publicly owned monopolies may restrict output to levels below the private market outcome and thus generate an even lower level of social surplus than a private profit-maximizing monopolist. Private owners have an incentive to minimize cost as long as they reap benefits in the form of higher profits. Government bureaucrats have no incentive to reduce costs. The losers are customers and taxpayers, whose only recourse is the political system. 231. Under average-cost pricing, the monopolist earns zero economic profits, but average-cost pricing does not ensure a socially optimal market solution. Under marginal-marginal cost pricing, the monopolist cannot cover its total costs, so it will earn negative economic profits. (Recall that for a natural monopoly, ATC is declining for all relevant quantities, and MC is below ATC.)
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Ch 17: Monopolistic Competition
Indicate the answer choice that best completes the statement or answers the question. 1. Which of the following is true about a monopolistically competitive firm? a. It can earn an economic profit in the short run, but not the long run. b. It can earn an economic profit in the short run and the long run. c. It can earn an economic profit in the long run, but not the short run. d. It cannot earn an economic profit in either the short run or the long run. 2. The two types of imperfectly competitive markets are a. monopoly and monopolistic competition. b. monopoly and oligopoly. c. monopolistic competition and oligopoly. d. monopolistic competition and cartels. 3. Which of the following statements is not correct? a. Monopolistic competition is different from monopoly because monopolistic competition is characterized by free entry, whereas monopoly is characterized by barriers to entry. b. Both monopolistic competition and oligopoly fall in between the more extreme market structures of competition and monopoly. c. Monopolistic competition is different from oligopoly because each seller in monopolistic competition is small relative to the market, whereas each seller can affect the actions of other sellers in an oligopoly. d. Both monopolistic competition and perfect competition are characterized by product differentiation. 4. In a market that is characterized by imperfect competition, a. firms are price takers. b. there are always a large number of firms. c. there are at least a few firms that compete with one another. d. the actions of one firm in the market never have any impact on the other firms' profits. 5. One characteristic of an oligopoly market structure is a. firms in the industry are typically characterized by very diverse product lines. b. firms in the industry have some degree of market power. c. products typically sell at a price equal to their marginal cost of production. d. the actions of one seller have no impact on the profitability of other sellers. 6. A market structure with only a few sellers, each offering similar or identical products, is known as a. oligopoly. b. monopoly. c. monopolistic competition. d. perfect competition. 7. The commercial jetliner industry consisting of Boeing and Airbus would best be described as a. a perfectly competitive market. b. a monopolistically competitive market. c. an oligopoly. .
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Ch 17: Monopolistic Competition d. a monopoly. 8. Which of the following industries has the highest concentration ratio? a. Jeans b. Fruit c. Household laundry equipment d. Restaurants 9. Table 17-1 The following table shows the output produced by each of the top eight firms in four industries as well as the total industry output for those industries. Firm 1 2 3 4 5 6 7 8 Total
Industry A 50,000 47,000 43,000 38,000 32,000 25,000 17,000 8,000 270,000
Industry B 18,000 17,750 17,250 16,500 15,500 14,250 12,750 11,000 130,000
Industry C 37,000 36,500 35,500 34,000 32,000 29,500 26,500 23,000 300,000
Industry D 40,000 39,000 37,000 34,000 30,000 25,000 19,000 12,000 250,000
Refer to Table 17-1. What is the concentration ratio for Industry A? a. Approximately 52% b. Approximately 58% c. Approximately 66% d. Approximately 72% 10. Table 17-1 The following table shows the output produced by each of the top eight firms in four industries as well as the total industry output for those industries. Firm 1 2 3 4 5 6 7 8 Total .
Industry A 50,000 47,000 43,000 38,000 32,000 25,000 17,000 8,000 270,000
Industry B 18,000 17,750 17,250 16,500 15,500 14,250 12,750 11,000 130,000
Industry C 37,000 36,500 35,500 34,000 32,000 29,500 26,500 23,000 300,000
Industry D 40,000 39,000 37,000 34,000 30,000 25,000 19,000 12,000 250,000 Page 2
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Ch 17: Monopolistic Competition
Refer to Table 17-1. Which industry has the highest concentration ratio? a. Industry A b. Industry B c. Industry C d. Industry D 11. Table 17-1 The following table shows the output produced by each of the top eight firms in four industries as well as the total industry output for those industries. Firm 1 2 3 4 5 6 7 8 Total
Industry A 50,000 47,000 43,000 38,000 32,000 25,000 17,000 8,000 270,000
Industry B 18,000 17,750 17,250 16,500 15,500 14,250 12,750 11,000 130,000
Industry C 37,000 36,500 35,500 34,000 32,000 29,500 26,500 23,000 300,000
Industry D 40,000 39,000 37,000 34,000 30,000 25,000 19,000 12,000 250,000
Refer to Table 17-1. Based on the concentration ratio, which industry is the most competitive? a. Industry A b. Industry B c. Industry C d. Industry D 12. Which of the following is unique to a monopolistically competitive firm when compared to an oligopoly? a. The monopolistically competitive firm advertises. b. The monopolistically competitive firm produces a quantity of output that falls short of the socially optimal level. c. Monopolistic competition features many buyers. d. Monopolistic competition features many sellers. 13. A monopolistically competitive industry is characterized by a. many firms, differentiated products, and barriers to entry. b. many firms, differentiated products, and free entry. c. a few firms, identical products, and free entry. d. a few firms, differentiated products, and barriers to entry. 14. When an industry has many firms, the industry is .
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Ch 17: Monopolistic Competition a. an oligopoly if the firms sell differentiated products, but it is monopolistically competitive if the firms sell identical products. b. an oligopoly if the firms sell differentiated products, but it is perfectly competitive if the firms sell identical products. c. monopolistically competitive if the firms sell differentiated products, but it is perfectly competitive if the firms sell identical products. d. perfectly competitive if the firms sell differentiated products, but it is monopolistically competitive if the firms sell identical products. 15. Which of the following statements is correct? a. Monopolistic competition is similar to monopoly because both market structures are characterized by firms being price makers rather than price takers. b. Monopolistic competition is similar to perfect competition because both market structures are characterized by differentiated products. c. Monopolistic competition is similar to oligopoly because both market structures are characterized by strategic interaction between firms in the market. d. Monopolistic competition is similar to perfect competition because both market structures are characterized by perfectly elastic demand curves facing each firm. 16. In both perfect competition and monopolistic competition, each firm a. has some monopoly power. b. sells a product that is at least slightly different from those of other firms. c. faces a downward-sloping demand curve for its product. d. has many competitors. 17. A similarity between monopoly and monopolistic competition is that in both market structures a. strategic interactions among sellers are important. b. there are a small number of sellers. c. sellers are price makers rather than price takers. d. there are only a few buyers but many sellers. 18. Figure 17-1 Graph (a)
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Graph (b)
Graph (c)
Graph (d)
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Ch 17: Monopolistic Competition
Refer to Figure 17-1. Which of the graphs illustrates the demand curve most likely faced by a firm in a monopolistically competitive market? a. Graph (a) b. Graph (b) c. Graph (c) d. Graph (d) 19. For a monopolistically competitive firm, a. marginal revenue and price are the same. b. at the profit-maximizing quantity of output, marginal revenue equals marginal cost. c. at the profit-maximizing quantity of output, price equals marginal cost. d. at the profit-maximizing quantity of output, price equals the minimum of average total cost. 20. In the short run, a firm in a monopolistically competitive market operates much like a a. firm in a perfectly competitive market. b. firm in an oligopoly. c. monopolist. d. nonprofit firm. 21. A monopolistically competitive firm chooses a. the quantity of output to produce, but all firms in the market agree upon a single price. b. the price, but competition in the market determines the quantity. c. the price, but output is determined by a cartel production quota. d. the quantity of output to produce, but the price of its output is determined by demand. 22. Product differentiation in monopolistically competitive markets ensures that, for profit-maximizing firms, a. marginal revenue will equal average total cost. b. price will exceed marginal cost. c. marginal cost will exceed average total cost. d. average total cost will be rising. 23. When a monopolistically competitive firm raises its price, a. quantity demanded falls to zero. b. quantity demanded declines but not to zero. c. the market supply curve shifts outward. d. quantity demanded remains constant. 24. Table 17-2 A monopolistically competitive firm has the following cost structure: Output (Units) 10 .
Total Cost (Dollars) 800 Page 5
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Ch 17: Monopolistic Competition 20 30 40 50 60 70
875 1,025 1,250 1,550 1,925 2,375
Refer to Table 17-2. Suppose the monopolistically competitive firm faces the following demand curve: Quantity (Units) 10 20 30 40 50 60 70
Price (Dollars per unit) 50 42 34 26 18 10 2
To maximize profit (or minimize losses), the firm will produce a. 20 units. b. 30 units. c. 40 units. d. 50 units. 25. Table 17-3 A monopolistically competitive firm has the following cost structure: Output (Units) 1 2 3 4 5 6 7
Total Cost (Dollars) 30 32 36 42 50 63 77
Refer to Table 17-3. The monopolistically competitive firm faces the following demand curve: Quantity (Units) 1 .
Price (Dollars per unit) 20 Page 6
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Ch 17: Monopolistic Competition 2 3 4 5 6 7
18 15 12 9 7 4
If the government forces this firm to produce at its efficient scale, it will a. produce 3 units and make $9. b. produce 4 units and make $6. c. produce 5 units and lose $5. d. produce 7 units and lose $49. 26. A monopolistically competitive firm is currently producing 20 units of output. At this level of output, the firm is charging the highest price it can at $20, has marginal revenue equal to $12, has marginal cost equal to $12, and has average total cost equal to $18. From this information we can infer that a. the firm is currently maximizing its profit. b. the profits of the firm are negative. c. firms are likely to leave this market in the long run. d. the firm is earning zero profit. 27. In the short run, a firm operating in a monopolistically competitive market a. produces an output level where marginal revenue equals average total cost. b. produces an output where marginal revenue equals marginal cost, and the price is determined by demand. c. must earn zero economic profits. d. maximizes revenues as well as profits. 28. When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal cost, a. the firm must be earning a positive economic profit. b. the firm may be incurring economic losses. c. society benefits due to the firm's excess capacity. d. new firms will enter the market in the long run. 29. Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium? a. MR < MC b. MR > MC c. P < MC d. P = AR 30. Which of the following conditions is characteristic of a monopolistically competitive firm in both the short run and the long run? a. P > MC b. MC = ATC c. P < MR d. P = ATC .
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Ch 17: Monopolistic Competition 31. When a market is monopolistically competitive, the typical firm in the market is likely to experience a a. positive profit in the short run and in the long run. b. positive or negative profit in the short run and a zero profit in the long run. c. zero profit in the short run and a positive or negative profit in the long run. d. zero profit in the short run and in the long run. 32. Which of the following is not a key feature of monopolistic competition? a. Excess capacity b. A markup of price over marginal cost c. Positive economic profits for firms in the long run d. Differentiated products among firms in the market 33. Figure 17-2 This figure depicts a situation in a monopolistically competitive market.
Refer to Figure 17-2. What price will the monopolistically competitive firm charge in this market? a. $60 b. $70 c. $75 d. $80 34. Figure 17-2 .
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Ch 17: Monopolistic Competition This figure depicts a situation in a monopolistically competitive market.
Refer to Figure 17-2. How much consumer surplus will be derived from the purchase of this product at the monopolistically competitive price? a. $200 b. $312.50 c. $400 d. $800 35. Figure 17-2 This figure depicts a situation in a monopolistically competitive market.
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Ch 17: Monopolistic Competition
Refer to Figure 17-2. How much profit will the monopolistically competitive firm earn in this situation? a. $0 b. $80 c. $200 d. $400 36. Figure 17-2 This figure depicts a situation in a monopolistically competitive market.
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Ch 17: Monopolistic Competition
Refer to Figure 17-2. How much output will the monopolistically competitive firm produce in this situation? a. 20 units b. 25 units c. 40 units d. 80 units 37. Figure 17-2 This figure depicts a situation in a monopolistically competitive market.
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Ch 17: Monopolistic Competition
Refer to Figure 17-2. Assuming the firm is maximizing profit, this firm is operating a. in the short run and earning a positive economic profit. b. in the short run and breaking even. c. in the long run and earning a positive economic profit. d. in the long run and incurring an economic loss. 38. Figure 17-2 This figure depicts a situation in a monopolistically competitive market.
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Ch 17: Monopolistic Competition
Refer to Figure 17-2. Which of the following will occur in the long run in this industry? a. Firms will exit this industry. b. Firms will enter this industry. c. This firm will continue to earn positive economic profits. d. This firm will incur losses. 39. Figure 17-3
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Ch 17: Monopolistic Competition
Refer to Figure 17-3. The firm in this figure is monopolistically competitive and maximizing profit. This firm a. is operating in the long run. b. is earning a short-run economic profit. c. is incurring a short-run loss. d. The answer cannot be determined from the information given. 40. Figure 17-3
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Ch 17: Monopolistic Competition
Refer to Figure 17-3. At the profit-maximizing, or loss-minimizing, output level, how many units of output will the firm in this figure produce? a. 20 b. 30 c. 40 d. This firm will choose not to produce. 41. Figure 17-3
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Ch 17: Monopolistic Competition
Refer to Figure 17-3. What price will the monopolistically competitive firm charge in this market? a. $400 b. $600 c. $700 d. $800 42. Figure 17-3
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Ch 17: Monopolistic Competition
Refer to Figure 17-3. Assume the firm in the figure is currently producing 20 units of output and charging $925. The firm a. will increase its profits if it raises its price and reduces its production level. b. will increase its profits if it lowers its price and expands its production level. c. is maximizing profits. d. will increase its profits if it raises its price and expands its production level. 43. Figure 17-3
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Ch 17: Monopolistic Competition
Refer to Figure 17-3. The maximum total short-run economic profit for the monopolistically competitive firm in this figure is a. −$3,000. b. $3,000. c. $9,000. d. $24,000. 44. Figure 17-3
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Ch 17: Monopolistic Competition
Refer to Figure 17-3. Which of the following will occur in the long run in this industry? a. Firms will exit this industry. b. Firms will enter this industry. c. This firm will continue to earn positive economic profits. d. This firm will incur losses. 45. Figure 17-4 Graph (a)
Graph (b)
Graph (c)
Graph (d)
Refer to Figure 17-4. Which of the graphs depicts a short-run equilibrium that will encourage the entry of other firms .
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Ch 17: Monopolistic Competition into a monopolistically competitive industry? a. Graph (a) b. Graph (b) c. Graph (c) d. Graph (d) 46. Figure 17-4 Graph (a)
Graph (b)
Graph (c)
Graph (d)
Refer to Figure 17-4. Graph (b) is consistent with a firm in a monopolistically competitive market that is a. not in long-run equilibrium. b. in long-run equilibrium. c. producing its efficient scale of output. d. earning a positive economic profit. 47. Figure 17-5 The figure is drawn for a monopolistically competitive firm.
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Ch 17: Monopolistic Competition
Refer to Figure 17-5. As the figure is drawn, the firm is in a. a short-run equilibrium, but it is not in a long-run equilibrium. b. a long-run equilibrium, but it is not in a short-run equilibrium. c. a short-run equilibrium as well as a long-run equilibrium. d. neither a short-run equilibrium nor a long-run equilibrium. 48. Figure 17-5 The figure is drawn for a monopolistically competitive firm.
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Ch 17: Monopolistic Competition
Refer to Figure 17-5. In order to maximize its profit, the firm will choose to produce a. less than 100 units of output. b. 100 units of output. c. between 100 and 133.33 units of output. d. more than 133.33 units of output. 49. Figure 17-5 The figure is drawn for a monopolistically competitive firm.
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Ch 17: Monopolistic Competition
Refer to Figure 17-5. When the firm is maximizing its profit, the markup over marginal cost amounts to a. $16.67. b. $33.33. c. $50.00. d. $66.66. 50. Figure 17-5 The figure is drawn for a monopolistically competitive firm.
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Ch 17: Monopolistic Competition
Refer to Figure 17-5. The firm's maximum profit is a. −$5,000.00. b. $0. c. $5,000.00. d. $8,887.78. 51. Figure 17-5 The figure is drawn for a monopolistically competitive firm.
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Ch 17: Monopolistic Competition
Refer to Figure 17-5. Efficient scale is reached a. at 100 units. b. between 100 and 133.33 units. c. at 133.33 units. d. beyond 133.33 units. 52. Figure 17-5 The figure is drawn for a monopolistically competitive firm.
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Ch 17: Monopolistic Competition
Refer to Figure 17-5. The quantity of output at which the MC and ATC curves cross is the a. efficient scale of the firm. b. short-run equilibrium quantity of output for the firm. c. long-run equilibrium quantity of output for the firm. d. profit-maximizing quantity. 53. Figure 17-5 The figure is drawn for a monopolistically competitive firm.
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Ch 17: Monopolistic Competition
Refer to Figure 17-5. Given this firm's cost curves, if the firm were perfectly competitive rather than monopolistically competitive, then in a long-run equilibrium it would produce a. less than 100 units of output. b. between 100 and 133.33 units of output. c. 133.33 units of output. d. more than 133.33 units of output. 54. Figure 17-6 The figure is drawn for a monopolistically competitive firm.
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Ch 17: Monopolistic Competition
Refer to Figure 17-6. If the firm is maximizing profit, the firm is in a. a short-run equilibrium, but it is not in a long-run equilibrium. b. a long-run equilibrium, but it is not in a short-run equilibrium. c. a short-run equilibrium as well as a long-run equilibrium. d. neither a short-run equilibrium nor a long-run equilibrium. 55. Figure 17-6 The figure is drawn for a monopolistically competitive firm.
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Ch 17: Monopolistic Competition
Refer to Figure 17-6. In response to the situation represented by the figure, we would expect a. new firms to enter the market. b. the demand for this firm's product to decrease, assuming this firm does not exit. c. this firm's profit to remain the same. d. some of the firms that are currently in the market to exit. 56. Figure 17-6 The figure is drawn for a monopolistically competitive firm.
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Ch 17: Monopolistic Competition
Refer to Figure 17-6. In order to maximize its profit, the firm will choose to produce a. 100 units of output. b. between 100 and 133.33 units of output. c. 133.33 units of output. d. 154.92 units of output. 57. Figure 17-6 The figure is drawn for a monopolistically competitive firm.
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Refer to Figure 17-6. The firm's maximum profit a. is −$7,000. b. is −$5,000. c. is −$2,000. d. cannot be determined from the figure. 58. Figure 17-6 The figure is drawn for a monopolistically competitive firm.
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Refer to Figure 17-6. Efficient scale is reached a. at 100 units. b. at 133.33 units. c. between 133.33 units and 154.92 units. d. at 154.92 units. 59. Figure 17-6 The figure is drawn for a monopolistically competitive firm.
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Ch 17: Monopolistic Competition
Refer to Figure 17-6. If the firm were to produce 154.92 units of output, a. efficient scale would not be realized. b. the firm would earn zero profit. c. the firm would earn a positive profit. d. ATC would be at its minimum value. 60. Table 17-4 Beatrice's Birthday Cakes operates in a monopolistically competitive market, so it is one bakery among many in the market for birthday cakes. The following table presents cost and revenue data for birthday cakes at Beatrice's. Costs Quantity Total Produced Cost (Units) (Dollars) 0 25 1 28 2 32 3 37 4 43 5 50 6 58 7 67 8 77
.
Marginal Cost (Dollars) −
Quantity Demanded (Units) 0 1 2 3 4 5 6 7 8
Revenues Price
(Dollars per unit) 60 54 48 42 36 30 24 18 12
Total Marginal Revenue Revenue (Dollars) (Dollars) −
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Refer to Table 17-4. What is the profit-maximizing output for Beatrice's Birthday Cakes? a. 3 cakes b. 4 cakes c. 5 cakes d. 6 cakes 61. Table 17-4 Beatrice's Birthday Cakes operates in a monopolistically competitive market, so it is one bakery among many in the market for birthday cakes. The following table presents cost and revenue data for birthday cakes at Beatrice's. Costs Quantity Total Produced Cost (Units) (Dollars) 0 25 1 28 2 32 3 37 4 43 5 50 6 58 7 67 8 77
Marginal Cost (Dollars) −
Quantity Demanded (Units) 0 1 2 3 4 5 6 7 8
Revenues Price
(Dollars per unit) 60 54 48 42 36 30 24 18 12
Total Marginal Revenue Revenue (Dollars) (Dollars) −
Refer to Table 17-4. When maximizing profit, what price does Beatrice's charge for a cake? a. $24 b. $30 c. $36 d. $42 62. Table 17-4 Beatrice's Birthday Cakes operates in a monopolistically competitive market, so it is one bakery among many in the market for birthday cakes. The following table presents cost and revenue data for birthday cakes at Beatrice's. Costs Quantity Total Produced Cost (Units) (Dollars) 0 25 1 28 2 32 3 37 4 43 .
Marginal Cost (Dollars) −
Quantity Demanded (Units) 0 1 2 3 4
Revenues Price
(Dollars per unit) 60 54 48 42 36
Total Marginal Revenue Revenue (Dollars) (Dollars) −
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Ch 17: Monopolistic Competition 5 6 7 8
50 58 67 77
5 6 7 8
30 24 18 12
Refer to Table 17-4. At the profit-maximizing quantity, what is Beatrice's total profit? a. $43 b. $89 c. $101 d. $144 63. Table 17-4 Beatrice's Birthday Cakes operates in a monopolistically competitive market, so it is one bakery among many in the market for birthday cakes. The following table presents cost and revenue data for birthday cakes at Beatrice's. Costs Quantity Total Produced Cost (Units) (Dollars) 0 25 1 28 2 32 3 37 4 43 5 50 6 58 7 67 8 77
Marginal Cost (Dollars) −
Quantity Demanded (Units) 0 1 2 3 4 5 6 7 8
Revenues Price
(Dollars per unit) 60 54 48 42 36 30 24 18 12
Total Marginal Revenue Revenue (Dollars) (Dollars) −
Refer to Table 17-4. Given the cost and revenue data, Beatrice's is a. not in a long-run equilibrium. More businesses will enter the bakery market in the long-run. b. not in a short-run equilibrium. c. not in a long-run equilibrium. Some businesses currently in the bakery market will exit the market in the longrun. d. in a long-run equilibrium. 64. Table 17-4 Beatrice's Birthday Cakes operates in a monopolistically competitive market, so it is one bakery among many in the market for birthday cakes. The following table presents cost and revenue data for birthday cakes at Beatrice's. Quantity .
Costs Total
Marginal
Quantity Demanded
Revenues Price
Total
Marginal Page 35
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Ch 17: Monopolistic Competition Produced Cost (Units) (Dollars) 0 25 1 28 2 32 3 37 4 43 5 50 6 58 7 67 8 77
Cost (Dollars) −
(Units) 0 1 2 3 4 5 6 7 8
(Dollars per unit) 60 54 48 42 36 30 24 18 12
Revenue Revenue (Dollars) (Dollars) −
Refer to Table 17-4. If the government required Beatrice's to produce at the efficient scale of output, how many cakes would Beatrice's sell? a. 4 b. 5 c. 6 d. 7 65. Table 17-4 Beatrice's Birthday Cakes operates in a monopolistically competitive market, so it is one bakery among many in the market for birthday cakes. The following table presents cost and revenue data for birthday cakes at Beatrice's. Costs Quantity Total Produced Cost (Units) (Dollars) 0 25 1 28 2 32 3 37 4 43 5 50 6 58 7 67 8 77
Marginal Cost (Dollars) −
Revenues Quantity Demanded Price (Units) 0 1 2 3 4 5 6 7 8
(Dollars per unit) 60 54 48 42 36 30 24 18 12
Total Marginal Revenue Revenue (Dollars) (Dollars) −
Refer to Table 17-4. If the government forced Beatrice's to produce at the efficient scale of output, what is the maximum profit Beatrice's could earn? a. $59 b. $67 .
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Ch 17: Monopolistic Competition c. $101 d. $126 66. Table 17-4 Beatrice's Birthday Cakes operates in a monopolistically competitive market, so it is one bakery among many in the market for birthday cakes. The following table presents cost and revenue data for birthday cakes at Beatrice's. Costs Quantity Total Produced Cost (Units) (Dollars) 0 25 1 28 2 32 3 37 4 43 5 50 6 58 7 67 8 77
Marginal Cost (Dollars) −
Quantity Demanded (Units) 0 1 2 3 4 5 6 7 8
Revenues Price
(Dollars per unit) 60 54 48 42 36 30 24 18 12
Total Marginal Revenue Revenue (Dollars) (Dollars) −
Refer to Table 17-4. Suppose the government forced Beatrice's to produce at the efficient scale of output. Who would be better off as a result of this policy? Who would be worse off as a result of this policy? a. Beatrice's would be better off; consumers would be worse off. b. Consumers would be better off; Beatrice's would be worse off. c. No one would be better off; consumers would be worse off. d. No one would be better off; no one would be worse off. 67. Scenario 17-1 Peter operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Peter's demand and cost values for sales per day are given in the following table. (Everyone who purchases Peter's ice cream buys a double scoop cone because it's so delicious.) Quantity (Units) 20 40 60 80 100 120 140 160 .
Price (Dollars per unit) 5.60 5.20 4.80 4.40 4.00 3.60 3.20 2.80
Marginal Revenue (Dollars) 5.20 4.40 3.60 2.80 2.00 1.20 0.40 -0.40
Marginal Cost (Dollars) 2.20 2.40 2.60 2.80 3.00 3.20 3.40 3.60
Average Total Cost (Dollars per unit) 4.60 3.45 3.13 3.03 3.00 3.02 3.06 3.11 Page 37
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Ch 17: Monopolistic Competition 180
2.40
-1.20
3.80
3.18
Refer to Scenario 17-1. How many double scoop ice cream cones should Peter sell per day to maximize his profit? a. 80 b. 100 c. 120 d. 140 68. Scenario 17-1 Peter operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Peter's demand and cost values for sales per day are given in the following table. (Everyone who purchases Peter's ice cream buys a double scoop cone because it's so delicious.) Quantity (Units) 20 40 60 80 100 120 140 160 180
Price (Dollars per unit) 5.60 5.20 4.80 4.40 4.00 3.60 3.20 2.80 2.40
Marginal Revenue (Dollars) 5.20 4.40 3.60 2.80 2.00 1.20 0.40 -0.40 -1.20
Marginal Cost (Dollars) 2.20 2.40 2.60 2.80 3.00 3.20 3.40 3.60 3.80
Average Total Cost (Dollars per unit) 4.60 3.45 3.13 3.03 3.00 3.02 3.06 3.11 3.18
Refer to Scenario 17-1. What price should Peter charge per double scoop ice cream cone to maximize his profit? a. $5.60 b. $4.40 c. $3.20 d. $2.40 69. Scenario 17-1 Peter operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Peter's demand and cost values for sales per day are given in the following table. (Everyone who purchases Peter's ice cream buys a double scoop cone because it's so delicious.) Quantity (Units) 20 40 60 .
Price (Dollars per unit) 5.60 5.20 4.80
Marginal Revenue (Dollars) 5.20 4.40 3.60
Marginal Cost (Dollars) 2.20 2.40 2.60
Average Total Cost (Dollars per unit) 4.60 3.45 3.13 Page 38
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Ch 17: Monopolistic Competition 80 100 120 140 160 180
4.40 4.00 3.60 3.20 2.80 2.40
2.80 2.00 1.20 0.40 -0.40 -1.20
2.80 3.00 3.20 3.40 3.60 3.80
3.03 3.00 3.02 3.06 3.11 3.18
Refer to Scenario 17-1. How much profit will Peter earn each day if he chooses the price and quantity that maximize his profit? a. $109.60 b. $208.10 c. $225.90 d. $352.00 70. Scenario 17-1 Peter operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Peter's demand and cost values for sales per day are given in the following table. (Everyone who purchases Peter's ice cream buys a double scoop cone because it's so delicious.) Quantity (Units) 20 40 60 80 100 120 140 160 180
Price (Dollars per unit) 5.60 5.20 4.80 4.40 4.00 3.60 3.20 2.80 2.40
Marginal Revenue (Dollars) 5.20 4.40 3.60 2.80 2.00 1.20 0.40 -0.40 -1.20
Marginal Cost (Dollars) 2.20 2.40 2.60 2.80 3.00 3.20 3.40 3.60 3.80
Average Total Cost (Dollars per unit) 4.60 3.45 3.13 3.03 3.00 3.02 3.06 3.11 3.18
Refer to Scenario 17-1. Which of the following statements best describes the long-run adjustment in this market? a. One or more ice cream shops in Fairfield closes, increasing the demand for Peter's ice cream. Peter's profits increase and he sustains positive profits in the long run. b. One or more ice cream shops in Fairfield closes, increasing the demand for Peter's ice cream. Peter's profits increase until he earns zero profit. c. One or more new ice cream shops in Fairfield opens and competes with Peter for customers, reducing the demand for Peter's ice cream. Peter's profits decline until he incurs losses and exits the industry. d. One or more new ice cream shops in Fairfield opens and competes with Peter for customers, reducing the demand for Peter's ice cream. Peter's profits decline until he earns zero profit. 71. Figure 17-7 .
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Ch 17: Monopolistic Competition
Refer to Figure 17-7. Which of the following areas represents the profit for this profit maximizing monopolistically competitive firm? a. BCHG b. BCIJ c. GHIJ d. 0BCL 72. Figure 17-8
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Ch 17: Monopolistic Competition
Refer to Figure 17-8. Assume a monopolistically competitive firm is currently producing the profit-maximizing level of output. Which of the following represents the excess capacity of this firm? a. BJ b. GH c. LM d. There is no excess capacity. 73. Figure 17-8
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Ch 17: Monopolistic Competition
Refer to Figure 17-8. Which of the following best describes the profit-maximizing outcome for the firm depicted here? a. This firm is earning a short-run profit, but will earn zero profit in the long run. b. This firm is incurring a short-run loss, but will earn zero profit in the long run. c. This firm is earning zero profit in the short run, but will earn a positive profit in the long run. d. This firm is in long-run equilibrium and will continue to earn zero profit. 74. Figure 17-8
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Refer to Figure 17-8. If this firm were operating in a perfectly competitive market in the long run, it would charge a price equal to point a. I but in a monopolistically competitive market, the profit-maximizing price is C. b. E but in a monopolistically competitive market, the profit-maximizing price is C. c. C but in a monopolistically competitive market, the profit-maximizing price is G. d. G but in a monopolistically competitive market, the profit-maximizing price is J. 75. In monopolistically competitive markets, economic losses a. suggest that some existing firms will exit the market. b. suggest that new firms will enter the market. c. are minimized through government-imposed barriers to entry. d. are never possible. 76. In monopolistically competitive markets, free entry and exit suggests that a. the market structure will eventually be characterized by perfect competition in the long run. b. all firms earn zero economic profits in the long run. c. some firms will be able to earn economic profits in the long run. d. some firms will be forced to incur economic losses in the long run. 77. In a long-run equilibrium, a. only a perfectly competitive firm operates at its efficient scale. b. only a monopolistically competitive firm operates at its efficient scale. c. neither a competitive firm nor a monopolistically competitive firm charges a markup over marginal cost. .
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Ch 17: Monopolistic Competition d. both a perfectly competitive firm and a monopolistically competitive firm operate at their efficient scale of production. 78. In which of the following market structures can firms earn economic profits in the long run? a. Perfect competition only b. Monopolistic competition only c. Monopoly only d. Monopolistic competition and monopoly 79. In the long run, a monopolistically competitive firm produces a quantity that is a. equal to the efficient scale. b. less than the efficient scale. c. greater than the efficient scale. d. consistent with diseconomies of scale. 80. Hotels in New York City frequently experience an average vacancy rate of about 20 percent (i.e., on an average night, 80 percent of the hotel rooms are full). This kind of excess capacity is indicative of what kind of market? a. Perfect competition and monopolistic competition b. Perfect competition only c. Monopolistic competition only d. Oligopoly 81. Monopolistic competition is considered inefficient because a. price exceeds marginal cost. b. output is excessive. c. long-run profits are positive. d. barriers to entry limit the number of firms in the market. 82. The product-variety externality is associated with the a. producer surplus that accrues to incumbent firms in a monopolistically competitive industry. b. loss of consumer surplus from exposure to additional advertising. c. consumer surplus that is generated from the introduction of a new product. d. opportunity cost of firms exiting a monopolistically competitive industry. 83. When existing firms lose customers and profits due to entry of a new competitor, a a. predatory-pricing externality occurs. b. consumption externality occurs. c. business-stealing externality occurs. d. product-variety externality occurs. 84. When the loss from a business-stealing externality exceeds the gain from a product-variety externality, a. firms are more likely to operate at efficient scale. b. there are likely to be too many firms in a monopolistically competitive market. c. market efficiency is likely to be enhanced by the entry of new firms. d. all firms are earning negative economic profit. .
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Ch 17: Monopolistic Competition 85. Scenario 17-2 Delish, a moderately priced restaurant, has recently announced intentions to open a restaurant in Boston, MA. Assume that the restaurant market in Boston is characterized by monopolistic competition. Refer to Scenario 17-2. As a result of the new restaurant, consumers in Boston are likely to experience a a. product-variety externality, which is a negative externality. b. product-variety externality, which is a positive externality. c. business-stealing externality, which is a negative externality. d. business-stealing externality, which is a positive externality. 86. Scenario 17-2 Delish, a moderately priced restaurant, has recently announced intentions to open a restaurant in Boston, MA. Assume that the restaurant market in Boston is characterized by monopolistic competition. Refer to Scenario 17-2. As a result of the new restaurant, existing restaurant owners in Boston are likely to experience a a. product-variety externality, which is a negative externality. b. product-variety externality, which is a positive externality. c. business-stealing externality, which is a negative externality. d. business-stealing externality, which is a positive externality. 87. The relationship between advertising and product differentiation is a. positive; the more differentiated the product, the more a firm is likely to spend on advertising. b. negative; the more differentiated the product, the less a firm is likely to spend on advertising. c. zero; there is no relationship between product differentiation and advertising. d. irrelevant; firms with differentiated products do not need to advertise. 88. If we observe a great deal more advertising for Mucinex, an over-the-counter drug, than for a Grainger drill press, we can infer that a. more money is spent on Mucinex than on Grainger drill presses. b. the market for Mucinex is more highly differentiated than the market for Grainger drill presses. c. Grainger has lower costs of production than Mucinex. d. Mucinex operates in an oligopoly, while Grainger operates in a monopolistically competitive market. 89. Which of the following is not an argument made by critics of advertising? a. Advertising manipulates people's tastes. b. Advertising impedes competition. c. Advertising promotes economies of scale. d. Advertising increases the perception of product differentiation. 90. Critics of advertising argue that in some markets advertising may a. attract products of lower quality into the market. b. attract less informed buyers into the market. c. decrease elasticity of demand allowing firms to charge a larger markup over marginal cost. d. enhance competition in markets to an unnecessary degree. .
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Ch 17: Monopolistic Competition 91. If a firm in a monopolistically competitive market successfully uses advertising to decrease the elasticity of demand for its product, the firm will a. be able to increase its markup over marginal cost. b. eventually have to reduce price to remain competitive. c. increase the welfare of society. d. reduce its average total cost. 92. A law that restricts the ability of hotels/motels to advertise on billboards outside of a resort community would likely lead to a. no change in profits for all hotels/motels. b. reduced efficiency of local lodging markets. c. a request by consumers to increase the number of billboards. d. increased price competition among hotels/motels in the community. 93. Professional organizations and producer groups have an incentive to a. restrict advertising in order to enhance competition on the basis of price. b. restrict advertising in order to reduce competition on the basis of price. c. encourage advertising in order to reduce competition on the basis of price. d. encourage advertising in order to enhance competition on the basis of price. 94. According to one theory, advertising sends a signal to consumers about the quality of the product being offered. An implication of this theory is that a. the actual quality of the product is irrelevant. b. the existence of an expensive advertisement is more important than the content of the advertisement. c. advertising is not in the best interest of society. d. it is irrational for firms to pay famous people large amounts of money to appear in their advertisements. 95. Adibok knows that it produces and sells high-quality athletic shoes. Wurkout knows that it produces and sells lowquality athletic shoes. According to the signaling theory of advertising, a. both Adibok and Wurkout have incentives to spend large amounts of money on advertising for their athletic shoes. b. Adibok has an incentive to spend a large amount of money on advertising for its athletic shoes, but Wurkout does not. c. Wurkout has an incentive to spend a large amount of money on advertising for its athletic shoes, but Adibok does not. d. neither Adibok nor Wurkout has an incentive to spend a large amount of money on advertising for their athletic shoes. 96. Critics of markets that are characterized by firms that sell brand-name products argue that brand names encourage consumers to pay more for branded products that a. have elastic demand curves. b. are very different from generic products. c. are indistinguishable from generic products. d. consumer-advocate groups have found to be inferior. 97. Roberto consumes Coke exclusively. He claims that there is a clear taste difference and that competing brands of cola .
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Ch 17: Monopolistic Competition leave an unsavory taste in his mouth. In a blind taste test, Roberto is found to prefer Coke to store-brand cola nine out of ten times. The results of Roberto’s taste test would refute claims by critics of brand names that a. consumers are always willing to pay more for brand names. b. brand names cause consumers to perceive differences that do not really exist. c. consumers with the lowest levels of income are the most likely to be influenced by brand name advertising. d. brand names are a form of socially efficient advertising. 98. Which of the following statements is correct? a. The more similar Firm A's product is to Firm B's product, the more likely Firm A is to advertise. b. Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face. c. According to the signaling theory, the more product information an advertisement contains the more effective it is. d. Brand names may help consumers if they provide information about the quality of a product when acquiring such information is difficult. 99. Scenario 17-3 Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each firm has just come up with an idea for a new "frozen meal for two" which it would sell for $9. Assume that the marginal cost for each new product is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 1.5 million consumers to try its new product. YumYum has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 1.5 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Bertollini's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Bertollini estimates that its initial 1.5 million customers will buy one unit of the product each month in the coming year for a total of 18 million units. Refer to Scenario 17-3. If YumYum decides to advertise its product, it can expect to a. incur a loss of $15 million. b. incur a loss of $1.5 million. c. earn a profit of $1.5 million. d. earn a profit of $13.5 million. 100. Scenario 17-3 Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each firm has just come up with an idea for a new "frozen meal for two" which it would sell for $9. Assume that the marginal cost for each new product is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 1.5 million consumers to try its new product. YumYum has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 1.5 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Bertollini's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Bertollini estimates that its initial 1.5 million customers will buy one unit of the product each month in the coming year for a total of 18 million units. Refer to Scenario 17-3. By its willingness to spend money on advertising, Bertollini a. signals the quality of its new product to consumers. b. signals that it is not a profit maximizer. c. is detracting from the efficiency of markets. d. will drive YumYum out of the market. .
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Ch 17: Monopolistic Competition 101. Scenario 17-3 Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each firm has just come up with an idea for a new "frozen meal for two" which it would sell for $9. Assume that the marginal cost for each new product is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 1.5 million consumers to try its new product. YumYum has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 1.5 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Bertollini's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Bertollini estimates that its initial 1.5 million customers will buy one unit of the product each month in the coming year for a total of 18 million units. Refer to Scenario 17-3. On the basis of a theory that people buy a product because it is advertised, the content of advertisements for Bertollini's product a. must show a consumer taste-test to be successful. b. must include celebrity endorsements to be successful. c. is less important than the fact that they are willing to spend money on advertising. d. is only important if the quality of the product is high.
Indicate whether the statement is true or false. 102. There are four basic types of market structures. a. True b. False 103. The "competition" in monopolistically competitive markets is most likely a result of having many sellers in the market. a. True b. False 104. The "monopoly" in monopolistically competitive markets is most likely a result of firms having some pricing power due to product differentiation. a. True b. False 105. Monopolistic competition is characterized by many buyers and sellers, product differentiation, and free entry. a. True b. False 106. Monopolistic competition is characterized by many buyers and sellers, product differentiation, and barriers to entry. a. True b. False 107. A monopolistically competitive market is characterized by barriers to entry. a. True b. False 108. The market for wheat is most likely considered a monopolistically competitive market. .
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Ch 17: Monopolistic Competition a. True b. False 109. Monopolistic competition is the only market structure that features many sellers. a. True b. False 110. Product differentiation always leads to some measure of market power. a. True b. False 111. Oligopoly is characterized by a few sellers offering similar products, whereas monopolistic competition is characterized by many sellers offering differentiated products. a. True b. False 112. To be considered an oligopoly, the market must have a concentration ratio below 50%. a. True b. False 113. Monopolistic competition is characterized by a few sellers offering similar products, whereas oligopoly is characterized by many sellers offering differentiated products. a. True b. False 114. Oligopoly and monopolistic competition are examples of a market structure called imperfect competition. a. True b. False 115. Monopolistic competition and monopoly are examples of a market structure called imperfect competition. a. True b. False 116. A markup of price over marginal cost is inconsistent with free entry and zero profit. a. True b. False 117. Monopolistically competitive firms, like monopoly firms, maximize their profits by charging a price that exceeds marginal cost. a. True b. False 118. A profit-maximizing firm in a monopolistically competitive market charges a price equal to marginal cost. a. True b. False .
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Ch 17: Monopolistic Competition 119. For a profit-maximizing firm in a monopolistically competitive market, when price is equal to average total cost, price must lie above marginal cost. a. True b. False 120. A profit-maximizing firm in a monopolistically competitive market can earn positive, negative, or zero profits in the short run. a. True b. False 121. A firm in a monopolistically competitive market can earn both short-run and long-run profits. a. True b. False 122. A firm in a monopolistically competitive market can earn short-run profits but not long-run profits. a. True b. False 123. In the long run, monopolistically competitive firms produce where demand equals marginal cost. a. True b. False 124. When a firm in a monopolistically competitive market earns zero economic profit, its product price must equal marginal cost. a. True b. False 125. In the long run, monopolistically competitive firms produce where demand equals average total cost. a. True b. False 126. In a long-run equilibrium, both perfectly competitive markets and monopolistically competitive markets have price equal to average total cost. a. True b. False 127. In a long-run equilibrium, firms in both perfectly competitive markets and monopolistically competitive markets produce a quantity below the efficient scale of production. a. True b. False 128. When a monopolistically competitive firm is in a long-run equilibrium, the values of marginal cost, average total cost, and price are all the same. a. True b. False 129. In a monopolistically competitive market, the number of firms adjusts until economic profits are driven to zero. .
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Ch 17: Monopolistic Competition a. True b. False 130. When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium, marginal cost must lie below average total cost. a. True b. False 131. In a monopolistically competitive market, the demand curves faced by incumbent firms are unaffected by the entry of new firms into the market. a. True b. False 132. A monopolistically competitive firm faces a downward-sloping demand curve because there are few firms in the market. a. True b. False 133. A firm in a monopolistically competitive market is usually indifferent to an additional customer walking through the door since a sale to that customer will not increase the firm's profit. a. True b. False 134. The term excess capacity refers to the fact that a firm operates on the upward-sloping portion of its average-total-cost curve. a. True b. False 135. The term excess capacity refers to the fact that a firm produces a lower quantity than it would if it operated at the efficient scale. a. True b. False 136. Excess capacity characterizes firms in monopolistically competitive markets, even in situations of long-run equilibrium. a. True b. False 137. When a firm operates with excess capacity, it must be in a monopolistically competitive market. a. True b. False 138. A firm that would experience higher average total cost by increasing production is operating with excess capacity. a. True b. False 139. When a firm operates at efficient scale, it is producing at the minimum point on its average total cost curve. .
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Ch 17: Monopolistic Competition a. True b. False 140. The product-variety externality states that entry of a new firm conveys a negative externality on consumers. a. True b. False 141. The product-variety externality states the benefits to consumers from the introduction of a new product. a. True b. False 142. The business-stealing externality states that entry of a new firm imposes a cost on existing firms because they lose customers. a. True b. False 143. The product-variety externality and the business-stealing externality are both spillover costs of new firms entering a monopolistically competitive market. a. True b. False 144. The product-variety externality and the business-stealing externality are both spillover benefits of new firms entering a monopolistically competitive market. a. True b. False 145. Defenders of advertising argue that firms use advertising as a signal of quality, even if the advertising delivers little helpful information about the product. a. True b. False 146. Critics of advertising argue that advertising leads to less elastic demand for products and a larger markup of price over marginal cost. a. True b. False 147. The claim that advertising reduces the elasticity of demand is likely to be made by a defender of advertising. a. True b. False 148. Critics of advertising argue that firms use advertising to manipulate consumers’ tastes. a. True b. False 149. One thing that both critics of advertising and defenders of advertising agree on is that advertising fosters competition. a. True .
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Ch 17: Monopolistic Competition b. False 150. When advertising is used to relay information about price, each firm is able to enhance market power. a. True b. False 151. Policymakers have generally come to accept the view that advertising enhances the efficiency of markets. a. True b. False 152. Economists are unanimous in their belief that advertising is socially inefficient. a. True b. False 153. When McDonald’s opens a store in Dhaka, Bangladesh, it has a strong incentive to enforce product quality consistent with stores in the United States. a. True b. False 154. The Mikati Philippines Hard Rock Cafe has the exact same menu as the Hard Rock Cafe in New York. This is an example of a brand name enhancing market efficiency for U.S. tourists visiting the Philippines. a. True b. False 155. Empirical evidence suggests that advertising usually leads to an increase in the price for advertised products. a. True b. False 156. Economists who argue that advertising enhances market efficiency suggest that celebrity advertising signals inferior product quality. a. True b. False 157. Advertising during the Super Bowl is an example of information about quality contained primarily in the existence and expense of the advertising. a. True b. False 158. Brand names are rarely used to convey information about product quality. a. True b. False 159. The government of Italy will not allow any Hard Rock Cafe restaurants to open in Italy. Defenders of the efficiency of brand-name markets would argue that this has hindered restaurant market efficiency in Italy. a. True b. False .
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Ch 17: Monopolistic Competition 160. The debate over whether advertising serves a valuable purpose in society is definitively answered by economists who study the tastes and preferences of individuals. a. True b. False 161. If advertising decreases the elasticity of demand for specific brand names of hard liquor, we would expect firms to be able to charge a larger markup over marginal cost. a. True b. False 162. There is general disagreement among economists about the role of advertising, but there is widespread agreement about the role of brand names on market efficiency. a. True b. False 163. The government may not be able to improve the inefficiencies of a monopolistically competitive market. a. True b. False 164. Firms in monopolistically competitive markets and monopolies can earn long-run profits due to barriers to entry. a. True b. False 165. Free entry eliminates long-run profits for firms in competitive and monopolistic industries. a. True b. False 166. In the long run, a monopolistically competitive firm produces at efficient scale. a. True b. False 167. A monopolistically competitive firm cannot earn an economic profit in the long run. a. True b. False 168. In the long run, a monopolistically competitive firm’s demand curve becomes more elastic and shifts to the left. a. True b. False 169. A monopolistically competitive firm is a price-taker. a. True b. False 170. If a monopolistically competitive firm incurs an increase in fixed costs, its price will rise and its output will fall. a. True b. False .
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Ch 17: Monopolistic Competition
171. Which market structure(s) is(are) imperfectly competitive? 172. Which market structure(s) is(are) considered highly concentrated? 173. The market structure in which each firm has a monopoly over the product it makes, but many other firms make similar products that compete for the same customers is called 174. Which type of market structure has the fewest number of firms? 175. Which market structure(s) include(s) many firms with differentiated products who can enter and exit the market freely? 176. Describe the shape of the monopolistically competitive firm’s demand curve. 177. Economists measure a market’s domination by a small number of firms with a statistic called the 178. Suppose there is a market in which the firms hold the following market shares: 25%, 20%, 18%, 15%, 8%, 7%, 4%, 2%, 1%. What is the concentration ratio for this market? 179. Consider two industries in which firms hold the following market shares: Industry A: 25%, 20%, 18%, 15%, 8%, 7%, 4%, 2%, 1% Industry B: 30%, 10%, 9%, 8%, 8%, 8%, 8%, 6%, 6%, 5%, 2% What are the concentration ratios for each industry? Which is more competitive? 180. Table 17-5 A monopolistically competitive firm faces the following demand schedule for its product. In addition, the firm has total fixed costs equal to 20. Price $30 $26 $22 $18 $14 $10 $6
Quantity 1 2 3 4 5 6 7
Refer to Table 17-5. If this firm has a constant marginal cost of $7, what is the profit-maximizing level of output? 181. Table 17-5 A monopolistically competitive firm faces the following demand schedule for its product. In addition, the firm has total fixed costs equal to 20. .
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Ch 17: Monopolistic Competition Price $30 $26 $22 $18 $14 $10 $6
Quantity 1 2 3 4 5 6 7
Refer to Table 17-5. When this firm profit maximizes and faces a constant marginal cost of $7, what is the amount of its markup over marginal cost? 182. Table 17-5 A monopolistically competitive firm faces the following demand schedule for its product. In addition, the firm has total fixed costs equal to 20. Price $30 $26 $22 $18 $14 $10 $6
Quantity 1 2 3 4 5 6 7
Refer to Table 17-5. If this firm profit maximizes and faces a constant marginal cost of $7, does it have excess capacity? How do you know? 183. Figure 17-9
Refer to Figure 17-9. If this firm profit-maximizes, how much output will it produce? .
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Ch 17: Monopolistic Competition 184. Figure 17-9
Refer to Figure 17-9. If this firm profit-maximizes, what price will it charge? 185. Figure 17-9
Refer to Figure 17-9. If this firm profit-maximizes, how much revenue will it earn? 186. Figure 17-9
.
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Ch 17: Monopolistic Competition
Refer to Figure 17-9. If this firm profit-maximizes, how much cost will it incur? 187. Figure 17-9
Refer to Figure 17-9. If this firm profit-maximizes, how much profit or loss will it earn? 188. Figure 17-9
.
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Ch 17: Monopolistic Competition
Refer to Figure 17-9. What, if any, long run adjustment will occur in this industry? 189. Figure 17-10
Refer to Figure 17-10. If this firm profit-maximizes, how much output will it produce? 190. Figure 17-10
.
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Ch 17: Monopolistic Competition
Refer to Figure 17-10. If this firm profit-maximizes, what price will it charge? 191. Figure 17-10
Refer to Figure 17-10. When this firm profit-maximizes, what is the amount of the firm’s profit or loss? 192. Figure 17-10
.
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Ch 17: Monopolistic Competition
Refer to Figure 17-10. If this firm minimized cost, how much output will it produce? 193. Figure 17-10
Refer to Figure 17-10. How much excess capacity does this firm have? 194. Figure 17-10
.
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Ch 17: Monopolistic Competition
Refer to Figure 17-10. What, if any, long run adjustment will take place in this industry? 195. Figure 17-10
Refer to Figure 17-10. Does this monopolistically competitive market produce the welfare-maximizing level of output? 196. Figure 17-10
.
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Ch 17: Monopolistic Competition
Refer to Figure 17-10. Compare the price and marginal cost in this market with price and marginal cost if this were a perfectly competitive market. 197. Figure 17-11
Refer to Figure 17-11. Which letter represents the profit-maximizing quantity? 198. Figure 17-11
.
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Ch 17: Monopolistic Competition
Refer to Figure 17-11. Which letter represents the profit-maximizing price? 199. Figure 17-11
.
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Ch 17: Monopolistic Competition Refer to Figure 17-11. Use the letters to identify the area of total revenue for this firm. 200. Figure 17-11
Refer to Figure 17-11. Use the letters to identify the area of total cost for this firm. 201. Figure 17-11
.
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Ch 17: Monopolistic Competition
Refer to Figure 17-11. Use the letters to identify the area of profit for this firm. 202. Figure 17-11
.
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Ch 17: Monopolistic Competition Refer to Figure 17-11. What is the first step in this industry’s adjustment to long run equilibrium? 203. Figure 17-11
Refer to Figure 17-11. Use the letters to identify the deadweight loss associated with this firm’s profit-maximizing production. 204. Figure 17-12
.
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Ch 17: Monopolistic Competition
Refer to Figure 17-12. Which letter identifies the profit-maximizing level of output for this firm? 205. Figure 17-12
.
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Ch 17: Monopolistic Competition
Refer to Figure 17-12. Which letter identifies the efficient level of output for this firm? 206. Figure 17-12
.
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Ch 17: Monopolistic Competition
Refer to Figure 17-12. The difference between the price charged by the monopolistically competitive firm and the price that would be charged if this firm operated in a perfectly competitive market is represented by which line segment? 207. Figure 17-12
.
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Ch 17: Monopolistic Competition
Refer to Figure 17-12. Use the letters to identify the deadweight loss from this firm producing at its profit-maximizing level of output. 208. Scenario 17-4 Peter operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Peter’s demand and cost values for sales per day are given in the table below. (Everyone who purchases Peter’s ice cream buys a double scoop cone because it’s so delicious.) Quantity Price MR MC ATC 20 $5.60 $5.20 $2.20 $2.05 40 $5.20 $4.40 $2.40 $2.10 60 $4.80 $3.60 $2.60 $2.15 80 $4.40 $2.80 $2.80 $2.20 100 $4.00 $2.00 $3.00 $2.25 120 $3.60 $1.20 $3.20 $2.30 140 $3.20 $0.40 $3.40 $2.35 160 $2.80 -$0.40 $3.60 $2.40 180 $2.40 -$1.20 $3.80 $2.45
Refer to Scenario 17-4. How many ice cream cones should Peter sell in one day to maximize his profits? 209. Scenario 17-4 Peter operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice .
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Ch 17: Monopolistic Competition cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Peter’s demand and cost values for sales per day are given in the table below. (Everyone who purchases Peter’s ice cream buys a double scoop cone because it’s so delicious.) Quantity Price MR MC ATC 20 $5.60 $5.20 $2.20 $2.05 40 $5.20 $4.40 $2.40 $2.10 60 $4.80 $3.60 $2.60 $2.15 80 $4.40 $2.80 $2.80 $2.20 100 $4.00 $2.00 $3.00 $2.25 120 $3.60 $1.20 $3.20 $2.30 140 $3.20 $0.40 $3.40 $2.35 160 $2.80 -$0.40 $3.60 $2.40 180 $2.40 -$1.20 $3.80 $2.45
Refer to Scenario 17-4. What price should Peter charge to maximize his profits? 210. Scenario 17-4 Peter operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Peter’s demand and cost values for sales per day are given in the table below. (Everyone who purchases Peter’s ice cream buys a double scoop cone because it’s so delicious.) Quantity Price MR MC ATC 20 $5.60 $5.20 $2.20 $2.05 40 $5.20 $4.40 $2.40 $2.10 60 $4.80 $3.60 $2.60 $2.15 80 $4.40 $2.80 $2.80 $2.20 100 $4.00 $2.00 $3.00 $2.25 120 $3.60 $1.20 $3.20 $2.30 140 $3.20 $0.40 $3.40 $2.35 160 $2.80 -$0.40 $3.60 $2.40 180 $2.40 -$1.20 $3.80 $2.45
Refer to Scenario 17-4. When Peter maximizes his profits, how much revenue does he earn per day? 211. Scenario 17-4 Peter operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Peter’s demand and cost values for sales per day are given in the table below. (Everyone who purchases Peter’s ice cream buys a double scoop cone because it’s so delicious.) Quantity Price MR MC ATC 20 $5.60 $5.20 $2.20 $2.05 40 $5.20 $4.40 $2.40 $2.10 60 $4.80 $3.60 $2.60 $2.15 80 $4.40 $2.80 $2.80 $2.20 100 $4.00 $2.00 $3.00 $2.25 120 $3.60 $1.20 $3.20 $2.30 .
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Ch 17: Monopolistic Competition 140 160 180
$3.20 $2.80 $2.40
$0.40 -$0.40 -$1.20
$3.40 $3.60 $3.80
$2.35 $2.40 $2.45
Refer to Scenario 17-4. When Peter maximizes his profits, what is his total cost per day? 212. Scenario 17-4 Peter operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Peter’s demand and cost values for sales per day are given in the table below. (Everyone who purchases Peter’s ice cream buys a double scoop cone because it’s so delicious.) Quantity Price MR MC ATC 20 $5.60 $5.20 $2.20 $2.05 40 $5.20 $4.40 $2.40 $2.10 60 $4.80 $3.60 $2.60 $2.15 80 $4.40 $2.80 $2.80 $2.20 100 $4.00 $2.00 $3.00 $2.25 120 $3.60 $1.20 $3.20 $2.30 140 $3.20 $0.40 $3.40 $2.35 160 $2.80 -$0.40 $3.60 $2.40 180 $2.40 -$1.20 $3.80 $2.45
Refer to Scenario 17-4. What is the maximum amount of profit that Peter can earn per day? 213. Due to free entry and exit in monopolistic competition, in the long run price must be equal to 214. Monopolistically competitive firms could reduce the average total cost of producing by increasing output; therefore, these firms have 215. Entry of new firms in monopolistically competitive industries can convey a positive externality on consumers because new products result in more consumer surplus. This externality is called the 216. Entry of new firms in monopolistically competitive industries can convey a negative externality on producers because firms lose customers and profits from the entry of new competitors. This externality is called the 217. When a new firm considers entering a market, it takes into account only the profit it would make. What are the two external effects that occur in the market that the firm does not consider? 218. A new Mexican restaurant opens in the city of Manchester. The residents are happy about this new restaurant because they are experiencing what externality? 219. A new Mexican restaurant opens in the city of Manchester. The other restaurant owners are not happy about this new restaurant because they are experiencing what externality? 220. For the economy as a whole, about what percentage of total firm revenue is spent on advertising? 221. Firms that sell highly differentiated consumer goods, such as over-the-counter drugs, soft drinks, breakfast cereals, .
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Ch 17: Monopolistic Competition and dog food, typically spend between 10 and 20 percent of revenue for 222. In the debate between the critics and defenders of advertising, what conclusion have policymakers come to regarding the effect of advertising on competition - advertising makes markets more competitive or less competitive? 223. Scenario 17-5 Burger Bonanza, a major national burger chain, recently decided to spend $4 million on an advertising campaign featuring a world famous actor to promote its new Bomber Burger. Refer to Scenario 17-5. What can consumers conclude from Burger Bonanza’s willingness to spend $4 million on an advertising campaign? 224. Scenario 17-5 Burger Bonanza, a major national burger chain, recently decided to spend $4 million on an advertising campaign featuring a world famous actor to promote its new Bomber Burger. Refer to Scenario 17-5. What two benefits are conveyed by the brand name Burger Bonanza? 225. Scenario 17-6 Dean goes to the grocery store to buy chips and soda for a party. He purchases brand name products even though generic versions are available at lower prices. His friend John says he was irrational to spend more for a nearly identical product. His friend Martina agreed with Dean’s decision to spend more for the brand name products. Refer to Scenario 17-6. Which friend is a critic of brand names? 226. Scenario 17-6 Dean goes to the grocery store to buy chips and soda for a party. He purchases brand name products even though generic versions are available at lower prices. His friend John says he was irrational to spend more for a nearly identical product. His friend Martina agreed with Dean’s decision to spend more for the brand name products. Refer to Scenario 17-6. Martina offers two reasons for agreeing with Dean’s decision. What are they? 227. Scenario 17-6 Dean goes to the grocery store to buy chips and soda for a party. He purchases brand name products even though generic versions are available at lower prices. His friend John says he was irrational to spend more for a nearly identical product. His friend Martina agreed with Dean’s decision to spend more for the brand name products. Refer to Scenario 17-6. If Dean bought the brand name because of advertising he saw for the product, a defender of advertising would say 228. Scenario 17-6 Dean goes to the grocery store to buy chips and soda for a party. He purchases brand name products even though generic versions are available at lower prices. His friend John says he was irrational to spend more for a nearly identical product. His friend Martina agreed with Dean’s decision to spend more for the brand name products. Refer to Scenario 17-6. If advertising were banned in these markets, what would likely happen to the prices of chips and soda? 229. Considering perfect competition, monopolistic competition, and monopoly, which of the market structures features .
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Ch 17: Monopolistic Competition entry in the long run? 230. Considering perfect competition, monopolistic competition, and monopoly, which of the market structures results in production of the welfare-maximizing level of output? 231. Considering perfect competition, monopolistic competition, and monopoly, which of the market structures can have positive profits in the short run? 232. List five goods that are likely sold in a monopolistically competitive market. 233. Why does a typical monopolistically competitive firm face a downward-sloping demand curve? 234. In many college towns, private independent bookstores typically locate on the periphery of the college campus. However, in some college towns, the university has used political power to restrict private bookstores near campus through community zoning laws. Use your knowledge of markets to predict the price and quality of service differences in the market for college textbooks under the two different market regimes. 235. Use a graph to demonstrate why a profit-maximizing monopolistically competitive firm must operate at excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint. 236. In a small college town, four microbreweries have opened in the last two years. Demonstrate the effect of new market entrants on demand for existing firms (microbreweries) that already served this market. Assume that the local community now places a moratorium on new liquor licenses for microbreweries. How will this moratorium affect the long-run profitability of incumbent firms? 237. What is meant by the term "excess capacity" as it relates to monopolistically competitive firms? 238. Entry of firms in a monopolistically competitive industry is characterized by two externalities. List them and briefly describe how consumers and existing firms are influenced by them. 239. Evaluate the following statement in the context of business-stealing and product-variety externalities: "We have too many student apartments in this town already. Statistics show that vacancy rates average 15 percent during any given semester." 240. Assume the role of a critic of advertising. Describe the characteristics of advertising that reduce the effectiveness of markets and decrease the social welfare of society. 241. Assume the role of a defender of advertising. Describe the characteristics of advertising that enhance the effectiveness of markets and increase the social welfare of society. 242. Evaluate the following statement: "Advertisements that use celebrity endorsements are devoid of any value and do not enhance the efficient functioning of markets." 243. Professional organizations (for example, the American Medical Association and the American Bar Association) have been active advocates for regulation to restrict the right of professionals to advertise. Describe what economic incentives might exist for existing professionals to restrict advertising. 244. Discuss how brand names may enhance the efficiency of markets in a less developed country. 245. As developing countries make a transition to market-based economies, one of the first major capital investments is in "Western-quality" hotels. Explain why brand-name hotel accommodations are a critical step in attracting foreign .
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Ch 17: Monopolistic Competition investment. 246. In markets where the government imposes an excise tax on unit sales, it also has a tendency to dabble with restrictions on advertising (for example, cigarettes and hard liquor). Do potential (or actual) restrictions on advertising in these markets serve the interest of a government that is interested in maximizing its tax revenue from the sale of these products? Explain your answer.
.
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Ch 17: Monopolistic Competition Answer Key 1. a 2. c 3. d 4. c 5. b 6. a 7. c 8. c 9. c 10. a 11. c 12. d 13. b 14. c 15. a 16. d 17. c 18. b 19. b 20. c 21. d 22. b 23. b 24. b 25. c .
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Ch 17: Monopolistic Competition 26. a 27. b 28. b 29. d 30. a 31. b 32. c 33. d 34. a 35. c 36. a 37. a 38. b 39. b 40. b 41. d 42. b 43. b 44. b 45. c 46. a 47. c 48. b 49. c 50. b 51. d .
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Ch 17: Monopolistic Competition 52. a 53. d 54. a 55. d 56. a 57. c 58. d 59. d 60. b 61. c 62. c 63. a 64. d 65. a 66. b 67. a 68. b 69. a 70. d 71. b 72. c 73. d 74. b 75. a 76. b .
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Ch 17: Monopolistic Competition 77. a 78. c 79. b 80. c 81. a 82. c 83. c 84. b 85. b 86. c 87. a 88. b 89. c 90. c 91. a 92. b 93. b 94. b 95. b 96. c 97. b 98. d 99. b 100. a 101. c 102. True .
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Ch 17: Monopolistic Competition 103. True 104. True 105. True 106. False 107. False 108. False 109. False 110. True 111. True 112. False 113. False 114. True 115. False 116. False 117. True 118. False 119. True 120. True 121. False 122. True 123. False 124. False 125. True 126. True 127. False .
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Ch 17: Monopolistic Competition 128. False 129. True 130. True 131. False 132. False 133. False 134. False 135. True 136. True 137. False 138. False 139. True 140. False 141. True 142. True 143. False 144. False 145. True 146. True 147. False 148. True 149. False 150. False 151. True 152. False 153. True .
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Ch 17: Monopolistic Competition 154. True 155. False 156. False 157. True 158. False 159. True 160. False 161. True 162. False 163. True 164. False 165. True 166. False 167. True 168. True 169. False 170. False 171. oligopoly monopolistic competition 172. oligopoly 173. monopolistic competition. 174. monopoly 175. monopolistic competition 176. downward sloping 177. concentration ratio. 178. 78% .
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Ch 17: Monopolistic Competition 179. 78% 57% Industry B 180. 3 181. $15 182. Yes, average total cost is not minimized. 183. 50 184. $30 185. $1500 186. $1000 187. profit of $500 188. firms will enter price will decrease profits will equal zero 189. 22 190. $58 191. $0 192. 28 units 193. 6 units 194. none 195. No 196. Monopolistic competition: P>MC Perfect competition: P=MC 197. L 198. B 199. 0BCL 200. 0JIL 201. BCIJ .
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Ch 17: Monopolistic Competition 202. firms will enter 203. CEH 204. L 205. M 206. CG 207. BHJ 208. 80 209. $4.40 210. $352 211. $176 212. $176 213. average total cost 214. excess capacity. 215. product-variety externality, 216. business-stealing externality, 217. product-variety externality business-stealing externality 218. product-variety externality 219. business-stealing externality 220. 2% 221. advertising. 222. more competitive 223. high quality product 224. information about quality an incentive to maintain high quality 225. John .
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Ch 17: Monopolistic Competition 226. brand names provide information about quality brand names give firms an incentive to maintain high quality 227. the advertising conveyed information about the quality of the product. 228. They would increase. 229. perfect competition monopolistic competition 230. perfect competition 231. perfect competition monopolistic competition monopoly 232. Books, CDs, movies, computer games, and piano lessons are some examples. 233. Because its product is different from those offered by other firms. 234. In monopoly markets, price will be higher and the quality of service will be lower than in monopolistically competitive markets.
235.
Competitive firms do not face downward-sloping demand. The graph shows the firm choosing a level of production in which the intersection of marginal revenue and marginal cost occurs at an output level where average total cost is decreasing. This profit-maximizing output level is less than the efficient scale (minimum of average total cost), and therefore the firm is said to be operating with excess capacity.
.
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Ch 17: Monopolistic Competition
236.
The arrival of a new entrant should be graphically depicted by a leftward shift in the demand curves faced by all incumbent firms. If firms are able to make economic profits, these will be able to be maintained in the long run if new entrants are not allowed (which would essentially be a barrier to entry, meaning the market would no longer be characterized as monopolistically competitive). 237. Monopolistically competitive firms produce a level of output lower than the efficient scale of output and are therefore said to have excess capacity. 238. Business-stealing effect: incumbent firms are affected through the loss of sales; consumers are affected by lower price. Product-variety effect: incumbent firms face a market with more substitutes; consumers have more product variety from which to choose. 239. Business-stealing effect: if new entrants into the market can be profitable, then average vacancy rates are likely to rise above 15 percent. Product-variety effect: if new entrants to the market are able to identify niche markets which are profitable (i.e., offer club rooms, pools, athletic facilities, etc.), then product variety will increase, and average vacancy rates are likely to rise above 15 percent. 240. Advertising manipulates people's tastes and is psychological rather than informational. As a result, advertising creates a desire for a product that might not otherwise exist. Advertising may also impede competition by convincing consumers that products that are identical have significant differences. 241. Advertising provides information to consumers and thus allows consumers to make more informed (and therefore better) choices. Advertising fosters competition by making consumers more aware of prices and product characteristics in a market. 242. Some people argue that celebrity endorsements are a signal of quality due to the high cost of the advertisement. If so, then these advertisements relay information about product quality and enhance the effective functioning of markets. 243. If advertising increases information about prices and services, then providers of professional services will be required to compete with each other on the basis of price and service. As such, existing professionals will be subject to more competitive pressure in the markets they service, and individual profits are likely to fall. .
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Ch 17: Monopolistic Competition 244. Recognizable brand names signal quality products. In the tourist- and business-services market, this signal can be critical at the early stages of development to ensure visitors have a quality experience when other information is unavailable or unreliable. 245. Brand-name hotels are a critical first step to economic development because their recognized signal of quality reduces the barriers of facilitating foreign visitors (and their money). 246. In the case of the examples given, demand is quite inelastic, so restrictions on advertising are not likely to have a large impact on total sales but may have an impact on the distribution of sales across brand names. As such, government revenue is largely unaffected if the tax is on unit sales.
.
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Ch 18: Oligopoly
Indicate the answer choice that best completes the statement or answers the question. 1. Which of the following statements about oligopolies is not correct? a. An oligopolistic market has only a few sellers. b. The actions of any one seller can have a large impact on the profits of all other sellers. c. Oligopolistic firms are interdependent in a way that competitive firms are not. d. Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal costs. 2. In which of the following markets are strategic interactions among firms most likely to occur? a. Markets to which patent and copyright laws apply b. The market for piano lessons c. The market for tennis balls d. The market for corn 3. Which of the following examples illustrates an oligopoly market? a. A farmers' market with many individuals selling sweet corn and tomatoes b. A city whose electrical service is provided by one electric co-operative c. A city with two firms that are licensed to sell school uniforms for the local schools d. A city with many independently owned hair styling salons 4. Which of the following statements is correct? a. If duopolists successfully collude, then their combined output will be less than the output that would be observed if the market were a monopoly. b. The logic of self-interest decreases a duopoly's price below the monopoly price, and it pushes the duopolists to reach the competitive level of output. c. The logic of self-interest increases a duopoly's level of output above the monopoly level, and it pushes the duopolists to reach the competitive price. d. If duopolists successfully collude, then their combined output will be equal to the output that would be observed if the market were a monopoly. 5. Suppose that Bieber and Rihanna are duopolists in the music industry. In May, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By June, each singer is considering breaking the agreement. What would you expect to happen next? a. Bieber and Rihanna will determine that it is in each singer's self-interest to maintain the agreement. b. Bieber and Rihanna will each break the agreement. Both singers' profits will decrease. c. Bieber and Rihanna will each break the agreement. Both singers' profits will increase. d. Bieber and Rihanna will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase. 6. If a certain market were a monopoly, then the monopolist would maximize its profit by producing 4,000 units of output. If, instead, that market were a duopoly, then which of the following outcomes would be most likely if the duopolists successfully collude? a. Each duopolist produces 4,000 units of output. b. Each duopolist produces 1,500 units of output. c. One duopolist produces 2,400 units of output and the other produces 1,600 units of output. .
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Ch 18: Oligopoly d. One duopolist produces 3,000 units of output and the other produces 1,500 units of output. 7. As the number of sellers in an oligopoly becomes very large, a. the quantity of output approaches the monopoly quantity. b. the price approaches the monopoly price. c. the price effect is magnified. d. the quantity of output approaches the socially efficient quantity. 8. Table 18-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: Quantity Price Total Revenue and Total Profit (Gallons) (Dollars per gallon) (Dollars) 0 60 0 100 55 5,500 200 50 10,000 300 45 13,500 400 40 16,000 500 35 17,500 600 30 18,000 700 25 17,500 800 20 16,000 900 15 13,500 1,000 10 10,000 1,100 5 5,500 1,200 0 0
Refer to Table 18-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, what price will they charge? a. $25 b. $30 c. $35 d. $40 9. Table 18-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: .
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Ch 18: Oligopoly Quantity Price Total Revenue and Total Profit (Gallons) (Dollars per gallon) (Dollars) 0 60 0 100 55 5,500 200 50 10,000 300 45 13,500 400 40 16,000 500 35 17,500 600 30 18,000 700 25 17,500 800 20 16,000 900 15 13,500 1,000 10 10,000 1,100 5 5,500 1,200 0 0
Refer to Table 18-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, how many gallons of water will be produced and sold? a. 0 b. 500 c. 600 d. 1,200 10. Table 18-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: Quantity Price Total Revenue and Total Profit (Gallons) (Dollars per gallon) (Dollars) 0 60 0 100 55 5,500 200 50 10,000 300 45 13,500 400 40 16,000 500 35 17,500 600 30 18,000 700 25 17,500 800 20 16,000 900 15 13,500 1,000 10 10,000 1,100 5 5,500 .
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Ch 18: Oligopoly 1,200
0
0
Refer to Table 18-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, how much profit will each of them earn, assuming that the two producers split the market equally? a. $8,750 b. $9,000 c. $12,000 d. $18,000 11. Table 18-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: Quantity Price Total Revenue and Total Profit (Gallons) (Dollars per gallon) (Dollars) 0 60 0 100 55 5,500 200 50 10,000 300 45 13,500 400 40 16,000 500 35 17,500 600 30 18,000 700 25 17,500 800 20 16,000 900 15 13,500 1,000 10 10,000 1,100 5 5,500 1,200 0 0
Refer to Table 18-1. If the market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold? a. 0 gallons b. 600 gallons c. 900 gallons d. 1,200 gallons 12. Table 18-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much .
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Ch 18: Oligopoly water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: Quantity Price Total Revenue and Total Profit (Gallons) (Dollars per gallon) (Dollars) 0 60 0 100 55 5,500 200 50 10,000 300 45 13,500 400 40 16,000 500 35 17,500 600 30 18,000 700 25 17,500 800 20 16,000 900 15 13,500 1,000 10 10,000 1,100 5 5,500 1,200 0 0
Refer to Table 18-1. What is the socially efficient quantity of water? a. 0 gallons b. 600 gallons c. 900 gallons d. 1,200 gallons 13. Table 18-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: Quantity Price Total Revenue and Total Profit (Gallons) (Dollars per gallon) (Dollars) 0 60 0 100 55 5,500 200 50 10,000 300 45 13,500 400 40 16,000 500 35 17,500 600 30 18,000 700 25 17,500 800 20 16,000 900 15 13,500 .
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Ch 18: Oligopoly 1,000 1,100 1,200
10 5 0
10,000 5,500 0
Refer to Table 18-1. If this market for water were perfectly competitive instead of monopolistic, what price would be charged? a. $0 b. $30 c. $40 d. $60 14. Table 18-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: Quantity Price Total Revenue and Total Profit (Gallons) (Dollars per gallon) (Dollars) 0 60 0 100 55 5,500 200 50 10,000 300 45 13,500 400 40 16,000 500 35 17,500 600 30 18,000 700 25 17,500 800 20 16,000 900 15 13,500 1,000 10 10,000 1,100 5 5,500 1,200 0 0
Refer to Table 18-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from operating as a monopoly. What will be the price of water once Rochelle and Alec reach a Nash equilibrium? a. $15 b. $20 c. $25 d. $30 15. Table 18-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each .
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Ch 18: Oligopoly week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: Quantity Price Total Revenue and Total Profit (Gallons) (Dollars per gallon) (Dollars) 0 60 0 100 55 5,500 200 50 10,000 300 45 13,500 400 40 16,000 500 35 17,500 600 30 18,000 700 25 17,500 800 20 16,000 900 15 13,500 1,000 10 10,000 1,100 5 5,500 1,200 0 0
Refer to Table 18-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from operating as a monopoly. How many gallons of water will be produced and sold once Rochelle and Alec reach a Nash equilibrium? a. 600 b. 700 c. 800 d. 900 16. Table 18-2 The information in the following table shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. Quantity Demanded (Internet radio subscriptions) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 .
Price (Dollars per subscription per year) 64 60 56 52 48 44 40 36 32 Page 7
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Ch 18: Oligopoly 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000
28 24 20 16 12 8 4 0
Refer to Table 18-2. Suppose there is only one internet radio provider in this market and it seeks to maximize its profit. The company will a. sell 2,000 subscriptions and charge a price of $48 for each subscription. b. sell 3,000 subscriptions and charge a price of $40 for each subscription. c. sell 4,000 subscriptions and charge a price of $32 for each subscription. d. sell 5,000 subscriptions and charge a price of $24 for each subscription. 17. Table 18-2 The information in the following table shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. Quantity Demanded (Internet radio subscriptions) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000
.
Price (Dollars per subscription per year) 64 60 56 52 48 44 40 36 32 28 24 20 16 12 8 4 0
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Ch 18: Oligopoly Refer to Table 18-2. Assume there are two internet radio providers that operate in this market. If they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions, then their agreement will stipulate that a. each firm will charge a price of $40 and each firm will sell 3,000 subscriptions. b. each firm will charge a price of $40 and each firm will sell 1,500 subscriptions. c. each firm will charge a price of $32 and each firm will sell 2,000 subscriptions. d. each firm will charge a price of $20 and each firm will sell 3,000 subscriptions. 18. Table 18-2 The information in the following table shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. Quantity Demanded (Internet radio subscriptions) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000
Price (Dollars per subscription per year) 64 60 56 52 48 44 40 36 32 28 24 20 16 12 8 4 0
Refer to Table 18-2. Assume there are two profit-maximizing internet radio providers operating in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions. If the firms divide the market evenly, how much profit will each company earn? a. $12,000 b. $16,000 c. $44,000 d. $60,000 19. Table 18-2 The information in the following table shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the .
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Ch 18: Oligopoly marginal cost of providing an additional subscription is always $16. Quantity Demanded (Internet radio subscriptions) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000
Price (Dollars per subscription per year) 64 60 56 52 48 44 40 36 32 28 24 20 16 12 8 4 0
Refer to Table 18-2. Assume there are two profit-maximizing internet radio providers operating in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to sell. How many subscriptions will be sold altogether when this market reaches a Nash equilibrium? a. 2,000 b. 3,000 c. 4,000 d. 5,000 20. Table 18-2 The information in the following table shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. Quantity Demanded (Internet radio subscriptions) 0 500 1,000 1,500 2,000 2,500 .
Price (Dollars per subscription per year) 64 60 56 52 48 44 Page 10
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Ch 18: Oligopoly 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000
40 36 32 28 24 20 16 12 8 4 0
Refer to Table 18-2. Assume there are two profit-maximizing internet radio providers operating in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to sell. What price will they charge for a subscription when this market reaches a Nash equilibrium? a. $24 b. $32 c. $40 d. $48 21. Table 18-2 The information in the following table shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. Quantity Demanded (Internet radio subscriptions) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 .
Price (Dollars per subscription per year) 64 60 56 52 48 44 40 36 32 28 24 20 16 12 8 4 Page 11
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Ch 18: Oligopoly 8,000
0
Refer to Table 18-2. Assume that there are two profit-maximizing internet radio providers operating in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to sell. How much profit will each firm earn when this market reaches a Nash equilibrium? a. $12,000 b. $16,000 c. $52,000 d. $64,000 22. Table 18-2 The information in the following table shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. Quantity Demanded (Internet radio subscriptions) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000
Price (Dollars per subscription per year) 64 60 56 52 48 44 40 36 32 28 24 20 16 12 8 4 0
Refer to Table 18-2. The socially efficient level of output supplied to this market is a. 4,000 b. 5,000 c. 6,000 d. 8,000 23. Figure 18-1 .
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Ch 18: Oligopoly
Refer to Figure 18-1. Suppose this market is served by two firms who each face the marginal cost curve shown in the diagram. The marginal revenue curve that a monopolist would face in this market is also shown. If the firms are able to collude successfully, a. the total output will be 2 units and the price will be $6.00 per unit. b. the total output will be 2 units and the price will be $8.00 per unit. c. the total output will be 4 units and the price will be $6.00 per unit. d. there will be no deadweight loss. 24. Figure 18-1
.
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Ch 18: Oligopoly
Refer to Figure 18-1. Suppose this market is served by two firms who each face the marginal cost curve shown in the diagram and have zero fixed cost. The marginal revenue curve that a monopolist would face in this market is also shown. If the firms are able to collude successfully, each firm should earn a profit equal to a. $1. b. $2. c. $4. d. $6. 25. Table 18-3 The table shows the demand schedule for a particular product. Quantity Demanded Price (Units) (Dollars per unit) 0 16 1 14 2 12 3 10 4 8 5 6 6 4 7 2 8 0
.
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Ch 18: Oligopoly Refer to Table 18-3. Suppose the market for this product is served by two firms that have formed a cartel. What price will the cartel charge in this market if the marginal cost of production is $4? a. $6 b. $8 c. $10 d. $12 26. Table 18-3 The table shows the demand schedule for a particular product. Quantity Demanded Price (Units) (Dollars per unit) 0 16 1 14 2 12 3 10 4 8 5 6 6 4 7 2 8 0
Refer to Table 18-3. If the marginal cost of production in this market is $4, what is the socially efficient quantity of output? a. 3 units b. 4 units c. 5 units d. 6 units 27. Table 18-3 The table shows the demand schedule for a particular product. Quantity Demanded Price (Units) (Dollars per unit) 0 16 1 14 2 12 3 10 4 8 5 6 6 4 7 2 8 0 .
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Ch 18: Oligopoly
Refer to Table 18-3. Suppose the market for this product is served by two firms that have formed a cartel. If the marginal cost of production is $4 and each firm incurs a fixed cost of $6, the combined profit of the cartel will be a. $6 b. $12 c. $24 d. $32 28. Table 18-4 Only two firms, ABC and XYZ, sell a particular product. The following table shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Price Quantity Demanded Total Revenue (Dollars per unit) (Units) (Dollars) 28 0 0 26 5 130 24 10 240 22 15 330 20 20 400 18 25 450 16 30 480 14 35 490 12 40 480 10 45 450 8 50 400 6 55 330 4 60 240 2 65 130 0 70 0
Refer to Table 18-4. If ABC and XYZ operate to jointly maximize profits, then what is the price? a. $14 b. $16 c. $18 d. $20 29. Table 18-4 Only two firms, ABC and XYZ, sell a particular product. The following table shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Price Quantity Demanded Total Revenue (Dollars per unit) (Units) (Dollars) .
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Ch 18: Oligopoly 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70
0 130 240 330 400 450 480 490 480 450 400 330 240 130 0
Refer to Table 18-4. If ABC and XYZ operate to jointly maximize profits, then what quantity is sold? a. 25 b. 30 c. 35 d. 40 30. Table 18-4 Only two firms, ABC and XYZ, sell a particular product. The following table shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Price Quantity Demanded Total Revenue (Dollars per unit) (Units) (Dollars) 28 0 0 26 5 130 24 10 240 22 15 330 20 20 400 18 25 450 16 30 480 14 35 490 12 40 480 10 45 450 8 50 400 6 55 330 4 60 240 2 65 130 0 70 0 .
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Ch 18: Oligopoly
Refer to Table 18-4. If ABC and XYZ operate to jointly maximize profits and agree to share the profit equally, then how much profit will each of them earn? a. $105 b. $125 c. $250 d. $450 31. Table 18-4 Only two firms, ABC and XYZ, sell a particular product. The following table shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Price Quantity Demanded Total Revenue (Dollars per unit) (Units) (Dollars) 28 0 0 26 5 130 24 10 240 22 15 330 20 20 400 18 25 450 16 30 480 14 35 490 12 40 480 10 45 450 8 50 400 6 55 330 4 60 240 2 65 130 0 70 0
Refer to Table 18-4. ABC and XYZ agree to maximize joint profits. However, while ABC produces the agreed-upon amount, XYZ breaks the agreement and produces 5 more than agreed. How much profit does XYZ make? a. $90 b. $140 c. $240 d. $280 32. Table 18-4 Only two firms, ABC and XYZ, sell a particular product. The following table shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Price Quantity Demanded Total Revenue (Dollars per unit) (Units) (Dollars) 28 0 0 .
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Ch 18: Oligopoly 26 24 22 20 18 16 14 12 10 8 6 4 2 0
5 10 15 20 25 30 35 40 45 50 55 60 65 70
130 240 330 400 450 480 490 480 450 400 330 240 130 0
Refer to Table 18-4. ABC and XYZ agree to jointly maximize profits. If ABC and XYZ each break the agreement and each produce 5 more than agreed upon, how much less profit does each make, compared to the profit at the cartel output? a. $5 b. $20 c. $60 d. $90 33. Table 18-4 Only two firms, ABC and XYZ, sell a particular product. The following table shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Price Quantity Demanded Total Revenue (Dollars per unit) (Units) (Dollars) 28 0 0 26 5 130 24 10 240 22 15 330 20 20 400 18 25 450 16 30 480 14 35 490 12 40 480 10 45 450 8 50 400 6 55 330 4 60 240 2 65 130 0 70 0 .
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Ch 18: Oligopoly
Refer to Table 18-4. If this market were perfectly competitive instead of oligopolistic, what quantity would be produced? a. 25 b. 35 c. 50 d. 70 34. Table 18-4 Only two firms, ABC and XYZ, sell a particular product. The following table shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Price Quantity Demanded Total Revenue (Dollars per unit) (Units) (Dollars) 28 0 0 26 5 130 24 10 240 22 15 330 20 20 400 18 25 450 16 30 480 14 35 490 12 40 480 10 45 450 8 50 400 6 55 330 4 60 240 2 65 130 0 70 0
Refer to Table 18-4. If this market were perfectly competitive instead of oligopolistic, what would the price be? a. $18 b. $14 c. $8 d. $0 35. Table 18-4 Only two firms, ABC and XYZ, sell a particular product. The following table shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Price Quantity Demanded Total Revenue (Dollars per unit) (Units) (Dollars) 28 0 0 26 5 130 .
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Ch 18: Oligopoly 24 22 20 18 16 14 12 10 8 6 4 2 0
10 15 20 25 30 35 40 45 50 55 60 65 70
240 330 400 450 480 490 480 450 400 330 240 130 0
Refer to Table 18-4. What is the socially efficient quantity of the product? a. 25 b. 35 c. 50 d. 70 36. Table 18-4 Only two firms, ABC and XYZ, sell a particular product. The following table shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Price Quantity Demanded Total Revenue (Dollars per unit) (Units) (Dollars) 28 0 0 26 5 130 24 10 240 22 15 330 20 20 400 18 25 450 16 30 480 14 35 490 12 40 480 10 45 450 8 50 400 6 55 330 4 60 240 2 65 130 0 70 0
.
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Ch 18: Oligopoly Refer to Table 18-4. How much less do each of these firms earn in the Nash equilibrium than if they jointly maximize profits? a. $5 b. $10 c. $15 d. $20 37. Table 18-5 The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost. Quantity (Gallons) 0 50 100 150 200 250 300 350 400
Price (Dollars per gallon) 8 7 6 5 4 3 2 1 0
Total Revenue (Dollars) 0 350 600 750 800 750 600 350 0
Refer to Table 18-5. If the market for gasoline in Driveaway is perfectly competitive, then the equilibrium price of gasoline is a. $0 and the equilibrium quantity is 400 gallons. b. $1 and the equilibrium quantity is 350 gallons. c. $2 and the equilibrium quantity is 300 gallons. d. $4 and the equilibrium quantity is 200 gallons. 38. Table 18-5 The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost. Quantity (Gallons) 0 50 100 150 200 250 300 350 400 .
Price (Dollars per gallon) 8 7 6 5 4 3 2 1 0
Total Revenue (Dollars) 0 350 600 750 800 750 600 350 0 Page 22
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Ch 18: Oligopoly
Refer to Table 18-5. Suppose we observe that the price of a gallon of gasoline in Driveaway is $5; we observe as well that a particular seller's profit is $150. Given this observation, which of the following scenarios is most likely? a. The market for gasoline in Driveaway is a monopoly. b. There are two identical sellers of gasoline in Driveaway, and the sellers collude. c. There are two identical sellers of gasoline in Driveaway, and the sellers do not collude. d. There are three identical sellers of gasoline in Driveaway, and the sellers collude. 39. Table 18-5 The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost. Quantity (Gallons) 0 50 100 150 200 250 300 350 400
Price (Dollars per gallon) 8 7 6 5 4 3 2 1 0
Total Revenue (Dollars) 0 350 600 750 800 750 600 350 0
Refer to Table 18-5. If there are exactly two sellers of gasoline in Driveaway and if they collude, then which of the following outcomes is most likely? a. Each seller will sell 50 gallons and charge a price of $7. b. Each seller will sell 75 gallons and charge a price of $2.50. c. Each seller will sell 75 gallons and charge a price of $5. d. Each seller will sell 100 gallons and charge a price of $4. 40. Table 18-5 The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost. Quantity (Gallons) 0 50 100 150 200 250 300 350 .
Price (Dollars per gallon) 8 7 6 5 4 3 2 1
Total Revenue (Dollars) 0 350 600 750 800 750 600 350 Page 23
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Ch 18: Oligopoly 400
0
0
Refer to Table 18-5. If there are exactly five sellers of gasoline in Driveaway and if they collude, then which of the following outcomes is most likely? a. Each seller will sell 50 gallons and charge a price of $3. b. Each seller will sell 40 gallons and charge a price of $4. c. Each seller will sell 30 gallons and charge a price of $4. d. Each seller will sell 30 gallons and charge a price of $5. 41. Table 18-5 The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost. Quantity (Gallons) 0 50 100 150 200 250 300 350 400
Price (Dollars per gallon) 8 7 6 5 4 3 2 1 0
Total Revenue (Dollars) 0 350 600 750 800 750 600 350 0
Refer to Table 18-5. If there are exactly five sellers of gasoline in Driveaway and if they collude, then which of the following outcomes is most likely? a. Each seller will sell 20 gallons, charge a price of $6, and earn a profit of $80. b. Each seller will sell 30 gallons, charge a price of $5, and earn a profit of $90. c. Each seller will sell 40 gallons, charge a price of $4, and earn a profit of $120. d. Each seller will sell 50 gallons, charge a price of $3, and earn a profit of $50. 42. When an oligopoly market reaches a Nash equilibrium, a. the market price will be different for each firm. b. the firms will not have behaved as profit maximizers. c. a firm will have chosen its best strategy, given the strategies chosen by other firms in the market. d. a firm will not take into account the strategies of competing firms. 43. The equilibrium quantity in markets characterized by oligopoly is a. higher than in monopoly markets and higher than in perfectly competitive markets. b. higher than in monopoly markets and lower than in perfectly competitive markets. c. lower than in monopoly markets and higher than in perfectly competitive markets. d. lower than in monopoly markets and lower than in perfectly competitive markets. .
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Ch 18: Oligopoly 44. Suppose a market is initially perfectly competitive with many firms selling an identical product. Over time, however, suppose the merging of firms results in the market being served by only three or four firms selling this same product. As a result, we would expect a. an increase in market output and an increase in the price of the product. b. an increase in market output and an decrease in the price of the product. c. a decrease in market output and an increase in the price of the product. d. a decrease in market output and a decrease in the price of the product. 45. When price is above marginal cost, selling one more unit at the current price will increase profit. This concept is known as the a. income effect. b. price effect. c. output effect. d. cartel effect. 46. An oligopolist will increase production if the output effect is a. less than the price effect. b. equal to the price effect. c. greater than the price effect. d. The oligopolist never has an incentive to increase production. 47. As the number of firms in an oligopoly increases, a. each seller becomes more concerned about its impact on the market price. b. the output effect decreases. c. the total quantity of output produced by firms in the market gets closer to the socially efficient quantity. d. the oligopoly has more market power and firms earn a greater profit. 48. If duopoly firms that are not colluding were able to successfully collude, then a. price and quantity would rise. b. price and quantity would fall. c. price would rise and quantity would fall. d. price would fall and quantity would rise. 49. If one firm left a duopoly market where the firms did not cooperate, then a. price and quantity would rise. b. price would rise and quantity would fall. c. quantity would rise and price would fall. d. quantity and price would fall. 50. Suppose that Thierry and Abdul are duopolists. Thierry is producing 700 units of output, and Abdul is producing 500 units of output. When Abdul produces 500 units, Thierry maximizes profit by producing 700 units. When Thierry produces 700 units of output, Abdul maximizes profit by producing 500 units. Thierry and Abdul are a. pricing at the minimum of marginal cost. b. in a competitive market. c. at a Nash equilibrium. .
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Ch 18: Oligopoly d. engaging in monopoly pricing. 51. Cartels are difficult to maintain because a. the monopoly output is very difficult to determine. b. the number of firms is always large. c. costs to the firms in a cartel are continually rising. d. each firm has an incentive to deviate from its agreed output level. 52. Whenever a cartel in a duopoly breaks down, a. both firms obtain higher profits. b. total output in the market will rise. c. price in the market will rise. d. the socially optimal output will be produced. 53. In the prisoners' dilemma game, self-interest leads a. each prisoner to stay silent. b. to the follow-through of any agreement that the prisoners might have made before being questioned. c. to an outcome that is better for both prisoners. d. each prisoner to confess. 54. Table 18-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure.
Refer to Table 18-6. Pursuing its own best interest, Lopes will a. increase the size of its store and parking lot only if HomeMax also increases the size of its store and parking lot. b. increase the size of its store and parking lot only if HomeMax does not increase the size of its store and parking lot. c. increase the size of its store and parking lot regardless of the decision made by HomeMax. d. not increase the size of its store and parking lot regardless of the decision made by HomeMax. .
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Ch 18: Oligopoly 55. Table 18-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure.
Refer to Table 18-6. Pursuing its own best interest, HomeMax will a. increase the size of its store and parking lot only if Lopes also increases the size of its store and parking lot. b. increase the size of its store and parking lot only if Lopes does not increase the size of its store and parking lot. c. increase the size of its store and parking lot regardless of the decision made by Lopes. d. not increase the size of its store and parking lot regardless of the decision made by Lopes. 56. Table 18-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure.
Refer to Table 18-6. Increasing the size of its store and parking lot is a dominant strategy for a. Lopes, but not for HomeMax. .
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Ch 18: Oligopoly b. HomeMax, but not for Lopes. c. both stores. d. neither store. 57. Table 18-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure.
Refer to Table 18-6. If both stores follow a dominant strategy, HomeMax's annual profit will grow by a. $0.6 million. b. $1.5 million. c. $2.5 million. d. $3.4 million. 58. Table 18-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure.
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Refer to Table 18-6. If both stores follow a dominant strategy, Lopes's annual profit will grow by a. $0.4 million. b. $1.0 million. c. $2.0 million. d. $3.2 million. 59. Table 18-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure.
Refer to Table 18-6. When this game reaches a Nash equilibrium, annual profit will grow by a. $1.5 million for HomeMax and by $1.0 million for Lopes. b. $3.4 million for HomeMax and by $0.4 million for Lopes. c. $0.6 million for HomeMax and by $3.2 million for Lopes. d. $2.5 million for HomeMax and by $2.0 million for Lopes. 60. Table 18-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market .
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Ch 18: Oligopoly share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure.
Refer to Table 18-6. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimize growth related profit. They should both agree to a. increase their store and parking lot sizes. b. refrain from increasing their store and parking lot sizes. c. be more competitive in capturing market share. d. share the context of their conversation with the Federal Trade Commission. 61. Table 18-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure.
Refer to Table 18-6. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimize growth-related profit. If they both agree to cooperate on a strategy that maximizes their joint profits, annual profit will grow by a. $1.0 million for Lopes and by $1.5 million for HomeMax. .
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Ch 18: Oligopoly b. $0.4 million for Lopes and by $3.4 million for HomeMax. c. $3.2 million for Lopes and by $0.6 million for HomeMax. d. $2.0 million for Lopes and by $2.5 million for HomeMax. 62. Table 18-7 Two companies, Acme and Pinnacle, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies.
Refer to Table 18-7. The dominant strategy for Acme is to a. produce a good quality product, and the dominant strategy for Pinnacle is to produce a good quality product. b. produce a good quality product, and the dominant strategy for Pinnacle is to produce a poor quality product. c. produce a poor quality product, and the dominant strategy for Pinnacle is to produce a good quality product. d. produce a poor quality product, and the dominant strategy for Pinnacle is to produce a poor quality product. 63. Table 18-7 Two companies, Acme and Pinnacle, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies.
Refer to Table 18-7. Which of the following statements is correct? a. Acme can potentially earn its highest possible profit if it produces a good quality product, and for that reason it is a dominant strategy for Acme to produce a good quality product. .
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Ch 18: Oligopoly b. The highest possible combined profit for the two firms occurs when both produce a poor quality product, and for that reason producing a poor quality product is a dominant strategy for both firms. c. Regardless of the strategy pursued by Acme, Pinnacle's best strategy is to produce a good quality product, and for that reason producing a good quality product is a dominant strategy for Pinnacle. d. Our knowledge of game theory suggests that the most likely outcome of the game, if it is played only once, is for one firm to produce a poor quality product and for the other firm to produce a good quality product. 64. Table 18-7 Two companies, Acme and Pinnacle, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies.
Refer to Table 18-7. If this game is played only once, then the most likely outcome is that a. both firms produce a poor quality product. b. Acme produces a poor quality product and Pinnacle produces a good quality product. c. Acme produces a good quality product and Pinnacle produces a poor quality product. d. both firms produce a good quality product. 65. Table 18-7 Two companies, Acme and Pinnacle, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies.
Refer to Table 18-7. Acme and Pinnacle agree to cooperate so as to maximize total profit. If this game is played .
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Ch 18: Oligopoly repeatedly and Acme uses a tit-for-tat strategy, it will choose a a. good quality product in the first round and in subsequent rounds it will choose whatever Pinnacle chose in the previous round. b. poor quality product in the first round and in subsequent rounds it will choose whatever Pinnacle chose in the previous round. c. good quality product in all rounds, regardless of the choice made by Pinnacle. d. poor quality product in all rounds, regardless of the choice made by Pinnacle. 66. Table 18-7 Two companies, Acme and Pinnacle, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies.
Refer to Table 18-7. The more frequently this game is played, the more likely it is that a. both firms will produce a good quality product. b. both firms will produce a poor quality product. c. both firms experience a reduction in profits compared to the Nash equilibrium outcome. d. one firm will experience an increase in profits and the other will experience a decrease in profits. 67. Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and finds a small bag of marijuana and arrests the two. During the interrogation, each is separately offered the following: "If you confess to dealing drugs and testify against your partner, you will be given immunity and released while your partner will get 10 years in prison. If you both confess, you will each get 5 years." If neither confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of marijuana. If each suspected drug dealer follows a dominant strategy, what should they do? a. Confess regardless of the partner's decision b. Confess only if the partner confesses c. Don't confess regardless of the partner's decision d. Don't confess only if the partner doesn't confess 68. Juan Pablo and Zak are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $8,000. If they both advertise on radio, each will earn a profit of $14,000. If neither advertises at all, each will earn a profit of $20,000. If one advertises on TV and the other advertises on radio, then the one advertising on TV will earn $12,000 and the other will earn $10,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $22,000 and the other will earn $4,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn .
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Ch 18: Oligopoly $24,000 and the other will earn $8,000. If both follow their dominant strategy, then Juan Pablo will a. advertise on TV and earn $8,000. b. advertise on radio and earn $14,000. c. advertise on TV and earn $22,000. d. not advertise and earn $20,000. 69. Table 18-8 This table shows the payoffs for a game played between two players, A and B.
Refer to Table 18-8. If player B chooses Right, player A should choose a. Up and earn a payoff of 1. b. Middle and earn a payoff of 5. c. Middle and earn a payoff of 7. d. Down and earn a payoff of 4. 70. Table 18-8 This table shows the payoffs for a game played between two players, A and B.
Refer to Table 18-8. Which of the following statements regarding this game is true? a. Both players have a dominant strategy. b. Player A has a dominant strategy, but player B does not have a dominant strategy. .
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Ch 18: Oligopoly c. Player A does not have a dominant strategy, but player B does have a dominant strategy. d. Neither player has a dominant strategy. 71. Table 18-8 This table shows the payoffs for a game played between two players, A and B.
Refer to Table 18-8. Which of the following outcomes represents a Nash equilibrium in the game? a. Up-Center b. Middle-Right c. Down-Left d. Down-Center 72. In a prisoners' dilemma game, a. the solution when playing the game once will be the same as the solution when the players play the game repeatedly, since agreements cannot be maintained in a prisoners' dilemma. b. if the players play the game repeatedly, the players can achieve a higher payoff, on average, than when they play the game only once. c. repeated play will result in a worse outcome for both players than when the game is played only once. d. the tit-for-tat strategy in repeated play requires players to always select the opposite strategy as their opponent. 73. Table 18-9 Nadia and Maddie are two college roommates who both prefer a clean common space in their dorm room, but neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm room's common space. The following table shows the payoffs for this situation, where the higher a player's payoff number, the better off that player is.
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Refer to Table 18-9. If Maddie chooses to clean, then Nadia will a. clean and Maddie's payoff will be 30. b. not clean and Maddie's payoff will be 7. c. clean and Maddie's payoff will be 50. d. not clean and Maddie's payoff will be 10. 74. Table 18-9 Nadia and Maddie are two college roommates who both prefer a clean common space in their dorm room, but neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm room's common space. The following table shows the payoffs for this situation, where the higher a player's payoff number, the better off that player is.
Refer to Table 18-9. If Maddie chooses not to clean, then Nadia will a. clean, and Nadia's payoff will be 50. b. not clean, and Nadia's payoff will be 10. c. clean, and Nadia's payoff will be 7. d. not clean, and Nadia's payoff will be 30. 75. Table 18-9 Nadia and Maddie are two college roommates who both prefer a clean common space in their dorm room, but neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm room's common space. .
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Ch 18: Oligopoly The following table shows the payoffs for this situation, where the higher a player's payoff number, the better off that player is.
Refer to Table 18-9. What is Nadia's dominant strategy? a. Nadia has no dominant strategy. b. Nadia should always choose Clean. c. Nadia should always choose Don't Clean. d. Nadia has two dominant strategies, Clean and Don't Clean, depending on the choice Maddie makes. 76. Table 18-9 Nadia and Maddie are two college roommates who both prefer a clean common space in their dorm room, but neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm room's common space. The following table shows the payoffs for this situation, where the higher a player's payoff number, the better off that player is.
Refer to Table 18-9. What is the Nash Equilibrium in this dorm room cleaning game? a. Nadia: Clean Maddie: Clean b. Nadia: Don't Clean Maddie: Clean c. Nadia: Clean Maddie: Don't Clean .
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Ch 18: Oligopoly d. Nadia: Don't Clean Maddie: Don't Clean 77. In which of the following games is it clearly the case that the cooperative outcome of the game is good for the two players and bad for society? a. Two oil companies own adjacent oil fields over a common pool of oil, and each company decides whether to drill one well or two wells. b. Two airlines dominate air travel between City A and City B, and each airline decides whether to charge a "high" airfare or a "low" airfare on flights between those two cities. c. Two superpowers decide whether to build new weapons or to disarm. d. There are no games where the cooperative outcome of the game is good for the two players and bad for society. 78. A cooperative agreement among oligopolists is more likely to be maintained, a. the greater the number of oligopolists. b. the larger the number of buyers of the oligopolists' product. c. the smaller the number of buyers of the oligopolists' product. d. the more likely it is that the game among the oligopolists will be played over and over again. 79. Which of the following groups or entities has the authority to initiate legal suits to enforce antitrust laws? a. Only the U.S. Justice Department b. Only private citizens c. Only the President of the United States d. Both the U.S. Justice Department and private citizens 80. The Sherman Antitrust Act a. was passed to encourage judicial leniency in the review of cooperative agreements. b. was concerned with self-interest dominated Nash equilibriums in prisoners' dilemma games. c. enhanced the ability to enforce cartel agreements. d. restricted the ability of competitors to engage in cooperative agreements. 81. Two CEOs from different firms in the same market collude to fix the price in the market. This action violates the a. Clayton Act of 1914. b. Sherman Antitrust Act of 1890. c. Crandall-Putnam ruling of 1983. d. Jackson-Microsoft ruling of 2000. 82. According to the Clayton Act, a. lawyers are given an incentive to reduce the number of cases involving cooperative arrangements. b. individuals can sue to recover damages from illegal cooperative agreements. c. the government was able to incarcerate the CEO of a firm for illegal pricing arrangements. d. private lawsuits are discouraged. 83. Assume that Bart's Batteries has entered into a resale price maintenance agreement with Radio Shanty but not with Prime Purchase. In this case, .
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Ch 18: Oligopoly a. the wholesale price of Bart's Batteries will be different for Radio Shanty than it is for Prime Purchase. b. Bart's Batteries will never increase profits by having a resale price maintenance agreement with all retail outlets that sell its products. c. Prime Purchase might benefit from customers who go to Radio Shanty for information about different batteries. d. Radio Shanty will sell Bart's Batteries at a lower price than Prime Purchase. 84. Assume that Samorola has entered into an enforceable resale price maintenance agreement with Trint and U-Mobile. Which of the following will always be true? a. The wholesale price of Samorolas will be different for Trint than it is for U-Mobile. b. U-Mobile will benefit from customers who go to Trint for information about different mobile phones. c. Trint will sell Samorolas at a lower price than U-Mobile. d. U-Mobile and Trint will always sell Samorolas for exactly the same price. 85. The manufacturer of South Face sells jackets to retail stores for $120 each, and it requires the retail stores to charge customers $150 per jacket. Any retailer that charges less than $150 would violate its contract with South Face. What do economists call this business practice? a. Predatory pricing b. Resale price maintenance c. Tying d. Leverage 86. Consider a market served by a monopolist, Firm A. A new firm, Firm B, enters the market and, as a result, Firm A lowers its price to try to drive Firm B out of the market. This practice is known as a. resale price maintenance. b. predatory tying. c. tying. d. predatory pricing. 87. A central issue in the Microsoft antitrust lawsuit involved Microsoft's integration of its Internet browser into its Windows operating system, to be sold as one unit. This practice is known as a. tying. b. predation. c. wholesale maintenance. d. retail maintenance. 88. Scenario 18-1 Assume that a local restaurant sells two items, salads and steaks. The restaurant's only two customers on a particular day are Mr. Carnivore and Ms. Leafygreens. Mr. Carnivore is willing to pay $20 for a steak and $7 for a salad. Ms. Leafygreens is willing to pay only $8 for a steak, but is willing to pay $12 for a salad. Assume that the restaurant can provide each of these items at zero marginal cost. Refer to Scenario 18-1. If the restaurant is unable to use tying, what is the profit-maximizing price to charge for a steak? a. $20 b. $16 c. $12 .
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Ch 18: Oligopoly d. $8 89. Scenario 18-1 Assume that a local restaurant sells two items, salads and steaks. The restaurant's only two customers on a particular day are Mr. Carnivore and Ms. Leafygreens. Mr. Carnivore is willing to pay $20 for a steak and $7 for a salad. Ms. Leafygreens is willing to pay only $8 for a steak, but is willing to pay $12 for a salad. Assume that the restaurant can provide each of these items at zero marginal cost. Refer to Scenario 18-1. If the restaurant is unable to use tying, what is the profit-maximizing price to charge for a salad? a. $16 b. $14 c. $12 d. $7 90. Scenario 18-1 Assume that a local restaurant sells two items, salads and steaks. The restaurant's only two customers on a particular day are Mr. Carnivore and Ms. Leafygreens. Mr. Carnivore is willing to pay $20 for a steak and $7 for a salad. Ms. Leafygreens is willing to pay only $8 for a steak, but is willing to pay $12 for a salad. Assume that the restaurant can provide each of these items at zero marginal cost. Refer to Scenario 18-1. If the restaurant is able to use tying to price salads and steaks, what is the profit-maximizing price to charge for the "tied" good? a. $27 b. $20 c. $19 d. $15 91. Scenario 18-1 Assume that a local restaurant sells two items, salads and steaks. The restaurant's only two customers on a particular day are Mr. Carnivore and Ms. Leafygreens. Mr. Carnivore is willing to pay $20 for a steak and $7 for a salad. Ms. Leafygreens is willing to pay only $8 for a steak, but is willing to pay $12 for a salad. Assume that the restaurant can provide each of these items at zero marginal cost. Refer to Scenario 18-1. How much additional profit can the restaurant earn by switching to the use of a tying strategy to price salads and steaks rather than pricing these goods separately? a. $20 b. $12 c. $7 d. $6
Indicate whether the statement is true or false. 92. The essence of an oligopolistic market is that there are only a few sellers. a. True b. False .
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Ch 18: Oligopoly 93. Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding oligopolistic markets. a. True b. False 94. In a competitive market, strategic interactions among the firms are not important. a. True b. False 95. For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger. a. True b. False 96. Suppose three firms form a cartel and agree to charge a specific price for their output. Each individual firm has an incentive to maintain the agreement because the firm’s individual profits will be the greatest under the cartel arrangement. a. True b. False 97. When all firms choose their best strategy given the strategies that all the other firms have chosen, the result is a Nash equilibrium. a. True b. False 98. If firms in an oligopoly agree to produce according to the monopoly outcome, they will produce the same level of output as they would produce in a Nash equilibrium. a. True b. False 99. Any market that is served by an oligopoly is in effect served by a monopoly. a. True b. False 100. Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same. a. True b. False 101. A group of firms that collude is called a cartel. a. True b. False 102. Oligopolies produce more when they collude than when they do not. a. True b. False 103. Cartels with a small number of firms have a greater probability of reaching the monopoly outcome than do cartels with a larger number of firms. .
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Ch 18: Oligopoly a. True b. False 104. As the number of firms in an oligopoly becomes very large, the price effect disappears. a. True b. False 105. The problems faced by oligopolies with three or more members are entirely different from the problems faced by duopolies. a. True b. False 106. If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the cartel is equal to what it would be if the market were a monopoly. a. True b. False 107. In a duopoly if the firms have agreed to jointly maximize profits, then each firm can increase its current individual profits by producing more. a. True b. False 108. As the number of firms in an oligopoly increases, the magnitude of the price effect increases. a. True b. False 109. If the output effect from increased production is larger than the price effect, then an oligopolist would increase production. a. True b. False 110. All examples of the prisoner’s dilemma game are characterized by one and only one Nash equilibrium. a. True b. False 111. If two players engaged in a prisoner’s dilemma game are likely to repeat the game, they are more likely to cooperate than if they play the game only once. a. True b. False 112. The story of the prisoners' dilemma contains a general lesson that applies to any group trying to maintain cooperation among its members. a. True b. False 113. In the prisoners' dilemma game, one prisoner is always better off confessing, no matter what the other prisoner does. .
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Ch 18: Oligopoly a. True b. False 114. A dominant strategy is a strategy that is best for a player in a game regardless of the strategies chosen by the other players. a. True b. False 115. In the prisoners' dilemma game, confessing is a dominant strategy for each of the two prisoners. a. True b. False 116. The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that the two prisoners play in the prisoners' dilemma. a. True b. False 117. In the case of oligopolistic markets, self-interest makes cooperation difficult and it often leads to an undesirable outcome for the firms that are involved. a. True b. False 118. The decisions of the US and Soviet Union to build nuclear weapons is much like the prisoners’ dilemma. a. True b. False 119. In some games, the noncooperative equilibrium is bad for the players and bad for society. a. True b. False 120. When prisoners' dilemma games are repeated over and over, sometimes the threat of penalty causes both parties to cooperate. a. True b. False 121. A tit-for-tat strategy, in a repeated game, is one in which a player starts by cooperating and then does whatever the other player did last time. a. True b. False 122. The notion of a tit-for-tat strategy applies to a prisoners’ dilemma game that is played repeatedly, but it does not apply if the game is played only once. a. True b. False 123. One way that public policy encourages cooperation among oligopolists is through antitrust law. .
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Ch 18: Oligopoly a. True b. False 124. The Sherman Antitrust Act prohibits competing firms from even talking about fixing prices. a. True b. False 125. The Sherman Antitrust Act states that if a person can prove that one was damaged by an illegal arrangement to restrain trade, one could sue and recover three times the damages one sustained. a. True b. False 126. Resale price maintenance prevents retailers from competing on price. a. True b. False 127. A manufacturer of light bulbs sells its products to retail stores and requires the stores to sell the bulbs to customers for $2 per bulb. This practice is known as tying. a. True b. False 128. Some business practices that appear to reduce competition, such as resale price maintenance, may have legitimate economic purposes. a. True b. False 129. Tying can be thought of as a form of price discrimination. a. True b. False 130. Tying is always profitable for a monopoly. a. True b. False 131. Policymakers should be aggressive in using their powers to place limits on firm behavior, because business practices that appear to reduce competition never have any legitimate purposes. a. True b. False 132. As the number of firms in a cartel increases, the easier it is to enforce the cartel agreement. a. True b. False 133. When firms form a cartel in an oligopoly market, the total output is always the same as if the market were perfectly competitive. a. True .
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Ch 18: Oligopoly b. False 134. A Nash Equilibrium always results in the highest total profit for the firms in an oligopoly market. a. True b. False 135. A Nash Equilibrium is a stable outcome for an oligopoly market situation. a. True b. False 136. A dominant strategy exists for at least one player in every game. a. True b. False 137. In a prisoner’s dilemma, the Nash Equilibrium might not have a dominant strategy for either player. a. True b. False 138. In cartels, the reason that the monopoly output is unstable is due to the factors that are present in a prisoner’s dilemma. a. True b. False 139. It is always the case that players in a prisoner’s dilemma situation will choose the Nash Equilibrium. a. True b. False 140. In a prisoner’s dilemma situation where firms are setting prices, the dominant strategy is always to charge the price that leads to maximum profits for all firms. a. True b. False 141. In a prisoner’s dilemma, only one firm has a dominant strategy. a. True b. False
142. Why are the actions of firms interdependent in an oligopoly market but not in a monopolistically competitive market? 143. Why are the actions of the firms in an oligopoly interdependent? 144. Economists use game theory to analyze __________. .
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Ch 18: Oligopoly 145. Why do economists use game theory to study the actions of firms in oligopoly markets but not in other markets? 146. As the number of firms in an oligopoly industry increases, the market moves closer to a __________ market. 147. Compare the equilibrium output in a duopoly to the monopoly output. 148. Suppose the market for home-grown peppers in the town of Smallville is comprised of two farmers. Explain why they might try to collude. 149. Suppose the market for home-grown peppers in the town of Smallville is comprised of two farmers. Suppose the two farmers try to collude. Explain why their collusion might not be successful. 150. Table 18-10 Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Quantity Total Revenue Price (in gallons) (and Total Profit) 0 $12 $0 1 $11 $11 2 $10 $20 3 $9 $27 4 $8 $32 5 $7 $35 6 $6 $36 7 $5 $35 8 $4 $32 9 $3 $27 10 $2 $20 11 $1 $11 12 $0 $0
Refer to Table 18-10. Discuss the difference between the monopoly outcome and the Nash equilibrium. 151. Table 18-10 Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Quantity Total Revenue Price (in gallons) (and Total Profit) 0 $12 $0 1 $11 $11 2 $10 $20 3 $9 $27 4 $8 $32 .
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Ch 18: Oligopoly 5 6 7 8 9 10 11 12
$7 $6 $5 $4 $3 $2 $1 $0
$35 $36 $35 $32 $27 $20 $11 $0
Refer to Table 18-10. Briefly explain why each duopolist earns a lower profit at the Nash equilibrium than if they cooperated to produce the monopoly output. 152. Table 18-11 Imagine a small town in a remote area where only two residents, Maria and Miguel, own dairies that produce milk that is safe to drink. Each week Maria and Miguel work together to decide how many gallons of milk to produce. They bring milk to town and sell it at whatever price the market will bear. To keep things simple, suppose that Maria and Miguel can produce as much milk as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for milk is shown in the table below: Quantity Total Revenue Price (in gallons) (and Total Profit) 0 $24 $0 1 $22 $22 2 $20 $40 3 $18 $54 4 $16 $64 5 $14 $70 6 $12 $72 7 $10 $70 8 $8 $64 9 $6 $54 10 $4 $40 11 $2 $22 12 $0 $0
Refer to Table 18-11. Discuss the difference between the monopoly outcome and the Nash equilibrium. 153. Table 18-11 Imagine a small town in a remote area where only two residents, Maria and Miguel, own dairies that produce milk that is safe to drink. Each week Maria and Miguel work together to decide how many gallons of milk to produce. They bring milk to town and sell it at whatever price the market will bear. To keep things simple, suppose that Maria and Miguel can produce as much milk as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for milk is shown in the table below: Quantity Total Revenue Price (in gallons) (and Total Profit) 0 $24 $0 1 $22 $22 2 $20 $40 3 $18 $54 .
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Ch 18: Oligopoly 4 5 6 7 8 9 10 11 12
$16 $14 $12 $10 $8 $6 $4 $2 $0
$64 $70 $72 $70 $64 $54 $40 $22 $0
Refer to Table 18-11. Briefly explain why each duopolist earns a lower profit at the Nash equilibrium than if they cooperated to produce the monopoly output. 154. Define collusion. 155. If the members of an oligopoly could agree on a total quantity to produce and a price to charge, what quantity and price would they choose? Will this choice represent a Nash equilibrium? 156. When a group of firms acts in unison to maximize profits as if they were a monopoly, they form a __________. 157. Give an example of a famous cartel. 158. OPEC (Organization of Petroleum Exporting Countries) is an example of a cartel in the output market for petroleum. Major League Baseball could be considered a cartel in the __________ market for baseball players. 159. To function as a monopoly, OPEC and other cartels rely on __________ among members. 160. Some people consider the NCAA (National Collegiate Athletic Association) to be a __________ in the market for college athletics. 161. If the output effect is larger than the price effect, an individual firm will __________ production. 162. How does free trade relate to the theory of oligopoly? 163. Reaching and enforcing an agreement between members of a cartel becomes more difficult as the size of the group __________. 164. As the number of firms in an oligopoly industry decreases, the market moves closer to a __________ market. 165. Table 18-12 Suppose that Angelina and Brad own the only two professional photography stores in town. Each must choose between a low price and a high price for senior photo packages. The annual economic profit from each strategy is indicated in the table below: Angelina Low price High price Brad Low Angelina’s profit = $20,000 price Brad’s profit = $20,000 Brad High Angelina’s profit = $25,000 price Brad’s profit = $5,000 .
Angelina’s profit = $4,000 Brad’s profit = $23,000 Angelina’s profit = $22,000 Brad’s profit = $22,000 Page 48
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Refer to Table 18-12. Does Angelina have a dominant strategy? If so, describe it. 166. Table 18-12 Suppose that Angelina and Brad own the only two professional photography stores in town. Each must choose between a low price and a high price for senior photo packages. The annual economic profit from each strategy is indicated in the table below: Angelina Low price High price Brad Low Angelina’s profit = $20,000 price Brad’s profit = $20,000 Brad High Angelina’s profit = $25,000 price Brad’s profit = $5,000
Angelina’s profit = $4,000 Brad’s profit = $23,000 Angelina’s profit = $22,000 Brad’s profit = $22,000
Refer to Table 18-12. Does Brad have a dominant strategy? If so, describe it. 167. Table 18-12 Suppose that Angelina and Brad own the only two professional photography stores in town. Each must choose between a low price and a high price for senior photo packages. The annual economic profit from each strategy is indicated in the table below: Angelina Low price High price Brad Low Angelina’s profit = $20,000 price Brad’s profit = $20,000 Brad High Angelina’s profit = $25,000 price Brad’s profit = $5,000
Angelina’s profit = $4,000 Brad’s profit = $23,000 Angelina’s profit = $22,000 Brad’s profit = $22,000
Refer to Table 18-12. Is there a Nash equilibrium? If so, describe it. 168. Table 18-13 Suppose that Robert and Howard own the only two movie studios in California. Each producer must choose between a low budget and a high budget strategy for his next film. The economic profit from each strategy is indicated in the table below: Howard Low budget High budget Robert Low Howard’s profit = $19,000 budget Robert’s profit = $19,000 Robert High Howard’s profit = $25,000 budget Robert’s profit = $5,000
Howard’s profit = $4,000 Robert’s profit = $24,000 Howard’s profit = $21,000 Robert’s profit = $21,000
Refer to Table 18-13. Does Howard have a dominant strategy? If so, describe it. .
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Ch 18: Oligopoly 169. Table 18-13 Suppose that Robert and Howard own the only two movie studios in California. Each producer must choose between a low budget and a high budget strategy for his next film. The economic profit from each strategy is indicated in the table below: Howard Low budget High budget Robert Low Howard’s profit = $19,000 budget Robert’s profit = $19,000 Robert High Howard’s profit = $25,000 budget Robert’s profit = $5,000
Howard’s profit = $4,000 Robert’s profit = $24,000 Howard’s profit = $21,000 Robert’s profit = $21,000
Refer to Table 18-13. Does Robert have a dominant strategy? If so, describe it. 170. Table 18-13 Suppose that Robert and Howard own the only two movie studios in California. Each producer must choose between a low budget and a high budget strategy for his next film. The economic profit from each strategy is indicated in the table below: Howard Low budget High budget Robert Low Howard’s profit = $19,000 budget Robert’s profit = $19,000 Robert High Howard’s profit = $25,000 budget Robert’s profit = $5,000
Howard’s profit = $4,000 Robert’s profit = $24,000 Howard’s profit = $21,000 Robert’s profit = $21,000
Refer to Table 18-13. Is there a Nash equilibrium? If so, describe it. 171. Table 18-14 Suppose that two oil companies – BP and Exxon – own adjacent natural gas fields. The profits that each firm earns depends on both the number of wells it drills and the number of wells drilled by the other firm. The table below lists each firm’s individual profits: Exxon Drill one well Drill two wells Exxon’s profit = $10 million BP Drill one well BP’s profit = $10 million BP Drill two Exxon’s profit = $6 million wells BP’s profit = $12 million
Exxon’s profit = $12 million BP’s profit = $6 million Exxon’s profit = $8 million BP’s profit = $8 million
Refer to Table 18-14. Does Exxon have a dominant strategy? If so, describe it. 172. Table 18-14 Suppose that two oil companies – BP and Exxon – own adjacent natural gas fields. The profits that each firm earns depends on both the number of wells it drills and the number of wells drilled by the other firm. The table below lists each firm’s individual profits: Exxon .
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Ch 18: Oligopoly Drill one well Drill two wells Exxon’s profit = $10 million BP Drill one well BP’s profit = $10 million BP Drill two Exxon’s profit = $6 million wells BP’s profit = $12 million
Exxon’s profit = $12 million BP’s profit = $6 million Exxon’s profit = $8 million BP’s profit = $8 million
Refer to Table 18-14. Does BP have a dominant strategy? If so, describe it. 173. Table 18-14 Suppose that two oil companies – BP and Exxon – own adjacent natural gas fields. The profits that each firm earns depends on both the number of wells it drills and the number of wells drilled by the other firm. The table below lists each firm’s individual profits: Exxon Drill one well Drill two wells Exxon’s profit = $10 million BP Drill one well BP’s profit = $10 million BP Drill two Exxon’s profit = $6 million wells BP’s profit = $12 million
Exxon’s profit = $12 million BP’s profit = $6 million Exxon’s profit = $8 million BP’s profit = $8 million
Refer to Table 18-14. Is there a Nash equilibrium? If so, describe it. 174. Table 18-15 Suppose that two coal mining companies – Allied and Barclay – own adjacent land suitable for excavating coal mines. The profits that each firm earns depends on both the number of mines it excavates and the number of mines excavated by the other firm. The table below lists each firm’s individual profits: Allied Excavate one mine Excavate two mines Barclay Excavate Allied’s profit = $9 million one mine Barclay’s profit = $9 million Barclay Excavate Allied’s profit = $6 million two mines Barclay’s profit = $11 million
Allied’s profit = $11 million Barclay’s profit = $6 million Allied’s profit = $7 million Barclay’s profit = $7 million
Refer to Table 18-15. Does Allied have a dominant strategy? If so, describe it. 175. Table 18-15 Suppose that two coal mining companies – Allied and Barclay – own adjacent land suitable for excavating coal mines. The profits that each firm earns depends on both the number of mines it excavates and the number of mines excavated by the other firm. The table below lists each firm’s individual profits: Allied Excavate one mine Excavate two mines Barclay Excavate Allied’s profit = $9 million one mine Barclay’s profit = $9 million Barclay Excavate Allied’s profit = $6 million two mines Barclay’s profit = $11 million .
Allied’s profit = $11 million Barclay’s profit = $6 million Allied’s profit = $7 million Barclay’s profit = $7 million Page 51
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Refer to Table 18-15. Does Barclay have a dominant strategy? If so, describe it. 176. Table 18-15 Suppose that two coal mining companies – Allied and Barclay – own adjacent land suitable for excavating coal mines. The profits that each firm earns depends on both the number of mines it excavates and the number of mines excavated by the other firm. The table below lists each firm’s individual profits: Allied Excavate one mine Excavate two mines Barclay Excavate Allied’s profit = $9 million one mine Barclay’s profit = $9 million Barclay Excavate Allied’s profit = $6 million two mines Barclay’s profit = $11 million
Allied’s profit = $11 million Barclay’s profit = $6 million Allied’s profit = $7 million Barclay’s profit = $7 million
Refer to Table 18-15. Is there a Nash equilibrium? If so, describe it. 177. Cooperation is easier to achieve in __________. 178. Which strategy was the most successful in the prisoners’ dilemma tournament? 179. How does the prisoners’ dilemma game apply to real-life situations? 180. Antitrust laws tend to target restraint of trade as characterized by __________. 181. Before the __________, agreements between oligopolists were unenforceable contracts; afterwards, such agreements were criminal conspiracies. 182. How did the Clayton Act of 1914 differ from the Sherman Antitrust Act of 1890? 183. The Clayton Act of 1914 allowed a person who successfully sued a company for damages caused by an illegal arrangement to restrain trade to recover __________ damages. 184. What are the three examples of controversial business practices that antitrust laws often prohibit? 185. Briefly describe the practice of resale price maintenance. 186. Briefly describe the two arguments that economists make to defend the practice of resale price maintenance. 187. Which potentially anti-competitive business practice is often justified on the grounds that it corrects for the free rider problem? 188. Briefly describe the business practice of tying. 189. Scenario 18-2 Assume that a local telecommunications company sells high speed internet access and cable television. The company’s only two customers are Taylor and Tim. Taylor is willing to pay $50 per month for high speed internet access and $50 per month for cable television. Tim is willing to pay only $20 per month for high speed internet access, but is willing to pay $70 per month for cable television. Assume that the telecommunications company can provide each of these products at .
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Ch 18: Oligopoly zero marginal cost. Refer to Scenario 18-2. If the telecommunications company is unable to use tying, what is the profit-maximizing price to charge for high speed internet access? 190. Scenario 18-2 Assume that a local telecommunications company sells high speed internet access and cable television. The company’s only two customers are Taylor and Tim. Taylor is willing to pay $50 per month for high speed internet access and $50 per month for cable television. Tim is willing to pay only $20 per month for high speed internet access, but is willing to pay $70 per month for cable television. Assume that the telecommunications company can provide each of these products at zero marginal cost. Refer to Scenario 18-2. If the telecommunications company is unable to use tying, what is the profit-maximizing price to charge for cable television? 191. Scenario 18-2 Assume that a local telecommunications company sells high speed internet access and cable television. The company’s only two customers are Taylor and Tim. Taylor is willing to pay $50 per month for high speed internet access and $50 per month for cable television. Tim is willing to pay only $20 per month for high speed internet access, but is willing to pay $70 per month for cable television. Assume that the telecommunications company can provide each of these products at zero marginal cost. Refer to Scenario 18-2. If the telecommunications provider is able to use tying to price high speed internet access and cable television, what is the profit-maximizing price to charge for the "tied" good? 192. Scenario 18-2 Assume that a local telecommunications company sells high speed internet access and cable television. The company’s only two customers are Taylor and Tim. Taylor is willing to pay $50 per month for high speed internet access and $50 per month for cable television. Tim is willing to pay only $20 per month for high speed internet access, but is willing to pay $70 per month for cable television. Assume that the telecommunications company can provide each of these products at zero marginal cost. Refer to Scenario 18-2. How much additional profit can the telecommunications company earn by switching to the use of a tying strategy to price high speed internet access and cable television rather than pricing these goods separately? 193. Briefly describe the practice of predatory pricing. 194. Government regulators might suspect a firm of engaging in predatory pricing if it charges prices that seem to be too __________. 195. Which of the controversial business practices, resale price maintenance, predatory pricing, or tying, was a part of a long-running antitrust lawsuit against Microsoft and why? 196. Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with the rest of the cartel. Why? 197. What effect does the number of firms in an oligopoly have on the characteristics of the market? 198. Assume that demand for a product that is produced at zero marginal cost is reflected in the table below. .
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Ch 18: Oligopoly Quantity 0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 a. b.
Price $36 $33 $30 $27 $24 $21 $18 $15 $12 $9 $6 $3 $0
What is the profit-maximizing level of production for a group of oligopolistic firms that operate as a cartel? Assume that this market is characterized by a duopoly in which collusive agreements are illegal. What market price and quantity will be associated with a Nash equilibrium?
199. Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly. Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels. 200. Describe the output and price effects that influence the profit-maximizing decision faced by a firm in an oligopoly market. How does this differ from output and price effects in a monopoly market? 201. Explain how the output effect and the price effect influence the production decision of the individual oligopolist. 202. Ford and General Motors are considering expanding into the Vietnamese automobile market. Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision. 203. Nike and Reebok (athletic shoe companies) are considering whether to advertise during the Super Bowl. Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision. Does the repeated game scenario differ from a single period game? Is it possible that a repeated game (without collusive agreements) could lead to an outcome that is better than a single-period game? Explain the circumstances in which this may be true. 204. Outline the purpose of antitrust laws. What do they accomplish? 205. Explain the practice of resale price maintenance and discuss why it is controversial. 206. Explain the practice of tying and discuss why it is controversial.
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Ch 18: Oligopoly Answer Key 1. d 2. c 3. c 4. d 5. b 6. c 7. d 8. b 9. c 10. b 11. d 12. d 13. a 14. b 15. c 16. b 17. b 18. b 19. c 20. b 21. a 22. c 23. b 24. b 25. c .
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Ch 18: Oligopoly 26. d 27. a 28. c 29. a 30. b 31. b 32. b 33. c 34. c 35. c 36. d 37. c 38. d 39. c 40. d 41. b 42. c 43. b 44. c 45. c 46. c 47. c 48. c 49. b 50. c 51. d .
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Ch 18: Oligopoly 52. b 53. d 54. c 55. c 56. c 57. b 58. b 59. a 60. b 61. d 62. a 63. c 64. d 65. b 66. b 67. a 68. b 69. b 70. d 71. b 72. b 73. b 74. b 75. c 76. d .
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Ch 18: Oligopoly 77. b 78. d 79. d 80. d 81. b 82. b 83. c 84. d 85. b 86. d 87. a 88. a 89. d 90. b 91. d 92. True 93. False 94. True 95. False 96. False 97. True 98. False 99. False 100. False 101. True 102. False .
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Ch 18: Oligopoly 103. True 104. True 105. False 106. True 107. True 108. False 109. True 110. False 111. True 112. True 113. True 114. True 115. True 116. True 117. True 118. True 119. True 120. True 121. True 122. True 123. False 124. True 125. False 126. True 127. False .
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Ch 18: Oligopoly 128. True 129. True 130. False 131. False 132. False 133. False 134. False 135. True 136. False 137. False 138. True 139. False 140. False 141. False 142. Because there are only a few firms in an oligopoly market, their actions are interdependent. There are so many firms in a monopolistically competitive market that each firm it too small for its actions to affect other firms. 143. because there are only a few firms in an oligopoly market 144. strategic situations 145. In oligopoly markets, there are a few firms whose actions are interdependent. Hence, oligopolists have strategies that economics can model using game theory. Only one firm exists in a monopoly, so there are no interdependent actions of firms. In perfect competition and monopolistic competition, there are so many firms that each firm is too small for its actions to affect other firms in the market. 146. competitive 147. The duopoly output will be higher than the monopoly output because the self interests of each duopolist will drive each firm to cheat by producing slightly more output in an effort to increase individual profits. 148. The two farmers might try to collude about quantities to produce or prices to charge. Specifically, they might try to determine the equilibrium price and quantity of peppers that a monopolist would charge and produce, respectively. If they could collude to produce the monopoly output and charge the monopoly price, jointly they would earn the highest profits. 149. The two farmers might try to determine the equilibrium price and quantity of peppers that a monopolist would charge and produce, respectively. If they could collude to produce the monopoly output and charge the monopoly price, jointly .
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Ch 18: Oligopoly they would earn the highest profits. But if one farmer attempts to sell a slightly higher quantity at a slightly lower price, she might earn higher profits than if the other farmer holds to the previous agreement to reduce quantity to the monopoly level. Because the other farmer probably has the same idea that she does, both farmers are likely to sell a bit more, which will lower the market price and reduce each farmer’s individual profits. 150. The monopoly outcome occurs at the highest total profit level of Q=6, P=$6, and profit=$36. If each duopolist pursues his/her self-interests, each will produce Q=4 for a total Q=8, P=$4, and each duopolist’s profit will be half of $32 or $16. Because neither duopolist can do better by producing an output level different from 4, they reach a Nash equilibrium. This problem illustrates the tension between cooperation and self-interest. 151. The monopoly outcome occurs at the highest total profit level of Q=6, P=$6, total profit=$36, and each duopolist earns $18. As each duopolist tries to produce a slightly higher level of output to earn higher profits than half of the monopoly-output profits, total quantity produced in the market increases, which lowers market price. 152. The monopoly outcome occurs at the highest total profit level of Q=6, P=$12, and profit=$72. If each duopolist pursues his/her self-interests, each will produce Q=4 for a total Q=8, P=$8, and each duopolist’s profit will be half of $64 or $32. Because neither duopolist can do better by producing an output level different from 4, they reach a Nash equilibrium. This problem illustrates the tension between cooperation and self-interest. 153. The monopoly outcome occurs at the highest total profit level of Q=6, P=$12, total profit=$72, and each duopolist earns $36. As each duopolist tries to produce a slightly higher level of output to earn higher profits than half of the monopoly-output profits, total quantity produced in the market increases, which lowers market price. 154. Collusion is an agreement among firms in a market about quantities to produce or prices to charge. 155. the monopoly quantity and price; no because the self-interests of the individual oligopolists will encourage each oligopolist to produce a slightly higher level of output than the oligopolist’s share of the monopoly quantity, which will lower the market price 156. cartel 157. OPEC (Organization of Petroleum Exporting Countries) 158. input 159. cooperation 160. cartel 161. increase 162. Free trade increases the number of producers of a product, which keeps prices closer to marginal cost. The more producers there are in a market, the more difficult it will be for firms to collude. Because collusion moves the market price and quantity away from socially optimal levels, free trade enhances social welfare. 163. increases 164. monopoly 165. Yes, regardless of Brad’s strategy, Angelina should choose the low pricing strategy. If Brad chooses the low pricing strategy, $20,000 > $4,000. If Brad chooses the high pricing strategy, $25,000 > $22,000. .
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Ch 18: Oligopoly 166. Yes, regardless of Angelina’s strategy, Brad should choose the low pricing strategy. If Angelina chooses the low pricing strategy, $20,000 > $5,000. If Angelina chooses the high pricing strategy, $23,000 > $22,000. 167. Yes. Angelina has a dominant strategy to choose low pricing. Brad has a dominant strategy to choose low pricing. If Angelina chooses low pricing, Brad cannot do any better than choosing low pricing. If Brad chooses low pricing, Angelina cannot do any better than choosing low pricing. Thus, the Nash equilibrium occurs when each photographer chooses the low pricing strategy. 168. Yes, regardless of Robert’s strategy, Howard should choose the low budget strategy. If Robert chooses the low budget strategy, $19,000 > $4,000. If Robert chooses the high budget strategy, $25,000 > $21,000. 169. Yes, regardless of Howard’s strategy, Robert should choose the low budget strategy. If Howard chooses the low budget strategy, $19,000 > $5,000. If Howard chooses the high budget strategy, $24,000 > $21,000. 170. Yes. Robert has a dominant strategy to choose the low budget strategy. Howard has a dominant strategy to choose the low budget strategy. If Robert chooses the low budget strategy, Howard cannot do any better than choosing the low budget strategy. If Howard chooses the low budget strategy, Robert cannot do any better than choosing the low budget strategy. Thus, the Nash equilibrium occurs when each movie producer chooses the low budget strategy. 171. Yes, regardless of BP’s strategy, Exxon should choose to drill two wells. If BP chooses to drill one well, $12,000 > $10,000. If BP chooses to drill two wells, $8,000 > $6,000. 172. Yes, regardless of Exxon’s strategy, BP should choose to drill two wells. If Exxon chooses to drill one well, $12,000 > $10,000. If Exxon chooses to drill two wells, $8,000 > $6,000. 173. Yes. Exxon has a dominant strategy to drill two wells. BP has a dominant strategy to drill two wells. If Exxon drills two wells, BP cannot do any better than drilling two wells. If BP drills two wells, Exxon cannot do any better than drilling two wells. Thus, the Nash equilibrium is for each firm to drill two wells. 174. Yes, regardless of Barclay’s strategy, Allied should choose to excavate two mines. If Barclay chooses to excavate one mine, $11,000 > $9,000. If Barclay chooses to excavate two mines, $7,000 > $6,000. 175. Yes, regardless of Allied’s strategy, Barclay should choose to excavate two mines. If Allied chooses to excavate one mine, $11,000 > $9,000. If Allied chooses to excavate two mines, $7,000 > $6,000. 176. Yes. Allied has a dominant strategy to excavate two mines. Barclay has a dominant strategy to excavate two mines. If Allied excavates two mines, Barclay cannot do any better than excavating two mines. If Barclay excavates two mines, Allied cannot do any better than excavating two mines. Thus, the Nash equilibrium is for each firm to excavate two mines. 177. repeated games 178. tit-for-tat 179. It illustrates how cooperation can be difficult to maintain, even when cooperation would make both parties better off. 180. agreements among competitors to reduce quantities and/or raise prices 181. Sherman Antitrust Act of 1890 182. The Clayton Act strengthened the antitrust laws and allowed private parties to sue firms alleged to be engaged in .
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Ch 18: Oligopoly illegal restraint of trade. 183. triple 184. resale price maintenance, predatory pricing, tying 185. Resale price maintenance is a requirement between a wholesale seller and retail seller that requires the retailers to charge a specific minimum price. 186. First, economists do not agree that resale price maintenance reduces competition. Second, economists argue that the practice has the legitimate goal to provide good customer service, which could be considered a public good and thus subject to the free-rider problem. 187. resale price maintenance 188. Tying is the practice of bundling products together so that the consumer cannot buy them separately. 189. $50 190. $50 191. $90 192. $30 193. Predatory pricing occurs when a firm lowers its price temporarily for the purpose of driving a competitor out of business. 194. low 195. The government accused Microsoft of tying sales of its Internet browser to it Windows operating system. The government claimed that Microsoft was illegally bundling the two products in order to expand its market power into the area of Internet browsers. 196. Individual profits can be increased at the expense of group profits if individuals cheat on the cartel's cooperative agreement. 197. As the number of firms increases, the equilibrium quantity of goods provided increases and price falls; the market begins to resemble a competitive one. 198. a. Q = 1200 b. Q = 1600, P = 12 199. The source of the tension exists because total profits are maximized when oligopolists cooperate on price and quantity by operating as a monopolist. However, individual profits can be gained by individuals cheating on their cooperative agreement. This is why cooperative agreements among members of a cartel are inherently unstable. This is evident in the problem OPEC experiences in enforcing the cooperative agreement on production and price of crude oil. 200. Output effect: Price > Marginal cost => increased output will add to profit Price effect: increased quantity is sold at a lower price => lower revenue (profit?) .
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Ch 18: Oligopoly An oligopolist must take into account how the output and price effects will be influenced by competitors' production decisions, or it must assume competitors' production will not change in response to its own actions. 201. Since the individual oligopolist faces a downward-sloping demand curve, she realizes that if she increases output, all output must be sold at a lower market price. As such, the revenue from selling the additional units at the lower market price must exceed the loss in revenue from selling all previous units at the new lower price. Otherwise, profits will fall as output (production) is increased. 202. The answer should present two strategies for each company, such as “Expand” and “Don’t Expand.” To be a prisoner’s dilemma, each firm needs a dominant strategy, but each firm choosing its dominant strategy results in an outcome that is jointly worse than if they both chose their other strategy. A possible payoff table with payoffs (Ford, GM) is GM Don’t Expand
GM Expand (2, 2) Ford Expand Ford Don’t Expand (1, 4)
(4, 1) (3, 3)
203. The answer should show that if both shoe companies decide to advertise they will both be worse off than if they did not. It should also show that each company has the individual incentive to advertise. The dominant strategy of both companies will be to advertise, regardless of what the other is doing. If the game is repeated more than once it is possible that the shoe companies will decide not to advertise in the hopes that the other company adequately understands the mutually beneficial gains that come from not advertising. 204. The purpose of antitrust laws is to move markets toward a competitive equilibrium outcome. These laws are used to prevent behavior that would lead to excessive market power by any single firm. 205. Resale price maintenance is a requirement by producers that retailers sell their product for a price specified by the manufacturer. It is controversial because on the surface it appears to limit the ability of retailers to compete on the basis of price. However, if the manufacturer does not exercise resale price maintenance a free-rider problem may become evident among the retailers and ultimately lead to lower profits for the manufacturer. 206. Tying is the practice of bundling goods for sale. It is controversial because it is perceived as a tool for expanding the market power of firms by forcing consumers to purchase additional products. However, economists are skeptical that a buyer's willingness to pay increases just because two products are bundled together. In other words, simply bundling two products together doesn't necessarily add any value. It is more accurately believed to be a form of price discrimination.
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Ch 19: The Markets for the Factors of Production
Indicate the answer choice that best completes the statement or answers the question. 1. To say that a firm is competitive in the labor market is to say that the firm a. has little or no control over the number of workers it hires. b. has little or no control over the wage it pays its workers. c. is aggressive in pursuing the most skilled workers in the labor market. d. is aggressive in trying to keep its workers' wages low. 2. Because a firm's demand for a factor of production is derived from its decision to supply a good in the market, it is called a a. marginal product of demand. b. secondary demand. c. derived demand. d. compensatory demand. 3. The marginal product of labor is defined as the change in a. output per additional unit of revenue. b. output per additional unit of labor. c. revenue per additional unit of labor. d. revenue per additional unit of output. 4. When a production function exhibits a diminishing, but positive, marginal product of labor, a. output increases, but at an increasing rate, as more workers are employed. b. output increases, but at a decreasing rate, as more workers are employed. c. output declines as more workers are employed. d. the effects on marginal product are ambiguous. 5. Diminishing marginal product affects the shape of the production function in what way? a. The slope of the production function decreases as the quantity of input increases. b. The production function becomes steeper as the quantity of input increases. c. The production function slopes downward. d. The production function is horizontal beyond a certain quantity of input. 6. Diane's Auto World installs tires on automobiles, light trucks, and sport utility vehicles. She is a profit-maximizing business owner whose firm operates in a competitive market. The marginal cost of installing a tire is $20. The marginal productivity of the last worker that Diane hired was two tires per hour. What is the maximum hourly wage that Diane was willing to pay the last worker hired? a. $10 b. $20 c. $40 d. $60 7. Suppose that eight workers can manufacture 70 radios per day and that nine workers can manufacture 90 radios per day. If radios can be sold for $20 each, the value of marginal product of the ninth worker is a. 20 radios. .
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Ch 19: The Markets for the Factors of Production b. 90 radios. c. $200. d. $400. 8. Value of marginal product is defined as the additional a. output a firm would receive after hiring one more unit of a factor of production. b. cost of hiring one more unit of a factor of production. c. revenue earned from selling one more unit of product. d. revenue earned from hiring one more unit of a factor of production. 9. To maximize profit, a competitive firm hires workers up to the point of intersection of the a. marginal product curve and the wage. b. value of marginal product curve and the wage. c. value of marginal product curve and the marginal revenue curve. d. total revenue curve and the wage. 10. If the value of the marginal product of labor exceeds the wage, then hiring another worker a. decreases the firm's total output. b. decreases the firm's total cost. c. decreases the firm's total revenue. d. increases the firm's profit. 11. Sunshine's Organic Market sells organic produce. Assume that labor is the only input that varies for the firm. The store manager has determined that if they hire nine workers, the store can sell 200 pounds of produce per day. If they hire10 workers, the store can sell 230 pounds of produce per day. The store earns $4 for each pound of produce that it sells, and the manager pays each worker $60 per day. Which of the following is correct? a. For the 10th worker, the marginal product is 20 pounds of produce per day. b. For the 10th worker, the marginal revenue product (value of the marginal product) is $120 per day. c. The marginal profit from the 10th worker is $120. d. The firm will increase its profit if it hires fewer than nine workers. 12. Omega Custom Cabinets produces and sells custom bathroom vanities. Assume that labor is the only input that varies for the firm. The firm has determined that if it hires 10 workers, it can produce and sell 20 vanities per week. If it hires 11 workers, it can produce and sell 22 vanities per week. It sells each vanity for $800, and it pays each of its workers $1,000 per week. Which of the following is correct? a. For the 11th worker, the marginal profit is $600. b. For the 11th worker, the marginal revenue product (value of the marginal product) is $2,000. c. The firm is maximizing its profit. d. If the firm is employing 11 workers, then its profit would increase if it cut back to 10 workers. 13. A competitive firm sells its output for $60 per unit. Assume that labor is the only input that varies for the firm. The marginal product of the 10th worker is 20 units of output per day; the marginal product of the 11th worker is 16 units of output per day. The firm pays its workers a wage of $150 per day. For the 11th worker, the value of the marginal product of labor is a. $480. .
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Ch 19: The Markets for the Factors of Production b. $960. c. $1,200. d. $2,400. 14. Suppose that a competitive firm hires labor up to the point at which the value of the marginal product equals the wage and that labor is the only input that varies for the firm. If the firm pays a wage of $700 per week and the marginal product of labor equals 35 units per week, then the marginal cost of producing an additional unit of output is a. $20. b. $35. c. $700. d. $0. 15. Figure 19-1
Refer to Figure 19-1. The marginal product of the second worker is a. 90 units of output. b. 105 units of output. c. 210 units of output. d. 330 units of output. 16. Figure 19-1
.
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Ch 19: The Markets for the Factors of Production
Refer to Figure 19-1. Suppose the firm hires each unit of labor for $600 per week, and each unit of output sells for $9. What is the value of the marginal product of the third worker? a. $540 b. $600 c. $675 d. $810 17. Figure 19-1
.
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Ch 19: The Markets for the Factors of Production
Refer to Figure 19-1. Suppose the firm hires each unit of labor for $700 per week, and each unit of output sells for $9. How many workers will the firm hire to maximize its profit? a. 2 b. 3 c. 4 d. 5 18. Figure 19-1
.
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Ch 19: The Markets for the Factors of Production
Refer to Figure 19-1. Suppose the firm sells its output for $12 per unit, and it pays each of its workers $700 per week. How many workers will the firm hire to maximize its profit? a. 2 b. 3 c. 4 d. 5 19. Figure 19-1
.
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Ch 19: The Markets for the Factors of Production
Refer to Figure 19-1. Suppose the firm sells its output for $15 per unit, and it pays each of its workers $750 per week. When output increases from 210 units to 285 units, the a. marginal cost is $10 per unit of output. b. marginal revenue is $5 per unit of output. c. value of the marginal product of labor is $4,275. d. firm’s profit decreases. 20. Figure 19-1
.
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Ch 19: The Markets for the Factors of Production
Refer to Figure 19-1. Suppose the firm sells its output for $10 per unit, and it pays each of its workers $400 per week. When the number of workers increases from 4 to 5, the a. marginal revenue is $450 per unit of output, and the marginal cost is $400 per unit of output. b. value of the marginal product of labor is $3,900, and the marginal cost per unit of output is $400. c. value of the marginal product of labor is $450, and the marginal cost per unit of output is about $8.89. d. firm's profit increases. 21. Figure 19-1
.
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Ch 19: The Markets for the Factors of Production
Refer to Figure 19-1. The shape of the curve suggests the presence of a. an inverted production function. b. diminishing total product. c. increasing marginal product. d. diminishing marginal product. 22. Scenario 19-1 Harry owns a snow-removal business. He hires workers to shovel driveways for him during the winter. The first worker he hires can shovel 12 driveways in one day. When Harry hires two workers, they can shovel a total of 22 driveways in one day. When Harry hires a third worker, he shovels an additional eight driveways in one day. Refer to Scenario 19-1. What is the marginal productivity of the second worker? a. 7 b. 10 c. 12 d. 22 23. Scenario 19-1 Harry owns a snow-removal business. He hires workers to shovel driveways for him during the winter. The first worker he hires can shovel 12 driveways in one day. When Harry hires two workers, they can shovel a total of 22 driveways in one day. When Harry hires a third worker, he shovels an additional eight driveways in one day. Refer to Scenario 19-1. Suppose that Harry pays each worker $80 per day and that he charges each customer $20 to have his driveway shoveled. What is the value of the marginal product of labor for the second worker? .
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Ch 19: The Markets for the Factors of Production a. $200 b. $240 c. $800 d. $960 24. Table 19-1 Labor (Number of workers) 0 1 2 3 4 5 6
Output (Units per day) 0 10 18 25 30 33 34
Refer to Table 19-1. What is the marginal product of the second worker? a. 8 b. 9 c. 10 d. 18 25. Table 19-1 Labor (Number of workers) 0 1 2 3 4 5 6
Output (Units per day) 0 10 18 25 30 33 34
Refer to Table 19-1. Suppose that the firm pays its workers $45 per day. Each unit of output sells for $10. How many workers should the firm hire? a. 1 b. 2 c. 3 d. 4 .
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Ch 19: The Markets for the Factors of Production 26. Table 19-2 Labor Output (Number of workers) (Bracelets per week) 0 0 1 200 2 360 3 480 4 560 5 600
Refer to Table 19-2. The table shows the number of bracelets that can be assembled per week by various numbers of workers. If the price per bracelet in a perfectly competitive product market is $8, how many workers would the firm employ if the weekly wage rate is $800? a. 1 b. 2 c. 3 d. 4 27. Table 19-3 Labor (Number of workers) Firm A 1 200 2 160 3 120 4 80
Output Firm B Firm C 200 200 380 600 540 1,200 680 2,000
Firm D 200 400 600 800
Refer to Table 19-3. Which firm's production function exhibits positive but diminishing marginal product? a. Firm A b. Firm B c. Firm C d. Firm D 28. Table 19-4 Marginal Product Value of the Marginal Wage Marginal Profit of Labor Product of Labor (Dollars) (Dollars) (Units) (Dollars) 0 – – – – 1,000 1,000 5,000 3,000 2,000 1,800 800 4,000 3,000 1,000
Labor Output (Number of workers) (Units) 0 1 2 .
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Ch 19: The Markets for the Factors of Production 3 4
2,300 2,600
500 300
2,500 1,500
3,000 3,000
–500 –1,500
Refer to Table 19-4. How many workers should the firm hire? a. 1 b. 2 c. 3 d. 4 29. Table 19-5 Labor Output (Number of workers) (Units) 0 1 2 3 4
0 300 500 600 650
Marginal Product Value of the Marginal Wage Marginal Profit of Labor Product of Labor (Dollars) (Dollars) (Units) (Units) – – – – 300 600 300 300 200 AA 300 100 100 200 300 BB CC DD 300 −200
Refer to Table 19-5. What is the value for the cell labeled AA? a. $600 b. $500 c. $400 d. $300 30. Table 19-6 Consider the following daily production data for MadeFromScratch, Inc. MadeFromScratch sells cupcakes for $3 each and pays the workers a wage of $325 per day. Labor (Number of workers) 0 1 2 3 4 .
Marginal Value of the Wage Output Product Marginal (Dollars per (Cupcakes per of Labor Product of Labor worker per day) (Cupcakes per (Cupcakes) day) day) 0 325 200 325 350 325 475 325 575 325
Marginal Profit (Dollars)
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Ch 19: The Markets for the Factors of Production
Refer to Table 19-6. What is the third worker's marginal product of labor? a. 120 cupcakes b. 140 cupcakes c. 125 cupcakes d. 180 cupcakes 31. Table 19-6 Consider the following daily production data for MadeFromScratch, Inc. MadeFromScratch sells cupcakes for $3 each and pays the workers a wage of $325 per day. Labor (Number of workers) 0 1 2 3 4
Marginal Value of the Wage Output Product Marginal (Dollars per (Cupcakes per of Labor Product of Labor worker per day) (Cupcakes per (Cupcakes) day) day) 0 325 200 325 350 325 475 325 575 325
Marginal Profit (Dollars)
Refer to Table 19-6. What is the value of the marginal product of the first worker? a. $200 b. $400 c. $600 d. $700 32. Table 19-6 Consider the following daily production data for MadeFromScratch, Inc. MadeFromScratch sells cupcakes for $3 each and pays the workers a wage of $325 per day. Labor (Number of workers) 0 1 2 3 4 .
Marginal Value of the Wage Output Product Marginal (Dollars per (Cupcakes per of Labor Product of Labor worker per day) (Cupcakes per (Cupcakes) day) day) 0 325 200 325 350 325 475 325 575 325
Marginal Profit (Dollars)
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Ch 19: The Markets for the Factors of Production
Refer to Table 19-6. The marginal product of labor begins to diminish with the addition of which worker? a. The 1st worker b. The 2nd worker c. The 3rd worker d. The 4th worker 33. Table 19-6 Consider the following daily production data for MadeFromScratch, Inc. MadeFromScratch sells cupcakes for $3 each and pays the workers a wage of $325 per day. Labor (Number of workers) 0 1 2 3 4
Marginal Value of the Wage Output Product Marginal (Dollars per (Cupcakes per of Labor Product of Labor worker per day) (Cupcakes per (Cupcakes) day) day) 0 325 200 325 350 325 475 325 575 325
Marginal Profit (Dollars)
Refer to Table 19-6. Assuming MadeFromScratch is a competitive, profit-maximizing firm, how many workers will the firm hire? a. Two workers b. Three workers c. Four workers d. Five workers 34. Table 19-6 Consider the following daily production data for MadeFromScratch, Inc. MadeFromScratch sells cupcakes for $3 each and pays the workers a wage of $325 per day. Labor (Number of workers) 0 1 2 3 4 .
Marginal Value of the Wage Output Product Marginal (Dollars per (Cupcakes per of Labor Product of Labor worker per day) (Cupcakes per (Cupcakes) day) day) 0 325 200 325 350 325 475 325 575 325
Marginal Profit (Dollars)
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Ch 19: The Markets for the Factors of Production
Refer to Table 19-6. Assume that MadeFromScratch is a competitive, profit-maximizing firm. If the market price of cupcakes increases from $3.00 to $3.50, how many workers would the firm then hire? a. Two workers b. Three workers c. Four workers d. Five workers 35. Table 19-6 Consider the following daily production data for MadeFromScratch, Inc. MadeFromScratch sells cupcakes for $3 each and pays the workers a wage of $325 per day. Labor (Number of workers) 0 1 2 3 4
Marginal Value of the Wage Output Product Marginal (Dollars per (Cupcakes per of Labor Product of Labor worker per day) (Cupcakes per (Cupcakes) day) day) 0 325 200 325 350 325 475 325 575 325
Marginal Profit (Dollars)
Refer to Table 19-6. Suppose that there is a technological advance that allows MadeFromScratch employees to produce more cupcakes than they could before. Because of this change, the firm's a. demand for labor shifts right. b. demand for labor shifts left. c. supply of labor shifts right. d. supply of labor shifts left. 36. Table 19-7 The table displays data for a small, competitive, profit-maximizing firm that produces and sells envelopes. Labor (Number of workers)
Marginal Product of Labor (Boxes of envelopes per week)
Wage (Dollars per worker per week)
0 1 2 3 4 5
134 106 92 84 78
600 600 600 600 600
.
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Ch 19: The Markets for the Factors of Production Refer to Table 19-7. Suppose the firm sells each box of envelopes that it produces for $6. What is the marginal profit of the fourth worker? a. $−132 b. $−96 c. $132 d. $504 37. Table 19-7 The table displays data for a small, competitive, profit-maximizing firm that produces and sells envelopes. Labor (Number of workers)
Marginal Product of Labor (Boxes of envelopes per week)
Wage (Dollars per worker per week)
0 1 2 3 4 5
134 106 92 84 78
600 600 600 600 600
Refer to Table 19-7. Suppose the firm sells each box of envelopes that it produces for $7.50. How many workers should the firm hire? a. 2 b. 3 c. 4 d. 5 38. Table 19-7 The table displays data for a small, competitive, profit-maximizing firm that produces and sells envelopes. Labor (Number of workers)
Marginal Product of Labor (Boxes of envelopes per week)
Wage (Dollars per worker per week)
0 1 2 3 4 5
134 106 92 84 78
600 600 600 600 600
Refer to Table 19-7. Suppose the firm sells each box of envelopes that it produces for $6. The firm would not be interested in hiring a third worker unless the wage fell from its current level of $600 to what level? a. $564 .
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Ch 19: The Markets for the Factors of Production b. $557 c. $554 d. $551 39. Figure 19-2
Refer to Figure 19-2. Each August many high school and college students visit a doctor's office to have a sports physical. If the price of sports physicals falls, what happens in the market for nurses? a. Demand increases from D1 to D2. b. Demand decreases from D2 to D1. c. Supply increases from S1 to S2. d. Supply decreases from S2 to S1. 40. Scenario 19-2 Gertrude Kelp owns three boats that participate in commercial fishing for fresh Pacific salmon off the coast of Alaska. As part of her business, she hires a captain and several crew members for each boat. In the market for fresh Pacific salmon, there are thousands of firms like Gertrude's. While Gertrude usually catches a significant number of fish each year, her contribution to the entire harvest of salmon is negligible relative to the size of the market. Refer to Scenario 19-2. If the price of fresh Pacific salmon were to decrease significantly, it is most likely that Gertrude would a. reduce her demand for crew members. b. hire more boats. c. become a seller in at least one factor market. d. hire more crew members. .
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Ch 19: The Markets for the Factors of Production 41. 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. 42. If the selling price of a bushel of cranberries rises, we would expect the demand for labor in the cranberry industry to a. increase. b. decrease. c. be unchanged. d. increase by less than the corresponding decrease in supply. 43. If the demand curve for wedding cakes shifts to the right, then the value of the marginal product of labor for bakers will a. rise. b. fall. c. remain unchanged. d. rise or fall; either is possible. 44. Figure 19-3 The figure shows a particular profit-maximizing, competitive firm's value-of-marginal-product (VMP) curve.
Refer to Figure 19-3. The firm would choose to hire three workers if .
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Ch 19: The Markets for the Factors of Production a. the market wage for a day’s work is $220. b. the market wage for a day’s work is $260. c. the output price is $220. d. the output price is $260. 45. Figure 19-3 The figure shows a particular profit-maximizing, competitive firm's value-of-marginal-product (VMP) curve.
Refer to Figure 19-3. Suppose the marginal product of the fifth unit of labor is 30 units of output per day. The figure implies that the a. price of output is $4. b. price of output is $6. c. price of output is $8. d. daily wage is $120. 46. Fiona's hourly wage increases from $8 to $10. Which of the following describes a consequence of the increase in Fiona's wage? a. The opportunity cost of Fiona's leisure time has decreased. b. Fiona may choose to work fewer hours due to the increase in her wage. c. If Fiona’s labor supply curve is upward sloping, she will choose to work fewer hours. d. If Fiona’s labor supply curve is backward bending, she will choose to work more hours. 47. Scenario 19-3 Sam has two jobs, one for the winter and one for the summer. In the winter, he works as a lift attendant at a ski resort where he earns $13 per hour. During the summer, he drives a tour bus around the ski resort, earning $11 per hour. .
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Ch 19: The Markets for the Factors of Production Refer to Scenario 19-3. During the winter months, what is Sam's opportunity cost of taking an hour off work to go skiing? a. $13 b. Between $11 and $13 c. $11 d. Less than $11 48. Scenario 19-3 Sam has two jobs, one for the winter and one for the summer. In the winter, he works as a lift attendant at a ski resort where he earns $13 per hour. During the summer, he drives a tour bus around the ski resort, earning $11 per hour. Refer to Scenario 19-3. Assume that Sam has an upward-sloping labor supply curve. If the opportunity cost of Sam's leisure time increases, he will respond by working a. more hours. b. fewer hours. c. an equal number of hours. d. a number of hours that cannot be determined from the information. The labor demand curve is needed to make this determination. 49. Scenario 19-3 Sam has two jobs, one for the winter and one for the summer. In the winter, he works as a lift attendant at a ski resort where he earns $13 per hour. During the summer, he drives a tour bus around the ski resort, earning $11 per hour. Refer to Scenario 19-3. If Sam takes fewer hours of leisure in the summer than in the winter, we can assume that his labor supply curve for the range of earnings in this example a. is horizontal. b. is vertical. c. is upward sloping. d. has a backward-bending portion. 50. Your college roommate receives a pay raise at her part-time job from $9 to $11 per hour. She used to work 25 hours per week, but now she decides to work 20 hours per week in order to spend more time studying economics. For this price range, her labor supply curve is a. vertical. b. horizontal. c. upward sloping. d. backward sloping. 51. Among the people who are characterized below, who has the highest opportunity cost of leisure? a. An attorney who earns $200 per hour and who plays golf during their leisure time b. A medical doctor who earns $210 per hour and who sleeps during their leisure time c. A retail clerk who earns $15 per hour and who watches TV during their leisure time d. A waiter who earns $12 per hour and who reads poetry during their leisure time 52. If the wages of a dentist increase, which of the following statements is not true? a. Their opportunity cost of leisure increases. .
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Ch 19: The Markets for the Factors of Production b. Their hours of labor supplied may increase. c. Their hours of labor supplied may decrease. d. Their opportunity cost of leisure decreases. 53. Figure 19-4
Refer to Figure 19-4. This graph illustrates the market for bakers who make homemade breads and breakfast pastries. If the bakery profession becomes more attractive to young women and men because of a new reality television show, what happens in the market for bakers? a. Demand increases from D1 to D2. b. Demand decreases from D2 to D1. c. Supply increases from S1 to S2. d. Supply decreases from S2 to S1. 54. Which of the following would shift a market labor supply curve to the right? a. An increase in the price of output b. An increase in immigration c. A labor-saving technological change d. A decrease in the wage rate 55. What happens to labor supply in the pear-picking market when the wage paid to apple pickers increases? a. The labor supply will stay unchanged until the wages paid to pear pickers change. b. The labor supply will decrease. c. The labor supply will increase. .
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Ch 19: The Markets for the Factors of Production d. The labor supply may fall or rise, depending on the price of pears. 56. Suppose that the wage paid to workers who de-tassel corn rises. What happens in the market for workers who weed soybean fields, given that workers who de-tassel corn can easily work weeding soybean fields? a. The demand curve for soybean workers increases. b. The demand curve for soybean workers decreases. c. The supply curve for soybean workers increases. d. The supply curve for soybean workers decreases. 57. What happens to the labor supply curves in both countries when Mexican workers leave Mexico and move to the United States? a. Labor supply decreases in Mexico and decreases in the United States. b. Labor supply increases in the United States and increases in Mexico. c. Labor supply increases in the United States and decreases in Mexico. d. Labor supply increases in Mexico and decreases in United States. 58. Scenario 19-4 Suppose that workers from northern Minnesota, North Dakota, and Montana decide to immigrate to southern Canada. Refer to Scenario 19-4. In the labor market in southern Canada, the equilibrium wage a. and the equilibrium quantity of labor will rise. b. and the equilibrium quantity of labor will fall. c. will rise, and the equilibrium quantity of labor will fall. d. will fall, and the equilibrium quantity of labor will rise. 59. Scenario 19-4 Suppose that workers from northern Minnesota, North Dakota, and Montana decide to immigrate to southern Canada. Refer to Scenario 19-4. In the labor market in the northern United States, the equilibrium wage a. and the equilibrium quantity of labor will rise. b. and the equilibrium quantity of labor will fall. c. will rise, and the equilibrium quantity of labor will fall. d. will fall, and the equilibrium quantity of labor will rise. 60. Figure 19-5
.
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Ch 19: The Markets for the Factors of Production
Refer to Figure 19-5. When the relevant labor supply curve is S1, and the labor market is in equilibrium, the a. wage is W2. b. opportunity cost of leisure to workers is W2. c. marginal product of labor to firms is W1. d. value of the marginal product of labor to firms is W1. 61. Figure 19-5
.
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Ch 19: The Markets for the Factors of Production
Refer to Figure 19-5. Which of the following would shift the labor supply curve from S1 to S2? a. Technological progress b. A decrease in the price of the firm’s output c. A change in workers' attitudes toward the work-leisure tradeoff in favor of work d. An increase in the price of the firm’s output 62. Figure 19-5
.
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Ch 19: The Markets for the Factors of Production
Refer to Figure 19-5. If the relevant labor supply curve is S2 and the current wage is W1, a. there is a surplus of labor. b. the quantity of labor demanded exceeds the quantity of labor supplied. c. an increase in the minimum wage could restore equilibrium in the market. d. firms will need to raise the wage to restore equilibrium. 63. Figure 19-5
.
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Ch 19: The Markets for the Factors of Production
Refer to Figure 19-5. Assume W1 = $15 and W2 = $12, and the market is always in equilibrium. A shift of the labor supply curve from S1 to S2 would a. increase the value of the marginal product of labor by $3. b. decrease the value of the marginal product of labor by $3. c. decrease the value of the marginal product of labor by more than $3. d. not change the value of the marginal product of labor. 64. Suppose that the market for labor is initially in equilibrium. An increase in immigration will cause the equilibrium wage a. and the equilibrium quantity of labor to rise. b. and the equilibrium quantity of labor to fall. c. to rise and the equilibrium quantity of labor to fall. d. to fall and the equilibrium quantity of labor to rise. 65. Consider the market for medical doctors. Suppose the opportunity cost of going to medical school decreases for many individuals. Suppose, it generally takes about 10 years to become a practicing doctor. Holding all else constant, in 10 years the equilibrium wage for doctors will a. increase. b. decrease. c. not change. d. It is not possible to determine what will happen to the equilibrium wage. .
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Ch 19: The Markets for the Factors of Production 66. When labor supply increases, a. the marginal productivity of workers always increases. b. profit-maximizing firms reduce employment. c. wages increase as long as labor supply is upward sloping. d. wages decrease as long as labor demand is downward sloping. 67. Suppose that workers immigrate to Minnesota from Canada. Which of the following correctly describes what would happen in the market for labor in Minnesota? a. The equilibrium wage would increase, and the quantity of labor would increase. With more workers, the added output from an extra worker is larger. b. The equilibrium wage would decrease, and the quantity of labor would decrease. With fewer workers, the added output from an extra worker is smaller. c. The equilibrium wage would decrease, and the quantity of labor would increase. With more workers, the added output from an extra worker is smaller. d. The equilibrium wage would decrease, and the quantity of labor would increase. With more workers, the added output from an extra worker is larger. 68. When a labor market experiences a surplus of labor, there is downward pressure on a. the supply of labor. b. the final product price. c. wages. d. the demand for labor. 69. An increase in the supply of labor has the effect of a. increasing the marginal product of labor. b. increasing the wage. c. decreasing the marginal product of labor. d. decreasing the wage. 70. Scenario 19-5 Rocchetta Industries manufactures and supplies bottled water in Mexico. As a result of a contamination of water supplies at many of Mexico's resort communities, the demand for bottled water has increased. Refer to Scenario 19-5. When the labor market adjusts to its new equilibrium, we would expect the a. marginal product of labor to be higher than it was before the increase in demand for bottled water. b. value of the marginal product of labor to be higher than it was before the increase in demand for bottled water. c. price of bottled water to be lower than it was before the increase in demand for bottled water. d. wages of Rocchetta workers to be lower than they were before the increase in demand for bottled water. 71. Figure 19-6
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Refer to Figure 19-6. Which of the following is a possible explanation of the shift of the labor demand curve from D1 to D2? a. The wage earned by automobile workers increased. b. The price of automobiles increased. c. The opportunity cost of leisure, as perceived by automobile workers, decreased. d. Large segments of the population changed their tastes regarding leisure versus work. 72. Figure 19-6
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Refer to Figure 19-6. Which of the following events would most likely explain a shift of the labor demand curve from D2 back to D1? a. The price of automobiles decreased. b. A large number of immigrants entered the automobile-worker market. c. A technological advance increased the marginal product of automobile workers. d. The demand for automobiles increased. 73. Suppose that the market for labor is initially in equilibrium. An increase in the price of output will cause the equilibrium wage a. and the equilibrium quantity of labor to rise. b. and the equilibrium quantity of labor to fall. c. to rise and the equilibrium quantity of labor to fall. d. to fall and the equilibrium quantity of labor to rise. 74. Consider the labor market for computer programmers. During the late 1990s, the value of the marginal product of all computer programmers increased dramatically. Holding all else equal, what effect did this process have on the labor market for computer programmers? The equilibrium wage a. increased, and the equilibrium quantity of labor increased. b. increased, and the equilibrium quantity of labor decreased. c. decreased, and the equilibrium quantity of labor increased. d. decreased, and the equilibrium quantity of labor decreased. 75. Scenario 19-6 .
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Ch 19: The Markets for the Factors of Production Suppose the following events occur in the market for university economics professors. Event 1: A recession in the U.S. economy lowers the opportunity cost of going to graduate school in economics to become a university economics professor. Event 2: An increasing number of students in U.S. primary and secondary schools increases the number of students entering college, increasing the output price of university economics professors’ services. Refer to Scenario 19-6. As a result of these two events, holding all else constant, the equilibrium wages of university economics professors will a. increase. b. decrease. c. not change. d. not be able to be determined without more information. 76. Scenario 19-6 Suppose the following events occur in the market for university economics professors. Event 1: A recession in the U.S. economy lowers the opportunity cost of going to graduate school in economics to become a university economics professor. Event 2: An increasing number of students in U.S. primary and secondary schools increases the number of students entering college, increasing the output price of university economics professors’ services. Refer to Scenario 19-6. As a result of these two events, holding all else constant, the equilibrium quantity of university economics professors will a. increase. b. decrease. c. not change. d. not be able to be determined without more information. 77. Consider the labor market for short-order cooks. A labor-augmenting technological change such as a faster food processor will cause a. both equilibrium wages and equilibrium employment to increase. b. both equilibrium wages and equilibrium employment to decrease. c. equilibrium wages to increase and equilibrium employment to decrease. d. equilibrium wages to decrease and equilibrium employment to increase. 78. Assume the market for candles is competitive. A decrease in the market price of candles a. decreases the demand for workers who make candles and decreases their equilibrium wage. b. decreases the demand for workers who make candles and increases their equilibrium wage. c. increases the demand for workers who make candles and decreases their equilibrium wage. d. increases the demand for workers who make candles and increases their equilibrium wage. 79. Suppose the wage earned by pear pickers suddenly rises. Which of the following effects would we most likely observe as a result? a. The supply of apple pickers would decrease and the equilibrium wage of apple pickers would decrease. b. The supply of apple pickers would decrease and the equilibrium wage of apple pickers would increase. c. The demand for apple pickers would increase and the equilibrium wage of apple pickers would decrease. .
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Ch 19: The Markets for the Factors of Production d. The demand for apple pickers would decrease and the equilibrium wage of apple pickers would decrease. 80. If one were to consider a university as a business, the computers in the computer labs would be regarded by economists as a. technology flows. b. mechanization flows. c. part of the university's stock of capital. d. a flow of services from the university's stock of capital. 81. Consider the market for capital equipment. Suppose the price of firms' output increases. Holding all else constant, the equilibrium rental price of capital equipment will a. increase. b. decrease. c. not change. d. not be able to be determined without more information. 82. Consider the market for capital equipment. Suppose the market price of firms' output decreases. Holding all else constant, the equilibrium quantity of capital equipment will a. increase. b. decrease. c. not change. d. not be able to be determined without more information. 83. The demand curve for capital a. is vertical. b. is horizontal. c. is derived from households' decisions concerning saving and spending. d. reflects the marginal productivity of capital. 84. Consider the market for capital equipment. Suppose the value of the marginal product of capital equipment increases. Holding all else constant, the equilibrium rental price of capital equipment will a. increase. b. decrease. c. not change. d. not be able to be determined without more information. 85. Figure 19-7
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Refer to Figure 19-7. Suppose the intersection of the supply and demand curves matches with a value of $200 on the vertical axis. Then a. the marginal product of capital is 200. b. the value of the marginal product of capital is $200. c. a unit of capital can be purchased for $200. d. each worker in markets that produce capital goods earns a wage of $200. 86. The wage is to the labor market as the a. rental price of capital is to the capital market. b. purchase price of capital is to the capital market. c. supply of land is to the land market. d. demand for land is to the land market. 87. Suppose that a violent earthquake causes the uninhabited Hawaiian island of Mokuauia (also called Goat Island) to fall into the Pacific Ocean. No people are killed or injured, and since the island is undeveloped, no buildings are destroyed. The island was a source of tourist income for Hawaiian landowners. Which of the following statements correctly describes the rents earned by the people who own land on the surrounding islands? a. As the supply of vacation land decreases, the marginal productivity of the remaining land will decrease; thus rents will decrease. b. As the supply of vacation land decreases, the marginal productivity of the remaining land will increase; thus, rents will decrease. c. As the supply of vacation land decreases, the marginal productivity of the remaining land will increase; thus, rents will increase. d. There would be no change in the rents earned by the other landowners because the effects of supply and .
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Ch 19: The Markets for the Factors of Production demand would exactly cancel each other out. 88. The rental price of land is a. the price paid for ownership of the land. b. the price paid for the flow of services from land over a specified time period. c. always more than the purchase price. d. the cost of building rental properties on land. 89. As a result of a labeling mistake at the chemical factory, a farmer accidentally sprays weedkiller rather than fertilizer on half their land. As a result, they lose half of their productive farmland. If the property of diminishing returns applies to all factors of production, they should expect to see a. an increase in the marginal productivity of their remaining land and an increase in the marginal productivity of their labor. b. an increase in the marginal productivity of their remaining land and a decrease in the marginal productivity of their labor. c. a decrease in the marginal productivity of their remaining land and an increase in the marginal productivity of their labor. d. a decrease in the marginal productivity of their remaining land and a decrease in the marginal productivity of their labor. 90. Consider the market for land. Suppose the value of the marginal product of land decreases. Holding all else constant, the equilibrium rental price for land will a. increase. b. decrease. c. not change. d. not be able to be determined without more information. 91. Rent, interest, and profit are all forms of income paid to the owners of a. aggregate stock. b. aggregate demand. c. firms and not-for-profit organizations. d. land and capital. 92. Because of diminishing returns, a factor in abundant supply has a a. high marginal product and a high rental price. b. high marginal product and a low rental price. c. low marginal product and a high rental price. d. low marginal product and a low rental price. 93. "The firm hires the factor up to the point where the value of the factor's marginal product is equal to the factor's price." This statement applies to which factor of production? a. Labor only b. Land only c. Capital only d. Land, labor, and capital .
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Ch 19: The Markets for the Factors of Production 94. As a result of a fire, a small business owner loses some of their computers and other equipment. If the property of diminishing returns applies to all factors of production, they should expect to see a. an increase in the marginal productivity of their remaining capital and an increase in the marginal productivity of their labor. b. an increase in the marginal productivity of their remaining capital and a decrease in the marginal productivity of their labor. c. a decrease in the marginal productivity of their remaining capital and an increase in the marginal productivity of their labor. d. a decrease in the marginal productivity of their remaining capital and a decrease in the marginal productivity of their labor. 95. Suppose that an industrial accident at a factory destroys a significant number of high-speed blenders that bartenders use to mix frozen drinks. What will happen in the labor market for bartenders? a. Both wages and employment will increase. b. Both wages and employment will decrease. c. Wages will increase, and employment will decrease. d. Wages will decrease, and employment will increase. 96. Which of the following statements is correct? a. The market for capital is unlike the market for labor because the rental price of capital is unaffected by the marginal product of capital, whereas the price of labor is affected by the marginal product of labor. b. The market for capital is unlike the market for labor because the purchase price of capital is unaffected by the marginal product of capital, whereas the price of labor is affected by the marginal product of labor. c. The market for capital is like the market for labor because the rental price of capital is affected by the marginal product of capital, and the price of labor is affected by the marginal product of labor. d. Neither the market for capital nor the market for labor is affected by the marginal product of capital or the marginal product of labor. 97. Suppose that a college physics experiment goes horribly wrong and releases an electronic pulse that renders all electronic equipment in the cities of Columbus, Cleveland, and Cincinnati in Ohio permanently useless. No people are hurt, and no buildings are damaged. After the accident, the wages earned by Ohio workers will a. increase because the marginal productivities of Ohio workers will increase. b. decrease because the marginal productivities of Ohio workers will decrease. c. decrease because the marginal productivities of Ohio workers will increase. d. increase because the marginal productivities of Ohio workers will decrease. 98. A decrease in population can be expected to a. increase the marginal product of land. b. decrease the supply of land. c. decrease the rents on land. d. increase the demand for land. 99. Suppose that a rare virus infects and kills a significant percentage of the population. Assuming that land and labor are complements in a farming production function, what would happen to the wages earned by workers and the rents earned by landowners? a. Both wages and rents would increase. .
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Ch 19: The Markets for the Factors of Production b. Both wages and rents would decrease. c. Wages would increase, and rents would decrease. d. Wages would decrease, and rents would increase. 100. A change in the supply of one factor of production a. can alter the earnings of all of the other factors. b. alters the earnings of capital and labor but not land. c. will not change the marginal productivities of other factors but may change their prices. d. alters the earnings of that factor only.
Indicate whether the statement is true or false. 101. A firm’s demand for labor is derived from its decision to supply a good in another market. a. True b. False 102. In 2015, the total income of all U.S. residents was approximately $16 billion. a. True b. False 103. In 2015, the total income of all U.S. residents was approximately $16 trillion. a. True b. False 104. Land, labor, and capital are examples of factors of production. a. True b. False 105. Stock dividends and interest payments are examples of factors of production. a. True b. False 106. The quantity available of one factor of production can affect the marginal product of other factors. a. True b. False 107. If the marginal productivity of the sixth worker hired is less than the marginal productivity of the fifth worker hired, then the addition of the sixth worker causes total output to decline. a. True b. False 108. Let L represent the quantity of labor, and let Q represent the quantity of output. Suppose a certain production function includes the points (L = 7, Q = 27), (L = 8, Q = 35), and (L = 9, Q = 45). Based on these three points, this production function exhibits diminishing marginal product. a. True b. False .
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Ch 19: The Markets for the Factors of Production 109. If a firm is able to charge a higher price for its output, all else equal, the value of the marginal product of labor will decrease to offset the higher price. a. True b. False 110. Daryn is raking leaves to earn money for his university’s economics club. In the first hour, he rakes 8 bags of leaves. In the second hour, he rakes 6 bags of leaves. If he earns $8 per hour, the value of the marginal product of the second hour of labor is $48. a. True b. False 111. Daryn is raking leaves to earn money for his university’s economics club. In the first hour, he rakes 8 bags of leaves. In the second hour, he rakes 6 bags of leaves. If he earns $8 per hour, the value of the marginal product of the second hour of labor is $16. a. True b. False 112. In a competitive market for labor, the equilibrium wage always equals the value of the marginal product. a. True b. False 113. In order to calculate the value of the marginal product of labor, a manager must know the marginal product of labor and the wage rate of the worker. a. True b. False 114. The value of the marginal product of labor can be calculated as the price of the final good minus the marginal product of labor. a. True b. False 115. The value of the marginal product of capital can be calculated as the market price of the good multiplied by the marginal product of capital. a. True b. False 116. For competitive firms, the curve that represents the value of marginal product of labor is the same as the demand for labor curve. a. True b. False 117. A profit-maximizing competitive firm will hire workers up to the point at which the wage equals the price of the final good. a. True b. False .
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Ch 19: The Markets for the Factors of Production 118. A profit-maximizing competitive firm will hire workers up to the point at which the wage equals the marginal product of labor. a. True b. False 119. When a competitive firm hires labor up to the point at which the value of the marginal product of labor equals the wage, it also produces up to the point at which the price of output equals average variable cost. a. True b. False 120. The demand for computer programmers is inseparably tied to the supply of computer software. a. True b. False 121. If Firm X is a competitive firm in the market for labor, it has little influence over the wage it pays its employees. a. True b. False 122. The idea that rational employers think at the margin is central to understanding how many units of labor they choose to employ. a. True b. False 123. Technological advances can cause the labor demand curve to shift. a. True b. False 124. In the United States, technological advances help explain persistently rising employment in the face of rising wages. a. True b. False 125. Labor-saving technological advances increase the marginal productivity of labor. a. True b. False 126. Labor-augmenting technological advances increase the marginal productivity of labor. a. True b. False 127. An increase in the output price will increase the firm’s demand for labor, all else equal. a. True b. False 128. Labor-saving technological advances decrease the marginal productivity of labor. a. True b. False .
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Ch 19: The Markets for the Factors of Production 129. Labor-augmenting technological advances decrease the marginal productivity of labor. a. True b. False 130. An increase in a product’s price will shift the labor demand curve for workers who produce that product to the left. a. True b. False 131. From 1960 to 2015, inflation-adjusted wages increased by 165 percent in the U.S., and yet firms more than doubled the amount of labor they employed. a. True b. False 132. An increase in the wages paid to high-school student who detassle corn will increase the labor supply of high-school students who weed soybean fields, all else equal. a. True b. False 133. The labor-supply curve is affected by the trade-off between labor and leisure. a. True b. False 134. The opportunity cost of leisure is impossible to measure because we cannot measure leisure time in dollars. a. True b. False 135. The labor supply curve reflects how workers' decisions about the labor-leisure tradeoff respond to changes in the opportunity cost of leisure. a. True b. False 136. Ellen receives a raise at her current part-time job from $8 to $10 per hour. If her labor supply curve is upward sloping, she will work fewer hours after receiving the pay raise. a. True b. False 137. Jessica receives a raise at her current part-time job from $9 to $11 per hour. If her labor supply curve is backward sloping, she will work fewer hours after receiving the pay raise. a. True b. False 138. Labor supply curves are always upward sloping. a. True b. False 139. When an individual’s income goes up, that individual may choose to supply less labor, resulting in a backward.
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Ch 19: The Markets for the Factors of Production sloping labor supply curve. a. True b. False 140. The supply of labor in any one market depends on the opportunities available in other markets. a. True b. False 141. Movements of workers from country to country can cause shifts in the labor supply curves for both countries. a. True b. False 142. If the demand for labor in a particular industry increases, the equilibrium wage in that industry will also increase. a. True b. False 143. An increase in immigration will lower the equilibrium wage, all else held constant. a. True b. False 144. As the number of concrete workers in the United States falls, the wage paid to the remaining concrete workers will necessarily fall as well. a. True b. False 145. If men’s preferences for work change such that more men want to be stay-at-home fathers, the wages paid to men who remain in the workplace would rise, all else equal. a. True b. False 146. Oil field workers' wages are directly tied to the world price of oil. a. True b. False 147. Changes in supply and demand in the labor market will cause changes in wages. a. True b. False 148. In general, less productive workers are paid less than more productive workers. a. True b. False 149. If the demand for labor decreases and the supply of labor is unchanged, then the opportunity cost of leisure will decrease. a. True b. False .
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Ch 19: The Markets for the Factors of Production 150. Profit maximization by firms ensures that the equilibrium wage always equals the value of the marginal product of capital. a. True b. False 151. Increases in productivity are not responsible for increased standards of living in the United States. a. True b. False 152. Average productivity can be measured as total output divided by total units of labor. a. True b. False 153. For a snow-removal business, the capital stock would include inputs such as snow blowers and shovels. a. True b. False 154. When a firm decides to retain its earnings instead of paying dividends, the stockholders necessarily suffer. a. True b. False 155. Capital owners are compensated according to the value of the marginal product of that capital. a. True b. False 156. If the output price of a product rises, the demand for capital will increase, raising the rental price of capital. a. True b. False 157. Suppose the supply of capital decreases. As a result, the quantity of capital used in production and the rental price of capital will both fall. a. True b. False 158. The rental price of capital is the price a person pays to own the capital indefinitely. a. True b. False 159. Capital income does not include income paid to households for the use of their capital. a. True b. False 160. Firms pay out a portion of their earnings in the form of interest and dividends, and those payments are a portion of the economy's capital income. a. True .
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Ch 19: The Markets for the Factors of Production b. False 161. The marginal product of land depends on the quantity of land that is available. a. True b. False 162. Suppose an influenza pandemic were to significantly decrease the population of a country. We would predict a decrease in the marginal product of land in that country. a. True b. False 163. For profit-maximizing competitive firms, the demand curve for each factor of production equals the value of the marginal product of that factor. a. True b. False 164. An event that changes the supply of any factor of production can alter the earnings of all the factors. a. True b. False 165. A profit-maximizing competitive firm will hire workers up to the point at which the wage equals the price of the final good multiplied by the marginal product of the last worker hired. a. True b. False 166. Suppose Cassie's Candles is a profit-maximizing competitive firm. Cassie sells hand-made candles for $10 each. She will pay an hourly wage of $20 so long as the marginal productivity of a worker equals or exceeds two candles per hour. a. True b. False 167. Suppose that the "Millennial" generation values leisure more than past generations. We can expect a decrease in the labor supply as the Millennials enter their prime working ages. a. True b. False 168. Suppose that the "Millennial" generation values leisure more than past generations. We can expect a decrease in the labor supply as the Millennials enter their prime working ages and a corresponding decrease in wages. a. True b. False 169. Suppose that the "Millennial" generation values leisure more than past generations. We can expect a decrease in the labor supply as the Millennials enter their prime working ages and a corresponding increase in wages. a. True b. False 170. U.S. immigrants are less likely to be working than immigrants in other developed countries. a. True .
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Ch 19: The Markets for the Factors of Production b. False 171. The U.S. economy has been very successful in absorbing immigrants and putting them to work. a. True b. False 172. Growth in real wage rates is closely tied to growth in labor productivity. a. True b. False 173. A monopsony firm in a labor market hires fewer workers than would a competitive firm. a. True b. False 174. The value of the marginal product of capital can be calculated as the marginal product of capital multiplied by the cost of the capital input. a. True b. False 175. The marginal product of land depends only on the quantity of land available. a. True b. False
176. What are the three most important factors of production? 177. Why do we say that the demand for labor is a derived demand? 178. The demand for rocket scientists is inseparably linked to the supply of __________. 179. Restaurants’ demand for cooks and waiters is inseparably linked to the supply of __________. 180. A firm hires some number of custodians to clean a large warehouse. When only a few custodians are hired, they can quickly find and remove a lot of dust and debris. As the number of custodians increases, additional custodians have to go to greater lengths and spend more time to find and remove additional dust and debris. What property of production functions is relevant to the custodians’ situation? 181. What is the relationship between the marginal product of labor and the value of the marginal product of labor? 182. Does history suggest that most technological progress is labor-saving or labor-augmenting? 183. A competitive, profit-maximizing firm hires labor up to the point at which the wage is equal to the __________. 184. When a competitive firm hires labor up to the point at which the value of the marginal product of labor equals the wage, it also produces output up to the point at which marginal cost is equal to __________. 185. A competitive, profit-maximizing pays its workers a wage of $200 per day and it sells its output for $10 per unit. Determine the marginal product, on a daily basis, of the last worker hired. .
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Ch 19: The Markets for the Factors of Production 186. A competitive, profit-maximizing pays its workers a wage of $294 per day. The marginal product of the last worker is 35 units of output. What is the firm’s marginal cost of producing its last unit of output? 187. What are the typical effects on the labor market of technological progress? 188. The substantial increases in output per worker over the last 50 or so years are largely explained by __________. 189. Figure 19-8 The figure shows the relationship between the number of mechanics hired and the number of car repairs performed per day at a car-repair shop.
Refer to Figure 19-8. The relationship depicted on the graph is called a _______ function. 190. Figure 19-8 The figure shows the relationship between the number of mechanics hired and the number of car repairs performed per day at a car-repair shop.
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Refer to Figure 19-8. The production process depicted on the graph exhibits _______ marginal product of labor. 191. Figure 19-8 The figure shows the relationship between the number of mechanics hired and the number of car repairs performed per day at a car-repair shop.
Refer to Figure 19-8. What is the marginal product of the third mechanic? 192. Figure 19-8 The figure shows the relationship between the number of mechanics hired and the number of car repairs performed per day at a car-repair shop. .
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Refer to Figure 19-8. What is the marginal product of the second mechanic? 193. Figure 19-8 The figure shows the relationship between the number of mechanics hired and the number of car repairs performed per day at a car-repair shop.
Refer to Figure 19-8. If the shop charges $150 per repair, then what is the value of the marginal product of the second mechanic? 194. Figure 19-8 The figure shows the relationship between the number of mechanics hired and the number of car repairs performed per day at a car-repair shop. .
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Refer to Figure 19-8. If the shop charges $120 per repair, then what is the value of the marginal product of the third mechanic? 195. Figure 19-8 The figure shows the relationship between the number of mechanics hired and the number of car repairs performed per day at a car-repair shop.
Refer to Figure 19-8. If the shop charges $150 per repair and pays each of its mechanics a wage of $700 per day, then what is the marginal profit of the second mechanic? 196. Figure 19-8 .
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Ch 19: The Markets for the Factors of Production The figure shows the relationship between the number of mechanics hired and the number of car repairs performed per day at a car-repair shop.
Refer to Figure 19-8. If the shop charges $120 per repair and pays each of its mechanics a wage of $400 per day, then what is the marginal profit of the third mechanic? 197. Figure 19-8 The figure shows the relationship between the number of mechanics hired and the number of car repairs performed per day at a car-repair shop.
Refer to Figure 19-8. Suppose the shop charges $125 per repair. Over what interval of wages, W, would the shop .
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Ch 19: The Markets for the Factors of Production maximize its profit by hiring exactly 4 mechanics? (Determine W1 and W2 such that W1 < W < W2 ). 198. Figure 19-8 The figure shows the relationship between the number of mechanics hired and the number of car repairs performed per day at a car-repair shop.
Refer to Figure 19-8. Suppose the shop pays each of its mechanics $210 per day. Over what interval of prices (that is, charges per car repair, P) would the shop maximize its profit by hiring exactly 3 mechanics? (Determine P1 and P2 such that P1 < P < P2 ). 199. How does technological advance affect the demand for labor? 200. Jen’s wage decreased, and she responded by enjoying more hours of leisure per day. Is Jen’s behavior consistent with an upward-sloping labor-supply curve? 201. Willie’s wage increased, and he responded by enjoying more hours of leisure per day. Is Willie’s behavior consistent with an upward-sloping labor-supply curve? 202. Over the last 60 or so years, the percentage of women with paid jobs has increased significantly. Is this increase in female employment associated with an increase in the demand for labor, or is it associated with an increase in the supply of labor? 203. The theory of labor supply is based on the trade-off between __________. 204. Bill is a laborer. What is the relationship between Bill’s wage and his opportunity cost of an hour of leisure? 205. Does an upward-sloping labor-supply curve mean that people respond to a decrease in the wage by enjoying more leisure or less leisure? 206. Who has a greater opportunity cost of leisure — a president of a major corporation or a babysitter? .
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Ch 19: The Markets for the Factors of Production 207. A highly-paid research scientist works 12 hours a day, while a common laborer works only 5 hours a day. Offer a likely explanation, using the concept of opportunity cost. 208. Over time, carpenters become aware of more attractive employment opportunities outside of carpentry. Does this development affect the demand for carpenters, or does it affect the supply of carpenters? 209. Does the movement of workers from other countries to the U.S. affect the demand for labor in the U.S., or does it affect the supply of labor in the U.S.? 210. Rob was the last worker hired by a firm that is competitive in the labor market. The labor market always is in equilibrium. Rob’s wage is $30 per hour. When Rob was hired, the firm’s output increased by 4 units per hour as a result. For what price does the firm sell its output? 211. Angie was the last worker hired by a firm that is competitive in the labor market. The labor market always is in equilibrium. The firm sells its output for $24 per unit. When Angie was hired, the firm’s output increased by 2 units per hour as a result. What is Angie’s hourly wage? 212. How does increased immigration affect the labor market? How would the equilibrium wage and the equilibrium quantity of labor be affected? 213. Suppose the prices of agricultural products such as corn and soybeans increase. What is the effect of these price increases on the marginal product of the 1,000th farm worker? What is the effect on the value of the marginal product of the 1,000th farm worker? 214. Define monopsony. 215. If a particular labor market were to convert from a competitive market to a monopsony, what effect would we expect on the number of workers hired? What effect would we expect on the wage paid to workers? 216. Over time, there have been technological advances in the production of radios. At the same time, it has become less popular to listen to radio. Taking these two events into account, what would be the likely effect on the wages of workers who manufacture radios? 217. Suppose a shift of the labor-demand curve results in an increase of $5 in the equilibrium wage. How does this shift affect the value of the marginal product of labor? 218. Suppose a shift of the demand curve for strawberry pickers causes the equilibrium wage of strawberry pickers to increase by $2. The price of strawberries is $3 per pound before and after the shift. Does the shift increase the marginal product of the last picker hired, or does it decrease it? What is the amount of the increase or decrease? 219. Christine works for a firm that makes tires for cars. How is Christine’s wage affected if the price of tires decreases? 220. Christine works for a firm that makes tires for cars. How is Christine’s wage affected if the demand for cars increases? 221. Economic theory predicts a close relationship between productivity and real wages. Does history confirm this relationship? 222. The U.S. economy experienced a significant slowdown in productivity growth that lasted from about 1973 to about __________. .
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Ch 19: The Markets for the Factors of Production 223. Suppose XYZ Corporation is currently renting 300 units of capital at a rental price of $500 units per unit. The value of the marginal product of the 300th unit of capital is $400. How can the corporation increase its profit? 224. The equilibrium purchase price of an acre of land depends upon the current value of the marginal product of land and upon the __________. 225. When you receive interest on your bank account, that income is part of the economy’s __________ income. 226. Describe the difference between a diminishing marginal product of labor and a negative marginal product of labor. Why would a profit-maximizing firm always choose to operate where the marginal product of labor is decreasing (but not negative)? 227. Explain how a firm values the contribution of workers to its profitability. Would a profit-maximizing competitive firm ever stop increasing employment as long as marginal product is rising? Explain your answer. 228. In the 1980s, the dangerous Ebola virus entered the United States through contaminated monkeys that were imported for use in medical experiments. Suppose this virus had not been contained but had spread to the general population. Assume that the virus is lethal in half of the people who are exposed to it. Describe the resulting effect on labor productivity. 229. Using the theory of wage determination, explain why wages in developing countries, where levels of capital are small, are typically quite low. 230. A recent flood in the Midwest has destroyed much of the farmland that lies in fertile regions near the rivers. Describe the effect of the flood on the marginal productivity of land, labor, and capital. How would the flood affect the price of inputs? Provide some examples. 231. Describe the process by which the market for capital and the market for land reach equilibrium. As part of your description, elaborate on the role of the stock of the resource versus the flow of services from the resource. 232. Describe the difference between the purchase price of capital and the rental price of capital. If you know the value of marginal product from the flow of capital services, how would you determine the market price for the capital stock?
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Ch 19: The Markets for the Factors of Production Answer Key 1. b 2. c 3. b 4. b 5. a 6. c 7. d 8. d 9. b 10. d 11. b 12. a 13. b 14. a 15. a 16. c 17. a 18. c 19. a 20. c 21. d 22. b 23. a 24. a 25. d .
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Ch 19: The Markets for the Factors of Production 26. c 27. b 28. b 29. c 30. c 31. c 32. b 33. b 34. c 35. a 36. b 37. c 38. d 39. b 40. a 41. a 42. a 43. a 44. a 45. a 46. b 47. a 48. a 49. d 50. d 51. b .
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Ch 19: The Markets for the Factors of Production 52. d 53. c 54. b 55. b 56. d 57. c 58. d 59. c 60. d 61. c 62. a 63. b 64. d 65. b 66. d 67. c 68. c 69. d 70. b 71. b 72. a 73. a 74. a 75. d 76. a .
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Ch 19: The Markets for the Factors of Production 77. a 78. a 79. b 80. c 81. a 82. b 83. d 84. a 85. b 86. a 87. c 88. b 89. b 90. b 91. d 92. d 93. d 94. b 95. b 96. c 97. b 98. c 99. c 100. a 101. True 102. False .
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Ch 19: The Markets for the Factors of Production 103. True 104. True 105. False 106. True 107. False 108. False 109. False 110. True 111. False 112. True 113. False 114. False 115. True 116. True 117. False 118. False 119. False 120. True 121. True 122. True 123. True 124. True 125. False 126. True 127. True .
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Ch 19: The Markets for the Factors of Production 128. True 129. False 130. False 131. True 132. False 133. True 134. False 135. True 136. False 137. True 138. False 139. True 140. True 141. True 142. True 143. True 144. False 145. True 146. True 147. True 148. True 149. True 150. False 151. False 152. True 153. True .
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Ch 19: The Markets for the Factors of Production 154. False 155. True 156. True 157. False 158. False 159. False 160. True 161. True 162. True 163. True 164. True 165. True 166. True 167. True 168. False 169. True 170. False 171. True 172. True 173. True 174. False 175. False 176. The three most important factors of production are labor, land, and capital. 177. A firm’s demand for labor (or for any factor of production) is derived from its decision to supply a good in another market. 178. rockets .
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Ch 19: The Markets for the Factors of Production 179. restaurant meals 180. The property is diminishing marginal product (of labor). 181. The value of the marginal product of labor (VMPL) is equal to the market price of output (P) multiplied by the marginal product of labor (MPL). 182. History suggests that most technological progress is labor-augmenting. 183. value of the marginal product of labor 184. the price of output 185. Using the profit-maximizing condition P X MPL = W, we have $10 X MPL = $200, so MPL = 20. 186. Using the profit-maximizing conditions P X MPL = W and P = MC, and P = MC, we have MC = W/MPL, so MC = $294 / 35 = $8.40. 187. Technological progress typically increases the marginal product of labor, which in turn increases the demand for labor. 188. technological progress 189. production 190. diminishing 191. The marginal product of the third mechanic is 15 - 12 = 3 repaired cars. 192. The marginal product of the second mechanic is 12 - 8 = 4 repaired cars. 193. The marginal product of the second mechanic is 12 - 8 = 4 repaired cars. The value of the marginal product of that mechanic is $150 X 4 = $600. 194. The marginal product of the third mechanic is 15 - 12 = 3 repaired cars. The value of the marginal product of that mechanic is $120 X 3 = $360. 195. The marginal product of the second mechanic is 12 - 8 = 4 repaired cars, implying a value of the marginal product of $150 X 4 = $600. Thus, the marginal profit of the second mechanic is $600 - $700 = $-100. 196. The marginal product of the third mechanic is 15 - 12 = 3 repaired cars, implying a value of the marginal product of $120 X 3 = $360. Thus, the marginal profit of the third mechanic is $360 - $400 = $-40. 197. The marginal product of the fourth mechanic is 17 - 15 = 2 repaired cars, implying a value of the marginal product of $125 X 2 = $250. The marginal product of the fifth mechanic is 18 - 17 = 1 repaired car, implying a value of the marginal product of $125 X 1 = $125. Thus, the shop would maximize its profit by hiring exactly 4 mechanics if and only if $125 < W < $250. 198. The marginal product of the third mechanic is 15 - 12 = 3 repaired cars, implying a value of the marginal product of 3P. The marginal product of the fourth mechanic is 17 - 15 = 2 repaired car, implying a value of the marginal product of .
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Ch 19: The Markets for the Factors of Production 2P. Thus, the shop would maximize its profit by hiring exactly 3 mechanics if and only if 2P < $210 < 3P , from which we obtain $70 < P < $105. 199. Technological advance typically raises the marginal product of labor, which in turn increases the demand for labor and shifts the labor-demand curve to the right. 200. Yes. Jen responded to the lower wage by working fewer hours and enjoying more hours of leisure per day. 201. No. If Willie’s labor-supply curve were upward-sloping, then, in response to the higher wage, Willie would work more hours and enjoy fewer hours of leisure per day. 202. The increase in female employment is associated with an increase in the supply of labor. 203. work and leisure 204. Bill’s wage is equal to his opportunity cost of an hour of leisure. 205. An upward-sloping labor-supply curve means that people respond to a decrease in the wage by enjoying more leisure. 206. The opportunity cost of leisure is higher for the corporate president than for the babysitter. 207. The wage (opportunity cost of leisure) is higher for the research scientist than for the common laborer, so the scientist takes less leisure than does the laborer. 208. The change in alternative opportunities affects the supply of carpenters. 209. The movement of workers affects the supply of labor in the U.S. 210. Since the labor market always is in equilibrium, W = P X MPL. For Rob, W = $30 and MPL = 4, so P = $7.50. 211. Since the labor market always is in equilibrium, W = P X MPL. We have P = $24 and MPL = 2, so W = $48. 212. Increased immigration increases the supply of labor. With the increased supply, the equilibrium wage would decrease and the equilibrium quantity of labor would increase. 213. The marginal product of the 1,000th farm worker is unaffected. The value of the marginal product of the 1,000th farm worker increases. 214. A monopsony is a market with one buyer. 215. We would expect the number of workers hired to decrease. We would expect the wage paid to workers to decrease as well. 216. The technological advances have the effect of increasing the demand for radio workers. The reduced popularity of radio listening has the effect of decreasing the demand for radio workers. Thus, the overall effect on radio workers’ wages is ambiguous. 217. The shift must increase the value of the marginal product of labor by $5 as well. 218. In equilibrium, P X MPL = W, so .
. Thus,
, implying
. The MPL Page 59
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Ch 19: The Markets for the Factors of Production increases by 2/3 of a pound of strawberries. 219. The decrease in the price of tires decreases the demand for workers such as Christine. Her wage decreases as a result. 220. The increase in the demand for cars increases the price of cars. In turn, the demand for workers such as Christine increases, and her wage increases as a result. 221. Yes. Data from 1959-2012 serve as an example. 222. 1995 223. In view of the fact that the VMPL of the last unit of capital rented is less than the rental price, the corporation can increase its profit by renting fewer units of capital. 224. value of the marginal product of land expected to prevail in the future 225. capital 226. Diminishing marginal product of labor means that the last worker hired contributes less to the total output of the firm than the worker who was hired just previous to her. Negative marginal product of labor suggests that the last person hired actually causes total output of the firm to decline. The firm evaluates the benefit of hiring (added revenue) versus the added cost of hiring (wage). In competitive markets, the cost and benefit converge only when marginal product declines. If the marginal product of labor is negative, hiring an additional worker would actually decrease revenue. A profitmaximizing firm would never choose to operate where marginal product is rising because hiring an additional worker would increase the “value” a worker contributes to the firm, while costs remain constant. Thus, the firm will choose to operate where marginal product of labor is decreasing. 227. A firm values the contribution of a worker by evaluating the worker's individual contribution to firm revenue. This is done by multiplying the worker’s marginal product by the output price received for his production. A profit-maximizing firm would never choose to operate where marginal product is rising because hiring an additional worker would increase the "value" a worker contributes to the firm and cost would remain constant. As such, value and cost diverge as long a marginal product is increasing, and it is always more profitable to continue to hire more workers. 228. There are two possible direct effects: One effect would be that people would be absent from work if they caught the virus (but did not die) and so marginal productivity would be higher for the remaining workers. The other effect is that people who caught the virus would die, the labor supply would decrease, and the remaining workers would have a higher marginal product of labor. While the marginal productivity of the remaining workers increases, total output would still fall. 229. Wages are determined by the value of workers to firms. In many developing countries, the level of capital is quite small, and so worker productivity is quite low. Workers are not able to contribute as much value to a firm as their counterparts in countries that have more capital to complement their labor efforts. Since marginal productivity is low, wages are low. 230. The flood would increase the marginal product of unflooded land, lower the marginal product of labor, and lower the marginal product of capital. As such, the price of unflooded land should rise, and the prices of both labor and capital should fall. 231. Equilibriums in the markets for land and capital are governed by the value of marginal product for these factors relative to their supply. One difference between these markets and the market for labor is that in land and capital markets there is both a rental value (flow) and purchase price (stock). The difference between the rental value and purchase price .
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Ch 19: The Markets for the Factors of Production is reconciled by noting that in efficient markets, the purchase price should reflect the value of the stream of services provided by the land or capital (or the sum of rental values appropriately discounted). 232. The purchase price of capital is a reflection of the flow of value in using that capital to produce goods and services over its life span. The rental price of capital is the period-specific contribution of capital to production of goods and services. The discounted present value of rental prices over the life of the capital equipment should be equal to its purchase price.
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Ch 20: Earnings and Discrimination
Indicate the answer choice that best completes the statement or answers the question. 1. When the supply of workers is plentiful, one would predict that market wages would be a. determined outside the domain of economic theory. b. determined solely by factors that affect demand. c. low, other things equal. d. high, other things equal. 2. Other things the same, we'd expect that a job with less pleasant working conditions pays a. more; this is known as an efficiency wage. b. more; this is known as a compensating differential. c. less; this is known as an efficiency wage. d. less; this is known as a compensating differential. 3. Wages of doctors tend to be higher than wages of bankers. Which of the following is not a compensating differential explaining the difference in wages? a. Doctors have the stress of being responsible for other peoples' lives, whereas bankers do not. b. Doctors are on call to work nights and weekends, whereas bankers work traditional business hours. c. Doctors must pay for malpractice insurance in case they are sued for a mistake on the job. d. Doctors have to pay hundreds of thousands of dollars for medical school in order to learn the necessary skills to become a doctor. 4. Construction work is much riskier than working as a server at a restaurant. As a result, we'd expect a difference in wages between the two jobs. The difference is known as a. an efficiency wage. b. a compensating differential. c. a wage adjustment. d. a minimum wage. 5. Suppose that a company hires recent college graduates for two types of jobs, sales people and credit analysts. The hours worked and skill levels are the same for both positions. The sales people get to travel to several desirable locations, whereas the credit analysts do not leave the home office. When comparing the salaries of the two positions, it is likely that the company pays the a. sales people less as a compensating differential. b. credit analysts less as a compensating differential. c. same salary for both positions because they require the same skill level. d. same salary for both positions because it would be illegal to do otherwise. 6. Chloe and Guilherme both work at the local factory producing cars. Chloe earns $22 per hour working the day shift, and Guilherme earns $25 per hour working the night shift. Chloe and Guilherme do the same job, have the same experience, and have the same level of education. This means that the a. higher-paying job has a compensating wage differential of $3 per hour. b. higher-paying job has a compensating wage differential of $25 per hour. c. higher-paying job is intrinsically more attractive than the lower-paying job. d. factory is discriminating against Chloe because she is a woman. .
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Ch 20: Earnings and Discrimination 7. Which of the following comparisons best illustrates a compensating differential? a. Sachi's wage is higher than Jake's because the value of Sachi's marginal product is higher than Jake's. b. Venya's wage is higher than Kay's because Venya is very personable, and Kay is very gruff. c. Celia's wage is higher than Will's because Celia's job may cause long-term health problems, and Will's job will not impair his health. d. Avery's wage is higher than Adam's because Avery obtained a college degree, whereas Adam decided to start working after high school. 8. Assuming that all other things are equal, including the wage, which of the following statements is correct? a. The quantity of labor supplied for difficult jobs exceeds that for easy jobs. b. The quantity of labor supplied for fun jobs exceeds that for dull jobs. c. The quantity of labor supplied for dangerous jobs exceeds that for safe jobs. d. The quantity of labor supplied for dirty, outdoor jobs exceeds that for jobs in clean environments. 9. If government regulations make a certain job less dangerous, then we'd expect that the supply of labor for that job would a. increase, which by itself would raise the wage for that job. b. increase, which by itself would reduce the wage for that job. c. decrease, which by itself would raise the wage for that job. d. decrease, which by itself would reduce the wage for that job. 10. Who among the following individuals most likely experiences the largest nonmonetary reward as a supplier of labor? Assume all of the four individuals have the same level of education and work the same number of hours per week. a. Andrew, who prefers not to socialize and works at home by himself b. Aniyah, whose job provides little intellectual and personal satisfaction c. Antoinette, whose preference is to avoid dangerous work but works as a firefighter d. Amari, who works the night shift but would prefer to work during the day and sleep at night 11. Job A is hard, dull, and dangerous. Job B is easy, fun, and safe. All else equal, we would expect Job A to pay a. higher wages than Job B because the labor supplied for Job B will be greater. b. lower wages than Job B because the labor supplied for Job B will be greater. c. higher wages than Job B because the labor supplied for Job A will be greater. d. lower wages than Job B because the labor supplied for Job A will be greater. 12. Which of the following is an example of a compensating differential? a. Paying workers with more years of experience higher wages than workers with fewer years of experience, all else equal b. Paying workers who work on the day shift lower wages than workers who work the night shift, all else equal c. Paying accountants who have passed the Certified Public Accountant exam higher wages than accountants who have not passed it, all else equal d. Paying workers who have a higher educational attainment level higher wages than workers with less education, all else equal 13. Hanna and Metta are identical twins who attended elementary school through high school together. Hanna got a job after high school, and Metta got a job after graduating from college. Hanna earns $36,000 a year, and Metta earns $69,000 a year. Select the best explanation for this wage difference. .
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Ch 20: Earnings and Discrimination a. Hanna has less human capital than Metta. b. Metta has less human capital than Hanna. c. Hanna has received a compensating differential. d. Hanna is a member of a union. 14. The accumulation of investments in people, such as education and on-the-job training, is known as a. physical capital. b. human capital. c. efficiency wage. d. compensating differentials. 15. Which of the following is considered human capital? a. The ingredients a chef uses to prepare meals b. The pots and pans and other tools a chef uses to prepare meals c. The financial capital a chef uses to start his own restaurant d. The skills a chef learns when attending a class about cake decorating 16. Which of the following is an example of human capital for a college economics professor? a. Years of experience b. "Clickers" that interface with an in-class computer system and display the results of student "votes" c. Chalk d. Internet access in the classroom 17. After an employer pays the cost of educating a worker, the a. worker has a lower level of human capital. b. worker should become less productive. c. worker's value of the marginal product should decrease. d. worker might look for another job unless his employer pays him more. 18. The ownership of human capital a. is typically embodied in related physical capital. b. may be subject to government restrictions on transferability. c. is not easily transferable. d. often leads to lower wages. 19. Scenario 20-1 Ferris B., a student at a community college, is considering what he should do for summer employment. Two recruiters show up at his school in search of summer workers. Recruiter A is looking for lifeguards to patrol the beach at an exclusive island resort in the Caribbean. Recruiter B is looking for workers to staff positions at a summer youth camp. Refer to Scenario 20-1. Ferris is carefully considering the options that each recruiter presents. On the basis of knowledge obtained in his economics class, Ferris concludes that a. wages are unlikely to be affected by job requirements. b. since the lifeguard job would expose him to a threat of skin cancer, the wage will be low. c. if the lifeguard job has a requirement for special training or certification, the wage offer will be higher than .
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Ch 20: Earnings and Discrimination otherwise. d. if the lifeguard job also requires a willingness to clean public restrooms, the wage offer will be lower than otherwise. 20. Jill is the best eye surgeon in town, and she earns $350,000 a year. Sierra is an average eye surgeon in town, and she earns $100,000 a year. Jill's skills as a surgeon are a. valued more by the market relative to Sierra's and that explains why her income is higher than Sierra's. b. valued less by the market relative to Sierra's and that explains why her income is higher than Sierra's. c. valued less by the market relative to Sierra's and that explains why her income is lower than Sierra's. d. more expensive because she receives a compensating differential. 21. A recent law school graduate is considering two offers to practice law, one in New York and the other in Illinois. The New York bar exam is very difficult to pass compared with Illinois's exam. Assuming all other things equal, the attorney would expect a. to be unable to predict the wage difference between Illinois and New York. b. to make a lower wage in New York. c. to make a lower wage in Illinois. d. wages in Illinois and New York to be identical. 22. In recent years, the ratio of earnings of the typical U.S. college graduate to the earnings of the typical high school graduate without additional education has a. risen as the demand for skilled labor has increased relative to the demand for unskilled labor. b. risen as the demand for skilled labor has decreased relative to the demand for unskilled labor. c. fallen as the demand for skilled labor has increased relative to the demand for unskilled labor. d. fallen as the demand for skilled labor has decreased relative to the demand for unskilled labor. 23. Some economists hypothesize that international trade has altered the relative demand for skilled and unskilled labors, changing the gap in earnings between these two groups. Which of the following statements best describes this hypothesis? a. Unskilled labor is plentiful and cheap in the United States, so the United States tends to export goods produced with unskilled labor and import goods produced with skilled labor. b. Unskilled labor is plentiful and cheap in many foreign countries, so the United States tends to import goods produced with unskilled labor and export goods produced with skilled labor. c. Computers raise the demand for skilled workers and reduce the demand for the unskilled workers whose jobs are replaced by the computers. d. Greater demand for skilled labor has led to higher wages for those workers and greater demand for imported products. 24. Economists who attempt to explain the increasing earnings gap between skilled and unskilled workers offer two main hypotheses: a. one hypothesis emphasizes education, and the other emphasizes compensating differentials. b. one hypothesis emphasizes education, and the other emphasizes international trade. c. one hypothesis emphasizes international trade, and the other emphasizes technology. d. one hypothesis emphasizes technology, and the other emphasizes compensating differentials. 25. Which of the following scenarios would serve to decrease the demand for unskilled labor in the United States? a. Increased productivity gains among unskilled laborers .
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Ch 20: Earnings and Discrimination b. Increased demand for goods produced by unskilled laborers c. Increased international trade with countries where unskilled labor is more plentiful d. Increased supply of migrant workers 26. Which of the following could explain the changing gap in income between unskilled and skilled workers in the United States? a. International trade has decreased the domestic demand for skilled labor and increased the domestic demand for unskilled labor. b. Certain technological changes such as the introduction of computers have increased the domestic demand for skilled labor and decreased the domestic demand for unskilled labor. c. The average educational attainment of an unskilled worker continues to increase. d. There is greater domestic demand for unskilled labor compared to skilled labor. 27. The difference in wages paid to major-league baseball players and minor-league baseball players is most likely due to a. differences in chance. b. differences in natural ability. c. the fact that the players' union is strong. d. a compensating differential. 28. Certain factors that are probably important in determining wages are nevertheless difficult to measure. Consequently, labor economists find those factors difficult to incorporate into their studies of labor markets and wages. Those factors include a. effort and natural ability. b. natural ability and years of experience. c. years of experience and job characteristics. d. race and job characteristics. 29. Tia and Eric went to trade school at the same time. Each graduated with an associate's degree. They have received similar performance evaluations. Eric's employer is not a good business manager, and the sales manager lost a major deal. Because of the decrease in profits, the employees did not receive raises last year. Tia's employer is a savvy business manager and the sales manager is experienced and works hard. If Tia has higher earnings than Eric, the difference is most likely a function of a. chance. b. differences in human capital. c. differences in signaling. d. discrimination. 30. The "beauty premium" can be explained by the fact that a. marginal productivity in all occupations has a physical dimension. b. in some occupations, physical attractiveness of workers may enhance the value of their marginal product. c. beauty acts as an implicit signal of innate intelligence. d. beautiful people have higher fertility rates. 31. Which theory is supportive of the idea that increasing educational levels for all workers would raise all workers' productivity and therefore their wages? a. The theory of compensating differentials .
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Ch 20: Earnings and Discrimination b. The efficient-market hypothesis c. Human-capital theory d. Signaling theory 32. The human-capital theory explanation for why people invest in education has been challenged by a theory that suggests a. schooling acts only as a signal of ability. b. humans cannot be considered "capital." c. productivity is not linked to wages. d. ability, effort, and chance matter more. 33. When employers sort employment applications into high-ability and low-ability people based on whether or not the applicant has a college degree (irrespective of major), they are providing evidence in support of the a. human-capital theory of education. b. signaling theory of education. c. principle that education reduces marginal productivity. d. principle that most business owners are more interested in discriminating against a particular group than in maximizing profits. 34. Which of the following examples best describes the signaling theory of education? a. The hiring manager offers a job to a recent college graduate because they are more beautiful than the rest of the applicants. b. The hiring manager offers a job to a recent college graduate because they are expected to be more productive than other applicants due to their educational attainment. c. The hiring manager offers a job to a recent college graduate because the hiring manager has a bias toward people with college degrees. d. The hiring manager offers a job to a recent college graduate because education is correlated with natural ability. 35. According to the human-capital view, education a. has no effect on lifetime earnings. b. alters work ethic. c. enhances productivity. d. is an indicator of natural ability. 36. According to the signaling view, education a. has no effect on lifetime earnings. b. alters work ethic. c. enhances productivity. d. is an indicator of natural ability. 37. Suppose that the country of Libraria made a concerted effort to increase the educational level of its people. If this effort had no effect on the wages of its workers, one might consider this as evidence in support of a. only the human-capital view of education. b. only the signaling view of education. .
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Ch 20: Earnings and Discrimination c. both the human-capital and the signaling view of education. d. neither the human-capital nor the signaling view of education. 38. According to the signaling theory of education, better-educated workers a. are likely to be high-ability workers. b. improve their marginal productivity through education. c. are in scarce supply in less-developed countries. d. can only find low-skilled jobs due to technology. 39. If the signaling theory of education is correct, a. workers with more years of formal schooling will earn less than workers with fewer years of formal schooling. b. additional years of formal schooling do not increase a worker's productivity. c. workers with more years of formal schooling are less likely to be affected by ability, effort, and chance. d. men are more likely to earn more than women because men are more likely to have graduated from college. 40. Jake and Levi have 130 hours of college credit each from Impressive University. Each has 30 hours of economics. Jake has a bachelor's degree, whereas Levi is three credits short of required physical education classes and therefore does not have a degree. Each of them has one year of experience as a market analyst for ABC Company. Assuming that the physical education class would not enhance Levi's job performance, if Jake earns a higher salary than Levi, the ABC Company may subscribe to the a. human-capital theory. b. discrimination theory. c. compensating differential theory. d. signaling theory. 41. Maria has just graduated from Princeton University and has applied for a job at a major bank. The bank decides to offer Maria a job because they perceive her degree from Princeton to be an indication of her high-ability. To which of the following views of education does the bank subscribe? a. Signaling b. Human-capital view c. Superstar phenomenon d. Benefits of beauty 42. For a "superstar" to emerge, it must be the case that a. it is possible to supply the good or service that the superstar produces at low cost to every customer. b. some customers are willing and able to pay large sums of money to enjoy the good or service provided by the superstar. c. the superstar has a natural monopoly on their good or service. d. the superstar can become sufficiently popular to earn income from advertisements. 43. Suppose that Philip is the best contractor in town, and he makes $400,000 a year. Suppose that Saoirse Ronan is the best and highest paid actress in Hollywood, and she makes $13 million per movie. Both are the best in their respective fields of work. One reason for the significant difference in incomes has to do with the nature of the service each offers. Philip's contracting services a. can be provided to an unlimited number of customers in a year, but Saoirse's work is sold to only a few individuals in a year. .
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Ch 20: Earnings and Discrimination b. can only be provided to a limited number of customers in a year, but Saoirse's work is sold to millions of individuals in a year—i.e., to anyone who has the willingness and ability to pay for admission to her movies. c. can be provided to an unlimited number of customers in a year, and Saoirse's work is sold to millions of individuals in a year—i.e., to anyone who has the willingness and ability to pay for admission to her movies. d. can only be provided to a limited number of customers in a year, and Saoirse's work is sold to only a few individuals in a year. 44. Dr. Benson is regarded as, by far, the best dentist in his part of the country, yet his income is not significantly higher than the average income for a dentist in his area. In contrast, Bo Johnson, the best baseball player in that region, earns five times the average salary of all baseball players. The most likely explanation is that a. the widespread perception that Dr. Benson is a great dentist is, in fact, incorrect. b. the baseball players' union is more powerful than the professional association of dentists. c. Bo Johnson, unlike Dr. Benson, can provide his services to millions of people simultaneously. d. chance plays a role in determining people's incomes, resulting in earnings discrepancies that are hard to explain or justify. 45. Sometimes wages are set above the equilibrium level when firms pay a. workers with more seniority higher wages than newly hired workers. b. efficiency wages to reduce turnover. c. compensating differentials to workers who work the night shift. d. more attractive salespeople higher wages than less attractive salespeople. 46. Effective minimum-wage laws will most likely a. increase demand for labor. b. create a surplus of labor. c. increase incomes for all unskilled workers. d. decrease incomes for all unskilled workers. 47. Which of the following is the most likely outcome of raising the minimum wage? a. An increase in both the quantity of labor supplied by workers and the quantity of labor demanded by firms b. An increase in the quantity of labor supplied by workers and a decrease in the quantity of labor demanded by firms c. A decrease in the quantity of labor supplied by workers and an increase in the quantity of labor demanded by firms d. A decrease in both the quantity of labor supplied by workers and the quantity of labor demanded by firms 48. Figure 20-1
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Refer to Figure 20-1. If the minimum wage in this market is $8, then a. employment is 10 million. b. employment is 12 million. c. there is a surplus of 1 million workers. d. there is a surplus of 3 million workers. 49. Figure 20-1
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Refer to Figure 20-1. Suppose the local labor market was in equilibrium to begin with but then the largest local employer decided to change its compensation scheme to $8. Which of the following compensation schemes could the graph be illustrating? a. An efficiency wage b. Discrimination c. A compensating differential d. The superstar phenomenon 50. Figure 20-1
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Refer to Figure 20-1. What is the change in employment of having the minimum wage at $8 instead of $7? a. Two million jobs are gained. b. No jobs are gained or lost. c. One million jobs are lost. d. Three million jobs are lost. 51. Figure 20-2
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Refer to Figure 20-2. This figure depicts labor demand and supply in a nonunionized labor market. The original equilibrium wage is $10. If a labor union subsequently establishes a union shop and negotiates an hourly wage of $12.50, then there will be an excess a. demand of 100 workers. b. demand of 300 workers. c. supply of 100 workers. d. supply of 300 workers. 52. Figure 20-2
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Refer to Figure 20-2. This figure depicts labor demand and supply in a nonunionized labor market. The original equilibrium is at $10. If a labor union subsequently establishes a union shop and negotiates an hourly wage of $12.50, then employment is a. 500. b. 600. c. 700. d. 800. 53. Figure 20-2
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Refer to Figure 20-2. This figure depicts labor demand and supply in a nonunionized labor market. If the minimum wage were $7.50, employment in this market would be a. 400. b. 500. c. 600. d. 700. 54. Figure 20-3
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Refer to Figure 20-3. Suppose the manufacturing labor market, which is nonunionized, is in equilibrium at a wage equal to $25. Suppose now that the AFL-CIO (a labor organization) organizes the workers in the manufacturing market and negotiates a wage of $30 per hour. Because of the union, a. 80 people who were once employed are now unemployed. b. 40 people who were once employed are now unemployed. c. 80 people who were once unemployed are now employed. d. 40 people who were once unemployed are now employed. 55. Figure 20-3
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Refer to Figure 20-3. Suppose the manufacturing labor market, which is nonunionized, is in equilibrium at a wage equal to $25. Suppose now that the AFL-CIO (a labor organization) organizes the workers in the manufacturing market and negotiates a wage of $30 per hour. After the workers become unionized, how many workers do manufacturing firms collectively hire? a. 160 workers b. 200 workers c. 240 workers d. There is not enough information to determine the number of workers. 56. Figure 20-4
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Refer to Figure 20-4. If a union is successful in reducing supply from S1 to S2, the wage will a. rise from $15 per hour to $18 per hour and 100 fewer people will be employed. b. rise from $15 per hour to $18 per hour and 200 more people will be employed. c. fall from $15 per hour to $12 per hour and 100 more people will be employed. d. fall from $18 per hour to $15 per hour and 200 fewer people will be employed. 57. Figure 20-5
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Refer to Figure 20-5. Given demand for labor, D1, and supply of labor, S1, what are the equilibrium wage and quantity of labor? a. $5 and 250 b. $6 and 200 c. $8 and 100 d. $8 and 400 58. Figure 20-5
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Refer to Figure 20-5. Given demand for labor, D1, and supply of labor, S1, what is the quantity demanded of labor if a minimum wage of $8 per hour is imposed on this market? a. 100 b. 200 c. 300 d. 400 59. Figure 20-5
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Refer to Figure 20-5. Given demand for labor, D1, and supply of labor, S1, what is the surplus of labor if a minimum wage of $8 per hour is imposed on this market? a. 100 b. 200 c. 300 d. 400 60. Figure 20-5
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Refer to Figure 20-5. Given demand for labor, D1, and supply of labor, S2, what is the surplus of labor if a minimum wage of $8 per hour is imposed on this market? a. 100 b. 200 c. 300 d. 400 61. Figure 20-5
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Refer to Figure 20-5. Given demand for labor, D1, and supply of labor, S2, which of the following could be considered an efficiency wage? a. $4 b. $5 c. $6 d. $7 62. The idea of paying workers an efficiency wage is that a. employers will find it profitable to hire more workers. b. workers receive wages consistent with their specific compensating differentials. c. workers and management gain at the expense of the stockholders of the company. d. workers have the incentive to work harder, thus increasing their marginal productivity. 63. Offering different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics is called a. a compensating differential. b. an efficiency wage. c. discrimination. d. compensating variation. 64. Which of the following represents an example of labor-market discrimination? a. An employer is more likely to grant an interview to a person graduating from Yale than from the local community college. .
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Ch 20: Earnings and Discrimination b. An employer is more likely to grant an interview to a person graduating from the local community college than from Yale. c. An employer is more likely to grant an interview to a woman with a traditionally "white" name such as Emily than to a woman with a traditionally "black" name such as Lakisha. d. An employer is as likely to grant an interview to a person with a traditionally "masculine" name such as "Alex" as a person with a traditionally "feminine" name such as "Emily." 65. Figure 20-6
Refer to Figure 20-6. This figure depicts labor demand and supply for the widget industry. The equilibrium market wage is $15. If a labor union forms within the widget industry and subsequently negotiates an hourly wage of $20.00, then there will be an a. excess demand of 50 labor hours. b. excess demand of 20 labor hours. c. excess supply of 20 labor hours. d. excess supply of 50 labor hours. 66. Figure 20-6
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Refer to Figure 20-6. This figure depicts labor demand and supply for the widget industry. The market equilibrium wage is $15. If the minimum wage in the economy is $10, how many hours of labor will be demanded from firms in the widget industry? a. 0 b. 10 c. 60 d. 90 67. Figure 20-6
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Refer to Figure 20-6. This figure depicts labor demand and supply for the widget industry. The equilibrium market wage is $15. Suppose a labor union forms and subsequently negotiates an hourly wage of $20.00. Which of the following statements about the impact of the union's formation on labor hours demanded is true? a. Labor hours demanded by widget firms will decrease by 20 hours. b. Labor hours demanded by widget firms will decrease by 30 hours. c. Labor hours demanded by widget firms will increase by 20 hours. d. Labor hours demanded by widget firms will increase by 30 hours. 68. Figure 20-6
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Refer to Figure 20-6. This figure depicts labor demand and supply for the widget industry. The equilibrium market wage is $15. Suppose a labor union forms and subsequently negotiates an hourly wage of $25.00. Which of the following statements is true? a. Widget workers benefit from having a higher wage. b. Widget firms benefit from receiving a higher profit. c. Widget firms will not hire any workers as a result. d. There is no impact on the labor market from the higher negotiated wage. 69. Which of the following cannot be used to help explain wage differences among different groups of workers? a. Human capital b. Discrimination c. Unions d. Minimum-wage laws 70. Evidence of differences in average wages of women compared to men a. clearly illustrates differences in productivity between genders. b. provides conclusive evidence of discrimination on the basis of gender. c. is seldom used to provide evidence of discriminatory bias. d. does not provide conclusive evidence of discrimination. 71. Economists generally agree that a. human-capital theory provides the best explanation of discriminatory practices. b. differences in average wages do not by themselves provide conclusive evidence about the magnitude of discrimination in labor markets. .
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Ch 20: Earnings and Discrimination c. discrimination is exclusively an economic, rather than political, phenomenon. d. most of the wage differentials observed in the U.S. economy are due to discrimination. 72. Assume men, on balance, have lower amounts of human capital than women have. Then we would expect the a. demand for female labor to be lower than the demand for male labor. b. demand for female labor to be higher than the demand for male labor. c. supply of female labor to be lower than the demand for male labor. d. supply of female labor to be higher than the supply of male labor. 73. Evidence of discrimination in labor markets a. applies only to race and gender. b. is conclusively identified by large differences in average wages rates between men and women. c. is difficult to verify by reference to differences in average wage rates. d. is more easily identified on the basis of race than gender. 74. Most economists believe that the higher average salaries earned by men in comparison to women arise from a. discrimination. b. a variety of factors, including differences in human capital and compensating differentials; few economists believe that gender discrimination in earnings exists. c. differences in human capital as the primary reason. d. a variety of factors, including differences in human capital, compensating differentials, and discrimination. 75. Empirical work that does not account for differences in the productivity of workers a. is unlikely to find evidence of wage differentials. b. can provide strong evidence of labor market discrimination. c. is likely to misinterpret apparent evidence of labor market discrimination. d. is accepted as superior to empirical work that does correct for differences in productivity of workers. 76. One of the problems with calculating the true amount of discrimination that takes place in the market for labor is the a. inability to calculate wage differentials. b. inability to see changes in the wage differentials over a period of time. c. difficulty in measuring productivity differences between workers. d. difficulty in measuring female labor-force participation. 77. Which of the following is an example of labor-market discrimination? You may assume that worker A and worker B have identical characteristics except for the ones listed. A firm offers a higher salary to worker A than worker B because worker A a. has more education. b. is willing to work the night shift. c. is a man, whereas worker B is a woman. d. has better performance reviews, indicating higher productivity. 78. Michaela and Martin are twins who attended elementary school through college together. Both twins got jobs in the same department of an accounting firm. They both work equally hard and have received similar performance reviews. Michaela earns $62,000 a year, and Martin earns $80,000 a year. Select the best explanation for this wage difference. .
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Ch 20: Earnings and Discrimination a. Michaela has less human capital than Martin. b. Michaela has more human capital than Martin. c. Martin has been discriminated against because he is male. d. Michaela has been discriminated against because she is female. 79. People who grew up in the western part of Aquilonia have an accent distinct from people who grew up in the eastern part of the country. People from the west also receive lower wages than people from the east. From this information alone, which of the following is not a possible explanation for this wage differential? a. Discrimination against people from the west exists. b. People from the east receive compensating differentials. c. People from the west have lower levels of human capital. d. People from the east put forth less effort in their work. 80. In the country of Freedonia, men and women have the same level of education and choose different forms of work in the same proportions. The only real difference is that men typically stay home to raise young children, returning to the work force after their children enter elementary school. If no discrimination exists, then we would expect that, on average, a. women would earn less than men. b. women would earn more than men. c. men and women would earn the same wage. d. wage differences between men and women would be due to differences in beauty. 81. Scenario 20-3 In the small town of Hamilton, Montana, there is a local hardware store called Eddy's Hardware. There are only two types of workers who apply for jobs at Eddy's Hardware: cowboys and farm boys. Local politicians have received numerous complaints that Eddy's Hardware is practicing wage discrimination against farm boys. Eddy's Hardware denies the complaint and says the store is only trying to maximize profit. Refer to Scenario 20-3. Which of the following statements would weaken the discrimination complaint against Eddy's Hardware? a. Farm boys are more productive than cowboys. b. Farm boys work longer hours than cowboys and their effort is greater. c. Farm boys are generally less educated than cowboys in the field of hardware. d. Farm boys have more human capital than cowboys. 82. Scenario 20-3 In the small town of Hamilton, Montana, there is a local hardware store called Eddy's Hardware. There are only two types of workers who apply for jobs at Eddy's Hardware: cowboys and farm boys. Local politicians have received numerous complaints that Eddy's Hardware is practicing wage discrimination against farm boys. Eddy's Hardware denies the complaint and says the store is only trying to maximize profit. Refer to Scenario 20-3. Which of the following statements would strengthen the discrimination complaint against Eddy's Hardware? a. Cowboys call in sick to work more often than farm boys. b. Farm boys are more likely than cowboys to work the day shift rather than the night shift. c. Cowboys' experience using hardware generally exceeds farm boys' experience using it. d. On average farm boys have less experience working at the hardware store than cowboys. .
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Ch 20: Earnings and Discrimination 83. If we find that some schools direct females away from science and math courses, we have evidence of a. labor-market discrimination. b. discrimination that occurs prior to people entering the labor market. c. discrimination by customers. d. discrimination by employers. 84. Discrimination by a manager in the hiring process a. decreases the firm's costs. b. increases the firm's costs. c. is evident if a white manager refuses to hire a certain Black applicant. d. is evident if a male manager fails to hire a certain female applicant. 85. Suppose that an employer can hire workers with brown hair and workers with blonde hair. Each type of worker has the same productivity. Which of the following is correct if the employer discriminates by hiring only workers with brown hair? a. The employer will be just as efficient as a nondiscriminating employer. b. The employer will face higher costs than firms that focus only on maximizing profits. c. The employer will immediately go out of business because discrimination is illegal. d. The employer will face union strikes. 86. Why would a wage differential due to discrimination in hiring be unlikely to persist in a competitive labor market? a. There is a cost advantage for firms that do not discriminate. b. Workers who are victims of discrimination will eventually drop out of the labor market. c. Competing firms will hire fewer of the workers who are temporarily victimized by discrimination. d. Discrimination cannot exist in markets. 87. In the presence of discrimination by customers, a. market forces nevertheless always work to prevent discriminatory wage differentials. b. discriminatory wage differentials can exist, but only if firms refrain from maximizing their profits. c. discriminatory wage differentials can exist, but only if government reinforces customers' practices by passing laws that mandate discrimination. d. discriminatory wage differentials can exist, even in the absence of discriminatory practices by firms or by government. 88. If there is systematic discrimination against a group of workers, then the wage paid to those workers likely will be a. lower due to a higher supply of workers in that group. b. lower due to a lower demand for workers in that group. c. higher due to a lower supply of workers in that group. d. higher due to a higher demand for workers in that group. 89. Which of the following explains why soccer players make millions of dollars in Europe but do not in the United States? a. Discriminatory rules established by the government b. Compensating wage differentials for living in Europe c. Discriminatory preferences on the part of U.S. sports fans for other sports .
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Ch 20: Earnings and Discrimination d. Efficiency wages paid to European players to enhance on-field performance 90. Scenario 20-4 Assume that the labor market for barbers is competitive and that it is differentiated into two groups: barbers who are bald (or going bald) and those who have a full head of hair. Assume that the barbers in this market have identical hair-cutting ability, regardless of whether they are bald or not. Currently, the equilibrium wage in the bald barber market is lower than that in the nonbald market. Further assume that the market for haircuts is competitive. Refer to Scenario 20-4. If consumers do not discriminate between bald barbers and barbers with hair, then a. all barbershops now earn a normal economic profit. b. competition will ensure the difference in wages will persist. c. barbershops that hire barbers with hair will be more profitable than those that don't. d. barbershops that hire bald barbers will be more profitable than those that don't. 91. Scenario 20-4 Assume that the labor market for barbers is competitive and that it is differentiated into two groups: barbers who are bald (or going bald) and those who have a full head of hair. Assume that the barbers in this market have identical hair-cutting ability, regardless of whether they are bald or not. Currently, the equilibrium wage in the bald barber market is lower than that in the nonbald market. Further assume that the market for haircuts is competitive. Refer to Scenario 20-4. If consumers do not discriminate between bald barbers and barbers with hair, then a. competitive pressure in the market for haircuts will eventually cause the equilibrium wage in both markets to be identical. b. the equilibrium wage in the "bald" market will eventually fall. c. the equilibrium wage in the "hairy" market will eventually rise. d. wages in the market for barbers can never be in equilibrium. 92. Scenario 20-4 Assume that the labor market for barbers is competitive and that it is differentiated into two groups: barbers who are bald (or going bald) and those who have a full head of hair. Assume that the barbers in this market have identical hair-cutting ability, regardless of whether they are bald or not. Currently, the equilibrium wage in the bald barber market is lower than that in the nonbald market. Further assume that the market for haircuts is competitive. Refer to Scenario 20-4. Competition in the market for haircuts is consistent with which of the following statements? a. Firms hiring nonbald barbers will have a cost advantage, leading to an increase in the demand for nonbald barbers. b. All firms that hire only bald barbers will go out of business. c. Firms hiring bald barbers will enter the market, increasing the demand for bald barbers. d. Firms hiring nonbald barbers will enter the market, increasing the demand for nonbald barbers. 93. Scenario 20-4 Assume that the labor market for barbers is competitive and that it is differentiated into two groups: barbers who are bald (or going bald) and those who have a full head of hair. Assume that the barbers in this market have identical hair-cutting ability, regardless of whether they are bald or not. Currently, the equilibrium wage in the bald barber market is lower than that in the nonbald market. Further assume that the market for haircuts is competitive. Refer to Scenario 20-4. If some consumers in the market for haircuts have a strong preference for having their hair cut by a barber who is not going bald, then a. the difference in wages will eventually disappear since a haircut is a homogeneous good. .
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Ch 20: Earnings and Discrimination b. barbershops that hire barbers with hair will be able to charge a higher price for a haircut to those consumers who have a strong preference for barbers with hair. c. barbershops that hire barbers with hair will always be much more profitable. d. barbershops that hire bald barbers will always be much more profitable. 94. Scenario 20-5 Jason works part-time at a grocery store after school. Jason has worked at the store for two years but still hasn't received a wage increase, even though newer employees have received raises. Jason has threatened his employer with a lawsuit if he doesn't get a raise in the next few weeks. Jason believes he is a victim of labor-market discrimination. Refer to Scenario 20-5. Which of the following statements would strengthen Jason's case against his employer? a. Jason only works part-time; as a result, he has fewer hours of experience even though he has been with the company longer. b. Jason doesn't accomplish as much in an hour as other workers doing the same job. c. Other workers that got raises moved to the night shift or agreed to work weekends. d. Unlike his colleagues, Jason agreed to participate in monthly workshops aimed at increasing his efficiency on the job. 95. Scenario 20-5 Jason works part-time at a grocery store after school. Jason has worked at the store for two years but still hasn't received a wage increase, even though newer employees have received raises. Jason has threatened his employer with a lawsuit if he doesn't get a raise in the next few weeks. Jason believes he is a victim of labor-market discrimination. Refer to Scenario 20-5. Why might an economist be skeptical of Jason's discrimination complaint? a. Through antitrust laws, discriminating firms can be penalized with large fees. b. Differences in wages alone do not by themselves prove discrimination. c. Discrimination leads to profit maximization. d. Even if customers dislike Jason because he's not helpful, if the store operates in a competitive market the store will pay Jason the same as other workers. 96. Scenario 20-6 The after-school tutoring industry is competitive, and so is the labor market for after-school tutors. Suppose male and female tutors have equal experience and skill. Currently, some tutoring centers are biased and will only hire male tutors, whereas unbiased tutoring centers desire to hire the cheapest tutors and do not care about their genders. As a result, the equilibrium wage for male tutors is higher than that of female tutors. Refer to Scenario 20-6. If consumers do not discriminate between biased and unbiased tutoring centers, then a. price of tutoring must increase in the short run to account for higher cost to biased tutoring centers. b. competition in the after-school tutoring industry will ensure the difference in wages will persist in the long run. c. biased tutoring centers will be more profitable than unbiased tutoring centers in the short run. d. unbiased tutoring centers will be more profitable than biased tutoring centers in the short run. 97. Scenario 20-6 The after-school tutoring industry is competitive, and so is the labor market for after-school tutors. Suppose male and female tutors have equal experience and skill. Currently, some tutoring centers are biased and will only hire male tutors, whereas unbiased tutoring centers desire to hire the cheapest tutors and do not care about their genders. As a result, the equilibrium wage for male tutors is higher than that of female tutors. .
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Ch 20: Earnings and Discrimination Refer to Scenario 20-6. If consumers do not discriminate between male and female tutors, then the a. equilibrium wage for male and female tutors will eventually be identical. b. equilibrium wage for female tutors will eventually fall. c. equilibrium wage for male tutors will eventually rise. d. equilibrium wage for male and female tutors will remain different, even in the long-run equilibrium. 98. Scenario 20-6 The after-school tutoring industry is competitive, and so is the labor market for after-school tutors. Suppose male and female tutors have equal experience and skill. Currently, some tutoring centers are biased and will only hire male tutors, whereas unbiased tutoring centers desire to hire the cheapest tutors and do not care about their genders. As a result, the equilibrium wage for male tutors is higher than that of female tutors. Refer to Scenario 20-6. Long-run competition in the after-school tutoring market is consistent with which of the following statements, assuming consumers do not discriminate between male and female tutors? a. Tutoring centers only hiring male tutors have lower cost, leading to an increase in the demand for male tutors. b. All firms that hire only male tutors will shut down because they are not able to compete. c. All firms that hire only female tutors will shut down because they are not able to compete. d. Nothing will change; all firms will continue to operate as they do now. 99. Scenario 20-6 The after-school tutoring industry is competitive, and so is the labor market for after-school tutors. Suppose male and female tutors have equal experience and skill. Currently, some tutoring centers are biased and will only hire male tutors, whereas unbiased tutoring centers desire to hire the cheapest tutors and do not care about their genders. As a result, the equilibrium wage for male tutors is higher than that of female tutors. Refer to Scenario 20-6. If some families strongly prefer their children to be tutored by male tutors, then a. the difference in male and female tutor wages will eventually disappear. b. biased tutoring centers can charge more for tutoring to offset the higher cost of hiring only male tutors. c. all unbiased tutoring centers will go out of business in the long run. d. all biased tutoring centers will make a profit in the short run, but will go out of business in the long run. 100. Which of the following scenarios exhibits statistical discrimination? a. The hiring manager at a firm will not interview women for an engineering role because this industry is predominantly male. b. A hospital currently employs females for 80% of its nursing staff. c. A study comes out showing that brunettes are more likely to work harder than blondes, so employers prefer hiring brunettes. d. In order to apply for medical school, you have to take the MCAT standardized exam.
Indicate whether the statement is true or false. 101. The economic theory of labor markets suggests that wages are determined by labor supply and labor demand. a. True b. False 102. A compensating differential refers to a difference in wages that arises from nonmonetary characteristics. a. True .
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Ch 20: Earnings and Discrimination b. False 103. A compensating differential is a difference in wages due to higher levels of education or other forms of human capital. a. True b. False 104. The fact that doctors are paid more than economics professors is an example of a compensating differential. a. True b. False 105. Traci is a nurse, and she gets paid an additional $1.00 per hour for agreeing to work the night shift. Carol is also a nurse, but she works the day shift and does not get paid this extra dollar per hour. This difference in pay is an example of a compensating differential. a. True b. False 106. Daryn earns a higher salary than his friend Nick because Daryn is willing to work on the loading dock, whereas Nick prefers to work in an air-conditioned office. The difference in salary could illustrate a compensating differential. a. True b. False 107. Compensating differentials are differences in wages related to the characteristics of a job. a. True b. False 108. A computer is an example of human capital. a. True b. False 109. Higher levels of human capital are correlated with higher earnings because firms are willing to pay more for bettereducated workers who have higher marginal productivities. a. True b. False 110. Education and on-the-job training are sources of human capital. a. True b. False 111. The human-capital theory of education maintains that workers who complete specific levels of education enhance their productivity through education. a. True b. False 112. Human capital refers to the physical tools and equipment that workers use on their jobs to enhance their productivity. a. True .
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Ch 20: Earnings and Discrimination b. False 113. John has financial assets totaling $1.5 million, and he plans to use these assets to start his own business. Since John owns these funds and will not need to borrow to start his business, these assets are considered human capital. a. True b. False 114. As a result of an increase in the earnings gap between skilled and unskilled jobs, the incentive to get a college education has been declining. a. True b. False 115. The changing gap in wages between unskilled and skilled workers is most likely related to a larger increase in demand for unskilled occupations relative to skilled occupations. a. True b. False 116. One hypothesis to explain the changing gap in wages between unskilled and skilled workers in the United States is that international trade has altered the relative demands for skilled and unskilled workers. a. True b. False 117. Over the past 30 years, the number of jobs in the United States requiring skilled labor has been declining as foreign countries steal these jobs away from the U.S. As a result, the domestic demand for skilled labor has been falling and the wage gap between skilled and unskilled labor has been narrowing. a. True b. False 118. The statement that "the rich get richer, and the poor get poorer" is supported by evidence of an expanding wage gap between high-skill and low-skill workers. a. True b. False 119. Some economists suggest that increased international trade with countries that have a greater proportion of unskilled workers has led to an expanding wage gap between high-skill and low-skill workers in the United States. a. True b. False 120. It is increasingly clear that technological change is the only explanation for an expanding wage gap between highskill and low-skill workers. a. True b. False 121. Empirical evidence suggests that ability, effort, and chance are not likely to be significant contributors to wage differences. a. True b. False .
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Ch 20: Earnings and Discrimination 122. Since measurable factors such as years of experience and years of education explain less than half of the variation in wages, ability, effort, and chance must play a significant role in determining wages. a. True b. False 123. Sometimes workers earn higher wages through chance. a. True b. False 124. One reason why better-looking workers may have higher earnings is that physical attractiveness may enhance a worker’s productivity for certain jobs, especially for those workers who deal with the public. a. True b. False 125. One reason why better-looking workers may have higher earnings is that physical attractiveness is correlated with intelligence. a. True b. False 126. The signaling theory of education maintains that workers who complete specific levels of education signal their high productivity to potential employers. a. True b. False 127. The signaling theory of education maintains that workers who complete specific levels of education enhance their productivity through education. a. True b. False 128. The signaling theory of education suggests that when people earn a college degree they do not become more productive, but they do signal their high ability to prospective employers. a. True b. False 129. A manager of a small firm who believes in the signaling theory of education would encourage their employees to obtain additional education to raise their on-the-job productivity. a. True b. False 130. The superstar phenomenon explains why professional athletes earn more than amateur athletes. a. True b. False 131. Superstars earn high incomes due to their ability to satisfy the demands of millions of people at once. a. True b. False .
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Ch 20: Earnings and Discrimination 132. An effective minimum wage law will increase the quantity of labor demanded. a. True b. False 133. Labor unions will raise the quantity of labor demanded. a. True b. False 134. Daryn and Nick work for two different companies, but each performs the same job working on a loading dock. Daryn, however, earns a higher salary than his friend Nick. The difference in salary could illustrate union wages if Daryn’s annual salary is covered by a collective bargaining agreement and Nick’s is not. a. True b. False 135. Efficiency wages will raise the quantity of labor supplied to the market. a. True b. False 136. It is likely that efficiency wages will decrease employee effort. a. True b. False 137. Efficiency wages may decrease employee turnover. a. True b. False 138. Discrimination is a reflection of some people's prejudice against certain groups in society. a. True b. False 139. Discrimination is an emotionally charged issue that is impossible to study objectively. a. True b. False 140. Labor-market discrimination based solely on age is illegal in the United States. a. True b. False 141. It is illegal in the United States for firms to pay different employees different wages for doing the same job. a. True b. False 142. Evidence of discrimination is most apparent when one compares wages among broad groups. a. True b. False .
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Ch 20: Earnings and Discrimination 143. When comparing average wages for Black and white men in the United States, wages paid to Black men have been about 20 percent less than those paid to white men. a. True b. False 144. When comparing average wages for male and female workers in the United States, wages paid to females have been about 40 percent less than those paid to male workers. a. True b. False 145. Politicians often point to wage differentials as evidence of labor-market discrimination against ethnic minorities and women; however, economists argue against this approach because people differ in the amount of human capital they have and the kinds of work they are willing and able to do. a. True b. False 146. If an older worker earns less than a younger worker for the same job, we have proof of age discrimination. a. True b. False 147. If people with blue eyes earn more than people with brown eyes, we have proof of discrimination against people with brown eyes. a. True b. False 148. Economists would argue that the gender wage gap is narrowing because of efficiency wages. a. True b. False 149. Differences in human capital among groups of workers is possibly a reflection of past discrimination. a. True b. False 150. Differences in human capital among workers can often be attributed to social or political processes rather than economic processes. a. True b. False 151. All differences in wages that are not accounted for by differences in human-capital investment are likely to be a result of discrimination. a. True b. False 152. In a labor market free from discrimination, wages for workers that are employed by the same company will still differ. a. True .
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Ch 20: Earnings and Discrimination b. False 153. One example of labor-market discrimination is that firms may be less likely to interview job-market candidates whose names suggest that they are members of a racial minority. a. True b. False 154. Discrimination is usually not a profit-maximizing strategy. a. True b. False 155. When discrimination occurs as a result of employer prejudice, discriminating firms do not maximize profits. a. True b. False 156. Profit-maximizing competitive firms will not discriminate in the hiring of workers unless consumers exercise a preference for discrimination in product markets or governments mandate discrimination. a. True b. False 157. A study using data from the late 1960s showed that Black baseball players earned less than comparable
white players. Studies of more recent salaries in baseball, however, have found no evidence of discriminatory wage differentials. a. True b. False 158. Streetcar owners in the early 20th century were against segregation for profit maximizing reasons. a. True b. False 159. According to economic historians, streetcars in southern cities in the early 1900s were racially segregated because the owners of the firms believed that segregation raised the firms’ profits. a. True b. False 160. Experimental evidence indicates women choose less competitive environments than men. a. True b. False 161. Customer discrimination is illegal in the United States. a. True b. False 162. Consumers are often a primary source of discrimination in labor markets. a. True b. False .
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Ch 20: Earnings and Discrimination 163. The differences in the desirability of different jobs within a company could give rise to a compensating differential between workers. a. True b. False 164. Workers in a labor union typically are paid less than workers not in a labor union. a. True b. False 165. Gerald earns a higher salary than his brother Peter because Gerald went to law school and is a lawyer, whereas Peter dropped out of college to work as a mechanic. The difference in salary illustrates a compensating differential. a. True b. False 166. Jen is a waitress, and she gets paid an additional $2.00 per hour for agreeing to work on Valentine's Day. Jamie is also a waitress, but she did not work on Valentine's Day and hence did not get the extra $2.00 per hour. This difference in pay is an example of differences in human capital. a. True b. False 167. One example of labor-market discrimination is that a firm may be less likely to interview a job candidate whose resume clearly indicates they are not a good fit for the job. a. True b. False
168. The difference in wages that results from nonmonetary characteristics of different jobs is called the 169. Workers who work the night shift at factories are paid more than similar workers who work the day shift due to a 170. Consider two groups of workers of equal skill level and experience: those who collect garbage and those who stuff envelopes with campaign fliers. Which group is likely to be paid more and why? 171. The accumulation of investments in people is called 172. The most important type of human capital is 173. Table 20-1 1975
2011
Men High school, no college College graduates Percent extra for college grads
$48,720 $69,146 +42%
$46,038 $80,508 +75%
Women High school, no college College graduates
$28,006 $37,804
$32,249 $58,229
.
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Ch 20: Earnings and Discrimination Percent extra for college grads +35% +81% Source: US Census Bureau and Mankiw’s calculations
Refer to Table 20-1. In 2011, on average how much more income would a man with a college degree earn than a man with a high school degree? 174. Table 20-1 1975 Men High school, no college College graduates Percent extra for college grads
$48,720 $69,146 +42%
2011 $46,038 $80,508 +75%
Women High school, no college $28,006 $32,249 College graduates $37,804 $58,229 Percent extra for college grads +35% +81% Source: US Census Bureau and Mankiw’s calculations
Refer to Table 20-1. What conclusion can you draw about the changes in the gaps in earnings between skilled and unskilled workers between 1975 and 2011? 175. Table 20-1 1975 Men High school, no college College graduates Percent extra for college grads
$48,720 $69,146 +42%
2011 $46,038 $80,508 +75%
Women High school, no college $28,006 $32,249 College graduates $37,804 $58,229 Percent extra for college grads +35% +81% Source: US Census Bureau and Mankiw’s calculations
Refer to Table 20-1. What are two possible hypotheses to explain the changes in relative demand for high-skilled workers and low-skilled workers in recent years? 176. Why do college graduates earn more in wages than workers with only a high school diploma? 177. About what proportion of the variation of wages across workers is explained by factors that can be measured? What are the other factors that explain wage differences but are difficult to measure? 178. Lucy and Lincoln are salespeople working for the same company with equal skills, ability, and experience. Both are paid a small base salary but the majority of their compensation is in the form of a commission, which is a percentage of the sales they make. Lucy earns more each year than Lincoln. What can you conclude about Lucy and Lincoln? .
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Ch 20: Earnings and Discrimination 179. According to economists Hamermesh and Biddle, how much more do people who are deemed more attractive than average earn? 180. According to a study of the “beauty premium,” how do the wages of people with average looks compare to those of people considered less attractive than average? 181. Which theory states that education makes workers more productive? 182. The theory of education that states firms use educational attainment as a way of sorting between high-ability and low-ability workers is called 183. Which theory states that education is correlated with natural ability? 184. Chris just completed his college degree from a prestigious university. He did not go to school to become more productive. Rather, he went to school and completed his degree to convey his innate productivity to employers. To which theory of education does he subscribe? 185. If a good is produced with technology that allows the best producer to supply every customer at a low cost and every customer in the market wants to enjoy the good supplied by the best producer, the best producer will be called a 186. Superstars arise in markets in which every customer in the market is able to enjoy the good supplied by the 187. Name two occupations that have the two characteristics required for the superstar phenomenon. 188. List three reasons why wages could be set above the equilibrium wage. 189. A cutting-edge biotech firm is hiring recent college graduates. To attract the very best applicants and to increase worker effort the firm is paying a wage 20% higher than the market wage for entry level employees in this industry. What is the term for the wage paid in this example? 190. Cheryl is a professor at a local university. She hired a student from the university to babysit for her children and paid the student a wage higher than the typical wage paid to babysitters in her area to ensure the babysitter’s reliability and that attention is paid to her children. What is the name for this above-equilibrium wage? 191. A group of firms working together and acting as a supplier of a product is called a cartel. A group of employees working together and acting as a single supplier of labor is called a 192. Unions are often able to sustain wages above the equilibrium wage because they can threaten to 193. Figure 20-7
.
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Ch 20: Earnings and Discrimination
Refer to Figure 20-7. Given demand, D1, and supply, S1, if wages adjust to balance labor supply and labor demand, what are the wage and quantity of labor? 194. Figure 20-7
Refer to Figure 20-7. Given demand, D1, and supply, S1, what is the quantity of labor demanded if a minimum wage of $8 per hour is imposed on this market? 195. Figure 20-7
.
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Ch 20: Earnings and Discrimination
Refer to Figure 20-7. Given demand, D1, and supply, S1, how many workers are unemployed if a minimum wage of $8 per hour is imposed on this market? 196. Figure 20-7
Refer to Figure 20-7. Given demand, D1, and supply, S2, how many workers are unemployed if a minimum wage of $8 per hour is imposed on this market? 197. Figure 20-7
.
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Ch 20: Earnings and Discrimination
Refer to Figure 20-7. Given demand, D1, and supply, S2, how many fewer people are employed if a minimum wage of $8 per hour is imposed on this market as compared to allowing wages to adjust to balance labor demand and labor supply? 198. Figure 20-7
Refer to Figure 20-7. Given demand, D1, and supply, S2, how much more do the workers with jobs earn per hour if a minimum wage of $8 per hour is imposed on this market? 199. Figure 20-7
.
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Ch 20: Earnings and Discrimination
Refer to Figure 20-7. Given demand, D1, and supply, S1, how much more do workers earn per hour if the supply curve shifts to S2? 200. Figure 20-8
Refer to Figure 20-8. The figure shows labor demand and labor supply in a non-unionized labor market. If the current labor demand is D1 and the current labor supply is S1, what is the equilibrium wage and quantity of labor? 201. Figure 20-8
.
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Ch 20: Earnings and Discrimination
Refer to Figure 20-8. The figure shows labor demand and labor supply in a non-unionized labor market. If the current labor demand is D1 and the current labor supply is S1, when a minimum wage of $18 per hour is imposed in this market, how many unemployed workers result? 202. Figure 20-8
Refer to Figure 20-8. The figure shows labor demand and labor supply in a non-unionized labor market. If the current labor demand is D1 and the current labor supply is S1, when a union is established in this market and succeeds in raising the wage to $18 per hour, what is the change in the number of workers employed? 203. Figure 20-8
.
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Ch 20: Earnings and Discrimination
Refer to Figure 20-8. The figure shows labor demand and labor supply in a non-unionized labor market. Suppose the current labor demand is D1 and the current labor supply is S1. If a firm in this market decided to pay its workers $18 per hour to increase the productivity of its workers, this firm would be paying a(n) 204. What is the term for offering different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics? 205. Artie and Angelina attended the same university, graduated with the same degree and grade point average, and are equally productive in their identical new jobs. Still, Angelina’s salary is 10% lower than Artie’s salary. One can conclude that Angelina likely suffers from 206. Among male workers over age 25, about what percent has a college degree? What is this percentage for black male workers over age 25? 207. Among female workers over age 25, about what percent has a college degree? What is this percentage for black female workers over age 25? 208. Studies show that white women earn approximately 25% less than white men. From this data alone, one should not conclude that white women are victims of discrimination. Name two other factors that could explain the difference in wages. 209. Is measuring the effect of discrimination on wages relatively easy or relatively difficult? Explain? 210. According to research by Bertrand and Mullainathan, which job applicants, those with “white” names or those with “black” names, received more calls from interested employers? What percent more? 211. Scenario 20-7 Suppose that in the competitive market for auto repair, firms prefer to hire men rather than women. Assume that the women applying for positions have the same skills, experience, and work ethic as the men. As a result of this discrimination, the demand for women is lower than it otherwise would be. Refer to Scenario 20-7. What conclusion can you draw about women’s wages compared to men’s wages in this industry? 212. Scenario 20-7 .
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Ch 20: Earnings and Discrimination Suppose that in the competitive market for auto repair, firms prefer to hire men rather than women. Assume that the women applying for positions have the same skills, experience, and work ethic as the men. As a result of this discrimination, the demand for women is lower than it otherwise would be. Refer to Scenario 20-7. If the firms in this market are profit-maximizers and customers do not care if a woman or a man works on their car, what will likely happen? 213. Scenario 20-7 Suppose that in the competitive market for auto repair, firms prefer to hire men rather than women. Assume that the women applying for positions have the same skills, experience, and work ethic as the men. As a result of this discrimination, the demand for women is lower than it otherwise would be. Refer to Scenario 20-7. Suppose that consumers prefer to have men work on their auto repairs and are willing to pay higher prices to accommodate these preferences. What will happen to the wage differential between men and women? 214. Many economists believe that competitive, market economies provide a natural antidote to employer discrimination known as the 215. Most of the time, a profit motive eliminates discriminatory behavior from a market; however, a discriminatory wage gap can persist even if the firm owners only care about profit if there is 216. Many studies of wage discrimination have been conducted on professional sports teams. This industry is easier to study than others because the professional teams have many objective measures of 217. Economists typically explain occupational differences between men and women through preferences, ability, and discrimination. What additional factor did economists Muriel Niederle and Lise Vesterlund add to this list? 218. On average professors of finance earn more than professors of economics. Other things the same, what does this imply about the supply of each type of professor? 219. Some economists argue that changes in U.S. trade flows have altered the gap between wages of skilled and unskilled workers. Explain. 220. A recent study of the determinants of wages for clerical staff at a state university found that years of schooling, years of experience, age and job characteristics only explained about one-half of the difference in wages. Describe other factors that may be important in explaining wages differences for clerical staff. 221. After graduating from college, you receive job offers from five different accounting firms. All job offers have a different compensation package. Is it irrational for you to accept an offer that doesn't provide the highest level of monetary compensation? Use the concept of compensating differentials to explain your answer. 222. The National Collegiate Athletic Association (NCAA) has long argued that nationally-prominent college athletes are compensated with an investment in human capital that far exceeds the monetary reward of playing professional sports. Examine this argument in light of your knowledge of human capital theory and the economic theory of labor markets. 223. Explain the theory that education acts as a signaling device. How does this contrast with the theory of education as an investment in human capital? 224. List the productivity factors that may explain the differences in pay between men and women in similar occupations. Do any of these factors arise as a result of cultural or social traditions? If so, describe how changes in social relationships will affect the pay gap over time. .
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Ch 20: Earnings and Discrimination 225. Explain the role of job experience in explaining the differences between the average wages of men and women. 226. Explain how compensating differentials could contribute to differences between the average wages of men and women. 227. Evaluate the following statement: "The gender pay gap provides evidence of widespread, severe, ongoing discrimination by employers and fellow workers." 228. Once during a U.S. presidential campaign, a lobbyist for a prominent national women's organization made the claim that women in the United States earn $0.60 for every $1.00 earned by a man. A reporter, who was prepared for this statement, asked the lobbyist why wages paid to the organization's secretarial staff (all of whom were women) were significantly below the national average if they were truly interested in raising the rates of compensation for women. If you were the lobbyist, how would you have answered this question? Do you think your answer is convincing? Explain. 229. Explain the role that consumers play in perpetuating discrimination in labor markets. 230. Explain why the following situation is likely to persist: soccer players in Europe are the highest paid athletes and in the US they are among the lowest paid athletes.
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Ch 20: Earnings and Discrimination Answer Key 1. c 2. b 3. d 4. b 5. a 6. a 7. c 8. b 9. b 10. a 11. a 12. b 13. a 14. b 15. d 16. a 17. d 18. c 19. c 20. a 21. c 22. a 23. b 24. c 25. c .
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Ch 20: Earnings and Discrimination 26. b 27. b 28. a 29. a 30. b 31. c 32. a 33. b 34. d 35. c 36. d 37. b 38. a 39. b 40. d 41. a 42. a 43. b 44. c 45. b 46. b 47. b 48. d 49. a 50. c 51. d .
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Ch 20: Earnings and Discrimination 52. a 53. c 54. b 55. a 56. a 57. a 58. a 59. c 60. b 61. d 62. d 63. c 64. c 65. d 66. c 67. b 68. c 69. d 70. d 71. b 72. b 73. c 74. d 75. c 76. c .
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Ch 20: Earnings and Discrimination 77. c 78. d 79. d 80. b 81. c 82. a 83. b 84. b 85. b 86. a 87. d 88. b 89. c 90. d 91. a 92. c 93. b 94. d 95. b 96. d 97. a 98. b 99. b 100. c 101. True 102. True .
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Ch 20: Earnings and Discrimination 103. False 104. True 105. True 106. True 107. True 108. False 109. True 110. True 111. True 112. False 113. False 114. False 115. False 116. True 117. False 118. True 119. True 120. False 121. False 122. True 123. True 124. True 125. False 126. True 127. False .
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Ch 20: Earnings and Discrimination 128. True 129. False 130. False 131. True 132. False 133. False 134. True 135. True 136. False 137. True 138. True 139. False 140. True 141. False 142. False 143. True 144. False 145. True 146. False 147. False 148. False 149. True 150. True 151. False 152. True 153. True .
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Ch 20: Earnings and Discrimination 154. True 155. True 156. True 157. True 158. True 159. False 160. True 161. False 162. True 163. True 164. False 165. False 166. False 167. False 168. compensating differential. 169. compensating differential. 170. garbage collectors, compensating differentials 171. human capital. 172. education. 173. 75% 174. The gap has widened for both men and women. 175. increased international trade and changes in technology 176. They have more human capital. 177. About half. The other factors include effort, ability, chance, and discrimination. 178. Lucy is more productive, exerts more effort than Lincoln. .
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Ch 20: Earnings and Discrimination 179. 5% more 180. 5 to 10 percent higher 181. human-capital theory 182. signaling. 183. signaling theory 184. signaling theory 185. superstar. 186. best producer. 187. Actors Athletes 188. minimum-wage laws market power of labor unions efficiency wages 189. efficiency wage 190. efficiency wage 191. union. 192. strike. 193. $5 and 250 194. 100 195. 300 196. 200 197. 100 198. $2 199. $1 200. $15 and 400 workers 201. 200 workers 202. 100 fewer workers have jobs .
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Ch 20: Earnings and Discrimination 203. efficiency wage. 204. discrimination 205. discrimination. 206. 32%, 18% 207. 31%, 21% 208. Differences in human capital Compensating differentials 209. It can be relatively difficult because equilibrium wages are determined by a number of factors such as human capital, beauty, effort, and willingness and ability to do different kinds of work. 210. white, 50% 211. Women will be paid less than men. 212. Women will be hired and the wage differential will disappear. 213. It will persist. 214. profit motive. 215. customer discrimination. 216. productivity. 217. attitudes toward competition 218. This implies the supply of professors of economics is larger than the supply of professors of finance relative to demand. 219. The U.S. tends to import goods produced by unskilled workers and export goods produced by skilled workers. Increased imports and exports have reduced U.S. demand for unskilled workers and raised U.S. demand for skilled workers. Consequently, wages of unskilled workers have fallen relative to wages of skilled workers. 220. Other factors may include job tenure, job responsibilities, ability, effort, chance, or some form of discrimination. 221. Compensating differentials refer to differences in job characteristics across different occupations. But compensating differentials can also lead to differences in job characteristics within an occupation. Such considerations may include geographic location and quality-of-life issues associated with a particular job offer. Thus, it is not irrational to consider nonmonetary compensation. 222. Many economists would argue that the NCAA is the most exploitative organization in the United States, considering the value that star student athletes contribute to a university. Most would argue that the education that star student athletes receive is of less value than what the athletes contribute. 223. The theory of signaling suggests that those who have desirable "productivity" characteristics are more likely to finish .
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Ch 20: Earnings and Discrimination educational programs. The human capital theory suggests that productivity characteristics are enhanced by the learning that takes place in formal educational programs. 224. Job experience, education, lifetime patterns of work experience, etc. The gap should narrow as the cultural and social barriers to female access to productivity-enhancing experiences are reduced. 225. Women, who have primary responsibility for housework and child-rearing duties, typically have less continuity in the labor force. As such, there is a difference in the average years of job experience between men and women. 226. Men and women may, on average, select different career paths. If men tend to be more concentrated in jobs that have less desirable working conditions, then compensating differentials can explain some of the difference in wages between men and women. 227. There are many explanations of the gender pay gap. Some are associated with discrimination both by consumers and employers. Others are not associated with discrimination. Examples of factors that would explain why men earn more than women, on average, but that are not associated with discrimination include years of labor-market experience, types of jobs, levels of human capital, and on-the-job training. 228. The lobbyist would likely respond by citing factors that explain wage differences on the basis of compensating differentials, education, and job experience. These arguments would be convincing to those who subscribe to the marginal productivity theory of compensation. 229. Consumers are able to exercise their biases when they purchase goods and services. For example, if consumers prefer to have female personal trainers than male personal trainers, then firms may respond to these preferences by paying a higher wage to attract female personal trainers. The higher wage paid to women based solely on their gender (or the lower wage paid to male trainers based solely on their gender) would be an example of discrimination driven by consumer preferences. 230. Consumers use personal preferences when they make purchases. In this case, US consumers prefer other sports such as baseball, basketball, or football over soccer. Although over time we would expect a movement together in compensations for athletes in different sports, the discriminatory preferences of consumers allow the gap to persist over time.
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Ch 21: Income Inequality and Poverty
Indicate the answer choice that best completes the statement or answers the question. 1. A government's policy of redistributing income makes the income distribution a. more equal, distorts incentives, alters behavior, and makes the allocation of resources more efficient. b. more equal, distorts incentives, alters behavior, and makes the allocation of resources less efficient. c. less equal, distorts incentives, alters behavior, and makes the allocation of resources more efficient. d. less equal, distorts incentives, alters behavior, and makes the allocation of resources less efficient. 2. Economists study poverty and income inequality to answer which of the following questions? a. What are people's wages? b. How does labor-force experience affect wages? c. How much inequality is there in society? d. How do people adjust their behavior due to taxation? 3. Based on data from 2019, the top fifth of all families received approximately what percent of all income in the United States? a. 4 percent b. 50 percent c. 41 percent d. 21 percent 4. The 2019 U.S. distribution of income shows that the top 5 percent of families earn approximately how much income per year? a. $145,000 and over b. $304,153 and over c. $500,000 and over d. $625,000 and over 5. Which of the following does not explain the rise in income inequality in the United States from 1970 to 2019? a. Changes in technology. b. An increase in minimum wages. c. A reduction in the demand for unskilled labor. d. Increased international trade with low-wage countries. 6. Table 21-1 The following table shows the distribution of income in Marysville. Group Bottom Quartile (25%) Third Quartile Second Quartile Top Quartile
Annual Family Income $30,000 and below $30,000 to $59,999 $60,000 to $89,999 $90,000 and above
Refer to Table 21-1. Seventy-five percent of all families have incomes below what level? .
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Ch 21: Income Inequality and Poverty a. $30,000 b. $60,000 c. $90,000 d. There is insufficient information to answer this question. 7. Table 21-1 The following table shows the distribution of income in Marysville. Group Bottom Quartile (25%) Third Quartile Second Quartile Top Quartile
Annual Family Income $30,000 and below $30,000 to $59,999 $60,000 to $89,999 $90,000 and above
Refer to Table 21-1. If the poverty line were $23,021, what would be the poverty rate? a. Less than 25% b. Between 25% and 50% c. Between 50% and 75% d. There is insufficient information to answer this question. 8. Table 21-2 Percentage of Before-Tax Income Received by Families in Hapland Group Bottom Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile
Percentage of Family Income in 2020 4.1 6.2 12.1 26.9 50.7
Percentage of Family Income in 1970 5.5 7.2 13.6 25.8 45.9
Refer to Table 21-2. According to the table, from 1970 to 2020, the Hapland income distribution became a. less equal. b. more equal. c. more equal at the lowest level of income but less equal at highest level of income. d. less equal at the lowest level of income but more equal at highest level of income. 9. Table 21-3 The Distribution of Income in Edgerton Group Bottom Quintile Second Quintile .
Annual Family Income $28,000 and below $28,000–$43,999 Page 2
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Ch 21: Income Inequality and Poverty Middle Quintile Fourth Quintile Top Quintile
$44,000–$75,999 $76,000–$87,999 $88,000 and above
Refer to Table 21-3. According to the table, what percent of families in Edgerton have income levels below $76,000? a. 20 percent. b. 40 percent. c. 60 percent. d. 80 percent. 10. Table 21-3 The Distribution of Income in Edgerton Group Bottom Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile
Annual Family Income $28,000 and below $28,000–$43,999 $44,000–$75,999 $76,000–$87,999 $88,000 and above
Refer to Table 21-3. Where would the government in Edgerton set the poverty line to have a poverty rate of 40 percent? a. $28,000 b. $44,000 c. $76,000 d. $88,000 11. Table 21-3 The Distribution of Income in Edgerton Group Bottom Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile
Annual Family Income $28,000 and below $28,000–$43,999 $44,000–$75,999 $76,000–$87,999 $88,000 and above
Refer to Table 21-3. If the poverty rate is 26%, where is the poverty line in Edgerton? a. Under $28,000 b. Between $28,000 and $43,999 c. Between $44,000 and $75,999 d. Between $76,000 and $87,999 .
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Ch 21: Income Inequality and Poverty 12. Table 21-4 Shares of Income by Quintile (Percent) 2000 2010 2019 Bottom Quintile 4.3 3.8 3.9 Second Quintile 9.8 9.4 9.2 Middle Quintile 15.4 15.4 14.8 Fourth Quintile 22.7 23.5 22.5 Top Quintile 47.7 47.9 49.5 Source: U.S. Bureau of Census Quintile
Refer to Table 21-4. In 2019, the top quintile of families have a. almost 13 times as much income as the bottom quintile of families. b. 48.8% more income than the bottom quintile of families. c. 23.4% more income than the bottom quintile of families. d. 9% more income than the bottom quintile of families. 13. Table 21-4 Shares of Income by Quintile (Percent) 2000 2010 2019 Bottom Quintile 4.3 3.8 3.9 Second Quintile 9.8 9.4 9.2 Middle Quintile 15.4 15.4 14.8 Fourth Quintile 22.7 23.5 22.5 Top Quintile 47.7 47.9 49.5 Source: U.S. Bureau of Census Quintile
Refer to Table 21-4. Comparing data from 2000 and 2019, which of the following statements is correct? a. There has been no change in overall income inequality because the share of income held by the fourth quintile is nearly identical. b. Overall income inequality has worsened slightly, as shown by the simultaneous increase in the share of income held by the top quintile and the decrease in the share of income held by the bottom quintile. c. Overall income inequality has improved because the share held by the second quintile has declined by 0.6%. d. Overall income inequality has improved because the share held by the bottom quintile has declined by 0.5%. 14. Table 21-5 The distribution of income for Dismal is as follows: Number of Families 1,000 .
Income $10,000 or below Page 4
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Ch 21: Income Inequality and Poverty 2,000 2,000 800 200
$10,001 to $20,000 $20,001 to $30,000 $30,001 to $40,000 $40,001 and above
Refer to Table 21-5. If the poverty line in the country of Dismal is $20,000, the poverty rate in Dismal is a. 16.7 percent. b. 33.3 percent. c. 50 percent. d. 83.3 percent. 15. Table 21-5 The distribution of income for Dismal is as follows: Number of Families 1,000 2,000 2,000 800 200
Income $10,000 or below $10,001 to $20,000 $20,001 to $30,000 $30,001 to $40,000 $40,001 and above
Refer to Table 21-5. If the poverty rate in Dismal is 50 percent, what is the poverty line in Dismal? a. $10,000. b. $20,000. c. $30,000. d. $40,000. 16. Figure 21-3. The Poverty Rate, 1959-2020.
.
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Source: U.S. Bureau of the Census.
Refer to Figure 21-3. Which of the following statements about the poverty rate is accurate? a. The poverty rate has declined substantially since 1973. b. The poverty rate has increased substantially since 1973. c. The poverty rate has not substantially changed since 1959. d. The poverty rate has not substantially changed since 1973. 17. Figure 21-3. The Poverty Rate, 1959-2020.
Source: U.S. Bureau of the Census. .
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Refer to Figure 21-3. Between 1959 and 1973 the poverty rate a. fell from approximately 22% to approximately 11%. b. rose from approximately 11% to approximately 22%. c. remained at approximately 11%. d. remained at approximately 22%. 18. If the U.S. government determines that the cost of feeding an urban family of four is $7,500 per year, then the official poverty line for a family of that type is a. $7,500. b. $15,000. c. $22,500. d. $30,000. 19. Table 21-6 Poverty Thresholds in 2018 by Size of Family and Number of Related Children Under 18 Years Related children under 18 years None One Two Three Four Five Six Seven Eight Size of family unit or more One person (unrelated individual): Under age 65 Aged 65 and older
13,064 12,043
Two persons Householder under 65 years 16,815 17,308 Householder aged 65 and over 15,178 17,242 Three people 19,642 20,212 20,231 Four people 25,900 26,324 25,465 25,554 Five people 31,234 31,689 30,718 29,967 29,509 Six people 35,925 36,068 35,324 34,612 33,553 32,925 Seven people 41,336 41,594 40,705 40,085 38,929 37,581 36,102 Eight people 46,231 46,640 45,800 45,064 44,021 42,696 41,317 40,967 Nine people or more 55,613 55,883 55,140 54,516 53,491 52,082 50,807 50,491 48,546 Source: U. S. Bureau of the Census, Current Population Survey.
Refer to Table 21-6. What is the poverty line in 2018 for a family of six with three children? a. $32,925 b. $34,612 .
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Ch 21: Income Inequality and Poverty c. $45,064 d. $20,231 20. Based on U.S. data for 2019, the poverty rate is the highest for which group of people? a. Children b. Married-couple families c. Female household, no spouse present d. Older adults 21. Which of the following represents a problem in measuring inequality? a. Measurements of income distributions typically include in-kind transfers, which distort the measure of inequality. b. A normal life-cycle pattern causes inequality in the income distribution but may not reflect inequality in living standards. c. Transitory income is a better measure of inequality than permanent income. d. There are no problems in measuring inequality. 22. Government vouchers to purchase food, also known as food stamps, are an example of a. an in-kind transfer. b. life-cycle income. c. a negative income tax. d. permanent income. 23. Susan won $2,000 at the blackjack tables on her birthday. Her winnings are an example of a. permanent income. b. life-cycle income. c. transitory income. d. an in-kind transfer. 24. Which of the following statements is correct? a. The distribution of annual income accurately reflects the distribution of living standards. b. Permanent incomes are more equally distributed than annual incomes. c. Transitory changes in income generally have a significant impact on a family's standard of living. d. Annual income is more equally distributed than permanent income. 25. An example of a transitory change in income is the a. annual cost of living adjustment to your salary. b. increase in income that results from a job promotion linked to your education. c. increase in income of California orange growers that results from an orange-killing frost in Florida. d. decrease in income that results from switching to part-time work rather than full-time work. 26. Suppose that a family saves and borrows to buffer itself against changes in income. These actions relate to which problem in measuring inequality? a. In-kind transfers b. Negative income tax .
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Ch 21: Income Inequality and Poverty c. Transitory versus permanent income d. Economic mobility 27. Suppose that Family A borrows money when its car breaks down and saves money when the wife receives a holiday bonus from her employer. Suppose that Family B borrows money to buy elaborate birthday presents for the children and spends the husband's holiday bonus on a vacation to Florida. Which of the following is correct? a. Both Family A's and Family B's spending habits suggest that they base their purchasing decisions on transitory income. b. Family A's spending habits suggest that it bases its purchasing decisions on transitory income rather than permanent income. Family B's spending habits suggest that it bases its purchasing decisions on permanent income rather than transitory income. c. Family A's spending habits suggest that it bases its purchasing decisions on permanent income rather than transitory income. Family B's spending habits suggest that it bases its purchasing decisions on transitory income rather than permanent income. d. Both Family A's and Family B's spending habits suggest that they base their purchasing decisions on permanent income. 28. The Callaway family owns a small bait and tackle shop in a resort town in Wisconsin. An economic recession reduces the number of tourists for one summer, which reduces the family's income for that year. For the Callaway family, their a. transitory income for the year of the recession likely exceeds their permanent income. b. permanent income likely exceeds their transitory income for the year of the recession. c. permanent income will be more affected by the recession than their transitory income. d. transitory income is unaffected by this situation. 29. Which of the following statements is correct? a. Fewer than three percent of families are categorized as poor for eight years or more. b. In the United States, the grandson of a millionaire is much more likely to be rich than the grandson of an average-income person. c. The majority of millionaires in the United States inherited their wealth. d. Most workers have about the same income (adjusted for inflation) when they are young as when they are middle-aged. 30. Which political philosophy believes that the government should equalize the incomes of all members of society? a. Utilitarianism b. Liberalism c. Libertarianism d. Utilitarianism, liberalism, and libertarianism all do not believe the government should equalize the incomes of all members of society. 31. When incentives to earn income are distorted by income redistribution programs, a. losses cannot exceed potential gains from greater equality of income. b. total income in an economy will not fall. c. total utility in society will definitely rise. d. total utility in society can fall. 32. Which of the following will not occur when government policies are enacted to make the distribution of income more .
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Ch 21: Income Inequality and Poverty equitable? a. People will alter their behaviors. b. Incentives will be distorted. c. Total utility will likely remain constant. d. The allocation of resources will be less efficient. 33. Which of the following statements is characteristic of utilitarianism? a. An extra dollar of income provides higher marginal utility to a person in the lowest income bracket than a person in the highest income bracket. b. Social policies should be created behind a "veil of ignorance." c. Society should strive to maximize the utility of its wealthiest member. d. Equality of opportunity is more important than equality of incomes. 34. A utilitarian government will pursue policies that redistribute income from high-income individuals to low-income individuals. One problem with these policies is that a. everyone has less incentive to work hard. b. high-income individuals will work harder while the low-income individuals will not. c. low-income individuals will work harder while the high-income individuals will not. d. everyone in the middle class ends up worse off. 35. In the parable of the leaky bucket, a fundamental problem with government redistribution programs is identified. As long as the government only has "leaky buckets" at its disposal, a. the costs of welfare programs will exceed the benefits. b. it should not try to reach complete equality in income. c. income equality will be the best policy option. d. equality of economic opportunity will reduce society's utility. 36. A society consists of three individuals: Larry, Margaret, and Nina. In terms of income and utility, Larry is currently best-off, Margaret ranks in the middle, and Nina is worst-off. Which of the following statements is correct? a. Utilitarianism suggests that government policies should strive to maximize the sum of all three individuals' utility. b. Liberalism suggests that government policies should strive to maximize the sum of Larry's utility and Nina's utility. c. Libertarianism suggests that government policies should strive to make Nina better off at the cost of Larry and Margaret. d. Utilitarianism suggests that the government policies should strive to make Nina better off than Margaret. 37. Ms. Spring currently earns $100,000 a year, while her junior partner, Mr. Fall, earns $55,000 a year. From the perspective of a utilitarian, if both of their incomes are subject to diminishing marginal utility, taking a dollar from Ms. Spring and giving it to Mr. Fall will a. increase society's total utility. b. lower Ms. Spring's marginal utility of income. c. increase Mr. Fall's marginal utility of income. d. lower society's total utility. 38. "An extra dollar of income gives more additional satisfaction to a person in the lowest income bracket than a person in .
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Ch 21: Income Inequality and Poverty the highest income bracket." This is an important assumption of which political philosophy? a. Utilitarianism b. Liberalism c. Libertarianism d. Republicanism 39. Which group (or groups) would be the most upset by wide variation in the income distribution? a. Utilitarians b. Utilitarians and liberals c. Libertarians d. Liberals and libertarians 40. A society consists of three individuals: Sam, Tristan, and Ulyana. In terms of income and utility, Sam is currently best-off, Tristan ranks in the middle, and Ulyana is worst-off. Which of the following statements is correct? a. Utilitarianism suggests that government policies should strive to maximize Ulyana's utility. b. Liberalism suggests that government policies should strive to increase Ulyana's utility. c. Libertarianism suggests that government policies should strive to improve Tristan's utility at the cost of Sam's utility. d. Libertarianism suggests that government policies should strive to make Sam, Tristan, and Ulyana equally well off. 41. Suppose that Jamal is moving to a state where personal incomes are distributed randomly. If Jamal believes in liberalism, he would prefer a. an income distribution that is relatively equal. b. that everyone has the same work opportunities and market-determined wage rates. c. that private property be transformed to government property to safeguard people's incomes. d. less economic assistance to those with lower income because it distorts the price system. 42. According to the maximin criterion, income should be transferred from high-income individuals to low-income individuals as long as it a. raises the well-being of the least fortunate. b. does not alter incentives to work and save. c. promotes an equal distribution of income. d. does not lower the welfare of older adults. 43. Marco earns more than Antonio. A legislator proposes taxing Marco to supplement Antonio's income. A libertarian would view this proposal as a. a way to improve the welfare of all in society. b. a way to enhance Antonio's income in a socially responsible way. c. validation of the role of diminishing marginal utility over the maximin criterion. d. an inappropriate role for government, since government should not redistribute income. 44. Scenario 21-1 The government is proposing switching from a progressive tax system in which families pay 15% of the first $50,000 earned, 25% of the next $50,000 earned, and 35% of any income over $100,000 to a tax system in which every family .
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Ch 21: Income Inequality and Poverty pays 20% of their income minus $20,000. Refer to Scenario 21-1. Which group would be most in favor of the switch from the current progressive tax policy to the new policy? a. Utilitarians, because they want to maximize the utility to the worst-off person in society. b. Liberals, because of the maximin criterion. c. Libertarians, because they believe in diminishing marginal utility. d. All three groups would be equally in favor of the switch. 45. Scenario 21-1 The government is proposing switching from a progressive tax system in which families pay 15% of the first $50,000 earned, 25% of the next $50,000 earned, and 35% of any income over $100,000 to a tax system in which every family pays 20% of their income minus $20,000. Refer to Scenario 21-1. What would libertarians think of the tax two policies? a. They would favor the current progressive policy over the proposed policy because it accounts for diminishing marginal utility. b. They would favor the proposed tax policy over the current progressive policy because it would result in a negative tax for the poorest families. c. They would favor the current progressive tax policy over the proposed policy because it rewards those who work the hardest. d. They would oppose both tax policies because both redistribute income. 46. When designing public policies, which income group would philosopher John Rawls argue needs the most attention? a. Individuals located in the bottom fifth of the income distribution. b. Individuals located at the average income level. c. Individuals located in the top fifth of the income distribution. d. Individuals located in the top five percent of the income distribution. 47. Scenario 21-2 Suppose that a society is made up of five families whose incomes are as follows: $120,000; $90,000; $30,000; $30,000; and $18,000. The federal government is considering two potential income tax plans: Plan A is a negative income tax plan where the taxes owed equal 1/3 of income minus $20,000. Plan B is a two-tiered plan where families earning less than $35,000 pay no income tax and families earning more than $35,000 pay 10% of their income in taxes. The income tax revenue collected from those families earning over $35,000 is then redistributed equally to those families earning less than $35,000. Refer to Scenario 21-2. Assuming that utility is directly proportional to the cash value of after-tax income, which government policy would an advocate of utilitarianism prefer? a. Only Plan A b. Only Plan B c. Either Plan A or Plan B d. Neither Plan A nor Plan B because any plan that forcibly redistributes income is against the philosophy .
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Ch 21: Income Inequality and Poverty 48. Which of the following statements is correct? a. A disadvantage of a minimum-wage law is that it may benefit unskilled workers who are low-income workers. b. A disadvantage of a negative income tax program is that a person in the lowest income decile who chooses not to work many hours would not receive a cash benefit. c. There are no disadvantages to minimum-wage laws, negative income taxes, or the Earned Income Tax Credit (EITC). d. A disadvantage of an Earned Income Tax Credit (EITC) is that it does not alleviates poverty due to unemployment, sickness, or other inability to work. 49. Critics of raising the minimum wage argue that minimum-wage laws are a. too expensive for local governments to fund. b. too expensive for local governments to administer. c. imprecise in their ability to help the working poor. d. easy for businesses to pay. 50. Supporters of raising the minimum wage argue that minimum-wage laws are a. a tax-free way to help low-income working individuals. Businesses bear the burden of paying higher wages, not the government. b. better than the Earned Income Tax Credit (EITC) in targeting low-income working individuals. The EITC may benefit teenagers from middle-class families who work summer jobs at the minimum wage. c. better than in-kind transfers such as food stamps in providing food rather than unhealthy items such as drugs or alcohol. d. a way to increase employment of those likely to earn the minimum wage. 51. Which of the following statements accurately characterizes the effects of minimum-wage laws? a. Any worker who wants to work at the minimum wage will be employed at that wage. b. Those workers who remain employed are hurt by a lower wage. c. The effects of minimum-wage laws do not depend on the elasticity of labor supply. d. The effects of minimum-wage laws depend strongly on the elasticity of labor demand. 52. A disadvantage associated with in-kind transfers to reduce poverty is that they a. alter peoples' incentives, whereas a negative income tax does not alter peoples' incentives. b. do not allow low-income families to make purchases based on their preferences. c. can only be distributed by the federal government. d. cannot restrict the group of recipients and some middle-class families may benefit from them. 53. Supplemental Security Income (SSI) is a type of a. in-kind transfer. b. minimum wage law. c. private charity. d. welfare payment. 54. Which of the following statements is not correct? a. Welfare programs may encourage illegitimate births. b. The decline in welfare benefits since the 1970s has been associated with a decline in the percentage of children .
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Ch 21: Income Inequality and Poverty living with a single parent. c. Welfare programs may reduce incentives for people to work. d. A negative income tax program uses tax revenues collected from high-income families to provide cash subsidies to low-income families. 55. Scenario 21-3 Suppose the government implemented a negative income tax and used the following formula to compute a family's tax liability: Taxes owed = (1/5 of income) − $15,000 Refer to Scenario 21-3. A family earning $50,000 before taxes would have how much after-tax income? a. −$5,000 b. $40,000 c. $45,000 d. $55,000 56. Scenario 21-3 Suppose the government implemented a negative income tax and used the following formula to compute a family's tax liability: Taxes owed = (1/5 of income) − $15,000 Refer to Scenario 21-3. This negative income tax would guarantee what minimum level of income to every family? a. $5,000 b. $10,000 c. $15,000 d. $50,000 57. Scenario 21-3 Suppose the government implemented a negative income tax and used the following formula to compute a family's tax liability: Taxes owed = (1/5 of income) − $15,000 Refer to Scenario 21-3. Below what level of income would families start to receive a subsidy from this negative income tax? a. $5,000 b. $15,000 c. $50,000 d. $75,000 58. A negative income tax system is designed to a. provide in-kind benefits to those in poverty. b. provide a minimum income to those with low income. c. reduce taxes on the rich when their incomes surpass the maximum income tax bracket. .
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Ch 21: Income Inequality and Poverty d. subsidize food consumption in low-income families. 59. Assume that the government proposes a negative income tax that calculates the taxes owed as follows: Taxes Owed = (1/3 × Income) − $10,000. If a family doesn't earn any income, how does the negative income tax affect it? a. It will receive an income subsidy of $1,000. b. It will receive an income subsidy of $3,000. c. It will receive an income subsidy of $10,000. d. It will not be affected at all, since the negative income tax requires a family to earn income. 60. Which of the following is not a characteristic of the Earned Income Tax Credit (EITC)? a. It does not discourage recipients from working. b. It is less distortionary than other anti-poverty programs. c. It helps people with disabilities who cannot work. d. It applies only to those with low levels of income. 61. Which of the following is not correct? a. A negative income tax only applies to working people, so it encourages people to get full-time work. b. Supporters advocate the use of the Earned Income Tax Credit as a way to help those with lower levels of income. c. A negative income tax subsidizes the incomes of people with lower levels of income. d. An advantage of a negative income tax is that it is not based on the number of children, so it does not provide incentives for unmarried women to have children. 62. Which of the following is not an example of in-kind transfers? a. Food stamps b. Medicaid c. The Earned Income Tax Credit d. Housing vouchers 63. If the government decided that each family needs a minimum income of $25,000 and promised to make up the difference between whatever a family earned and $25,000, which of the following is correct? a. The government is effectively taxing every dollar earned up to $25,000 at a rate of 50%. b. This program doesn't change anyone's incentive to work. c. This program encourages people to work more in order to receive additional on-the-job training, which improves their skills. d. This program reduces the incentive to work to earn any wage up to $25,000. 64. What unique statistical measure was used to calculate the poverty rate during the pandemic of 2020? a. The Supplemental Poverty Measure b. The Pre-tax Poverty Measure c. The In-Kind Poverty Measure d. The COVID-19 Poverty Measure
Indicate whether the statement is true or false. .
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Ch 21: Income Inequality and Poverty 65. The invisible hand of the marketplace acts to allocate resources efficiently, but it does not necessarily ensure that resources are allocated fairly. a. True b. False 66. When the government enacts policies to make the distribution of income more equitable, it distorts incentives, alters behavior, and makes the allocation of resources less efficient. a. True b. False 67. The United States has more income inequality than Japan, Germany, and France. a. True b. False 68. The United States has more income inequality than Brazil and South Africa. a. True b. False 69. The United States has a more unequal income distribution than many other developed countries such as Japan and Germany. a. True b. False 70. The United States has a more equal income distribution than many developing economies such as Mexico, South Africa, and Brazil. a. True b. False 71. Among all countries in the world, the United States has the most income inequality. a. True b. False 72. In the United States in 2019, the bottom fifth of the income distribution had incomes below $40,000. a. True b. False 73. The top 5 percent of U.S. annual family income in 2019 was $304,153 or more. a. True b. False 74. A U.S. family earning $200,000 would be in the top 20 percent of income distribution in 2019. a. True b. False 75. An income distribution may not give an accurate picture of the standard of living for individuals experiencing poverty because it does not include in-kind transfers. .
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Ch 21: Income Inequality and Poverty a. True b. False 76. Since 1970 the United States’ income distribution has become more equal. a. True b. False 77. In 2019, the top 20% of income earners accounted for over 80% of all income received by United States’ families. a. True b. False 78. In 2019, the top 5 percent of income earners accounted for over 60% of all income received by United States’ families. a. True b. False 79. In the United States from 1935 to 2019 the share of total income earned by the bottom fifth of income earners rose and then fell. a. True b. False 80. Despite continued growth in average income since the early 1970s, the poverty rate has not substantially changed since 1973. a. True b. False 81. Even though the average income in the United States has continued to grow, the poverty rate has increased to over 20% since the early 1970s. a. True b. False 82. The measured poverty rate may not reflect the true extent of economic deprivation because it does not include some forms of government assistance. a. True b. False 83. The poverty line is set by the government so that 10 percent of all families fall below that line and are thereby classified as “poverty-stricken.” a. True b. False 84. The poverty line is an absolute standard and is based on the cost of providing an adequate diet. a. True b. False 85. The poverty line is based on the percentage of people who cannot afford an adequate diet. .
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Ch 21: Income Inequality and Poverty a. True b. False 86. The poverty rate is the percentage of the population whose family income falls below the poverty line. a. True b. False 87. The poverty rate is an absolute level of income set by the federal government for each family size. A family with income below this rate is deemed to be in poverty. a. True b. False 88. The older adults represent the largest demographic group in poverty. a. True b. False 89. About half of Black and Hispanic children in female-headed households live in poverty. a. True b. False 90. Standard measurements of the degree of income inequality take both money income and in-kind transfers into account. a. True b. False 91. The economic life cycle describes how young people usually have higher savings rates than middle-aged people. a. True b. False 92. Many economists believe that a family bases its spending decisions on its permanent, or average, income rather than on transitory income. a. True b. False 93. Most economists believe that a family bases its spending decisions on its transitory income. a. True b. False 94. About four out of five millionaires in the United States earned their money rather than inherited it. a. True b. False 95. Fewer than three percent of families are below the poverty threshold for eight years or more. a. True b. False 96. There is very little economic mobility in the United States, which means that once a family is in poverty, it is very .
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Ch 21: Income Inequality and Poverty likely that they will remain in poverty for at least a decade. a. True b. False 97. According to a study by Michael Cox and Richard Alm, consumption per person in the richest 20% of households was only 2.1 times consumption per person in the poorest 20% of households. a. True b. False 98. Utilitarians believe that the proper goal of the government is to maximize the sum of the utilities of everyone in society. a. True b. False 99. The utilitarian justification for redistributing income is based on the assumption of diminishing marginal utility. a. True b. False 100. John Rawls, who developed the way of thinking called liberalism, argued that government policies should be aimed at maximizing the sum of utility of everyone in society. a. True b. False 101. If a government could successfully achieve the maximin criterion, each member of society would have an equal income. a. True b. False 102. A follower of liberalism would not support a redistribution of income but rather would focus on equalizing opportunities. a. True b. False 103. The maximin criterion is the idea that the government should aim to maximize the well-being of the worst-off person in society. a. True b. False 104. According to libertarians, the government should redistribute income from high-income individuals to low-income individuals to achieve a more equal distribution of income. a. True b. False 105. Libertarians believe that the government should enforce individual rights to ensure that all people have the same opportunities to use their talents to achieve success. a. True b. False .
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Ch 21: Income Inequality and Poverty 106. A goal of libertarians is to provide citizens with equal opportunities rather than to ensure equal outcomes. a. True b. False 107. Critics argue that a disadvantage of minimum-wage laws is that they do not effectively target the working poor because many minimum-wage workers are the teenage children of middle-income families. a. True b. False 108. Temporary Assistance for Needy Families (TANF) is an example of a negative income tax program. a. True b. False 109. The Supplemental Security Income (SSI) program focuses on those in the lowest income decile who are sick or have a disability. a. True b. False 110. One existing government program that works much like a negative income tax is the Earned Income Tax Credit. a. True b. False 111. One existing government program that works much like a negative income tax is Medicaid. a. True b. False 112. An advantage of a negative income tax is that it does not encourage the breakup of families because the only criterion for assistance is family income. a. True b. False 113. Critics argue that a disadvantage of the Earned Income Tax Credit is that it does not effectively target low-income working people because many recipients are the teenage children of middle-income families. a. True b. False 114. A disadvantage of the Earned Income Tax Credit (EITC) program is that it does not help alleviate poverty due to unemployment, sickness, or other inability to work. a. True b. False 115. Scenario 21-4 Suppose the government implemented a negative income tax and used the following formula to compute a family’s tax liability: Taxes owed = (1/4 of income) - $14,000 .
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Refer to Scenario 21-4. A family earning $40,000 before taxes will owe tax. a. True b. False 116. Scenario 21-4 Suppose the government implemented a negative income tax and used the following formula to compute a family’s tax liability: Taxes owed = (1/4 of income) - $14,000
Refer to Scenario 21-4. A family earning $56,000 before taxes will have $56,000 after tax. a. True b. False 117. Scenario 21-4 Suppose the government implemented a negative income tax and used the following formula to compute a family’s tax liability: Taxes owed = (1/4 of income) - $14,000
Refer to Scenario 21-4. This negative income tax ensures that families earn at least $56,000. a. True b. False 118. Scenario 21-4 Suppose the government implemented a negative income tax and used the following formula to compute a family’s tax liability: Taxes owed = (1/4 of income) - $14,000
Refer to Scenario 21-4. The government does not have to pay a subsidy to any family through this negative income tax if the family with the lowest income earns $50,000. a. True b. False 119. Scenario 21-4 Suppose the government implemented a negative income tax and used the following formula to compute a family’s tax liability: Taxes owed = (1/4 of income) - $14,000 .
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Refer to Scenario 21-4. The government does not receive any tax revenue through this negative income tax if the family with the highest income earns $56,000. a. True b. False
120. Who said “The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the equal sharing of miseries”? 121. Approximately what fraction of total income in the US economy comes from labor earnings? 122. If greater equality is the benefit of government intervention into the allocation of society’s resources, what is the cost? 123. Since 1970, has the distribution of income in the US become more equal, less equal, or remained unchanged? 124. In 2019, the top 20% of US families had more than ____ times as much income as the bottom 20%. 125. Of the following countries, which has the most equal distribution of income? United States, Brazil, Mexico, China, Japan, Germany, United Kingdom, Russia 126. The percentage of the population whose family income falls below an absolute level is call the 127. The poverty rate is the percentage of the population whose family income falls below an absolute level called the . 128. What measure does the federal government use when setting the official poverty line in the US? 129. Table 21-7 Distribution of Income in Imagination Number of Families 23,500 42,410 57,330 63,490 24,770 23,500
Income Range less than $18,000 between $18,000 and $36,000 between $36,000 and $54,000 between $54,000 and $72,000 between $72,000 and $90,000 more than $90,000
Average Income $15,890 $27,450 $46,220 $65,000 $80,790 $118,750
Refer to Table 21-7. If the poverty rate in Imagination is 10%, what is the poverty line? 130. Table 21-7 Distribution of Income in Imagination .
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Ch 21: Income Inequality and Poverty Number of Families 23,500 42,410 57,330 63,490 24,770 23,500
Income Range less than $18,000 between $18,000 and $36,000 between $36,000 and $54,000 between $54,000 and $72,000 between $72,000 and $90,000 more than $90,000
Average Income $15,890 $27,450 $46,220 $65,000 $80,790 $118,750
Refer to Table 21-7. If the poverty line in Imagination is $18,000, what is the poverty rate? 131. Table 21-7 Distribution of Income in Imagination Number of Families 23,500 42,410 57,330 63,490 24,770 23,500
Income Range less than $18,000 between $18,000 and $36,000 between $36,000 and $54,000 between $54,000 and $72,000 between $72,000 and $90,000 more than $90,000
Average Income $15,890 $27,450 $46,220 $65,000 $80,790 $118,750
Refer to Table 21-7. If the poverty rate in Imagination is 25%, in what income range on the table is the poverty line? 132. Table 21-7 Distribution of Income in Imagination Number of Families 23,500 42,410 57,330 63,490 24,770 23,500 .
Income Range less than $18,000 between $18,000 and $36,000 between $36,000 and $54,000 between $54,000 and $72,000 between $72,000 and $90,000 more than $90,000
Average Income $15,890 $27,450 $46,220 $65,000 $80,790 $118,750 Page 23
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Ch 21: Income Inequality and Poverty Refer to Table 21-7. The Human Development Report computes a measure of inequality by dividing the income of the richest 10% of the population by the income of the poorest 10%. What is the value for this measure of inequality in Imagination? 133. Table 21-7 Distribution of Income in Imagination Number of Families 23,500 42,410 57,330 63,490 24,770 23,500
Income Range less than $18,000 between $18,000 and $36,000 between $36,000 and $54,000 between $54,000 and $72,000 between $72,000 and $90,000 more than $90,000
Average Income $15,890 $27,450 $46,220 $65,000 $80,790 $118,750
Refer to Table 21-7. The Human Development Report computes a measure of inequality by dividing the income of the richest 10% of the population by the income of the poorest 10%. If the value for this measure of inequality in the US is 15.9 and the value for India is 8.6, how does Imagination compare to these two nations? 134. Table 21-8 Income Inequality in the United States The values in the table reflect the percentages of pre-tax-and-transfer income. Year 2010 2005 2000 1995 1990 1985 1980
Bottom Fifth 3.3% 3.4 3.6 3.7 3.8 3.9 4.2
Second Fifth 8.5% 8.6 8.9 9.1 9.6 9.8 10.2
Middle Fifth 14.6% 14.6 14.8 15.2 15.9 16.2 16.8
Fourth Fifth 23.4% 23.0 23.0 23.3 24.0 24.4 24.7
Top Fifth 50.2% 50.4 49.8 48.7 46.6 45.6 44.1
Top 5% 21.3% 22.2 22.1 21.0 18.5 17.6 16.5
Top Fifth 50.2% 50.4
Top 5% 21.3% 22.2
Source: US Census Bureau
Refer to Table 21-8. The trend in income inequality from 1980 to 2010 is . 135. Table 21-8 Income Inequality in the United States The values in the table reflect the percentages of pre-tax-and-transfer income. Year 2010 2005 .
Bottom Fifth 3.3% 3.4
Second Fifth 8.5% 8.6
Middle Fifth 14.6% 14.6
Fourth Fifth 23.4% 23.0
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Ch 21: Income Inequality and Poverty 2000 1995 1990 1985 1980
3.6 3.7 3.8 3.9 4.2
8.9 9.1 9.6 9.8 10.2
14.8 15.2 15.9 16.2 16.8
23.0 23.3 24.0 24.4 24.7
49.8 48.7 46.6 45.6 44.1
22.1 21.0 18.5 17.6 16.5
Source: US Census Bureau
Refer to Table 21-8. If the distribution of income were completely equal, what percentage of income would the bottom fifth of the population earn? 136. Table 21-8 Income Inequality in the United States The values in the table reflect the percentages of pre-tax-and-transfer income. Year 2010 2005 2000 1995 1990 1985 1980
Bottom Fifth 3.3% 3.4 3.6 3.7 3.8 3.9 4.2
Second Fifth 8.5% 8.6 8.9 9.1 9.6 9.8 10.2
Middle Fifth 14.6% 14.6 14.8 15.2 15.9 16.2 16.8
Fourth Fifth 23.4% 23.0 23.0 23.3 24.0 24.4 24.7
Top Fifth 50.2% 50.4 49.8 48.7 46.6 45.6 44.1
Top 5% 21.3% 22.2 22.1 21.0 18.5 17.6 16.5
Source: US Census Bureau
Refer to Table 21-8. In 2010, how many more percentage points of total income did the top fifth of the population earn compared to if the income distribution were completely equal? 137. Table 21-8 Income Inequality in the United States The values in the table reflect the percentages of pre-tax-and-transfer income. Year 2010 2005 2000 1995 1990 1985 1980
Bottom Fifth 3.3% 3.4 3.6 3.7 3.8 3.9 4.2
Second Fifth 8.5% 8.6 8.9 9.1 9.6 9.8 10.2
Middle Fifth 14.6% 14.6 14.8 15.2 15.9 16.2 16.8
Fourth Fifth 23.4% 23.0 23.0 23.3 24.0 24.4 24.7
Top Fifth 50.2% 50.4 49.8 48.7 46.6 45.6 44.1
Top 5% 21.3% 22.2 22.1 21.0 18.5 17.6 16.5
Source: US Census Bureau
Refer to Table 21-8. In 2010, what percentage of total income in the US did the bottom 20% of families have? 138. Table 21-8 Income Inequality in the United States .
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Ch 21: Income Inequality and Poverty The values in the table reflect the percentages of pre-tax-and-transfer income. Year 2010 2005 2000 1995 1990 1985 1980
Bottom Fifth 3.3% 3.4 3.6 3.7 3.8 3.9 4.2
Second Fifth 8.5% 8.6 8.9 9.1 9.6 9.8 10.2
Middle Fifth 14.6% 14.6 14.8 15.2 15.9 16.2 16.8
Fourth Fifth 23.4% 23.0 23.0 23.3 24.0 24.4 24.7
Top Fifth 50.2% 50.4 49.8 48.7 46.6 45.6 44.1
Top 5% 21.3% 22.2 22.1 21.0 18.5 17.6 16.5
Source: US Census Bureau
Refer to Table 21-8. In percentage terms, how much less income did the bottom 40% of families have in 2010 than in 1980? 139. With which three demographic variables is poverty correlated? 140. Of the following groups, which group is most likely to live in poverty - children, elderly, married-couple families, female household with no spouse present? 141. Of the following groups, which group is least likely to live in poverty - whites, blacks, Hispanics, Asians? 142. Table 21-9 Income Inequality in 2010 in the United States by Race The values in the table reflect the percentages of pre-tax-and-transfer income. Race Bottom Fifth Second Fifth Middle Fifth Fourth Fifth Asians 3.0% 8.9% 15.3% 24.5% Blacks 2.7 7.9 14.2 23.6 Hispanics 3.5 9.0 14.7 23.3 Whites 3.6 8.8 14.9 23.4
Top Fifth 48.3% 51.6 49.4 49.3
Top 5% 19.0% 21.4 20.6 21.0
Top Fifth 48.3% 51.6 49.4 49.3
Top 5% 19.0% 21.4 20.6 21.0
Source: US Census Bureau
Refer to Table 21-9. Which race shows the least equal distribution of income? 143. Table 21-9 Income Inequality in 2010 in the United States by Race The values in the table reflect the percentages of pre-tax-and-transfer income. Race Bottom Fifth Second Fifth Middle Fifth Fourth Fifth Asians 3.0% 8.9% 15.3% 24.5% Blacks 2.7 7.9 14.2 23.6 Hispanics 3.5 9.0 14.7 23.3 Whites 3.6 8.8 14.9 23.4 Source: US Census Bureau .
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Ch 21: Income Inequality and Poverty
Refer to Table 21-9. In percentage point terms, how much more did the top 5% of the Asian population earn than it would have if income were distributed equally? 144. What is the primary problem in comparing income inequality in the US with income inequality in other countries? 145. Goods and services given to the poor such as food stamps, housing vouchers, and medical services are called 146. If in-kind transfers were included in income at their market value, what would happen to the number of families below the poverty line? 147. The regular pattern of income variation over a person’s life is called the . 148. The life-cycle pattern of income variation causes inequality in the distribution of annual income, but it does not necessarily represent . 149. People can borrow and lend money to smooth out short term variations in income known as what kind of changes? 150. On what type of income do many economists believe that people base their consumption? 151. Economists Cox and Alm compared the gap between rich and poor and found that the richest 20% was about 15 times better off than the poorest 20% when they compared what data? 152. Economists Cox and Alm compared the gap between rich and poor and found that the richest 20% was about 2 times better off than the poorest 20% when they compared what data? 153. In a typical 10-year period, about one in four families falls below the poverty line in at least one year. What percentage of families are poor for eight or more years? 154. If a father earns 20% above his generation’s average income, his son will most likely earn what percent above his generation’s average income? What does this statistic indicate? 155. In the US, is it more likely that someone will become a millionaire by making money on his/her own or by inheriting a fortune? 156. Which political philosophy argues that the government should choose policies to maximize the total utility of everyone in society? 157. What is the term for a measure of happiness or satisfaction a person receives from his or her circumstances? 158. Which political philosophy argues that the government should choose policies deemed just, as evaluated by an impartial observer? 159. Which philosopher claimed that the government should aim to maximize the well-being of the worst-off person in society? .
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Ch 21: Income Inequality and Poverty 160. Jermaine believes that it is important to maximize the well-being of the worst-off person in society. He believes in the principle called the . 161. A government policy aimed at protecting people against the risk of adverse events is called . 162. Which of the three political philosophies discussed in the textbook, if any, view the total income of society as a shared resource that a social planner can freely redistribute to achieve some social goal? 163. Which political philosophy concludes that equality of opportunities is more important than equality of outcomes? 164. Which of the three political philosophies discussed in the textbook, if any, think the government should not take from some individuals and give to others to achieve any particular distribution of income? 165. With a minimum wage law, the workers who remain employed benefit from a . 166. Aniella believes that the demand for unskilled labor is relatively inelastic. Carmella believes that the demand for unskilled labor is relatively elastic. Which is an advocate of minimum-wage laws? 167. Aniella believes that the demand for unskilled labor is relatively inelastic. Carmella believes that the demand for unskilled labor is relatively elastic. Which believes that a minimum-wage law will result in significant unemployment? 168. Temporary Assistance for Needy Families (TANF) and Supplemental Security Income (SSI) are examples of . 169. Suppose the government used the following formula to compute a family’s tax liability: Taxes owed = 28% of income - $8,000. How much would a family that earned $75,000 owe? 170. Suppose the government used the following formula to compute a family’s tax liability: Taxes owed = 28% of income - $8,000. How much would a family that earned $18,000 owe? 171. Scenario 21-5 Zooey is a single mother of two young children whose husband died in a tragic car accident. She earns $20,000 per year working as a cashier at a grocery store. The government uses a negative income tax system in which Taxes owed = (1/4 of income) - $15,000. Refer to Scenario 21-5. Does Zooey owe or receive money from the government? How much? 172. Scenario 21-5 Zooey is a single mother of two young children whose husband died in a tragic car accident. She earns $20,000 per year working as a cashier at a grocery store. The government uses a negative income tax system in which Taxes owed = (1/4 of income) - $15,000. Refer to Scenario 21-5. One of Zooey’s friends tells her she would have more money for the year if she quit her job and filed her tax return with $0 in income. Is her friend correct? Why or why not? 173. Scenario 21-5 Zooey is a single mother of two young children whose husband died in a tragic car accident. She earns $20,000 per year working as a cashier at a grocery store. The government uses a negative income tax system in which Taxes owed = (1/4 of income) - $15,000. Refer to Scenario 21-5. Zooey’s friend Alfredo owes $0 in taxes. How much does he earn? .
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Ch 21: Income Inequality and Poverty 174. Scenario 21-5 Zooey is a single mother of two young children whose husband died in a tragic car accident. She earns $20,000 per year working as a cashier at a grocery store. The government uses a negative income tax system in which Taxes owed = (1/4 of income) - $15,000. Refer to Scenario 21-5. Zooey’s brother Zander owes $10,000 in taxes. How much does he earn? 175. The Earned Income Tax Credit (EITC) is a tax provision that allows poor working families to receive income tax refunds greater than the taxes they paid during the year. Therefore, the EITC works much like a . 176. What is one argument made by proponents of in-kind transfers over cash payments to the needy? 177. A system in which anyone collecting antipoverty program benefits must accept a government-provided job is called . 178. One way of expressing the tradeoff between income equality and efficiency is to say the more equally the pie is divided, the . 179. Explain the relationship between labor earnings and the distribution of income. 180. What is meant by a perfectly equal distribution of income? Use a graph to depict such a situation. 181. Given the table shown, which country has a more equal income distribution? Explain your answer. Country Country A Country B
Bottom Fifth 9.0% 4.8%
Second Fifth 13.5% 10.5%
Middle Fifth 17.5% 16.0%
Fourth Fifth 22.9% 23.5%
Top Fifth 37.1% 45.2%
182. Explain what information is contained in the poverty rate statistic. Are there problems in using an absolute scale to measure poverty? If so, explain them. 183. Compare and contrast the "life cycle" hypothesis and the "permanent income" hypothesis. What are their respective implications for inequality in the income distribution? 184. Explain the concept of diminishing marginal utility, and describe the role that it plays in the utilitarian argument for the redistribution of income. 185. Explain how a "leaky bucket" can be used to illustrate the utilitarian argument that governments should not attempt to completely equalize individual incomes. 186. Briefly describe the three prominent schools of thought in political philosophy. Identify one of the most well-known philosophers in each school. 187. The table below reflects the levels of total utility received from income for each of four members of a society.
.
Income
Peter
Paul
Mary
Jane
$1 $2
15 29
32 61
20 38
16 30 Page 29
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Ch 21: Income Inequality and Poverty $3 $4 $5 $6 $7 $8
a.
b.
c.
42 54 65 75 84 92
87 110 130 147 161 172
54 68 80 90 98 103
42 52 60 66 70 72
Assume that the society has the following income distribution: Peter $3 Paul $7 Mary $5 Jane $3 Is it possible for the government to increase total aggregate utility by redistributing income among members of society? Explain your answer. Assume that the government has $19 to allocate among the four members of society. (Assume that no one has any income to start with.) If the government is interested in distributing income in a way that maximizes aggregate total utility, how should it distribute the $19 of income? Does the table above describe a situation characterized by diminishing marginal utility? Explain your answer.
188. Assume that the government proposes a negative income tax that calculates taxes owed by the following formula, Taxes Owed = (1/3 × Income) - $10,000. Compute the tax that would be owed given each level of income. a. $120,000 b. $90,000 c. $60,000 d. $30,000 e. $0 189. Assume that the government proposes a negative income tax that calculates taxes owed by the formula, Taxes Owed = (a × Income) - b. A family with an income of $40,000 pays $5,000 in taxes, and a family with an income of $12,000 receives an income subsidy of $2,000. a. What is the value for “a”? b. What is the value for “b”? c. What is the tax liability of a family with an income of $50,000? d. At what level of income will a family neither pay taxes, nor receive an income subsidy? 190. Explain what is meant by "in-kind transfer" programs. Briefly outline the advantages and disadvantages of an in-kind transfer program. 191. Assume you are a critic of welfare reforms that impose a time limit on the number of years a person is eligible for welfare benefits. What is the foundation of your critique? 192. Outline the possible work disincentives created by anti-poverty programs. Is there a way to solve this problem without causing other forms of inefficiency to arise? Explain your answer.
.
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Ch 21: Income Inequality and Poverty Answer Key 1. b 2. c 3. b 4. b 5. b 6. c 7. a 8. a 9. c 10. b 11. b 12. a 13. b 14. c 15. b 16. d 17. a 18. c 19. b 20. c 21. b 22. a 23. c 24. b 25. c .
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Ch 21: Income Inequality and Poverty 26. c 27. c 28. b 29. a 30. d 31. d 32. c 33. a 34. a 35. b 36. a 37. a 38. a 39. b 40. b 41. a 42. a 43. d 44. b 45. d 46. a 47. a 48. d 49. c 50. a 51. d .
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Ch 21: Income Inequality and Poverty 52. b 53. d 54. b 55. d 56. c 57. d 58. b 59. c 60. c 61. a 62. c 63. d 64. a 65. True 66. True 67. True 68. False 69. True 70. True 71. False 72. True 73. True 74. True 75. True 76. False .
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Ch 21: Income Inequality and Poverty 77. False 78. False 79. True 80. True 81. False 82. True 83. False 84. True 85. False 86. True 87. False 88. False 89. True 90. False 91. False 92. True 93. False 94. True 95. True 96. False 97. True 98. True 99. True 100. False 101. False 102. False .
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Ch 21: Income Inequality and Poverty 103. True 104. False 105. True 106. True 107. True 108. False 109. True 110. True 111. False 112. True 113. False 114. True 115. False 116. True 117. False 118. False 119. True 120. Winston Churchill 121. 2/3 122. loss of efficiency 123. less equal 124. thirteen 125. Japan 126. poverty rate. 127. poverty line .
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Ch 21: Income Inequality and Poverty 128. three times the cost of providing an adequate diet 129. $18,000 130. 10% 131. between $18,000 and $36,000 132. 7.47 133. Imagination has a more equal distribution than either the US or India. 134. increasing 135. 20% 136. 30.2% 137. 3.3% 138. 2.6% 139. race, age, family composition 140. female household with no spouse present 141. whites 142. Blacks 143. 14% 144. differences in the way data are collected 145. in-kind transfers. 146. It would decrease by about 10%. 147. life cycle 148. inequality in living standards 149. transitory 150. permanent 151. Income before taxes 152. consumption per person 153. fewer than 3% .
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Ch 21: Income Inequality and Poverty 154. 8% Persistence of economic success across generations is limited, indicating substantial mobility among income classes. 155. Making money on his/her own 156. Utilitarianism 157. utility 158. Liberalism 159. John Rawls 160. maximin criterion 161. social insurance 162. utilitarianism liberalism 163. Libertarianism 164. libertarianism 165. higher wage 166. Aniella 167. Carmella 168. welfare programs 169. $13,000 170. -$2,960 171. She receives $10,000. 172. No, she would have $15,000 more if she continued working. 173. $60,000 174. $100,000 175. negative income tax 176. In-kind payments ensure that the poor get what they need most (food and shelter). 177. workfare .
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Ch 21: Income Inequality and Poverty 178. smaller the pie becomes 179. A person's earnings depend on the supply and demand for that person's labor, which in turn depends on natural ability, human capital, compensating differentials, discrimination, and so on. Because labor earnings make up about threefourths of the total income in the U.S. economy, the factors that determine wages are also largely responsible for determining how the economy's total income is distributed among the various members of society.
180.
If income were equally distributed across all families, each one-fifth of families would receive one-fifth of income. That is, 20 percent of all families would receive 20 percent of all income, 60 percent of all families would receive 60 percent of all income, etc. 181. Country A has a more equal income distribution. If income were equally distributed across all families, each onefifth of families would receive one-fifth of income. Country A is closer to that situation than Country B. 182. The poverty rate is the percentage of the population whose family income falls below an absolute level called the poverty line. The poverty line is set by the federal government at roughly three times the cost of providing an adequate diet. There are several problems associated with measuring poverty using an absolute scale. For example, the cost of living may differ across broad geographic regions. Families may be better off than their income level indicates if they receive in-kind transfers. Finally, it is very difficult to measure a true "standard of living." 183. Life-cycle variation in income suggests that people’s spending patterns vary less over their lifetimes than their income patterns. Young people may borrow so that they can spend more than they earn. An example of this would be a young person borrowing to go to college, buy a car, or buy a house. Annual earnings peak around age 50. Not surprisingly, many people save more in middle-age than at other times in their life. Their savings allow them to pay off the debts incurred when they were younger and to put away money that they will use to supplement their incomes once they retire. The permanent income hypothesis tries to account for random and transitory forces that affect income. People may borrow when they experience a temporary reduction in income and may save unexpected increases in income (e.g. a holiday bonus from an employer). The two theories are not mutually exclusive. Both theories would indicate that standard measures of income distribution overstate inequality in the distribution of wellbeing. 184. Diminishing marginal utility refers to the principle that as a person's income rises, the extra well-being derived from an additional dollar of income falls. The utilitarian argument of redistribution from rich to poor hinges on the fact that a dollar of additional income to the poor is valued more than a dollar of additional income to the rich. If this is not true, then .
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Ch 21: Income Inequality and Poverty the transfer from rich to poor would actually reduce the well-being of society. 185. Utilitarians reject complete equalization of income because they believe that people respond to incentives. As such, redistribution will reduce some people’s work efforts, which can actually lead to less total income generated in the economy. If the government attempts to redistribute income from the rich to the poor through taxes, some of the money will be lost due to the distorted incentives and deadweight losses associated with the taxes. We can think of the government as transporting the redistributed income in a “leaky bucket.” 186. According to utilitarianism, the government should choose policies to maximize the total utility of society by attempting to achieve a more equal distribution of income. Jeremy Bentham and John Stuart Mill were the founders. According to liberalism, the government should choose policies deemed to be just, as evaluated by an impartial observer behind a "veil of ignorance." The main decision-making rule is called the maximin criterion, which says that the government should aim to maximize the well-being of the worst-off person in society. John Rawls developed the liberalism philosophy in his book A Theory of Justice. According to libertarianism, the government should punish crimes and enforce voluntary agreements but not redistribute income that was fairly earned (not stolen). Libertarians argue that society itself earns no income; only individual members of society earn income. Robert Nozick was a libertarian. 187. a.
b. c.
No. If a dollar is taken from anyone, the possible net gain in utility to any other person is less than or equal to the loss incurred by the person it is taken from. Peter $4 Paul $7 Mary $5 Jane $3 Yes. Marginal utility declines as income increases for each person.
188. a. $30,000 b. $20,000 c. $10,000 d. $0 e. No taxes will be owed. Instead, the family/person would receive a subsidy of $10,000 189. a. 0.25 or 25% b. $5,000 c. $7,500 d. $20,000 190. An in-kind transfer program distributes specific goods and services to individuals who meet some criteria of need based on income. Examples of such programs include food stamps, Medicaid, and the distribution of toys and other presents during the Christmas season. Advocates of in-kind transfers argue that such transfers ensure that the poor receive assistance that is focused on basic needs such as food and medical care. Because the programs are restrictive, society is somewhat reassured that recipients are not spending their benefits on unproductive addictions such as alcohol. Advocates of cash payments argue that in-kind transfers are inefficient because the government does not know what goods and services the poor need most. 191. The critique is based on the premise that most people on welfare would not make a "choice" to pursue a life on .
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Ch 21: Income Inequality and Poverty welfare if it were not thrust upon them. As such, we have an obligation to help them as long as there is demonstrated need. 192. A high marginal tax rate exists on welfare transfers. There is inherently a trade-off between burdening the poor with a high effective marginal tax rate and burdening taxpayers with costly programs to reduce poverty.
.
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Ch 22: The Theory of Consumer Choice
Indicate the answer choice that best completes the statement or answers the question. 1. The theory of consumer choice provides the foundation for understanding the a. structure of a firm. b. profitability of a firm. c. demand for a firm's product. d. supply of a firm's product. 2. Figure 22-1
Refer to Figure 22-1. If the consumer's income is $140, then what is the price of a CD? a. $3 b. $5 c. $7 d. $9 3. Figure 22-1
.
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-1. If the price of a CD is $12, then the consumer's income amounts to a. $140. b. $180. c. $210. d. $240. 4. Figure 22-1
.
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-1. A consumer who chooses to spend all of her income could be at which point(s) on the figure? a. A only b. E only c. B, C, or D only d. A, B, C, or D only 5. Figure 22-1
.
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-1. All of the points identified on the figure represent affordable consumption options with the exception of a. A. b. E. c. A and E. d. B, C, D, and E. 6. Figure 22-2 In each case, the budget constraint moves from BC1 to BC2. Graph (a)
Graph (b)
Graph (c)
Graph (d)
Refer to Figure 22-2. Which of the graphs in the figure reflects a decrease in the price of good X only? .
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Ch 22: The Theory of Consumer Choice a. Graph (a) b. Graph (b) c. Graph (c) d. Graph (d) 7. Figure 22-2 In each case, the budget constraint moves from BC1 to BC2. Graph (a)
Graph (b)
Graph (c)
Graph (d)
Refer to Figure 22-2. Which of the graphs in the figure could reflect a simultaneous decrease in the prices of both goods? a. Only graph (a) b. Only graph (d) c. Graph (b) or graph (c) d. None of the graphs in the figure can reflect this. 8. Figure 22-3 In each case, the budget constraint moves from BC1 to BC2. Graph (a)
Graph (b)
Graph (c)
Graph (d)
Refer to Figure 22-3. Which of the graphs in the figure could reflect a simultaneous increase in the price of good X and decrease in the price of good Y? a. Graph (a) b. Graph (b) .
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Ch 22: The Theory of Consumer Choice c. Graph (c) d. Graph (d) 9. Figure 22-3 In each case, the budget constraint moves from BC1 to BC2. Graph (a)
Graph (b)
Graph (c)
Graph (d)
Refer to Figure 22-3. Which of the graphs in the figure could reflect an increase in income? a. Graph (a) b. Graph (b) c. Graph (d) d. None of the graphs reflects an increase in income. 10. Figure 22-4
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-4. Suppose a consumer has $100 in income, the price of popcorn is $2, and the value of B is 100. What is the price of soda? a. $1 b. $2 c. $5 d. $100 11. Figure 22-4
Refer to Figure 22-4. Suppose a consumer has $200 in income, the price of popcorn is $1, and the price of soda is $2. What is the value of A? a. 200 b. 100 c. 50 d. 25 12. Figure 22-4
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-4. Suppose the price of popcorn is $2, the price of soda is $4, the value of A is 30, and the value of B is 15. How much income does the consumer have? a. $120 b. $80 c. $60 d. $30 13. Figure 22-5
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-5. You have $36 to spend on good X and good Y. If good X costs $6 and good Y costs $12, your budget constraint is a. AB. b. BC. c. CD. d. DE. 14. Figure 22-5
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-5. If the price of good X is $5, and your budget constraint is DE, what is the price of good Y? a. $10 b. $5 c. $2.50 d. $1.67 15. Figure 22-6
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-6. If the consumer has $600 in income, what is the price of good X? a. $20 b. $6 c. $3 d. $0.33 16. Figure 22-6
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-6. If the consumer has $600 in income, what is the price of good Y? a. $20 b. $6 c. $3 d. $0.33 17. Figure 22-6
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Refer to Figure 22-6. If the price of good Y is $5, what is the price of good X? a. $500 b. $150 c. $16.67 d. $1.50 18. Figure 22-6
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Refer to Figure 22-6. If the price of good X is $15, what is the price of good Y? a. $1,500 b. $50 c. $5 d. $0.50 19. Scenario 22-1 Suppose the price of hot wings is $10, the price of beer is $1, and the consumer's income is $50. In addition, suppose the consumer's budget constraint illustrates hot wings on the horizontal axis and beer on the vertical axis. Refer to Scenario 22-1. If the price of beer doubles to $2, then the a. budget constraint intersects the vertical axis at 25 beers. b. slope of the budget constraint rises to −2. c. slope of the budget constraint falls to −4. d. budget constraint shifts inward in a parallel fashion. 20. Scenario 22-1 Suppose the price of hot wings is $10, the price of beer is $1, and the consumer's income is $50. In addition, suppose the consumer's budget constraint illustrates hot wings on the horizontal axis and beer on the vertical axis. Refer to Scenario 22-1. If the consumer's income rises to $60, then the budget line for hot wings and beer would a. now intersect the horizontal axis at six orders of hot wings and the vertical axis at 60 beers. b. not change. c. now intersect the horizontal axis at four orders of hot wings and the vertical axis at 16 beers. d. rotate outward along the beer axis. .
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Ch 22: The Theory of Consumer Choice 21. A budget constraint illustrates the a. prices that a consumer chooses to pay for products he consumes. b. purchases made by consumers. c. consumption bundles that a consumer can afford. d. consumption bundles that give a consumer equal satisfaction. 22. Kendra, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days. Ice cream costs $5 per gallon, and paperback novels cost $8 each. Kendra has a budget of $80, Tara has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and paperback novels. Who can afford to purchase 8 gallons of ice cream and 5 paperback novels? a. Kendra, Tara, and Chelsea b. Kendra only c. Tara and Chelsea but not Kendra d. None of the women 23. Suppose a consumer has an income of $800 per month and that she spends her entire income each month on beer and bratwurst. The price of a pint of beer is $5, and the price of a bratwurst is $4. Which of the following combinations of beers and bratwursts represents a point that would lie to the interior of the consumer's budget constraint? a. 160 beers and 200 bratwursts b. 40 beers and 50 bratwursts c. 80 beers and 100 bratwursts d. 160 beers and 0 bratwursts 24. Suppose a consumer spends her income on two goods: music CDs and DVDs. The price of a CD is $8, and the price of a DVD is $20. If we graph the budget constraint by measuring the quantity of CDs purchased on the vertical axis and the quantity of DVDs on the horizontal axis, what is the slope of the budget constraint? a. −5.0 b. −2.5 c. −0.4 d. The slope of the budget constraint cannot be determined without knowing the income the consumer has available to spend on the two goods. 25. Suppose a consumer is currently spending all of her available income on two goods: music CDs and DVDs. If the price of a CD is $9, the price of a DVD is $18, and she is currently consuming 10 CDs and 5 DVDs, what is the consumer's income? a. $90 b. $180 c. $270 d. $360 26. A consumer is currently spending all of her available income on two goods: music CDs and DVDs. At her current consumption bundle, she is spending twice as much on CDs as she is on DVDs. If the consumer has $120 of income and is consuming 10 CDs and 2 DVDs, what is the price of a CD? a. $4 b. $8 .
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Ch 22: The Theory of Consumer Choice c. $12 d. $20 27. A family on a trip budgets $800 for meals and gasoline. If the price of a meal for the family is $50, how many meals can the family buy if they do not buy any gasoline? a. 8 b. 16 c. 24 d. 32 28. A family on a trip budgets $1,000 for meals and gasoline. If the price of a meal for the family is $50 and if gasoline costs $3.50 per gallon, then how many meals can the family buy if they buy 100 gallons of gasoline? a. 13 b. 16 c. 19 d. 21 29. A family on a trip budgets $800 for meals and hotel accommodations. Suppose the price of a meal is $40. In addition, suppose the family could afford a total of eight nights in a hotel if they don't buy any meals. How many meals could the family afford if they gave up two nights in the hotel? a. 1 b. 2 c. 5 d. 8 30. On a graph we draw a consumer's budget constraint, measuring the number of pineapples on the horizontal axis and the number of pencils on the vertical axis. If the slope of the budget constraint is -6, then a. a pencil costs six times as much as a pineapple. b. the opportunity cost of a pineapple is one-sixth of a pencil. c. the opportunity cost of a pencil is six pineapples. d. a pineapple costs six times as much as a pencil. 31. Suppose Raul has budgeted $100 of his monthly income toward two goods: t-shirts and jeans. If the price of a pair of jeans is $20 and last month he spent his $100 on a bundle containing 2 pairs of jeans and 12 t-shirts, which of the following is another point on Raul's budget line? a. 3 pairs of jeans and 16 t-shirts b. 1 pair of jeans and 15 t-shirts c. 3 pairs of jeans and 6 t-shirts d. 0 pairs of jeans and 20 t-shirts 32. Indifference curves illustrate a. a firm's profits. b. a consumer's budget. c. a consumer's preferences. d. the prices of two goods. .
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Ch 22: The Theory of Consumer Choice 33. Both Diana and Sarah like Classical music and music by Beyoncé. Diana likes music by Beyoncé much better than Classical music, whereas Sarah prefers Classical music to music by Beyoncé. If we were to graph an indifference curve with CDs by Beyoncé on the horizontal axis and Classical music CDs on the vertical axis, then a. Diana and Sarah would have identical indifference curves. b. Diana's indifference curve would be steeper than Sarah's indifference curve. c. Sarah's indifference curve would be steeper than Diana's indifference curve. d. We do not have enough information to compare their indifference curves. 34. Alicia is a vegetarian, so she does not eat beef. That is, beef provides no additional utility to Alicia. She loves potatoes, however. If we illustrate Alicia's indifference curves by drawing beef on the horizontal axis and potatoes on the vertical axis, her indifference curves will a. slope downward. b. be vertical straight lines. c. slope upward. d. be horizontal straight lines. 35. Table 22-1 Bundle A B
Books 2 3
Movies 3 2
Refer to Table 22-1. A consumer likes two goods: books and movies. The two bundles shown in Table 22-1 lie on the same indifference curve for the consumer. Which of the following bundles could not lie on the same indifference curve with A and B and satisfy the four properties of indifference curves? a. 1 movie and 5 books b. 3 movies and 3 books c. 5 movies and 1 book d. 1 movie and 7 books 36. Liana consumes only beer and chips. Her indifference curves are all bowed inward. Consider the bundles (2,6), (4,4), and (6,2). If Liana is indifferent between (2,6) and (6,2), then Liana must a. prefer (4,4) to (6,2). b. be indifferent between (4,4) and (6,2). c. prefer (6,2) to (4,4). d. prefer (2,6) to (4,4). 37. Figure 22-7 The following graph shows three possible indifference curves (I) for a consumer.
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-7. When comparing bundle A to bundle E, the consumer a. prefers bundle A because it contains more donuts. b. prefers bundle E because it lies on a higher indifference curve. c. prefers bundle E because it contains more donuts. d. is indifferent between the two bundles. 38. Figure 22-7 The following graph shows three possible indifference curves (I) for a consumer.
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-7. When comparing bundle B to bundle C, the consumer a. prefers bundle B because it contains more donuts. b. is indifferent between the two bundles. c. prefers bundle C because it contains more cake. d. In order to compare bundle B to bundle C, we must know the prices of cake and donuts. 39. Figure 22-7 The following graph shows three possible indifference curves (I) for a consumer.
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-7. A person who chooses to consume bundle C is likely to a. receive higher total satisfaction at bundle C than at bundle A. b. spend more on bundle C than bundle A. c. receive higher marginal utility from cake than from donuts. d. receive higher marginal utility from donuts than from cake. 40. Figure 22-7 The following graph shows three possible indifference curves (I) for a consumer.
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-7. Which of the following statements is correct? a. Bundle A provides the same utility as bundle E. b. Bundle A provides the same utility as bundle C. c. Bundle B contains more cake than bundle C. d. The bundles along I2 are preferred to those along I3. 41. Figure 22-7 The following graph shows three possible indifference curves (I) for a consumer.
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-7. Which of the following comparisons is correct regarding the marginal rate of substitution (MRS) of donuts for cake? a. The MRS is greater between bundles A and B than between bundles B and C. b. The MRS is greater between bundles B and C than between bundles A and B. c. The MRS is the same between bundles A and B and bundles B and C because all three bundles lie on the same indifference curve. d. The MRS is greater between bundles E and B than between bundles B and D. 42. Figure 22-8
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-8. What is the consumer's marginal rate of substitution as she moves from A to B? a. 4 b. 2 c. 1 d. 0.5 43. Figure 22-8
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-8. As the consumer moves from A to B to C, the marginal rate of substitution a. increases. b. decreases. c. remains constant. d. first increases, then decreases. 44. Figure 22-8
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-8. As the consumer moves from A to B to C, the consumer's total utility a. increases. b. decreases. c. remains constant. d. first increases, then decreases. 45. The rate at which a consumer is willing to exchange one good for another while maintaining a constant level of satisfaction is called the a. relative expenditure ratio. b. value of marginal product. c. marginal rate of substitution. d. relative price ratio. 46. Assume that a consumer's indifference curve is bowed inward and negatively sloped. As the consumer moves from left to right along the horizontal axis, the consumer's marginal rate of substitution a. increases. b. decreases. c. remains constant. d. increases, then decreases. 47. All of the following are properties of typical indifference curves except a. higher indifference curves are preferred to lower ones. .
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Ch 22: The Theory of Consumer Choice b. indifference curves are downward sloping. c. indifference curves do not cross. d. indifference curves are bowed outward. 48. Janet prefers cashews to almonds. She prefers macadamia nuts to peanuts, but she is indifferent between almonds and peanuts. Which of the following statements can we say for sure? a. Janet prefers cashews to macadamia nuts. b. Janet prefers peanuts to cashews. c. Janet prefers macadamia nuts to almonds. d. Janet prefers almonds to macadamia nuts. 49. When a consumer spends less time enjoying leisure and more time working, she has a. lower income and therefore cannot afford more consumption. b. lower income and therefore can afford more consumption. c. higher income and therefore cannot afford more consumption. d. higher income and therefore can afford more consumption. 50. Figure 22-9 Graph (a)
Graph (b)
Graph (c)
Refer to Figure 22-9. Which of the graphs illustrates indifference curves for which the marginal rate of substitution is constant? a. Graph (a) only b. Graph (b) only c. Graph (c) only d. All of the graphs show a constant marginal rate of substitution. 51. Figure 22-9 Graph (a)
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Graph (b)
Graph (c)
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-9. Which of the following statements is correct? a. The indifference curves represented in graph (a) are perfect complements. b. The indifference curves represented in graph (b) are perfect substitutes. c. The indifference curves represented in graph (c) are neither perfect substitutes not perfect complements. d. The indifference curves represented in graph (c) are perfect complements. 52. Consider the indifference curve map for nickels and quarters. Assume nickels are on the horizontal axis and quarters are on the vertical axis. The indifference curves for nickels and quarters are a. straight lines with slope of −1/5. b. straight lines with a slope of −1. c. straight lines with a slope of −5. d. L shaped. 53. "Left" gloves and "right" gloves provide a good example of a. perfect substitutes. b. perfect complements. c. negatively sloped indifference curves. d. positively sloped indifference curves. 54. Table 22-2 A consumer likes two goods: pizza and beer. The five bundles shown in the following table lie on the same indifference curve for the consumer. Bundle A B C D E
Pizza 6 6 6 9 10
Beer 9 7 5 5 5
Refer to Table 22-2. Which of the following statements regarding these bundles is correct? a. The goods are perfect substitutes for this consumer. .
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Ch 22: The Theory of Consumer Choice b. The goods are perfect complements for this consumer. c. These bundles illustrate the property that indifference curves are bowed inward, but not to a 90-degree angle. d. These bundles violate the property that indifference curves do not cross. 55. Suppose that Milton likes to consume one glass of milk with every three chocolate chip cookies. For Milton, an additional cookie has no value unless he can consume it with the appropriate proportion of milk. Milton's indifference curves for milk and cookies are a. right angles. b. bowed inward, but not to a 90-degree angle. c. bowed outward. d. downward-sloping straight lines. 56. If Priscilla regards cheese and crackers as perfect complements, then a. her indifference curves slope upward. b. her indifference curves are straight lines. c. Priscilla prefers lower indifference curves to higher ones. d. for Priscilla a bundle of 5 crackers and 5 ounces of cheese is just as good as a bundle of 5 crackers and 8 ounces of cheese. 57. Figure 22-10
Refer to Figure 22-10. Given the budget constraint depicted in the graph, the consumer's optimal choice will be point a. A. b. B. c. C. .
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Ch 22: The Theory of Consumer Choice d. D. 58. Figure 22-10
Refer to Figure 22-10. It would be possible for the consumer to reach I3 if a. the price of Y increases. b. the price of X increases. c. income decreases. d. the price of Y decreases. 59. Figure 22-10
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-10. Bundle B represents a point where a. MRSxy > Py/Px. b. MRSxy = Px/Py. c. MRSxy < Px/Py. d. MRSxy > Px/Py. 60. When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget constraint, we say that the consumer is at an optimal choice point. A graph of an optimal choice point shows that it occurs a. along the lowest attainable indifference curve. b. where the indifference curve crosses the budget constraint. c. where the marginal utility per dollar spent is higher for X than for Y. d. along the highest attainable indifference curve. 61. Figure 22-11
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-11. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $4. The consumer's optimal choice is point a. A. b. B. c. C. d. D. 62. Figure 22-11
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-11. Assume that the consumer depicted in the figure faces prices and income such that she optimizes at point B. According to the graph, which of the following would cause the consumer to move to point A? a. A decrease in the price of Skittles b. A decrease in the price of M&M's c. An increase in the price of Skittles d. An increase in the price of M&M's 63. Figure 22-11
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-11. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $4. The consumer will choose a consumption bundle where the marginal rate of substitution is a. 2. b. 2/3. c. 1/2. d. 1/3. 64. Bundle J contains 10 units of good X and 5 units of good Y. Bundle K contains 5 units of good X and 10 units of good Y. Bundle L contains 10 units of good X and 10 units of good Y. Assume that the consumer's preferences satisfy the four properties of indifference curves. The price of X is $1, the price of Y is $2, and the consumer has an income of $20. Which bundle will the consumer choose? a. Bundle J b. Bundle K c. Bundle L d. Either bundle J or bundle K 65. Table 22-3 Traci consumes two goods, lemonade and pretzels. Lemonade costs $2 per glass, and she consumes it to the point where the marginal utility she receives from her last glass of lemonade is 4. Pretzels cost $3 per bag. The relationship between the marginal utility Traci gets from eating a bag of pretzels and the number of bags she eats per month is as follows: Bags of Pretzels Marginal Utility 1 30 .
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Ch 22: The Theory of Consumer Choice 2 3 4 5 6
20 12 6 2 0
Refer to Table 22-3. If Traci is maximizing her utility, how many bags of pretzels does she buy each month? a. 3 b. 4 c. 5 d. 6 66. Samantha is maximizing total utility while consuming food and clothing. Her marginal utility from food is 50, and her marginal utility from clothing is 25. If clothing is priced at $10 per unit, the price of food per unit must be a. $2. b. $2.50. c. $5. d. $20. 67. Suppose at the consumer's current consumption bundle the marginal rate of substitution of cheese for wine is 1/2 bottle of wine per pound of cheese. The price of one pound of cheese is $6, and the price of a bottle of wine is $10. The consumer should increase his consumption of a. cheese, decrease his consumption of wine, and move to a lower indifference curve. b. cheese, decrease his consumption of wine, and move to a higher indifference curve. c. wine, decrease consumption of cheese, and move to a higher indifference curve. d. cheese, decrease consumption of wine, and remain on the same indifference curve. 68. Suppose Jamie can choose between consuming two goods. If we observe that Jamie's budget constraint has moved outward, then we know for certain that a. her income must have increased. b. she will be indifferent between the two goods. c. the price of one or both of the goods must have decreased. d. she can reach a higher indifference curve. 69. Suppose William can choose between the consumption of two goods. If we observe that William's budget constraint has moved inward, then we know for certain that a. his income must have decreased. b. he will be indifferent between the two goods. c. the price of one or both of the goods must have increased. d. his utility will decrease. 70. When Stanley has an income of $1,000, he consumes 30 units of good A and 50 units of good B. After Stanley's income increases to $1,500, he consumes 60 units of good A and 45 units of good B. Which of the following statements is correct? .
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Ch 22: The Theory of Consumer Choice a. Both goods A and B are normal goods. b. Both goods A and B are inferior goods. c. Good A is a normal good, and good B is an inferior good. d. Good A is an inferior good, and good B is a normal good. 71. A good is an inferior good if the consumer buys less of it when a. his income rises. b. the price of the good rises. c. the price of a substitute good falls. d. his income falls. 72. Figure 22-12
Refer to Figure 22-12. Suppose that a consumer is originally at point R. Then the price of good X decreases. Which of the following represents the income effect of the price decrease? a. The movement from point R to point S b. The movement from point R to point T c. The movement from point T to point S d. The movement from point T to point R 73. Figure 22-12
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-12. Suppose that a consumer is originally at point R. Then the price of good X decreases. Which of the following represents the substitution effect of the price decrease? a. The movement from point R to point S b. The movement from point R to point T c. The movement from point T to point S d. The movement from point T to point R 74. When the price of a normal good increases, a. both the income and substitution effects encourage the consumer to purchase more of the good. b. both the income and substitution effects encourage the consumer to purchase less of the good. c. the income effect encourages the consumer to purchase more of the good, and the substitution effect encourages the consumer to purchase less of the good. d. the income effect encourages the consumer to purchase less of the good, and the substitution effect encourages the consumer to purchase more of the good. 75. Assume that a college student purchases only Ramen noodles and textbooks. If Ramen noodles are an inferior good and textbooks are a normal good, then the income effect associated with an increase in the price of a textbook will result in a. a decrease in the consumption of textbooks and a decrease in the consumption of Ramen noodles. b. a decrease in the consumption of textbooks and an increase in the consumption of Ramen noodles. c. an increase in the consumption of textbooks and an increase in the consumption of Ramen noodles. d. an increase in the consumption of textbooks and a decrease in the consumption of Ramen noodles. 76. A consumer consumes two normal goods, popcorn and Pepsi. The price of Pepsi rises. The substitution effect, by .
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Ch 22: The Theory of Consumer Choice itself, suggests that the consumer will consume a. more popcorn and more Pepsi. b. less popcorn and less Pepsi. c. more popcorn and less Pepsi. d. less popcorn and more Pepsi. 77. Figure 22-13
Refer to Figure 22-13. When the price of X is $80, the price of Y is $20, and the consumer's income is $160, the consumer's optimal choice is D. Then the price of X decreases to $20. The substitution effect can be illustrated as the movement from a. D to E. b. D to C. c. C to E. d. E to D. 78. Figure 22-13
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-13. When the price of X is $80, the price of Y is $20, and the consumer's income is $160, the consumer's optimal choice is D. Then the price of X decreases to $20. The income effect can be illustrated as the movement from a. D to E. b. D to C. c. C to E. d. E to D. 79. Figure 22-13
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-13. When the price of X is $80, the price of Y is $20, and the consumer's income is $160, the consumer's optimal choice is D. Then the price of X decreases to $20. We can derive the demand curve by determining the change in the quantity demanded illustrated by the movement from a. D to E. b. D to C. c. C to E. d. E to D. 80. Figure 22-14
.
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-14. Suppose the price of good X is $8, the price of good Y is $10, and the consumer's income is $360. Then the consumer's optimal choice is represented by a point on which curve? a. I1 b. I2 c. I3 d. I4 81. Figure 22-14
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-14. Suppose the price of good X is $8, the price of good Y is $10, and the consumer's income is $360. Then the consumer's optimal choice is to buy a. 15 units of good X and 24 units of good Y. b. 20 units of good X and 20 units of good Y. c. 30 units of good X and 12 units of good Y. d. 40 units of good X and 4 units of good Y. 82. Suppose an individual knows that the marginal utility he receives from the next apple is 5 and that the price of an apple is $2. He also knows that the marginal utility he receives from the next orange is 3 and the price of an orange is $1. If the individual is choosing optimally, the next good he will buy is a. an orange because the marginal utility per dollar spent on an orange is greater. b. an orange because the marginal utility of the orange is greater. c. an apple because the marginal utility per dollar spent on an apple is greater. d. an apple because the marginal utility of the apple is greater. 83. When Joshua's income increases, he purchases more prime-rib dinners than he did before his income increased. For Joshua, prime-rib dinners are a. a normal good. b. an inferior good. c. an optimal good. d. a Giffen good. 84. If a good is a Giffen good, then a. the supply curve is downward sloping. .
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Ch 22: The Theory of Consumer Choice b. the demand curve is upward sloping. c. the demand curve is horizontal. d. there is no optimal level of consumption for the consumer. 85. Consider the indifference curve map and budget constraint for two goods, beef and potatoes. Suppose the good measured on the horizontal axis, potatoes, is a Giffen good. Beef is measured on the vertical axis and is a normal good. When the price of potatoes increases, the substitution effect causes a. an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes. The substitution effect is less than the income effect. b. a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The substitution effect is greater than the income effect. c. an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes. The substitution effect is greater than the income effect. d. a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The substitution effect is less than the income effect. 86. Paulo consumes two goods, rice and fish. When the price of fish rises, he consumes less fish. When the price of rice rises, he consumes more rice. For Paulo, a. fish is not a Giffen good but rice is. b. rice is not a Giffen good but fish is. c. both fish and rice are normal goods. d. both fish and rice are Giffen goods. 87. Scenario 22-2 Lawrence has recently graduated from college with a degree in journalism and economics. He has decided to pursue a career as a freelance journalist writing for business newspapers and magazines. Lawrence is typically awake for 112 hours each week (he sleeps an average of eight hours each day). For each hour Lawrence spends writing, he can earn $75. Lawrence is such a good writer that he can get paid for as many hours of writing as he chooses to work. Refer to Scenario 22-2. If Lawrence decides to spend 80 hours a week playing volleyball on the beach and the rest of his time writing, how much income will he have available to spend on consumption goods? a. $900 b. $1,500 c. $2,400 d. $3,000 88. Scenario 22-2 Lawrence has recently graduated from college with a degree in journalism and economics. He has decided to pursue a career as a freelance journalist writing for business newspapers and magazines. Lawrence is typically awake for 112 hours each week (he sleeps an average of eight hours each day). For each hour Lawrence spends writing, he can earn $75. Lawrence is such a good writer that he can get paid for as many hours of writing as he chooses to work. Refer to Scenario 22-2. If Lawrence's wage increases to $90 per hour of writing, which of the following points would fall on his budget constraint? a. 75 hours of leisure, $2,775 of consumption b. 80 hours of leisure, $2,400 of consumption c. 85 hours of leisure, $2,430 of consumption .
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Ch 22: The Theory of Consumer Choice d. 90 hours of leisure, $1,650 of consumption 89. Figure 22-15
Refer to Figure 22-15. Rhonda experiences an increase in her hourly wage. Her optimal choice point moves from A to B. For Rhonda, a. her labor supply curve is backward bending. b. her labor supply curve is upward sloping. c. leisure is a normal good. d. labor is an inferior good. 90. The labor supply curve may have a backward-bending portion if, at higher wages, the income effect is a. smaller than the substitution effect. b. larger than the substitution effect. c. negative. d. zero. 91. Ryan experiences an increase in her wages. The hours of labor that she supplies to the market would increase if a. the income effect is larger than the substitution effect. b. the substitution effect is larger than the income effect. c. neither the income effect nor the substitution effect applies to Ryan's labor-leisure tradeoff. d. Ryan views both labor and leisure as inferior goods. .
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Ch 22: The Theory of Consumer Choice 92. Which of the following statements is not correct? a. If Fiona gets a higher wage and works more, the substitution effect is greater than the income effect for her. b. If Miguel experiences a wage decrease and works less, the income effect is greater than the substitution effect for him. c. If the substitution effect is greater than the income effect, the labor-supply curve is upward sloping. d. If the income effect is greater than the substitution effect, the labor-supply curve is downward sloping. 93. Scenario 22-3 Scott knows that he will ultimately face retirement. Assume that Scott will experience two periods in his life, one in which he works and earns income, and one in which he is retired and earns no income. Scott can earn $250,000 during his working period and nothing in his retirement period. He must both save and consume in his work period with an interest rate of 10 percent on savings. Refer to Scenario 22-3. Assume that Scott decides to consume $100,000 in the work period. How much money will he have available for consumption in his retirement period? a. $100,000 b. $110,000 c. $150,000 d. $165,000 94. Scenario 22-3 Scott knows that he will ultimately face retirement. Assume that Scott will experience two periods in his life, one in which he works and earns income, and one in which he is retired and earns no income. Scott can earn $250,000 during his working period and nothing in his retirement period. He must both save and consume in his work period with an interest rate of 10 percent on savings. Refer to Scenario 22-3. If the interest rate on savings increases, a. Scott will decrease his savings in the work period if the substitution effect is greater than the income effect for him. b. Scott will increase his savings in the work period if the income effect is greater than the substitution effect for him. c. Scott will always increase his savings in the work period. d. Scott will decrease his savings in the work period if the income effect is greater than the substitution effect for him. 95. Figure 22-16 The following figure illustrates the preferences of a representative consumer, Nathaniel.
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-16. A change in Nathaniel's optimum from point A to point B results from a. a change in Nathaniel's preferences. b. an increase in the income Nathaniel receives when he is young. c. an increase in the interest rate. d. a decrease in the interest rate. 96. Figure 22-16 The following figure illustrates the preferences of a representative consumer, Nathaniel.
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-16. Interest rates increase by 4 percent. Nathaniel's optimal choice point moves from A to B. Nathaniel consumes a. less while he is younger and saves more than he did before interest rates increased. b. more while he is younger and saves more than he did before interest rates increased. c. less while he is younger and saves less than he did before interest rates increased. d. more while he is younger and saves less than he did before interest rates increased. 97. Jordan is planning ahead for retirement and must decide how much to spend and how much to save while she's working in order to have money to spend when she retires. When the income effect dominates the substitution effect, an increase in the interest rate on savings will cause her to a. decrease her savings rate. b. increase her savings rate. c. continue saving at the current rate. d. change her savings rate but in an unknown way. 98. Suppose Reta is planning for retirement in a two-period world. In the first period, Reta is young and earns $1 million and in the second period, Reta is old and retired and earns nothing. The interest rate is initially 10 percent, but then it falls to 7 percent. After the interest rate falls, the a. substitution effect will induce Reta to consume more when she is young. b. substitution effect will induce Reta to consume less when she is young. c. income effect will induce Reta to consume more when she is young. d. change in interest rates generate a substitution effect but not an income effect. 99. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays .
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Ch 22: The Theory of Consumer Choice an annual interest rate of 25%, and you may borrow money at that interest rate. Consider the budget constraint between "spending today" on the horizontal axis and "spending a year from today" on the vertical axis. What is the slope of this budget constraint? a. −0.75 b. −1.00 c. −1.25 d. −2.25 100. Suppose Caroline is indifferent between tea and coffee as long as she consumes an equivalent amount of caffeine. Suppose that coffee has twice as much caffeine as tea. Which graph would illustrate a representative indifference curve? a.
b.
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Ch 22: The Theory of Consumer Choice d.
Indicate whether the statement is true or false. 101. The theory of consumer choice illustrates that people face tradeoffs, which is one of the Ten Principles of Economics. a. True b. False 102. A consumer’s budget constraint for goods X and Y is determined by how much the consumer likes good X relative to good Y. a. True b. False 103. The slope of the budget constraint reveals the relative price of good X compared to good Y. a. True b. False 104. The slope of a consumer’s budget constraint is unaffected by a change in income. a. True b. False 105. If a consumer experiences a decrease in income, the new budget constraint will have the same slope as the old budget constraint. a. True b. False 106. A budget constraint illustrates bundles that a consumer prefers equally, while an indifference curve illustrates bundles that are equally affordable to a consumer. a. True b. False 107. For a typical consumer, most indifference curves are bowed inward. a. True b. False 108. For a typical consumer, most indifference curves are downward sloping. .
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Ch 22: The Theory of Consumer Choice a. True b. False 109. For a typical consumer, indifference curves can intersect if they satisfy the property of transitivity. a. True b. False 110. A typical indifference curve is upward sloping. a. True b. False 111. When two goods are perfect complements, the indifference curves are right angles. a. True b. False 112. The indifference curves for left shoes and right shoes are right angles. a. True b. False 113. The indifference curves for left gloves and right gloves are straight lines. a. True b. False 114. The indifference curves for perfect substitutes are right angles. a. True b. False 115. The indifference curves for perfect substitutes are straight lines. a. True b. False 116. The indifference curves for nickels and dimes are straight lines. a. True b. False 117. If goods A and B are perfect substitutes, then the marginal rate of substitution of good A for good B is constant. a. True b. False 118. The slope at any point on an indifference curve equals the absolute price at which a consumer is willing to substitute one good for the other. a. True b. False 119. The marginal rate of substitution between goods A and B measures the price of A relative to the price of B. a. True .
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Ch 22: The Theory of Consumer Choice b. False 120. The marginal rate of substitution is the slope of the budget constraint. a. True b. False 121. The marginal rate of substitution is the slope of the indifference curve. a. True b. False 122. When indifference curves are downward sloping, the marginal rate of substitution is usually constant. a. True b. False 123. When indifference curves are bowed inward, the marginal rate of substitution varies at each point on the indifference curve. a. True b. False 124. A consumer’s optimal choice is affected by income, prices of goods, and preferences. a. True b. False 125. At a consumer’s optimal choice, the consumer chooses the combination of goods that equates the marginal rate of substitution and the price ratio. a. True b. False 126. At a consumer’s optimal choice, the consumer chooses the combination of goods such that the ratio of the marginal utilities equals the ratio of the prices. a. True b. False 127. If consumers purchase more of a good when their income rises, the good is a normal good. a. True b. False 128. If a consumer purchases more of good B when his income rises, good B is an inferior good. a. True b. False 129. A typical consumer consumes both coffee and donuts. After the consumer’s income decreases, the consumer consumes more coffee but fewer donuts than before. For this consumer, coffee is a normal good, but donuts are an inferior good. a. True b. False .
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Ch 22: The Theory of Consumer Choice 130. A typical consumer consumes both coffee and donuts. After the consumer’s income decreases, the consumer consumes more coffee but fewer donuts than before. For this consumer, donuts are a normal good, but coffee is an inferior good. a. True b. False 131. If a consumer purchases more of good X and good Y after her income increases, then neither good X nor good Y is an inferior good for her. a. True b. False 132. If a consumer purchases more of good A when her income falls, good A is an inferior good. a. True b. False 133. The income effect of a price change is unaffected by whether the good is a normal or inferior good. a. True b. False 134. The income effect of a price change is the change in consumption that results from the movement to a new indifference curve. a. True b. False 135. The direction of the substitution effect is not influenced by whether the good is normal or inferior. a. True b. False 136. The substitution effect of a price change is the change in consumption that results from the movement to a new indifference curve. a. True b. False 137. All points on a demand curve are optimal consumption points. a. True b. False 138. Giffen goods violate the law of demand. a. True b. False 139. Giffen goods are inferior goods for which the income effect dominates the substitution effect. a. True b. False 140. Economists have found evidence of a Giffen good when studying the consumption of rice in the Chinese province of Hunan. .
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Ch 22: The Theory of Consumer Choice a. True b. False 141. Katie wins $3 million in her state’s lottery. If Katie drastically reduces the number of hours she works after she wins the money, we can infer that the income effect is larger than the substitution effect for her. a. True b. False 142. Susie wins $2 million in her state’s lottery. If Susie keeps working after she wins the money, we can infer that the income effect is larger than the substitution effect for her. a. True b. False 143. Shelley wins $1 million in her state’s lottery. If Shelley keeps working after she wins the money, we can infer that the substitution effect must exactly offset the income effect for her. a. True b. False 144. A rational person can have a negatively-sloped labor supply curve. a. True b. False 145. The substitution effect in the work-leisure model induces a person to work less in response to higher wages, which tends to make the labor-supply curve slope upward. a. True b. False 146. The income effect in the work-leisure model induces a person to work less in response to higher wages, which tends to make the labor-supply curve slope backward. a. True b. False 147. A worker with a backward-bending labor supply curve responds to an increase in wages by working more hours. a. True b. False 148. A rise in the interest rate will generally result in people consuming more when they are old if the substitution effect outweighs the income effect. a. True b. False 149. A rise in the interest rate will generally result in people consuming less when they are old if the substitution effect outweighs the income effect. a. True b. False 150. The theory of consumer choice is representative of how consumers make decisions but is not intended to be a literal .
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Ch 22: The Theory of Consumer Choice account of the process. a. True b. False 151. An increase in the interest rate today leading to a decrease in consumption today violates the law of demand. a. True b. False 152. A decrease in the price of the good on the horizontal axis rotates the budget constraint counterclockwise. a. True b. False 153. A consumer maximizes utility at a point where multiple indifference curves intersect the budget line. a. True b. False 154. Consumers face tradeoffs except at the point where the indifference curve is tangent to the budget line. a. True b. False 155. Consumer will always consume more of a good if their income increases. a. True b. False
156. Scenario 22-4 Frank spends all of his income of $240 per month on shirts and hats. The price of a shirt is $40 and the price of a hat is $30. Refer to Scenario 22-4. If Frank uses all of his income to buy hats during a certain month, then how many hats does he buy? 157. Scenario 22-4 Frank spends all of his income of $240 per month on shirts and hats. The price of a shirt is $40 and the price of a hat is $30. Refer to Scenario 22-4. If Frank buys 3 shirts during a certain month, then how many hats does he buy during that month? 158. Scenario 22-4 Frank spends all of his income of $240 per month on shirts and hats. The price of a shirt is $40 and the price of a hat is $30. Refer to Scenario 22-4. What is the slope of Frank’s budget constraint if it is drawn with the quantity of shirts on the horizontal axis and the quantity of hats on the vertical axis? 159. Figure 22-17 The graph shows two budget constraints for a consumer. .
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-17. Suppose the consumer’s income is $90 and Budget Constraint A applies. What is the price of a light bulb? 160. Figure 22-17 The graph shows two budget constraints for a consumer.
Refer to Figure 22-17. Suppose the price of a hamburger is $10 and Budget Constraint A applies. What is the consumer’s income? What is the price of a light bulb? 161. Figure 22-17 The graph shows two budget constraints for a consumer.
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Refer to Figure 22-17. Suppose the price of a light bulb is $3 and Budget Constraint B applies. What is the consumer’s income? What is the price of a hamburger? 162. Figure 22-17 The graph shows two budget constraints for a consumer.
Refer to Figure 22-17. What particular change would result in a rotation of the budget constraint from Budget Constraint A to Budget Constraint B? 163. Figure 22-17 The graph shows two budget constraints for a consumer.
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Refer to Figure 22-17. Suppose Budget Constraint B applies. If the consumer’s income is $90 and if he is buying 5 light bulbs, then how much money is he spending on hamburgers? 164. If the market is offering consumers the trade-off of 3 pints of Pepsi for 1 pizza, and if the price of a pizza is $9, then what is the price of a pint of Pepsi? 165. A consumer’s budget constraint is drawn with the quantity of pizza measured along the horizontal axis and the price of Pepsi measured along the vertical axis. If the market is offering the consumer the trade-off of 3 pints of Pepsi for 1 pizza, then what is the slope of the consumer’s budget constraint? 166. What does the slope of a budget constraint represent? 167. A consumer’s budget constraint is drawn on a graph with the number of sandwiches measured along the horizontal axis and the number of bowls of soup measured along the vertical axis. Hold the consumer’s income and the price of a sandwich fixed, and increase the price of a bowl of soup. Describe the effect on the budget constraint. 168. The rate at which a consumer is willing to trade off one good for another is called the __________. 169. In order to represent a consumer’s choices on a graph, we draw her budget constraint as well as her __________ curves. 170. When we draw Katie’s indifference curves to represent her preferences for books and movies, we find that her indifference curves are upward-sloping. What does this tell us about Katie’s preferences? 171. A consumer’s indifference curves are right angles when, for the consumer, the goods in question are __________. 172. A consumer’s indifference curves are straight lines when, for the consumer, the goods in question are __________. 173. What does the slope of a consumer’s indifference curve represent? 174. Because people are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have little, indifference curves are ___________. 175. Teresa faces prices of $6.00 for a unit of good X and $1.50 for a unit of good Y. At her optimum, Teresa is willing to .
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Ch 22: The Theory of Consumer Choice give up 1 unit of good X for __________ units of good Y. 176. Thomas faces prices of $6 for a unit of good X and $30 for a unit of good Y. At his optimum, Thomas is willing to give up 1 unit of good Y for __________ units of good X. 177. If goods X and Y are both normal goods for Brenda, then an increase in Brenda’s income will lead her to __________. 178. Using our model of consumer choice, is it possible for a consumer to buy less of a particular good when his income rises? Briefly explain. 179. What is significant about a point on a graph at which an indifference curve is tangent to a budget constraint? 180. Goods x and y are available to Jeff. At Jeff’s optimum, the marginal utility per dollar spent on good x equals __________________. 181. Figure 22-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin.
Refer to Figure 22-18. Suppose point A was Kevin’s optimum last week, and point B is his optimum this week. What happened between last week and this week? 182. Figure 22-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin.
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Refer to Figure 22-18. If Kevin’s income is $1,260, then what is the price of a sweater? 183. Figure 22-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin.
Refer to Figure 22-18. If point A is Kevin’s optimum, then at that optimum, what is his opportunity cost of a shirt in terms of sweaters? 184. Figure 22-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin. .
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Refer to Figure 22-18. If the price of a shirt is $36 and point A is Kevin’s optimum, then what is Kevin’s income? 185. Figure 22-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin.
Refer to Figure 22-18. If Kevin’s income is $1,260 and point A is his optimum, then what is the price of a shirt? 186. Figure 22-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin.
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Refer to Figure 22-18. Suppose Kevin is optimally purchasing 12 shirts and 28 sweaters, and he is spending $648 on shirts. What is the price of a sweater? 187. Figure 22-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin.
Refer to Figure 22-18. Suppose Kevin is optimally purchasing 21 shirts and 28 sweaters, and he is spending $1,680 on sweaters. What is the price of a shirt? 188. Figure 22-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin. .
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Refer to Figure 22-18. If point B is Kevin’s optimum, then at that optimum, what is his opportunity cost of a sweater in terms of shirts? 189. Figure 22-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin.
Refer to Figure 22-18. If the price of a shirt is $20 and point B is Kevin’s optimum, then what is Kevin’s income? 190. Figure 22-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin. .
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Ch 22: The Theory of Consumer Choice
Refer to Figure 22-18. If Kevin’s income is $2,520 and point B is his optimum, then what is the price of a shirt? 191. Figure 22-18 The figure shows two indifference curves and two budget constraints for a consumer named Kevin.
Refer to Figure 22-18. For Kevin, are sweaters and shirts substitutes, complements, or neither? 192. Figure 22-19 The figure shows three indifference curves and a budget constraint for a consumer named Hannah. When young, Hannah works and earns income. When old, she is retired and earns no income. .
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Refer to Figure 22-19. Which of the four labeled points is Hannah’s optimum? 193. Figure 22-19 The figure shows three indifference curves and a budget constraint for a consumer named Hannah. When young, Hannah works and earns income. When old, she is retired and earns no income.
Refer to Figure 22-19. At two of the four labeled points, Hannah is equally happy. Identify those two points. 194. Figure 22-19 The figure shows three indifference curves and a budget constraint for a consumer named Hannah. When young, Hannah works and earns income. When old, she is retired and earns no income. .
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Refer to Figure 22-19. Of the four labeled points, which is (are) affordable to Hannah? 195. Figure 22-19 The figure shows three indifference curves and a budget constraint for a consumer named Hannah. When young, Hannah works and earns income. When old, she is retired and earns no income.
Refer to Figure 22-19. How much income does Hannah earn when she is young? 196. Figure 22-19 The figure shows three indifference curves and a budget constraint for a consumer named Hannah. When young, Hannah works and earns income. When old, she is retired and earns no income. .
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Refer to Figure 22-19. What is the value of the interest rate that Hannah earns on her saving? 197. Figure 22-19 The figure shows three indifference curves and a budget constraint for a consumer named Hannah. When young, Hannah works and earns income. When old, she is retired and earns no income.
Refer to Figure 22-19. If Hannah chose to spend $30,000 on consumption when young, then how much could she spend on consumption when old? 198. Figure 22-19 The figure shows three indifference curves and a budget constraint for a consumer named Hannah. When young, Hannah works and earns income. When old, she is retired and earns no income. .
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Refer to Figure 22-19. From the figure we can determine how much income Hannah earns when young and we can determine the interest rate. Could the interest rate rise to a level at which Hannah could afford to be at point A? 199. Figure 22-19 The figure shows three indifference curves and a budget constraint for a consumer named Hannah. When young, Hannah works and earns income. When old, she is retired and earns no income.
Refer to Figure 22-19. From the figure we can determine how much income Hannah earns when young and we can determine the interest rate. Could the interest rate rise to a level at which Hannah could afford to be at point D? 200. Is it possible for a normal good to be a Giffen good? Briefly explain. .
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Ch 22: The Theory of Consumer Choice 201. A field experiment conducted by economists in the Chinese province of Hunan provided evidence that, for poor households in that province, rice is a __________ good. 202. For Meg, the substitution effect of an interest-rate increase is stronger than the income effect. In response to a higher interest rate, will Meg save more or will she save less? 203. For Molly, the substitution effect of a wage increase is stronger than the income effect. In response to a wage increase, will Sally work more hours or will she work fewer hours? 204. For Brent, the income effect of a wage increase is stronger than the substitution effect. In response to a wage increase, will Brent work more hours or will he work fewer hours? 205. For Antonio, the income effect of an interest-rate increase is stronger than the substitution effect. In response to a higher interest rate, will Antonio save more or will he save less? 206. Answer the following questions based on the table. A consumer is able to consume the following bundles of rice and beans when the price of rice is $2 and the price of beans is $3. RICE 12 6 0 a. b. c. d.
BEANS 0 4 8
How much is this consumer's income? Draw a budget constraint given this information. Label it B. Construct a new budget constraint showing the change if the price of rice falls $1. Label this C. Given the original prices for rice ($2) and beans ($3), construct a new budget constraint if this consumer's income increased to $48. Label this D.
207. Draw a budget constraint that is consistent with the following prices and income. Income = 200 PY = 50 PX = 25 Demonstrate how your original budget constraint would change if income increases to a. 500. b. Demonstrate how your original budget constraint would change if PY decreases to 20. c. Demonstrate how your original budget constraint would change if PX increases to 40. 208. Assume that a consumer faces the following budget constraints.
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a. b. c. d.
Assuming that income is the same on both occasions, describe the difference in relative prices between Panel A and Panel B. If income in Panel B is $126, what is the price of good X? If income in Panel A is $84, what is the price of good Y? Assuming that the price of good X is the same on both occasions, describe the difference in income and price of good Y between Panel A and Panel B.
209. Evaluate the following statement, "Warren Buffet is the second richest person in the world. He doesn't face any constraint on his ability to purchase commodities he wants." 210. List and briefly explain each of the four properties of indifference curves. 211. Draw indifference curves that reflect the following preferences. a. pencils with white erasers and pencils with pink erasers b. left shoes and right shoes c. potatoes and rice d. income and polluted water 212. Graphically demonstrate the conditions associated with a consumer optimum. Carefully label all curves and axes. 213. Explain the relationship between the budget constraint and indifference curve at a consumer’s optimum. 214. Assume that a person consumes two goods, Coke and Snickers. Use a graph to demonstrate how the consumer adjusts his/her optimal consumption bundle when the price of Coke decreases. Carefully label all curves and axes. What will happen to consumption if Coke is a normal good? What will happen to consumption if Coke is an inferior good? (Remember to explain the possible change when the income effect dominates and when the substitution effect dominates.) 215. Using the graph shown, construct a demand curve for M&M's given an income of $10.
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Ch 22: The Theory of Consumer Choice
216. Using indifference curves and budget constraints, graphically illustrate the substitution and income effect that would result from a change in the price of a normal good. 217. Explain the difference between inferior and normal goods. As a developing economy experiences increases in income (measured by GDP), what would you predict to happen to demand for inferior goods? 218. Janet knows that she will ultimately face retirement. Assume that Janet will experience two periods in her life, one in which she works and earns income, and one in which she is retired and earns no income. Janet can earn $250,000 during her working period and nothing in her retirement period. She must both save and consume in her work period and can earn 10 percent interest on her savings. a. Use a graph to demonstrate Janet's budget constraint. On your graph, show Janet at an optimal level of consumption in the work period equal b. to $150,000. What is the implied optimal level of consumption in her retirement period? Now, using your graph from part b above, demonstrate how Janet will be affected by an increase in the interest rate on savings to 14 percent. Discuss the role of income and c. substitution effects in determining whether Janet will increase, or decrease her savings in the work period.
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Ch 22: The Theory of Consumer Choice Answer Key 1. c 2. c 3. d 4. c 5. b 6. b 7. d 8. d 9. b 10. a 11. a 12. c 13. d 14. a 15. b 16. a 17. d 18. b 19. a 20. a 21. c 22. b 23. b 24. b 25. b .
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Ch 22: The Theory of Consumer Choice 26. b 27. b 28. a 29. c 30. d 31. d 32. c 33. b 34. d 35. b 36. a 37. b 38. b 39. d 40. b 41. a 42. b 43. b 44. c 45. c 46. b 47. d 48. c 49. d 50. a 51. c .
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Ch 22: The Theory of Consumer Choice 52. a 53. b 54. b 55. a 56. d 57. c 58. d 59. d 60. d 61. a 62. d 63. c 64. a 65. b 66. d 67. b 68. d 69. d 70. c 71. a 72. c 73. b 74. b 75. b 76. c .
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Ch 22: The Theory of Consumer Choice 77. b 78. c 79. a 80. d 81. c 82. a 83. a 84. b 85. d 86. a 87. c 88. c 89. b 90. b 91. b 92. b 93. d 94. d 95. c 96. d 97. a 98. a 99. c 100. b 101. True 102. False .
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Ch 22: The Theory of Consumer Choice 103. True 104. True 105. True 106. False 107. True 108. True 109. False 110. False 111. True 112. True 113. False 114. False 115. True 116. True 117. True 118. False 119. False 120. False 121. True 122. False 123. True 124. True 125. True 126. True 127. True .
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Ch 22: The Theory of Consumer Choice 128. False 129. False 130. True 131. True 132. True 133. False 134. True 135. True 136. False 137. True 138. True 139. True 140. True 141. True 142. False 143. False 144. True 145. False 146. True 147. False 148. True 149. False 150. True 151. False 152. True 153. False .
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Ch 22: The Theory of Consumer Choice 154. False 155. False 156. Frank buys 8 hats during that month. 157. Frank buys 4 hats during that month. 158. The slope of the budget constraint is $40/$30 = 4/3 (or, technically, -4/3). 159. The price of a light bulb is $90/10 = $9. 160. The consumer’s income is ($10)(9) = $90. The price of a light bulb is $90/10 = $9. 161. The consumer’s income is ($3)(15) = $45. The price of a hamburger is $45/9 = $5. 162. A decrease in the price of light bulbs would cause the rotation. 163. If income is $90, then the price of a light bulb is $90/15 = $6. He is then spending ($6)(5) = $30 on light bulbs, so he is spending $90 - $30 = $60 on hamburgers. (The price of a hamburger is $90/9 = $10 and he is buying 6 hamburgers.) 164. The price of a pint of Pepsi is $3. 165. A pizza costs three times as much as a pint of Pepsi, so the slope of the budget constraint is 3 (or, technically, -3). 166. The slope of a budget constraint represents the relative price of the two goods. Alternatively, the slope of the budget constraint represents the opportunity cost of one good in terms of the other. 167. The horizontal intercept is unaffected, and the budget constraint becomes flatter. (The vertical intercept is now lower on the vertical axis.) 168. marginal rate of substitution 169. indifference 170. Either Katie dislikes books or she dislikes movies. 171. perfect complements 172. perfect substitutes 173. The slope of a consumer’s indifference curve represents that consumer’s marginal rate of substitution between two goods. 174. bowed inward strictly convex 175. 4 176. 5 .
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Ch 22: The Theory of Consumer Choice 177. buy more of good X and more of good Y 178. Yes, an increase in income will lead a consumer to buy less of a good when it is an inferior good. 179. A point of tangency between an indifference curve and a budget constraint represents a consumer’s optimum. 180. the marginal utility per dollar spent on good y. 181. The price of shirts decreased. 182. The price of a sweater is $1,260/42 = $30. 183. Kevin’s opportunity cost of a shirt is 42/35 = 6/5 sweaters. 184. Kevin’s income is
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185. The price of a shirt is $1,260/35 = $36. 186. Given that Kevin is optimally purchasing 12 shirts and 28 sweaters, point A is his optimum, and his budget constraint is the inner one. The price of a shirt is $648/12 = $54, and his income is Then the price of sweater is $1,890/42 = $45. 187. Given that Kevin is optimally purchasing 21 shirts and 28 sweaters, point B is his optimum, and his budget constraint is the outer one. The price of a sweater is $1,680/28 = $60 and his income is Then the price of a shirt is $2,520/63 = $40. 188. Kevin’s opportunity cost of a sweater is 63/42 = 3/2 shirts. 189. Kevin’s income is
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190. The price of a shirt is $2,520/63 = $40. 191. Kevin purchases 28 sweaters at two different prices of shirts, so it appears that shirts and sweaters are neither substitutes nor complements for him. 192. Point B is Hannah’s optimum. 193. Hannah is equally happy at points A and D. 194. Points B and C are affordable to Hannah. 195. Hannah earns $40,000 when she is young. 196. The interest rate is 197. The interest rate is $10,000 and have
or 25 percent. or 25 percent. If she spent $30,000 when young, then she would save to spend when old.
198. Yes. The point (0, 40000) is the horizontal intercept of the budget constraint at any interest rate. The budget constraint becomes steeper at higher interest rates. If the interest rate increased to a sufficiently-high level, Hannah could .
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Ch 22: The Theory of Consumer Choice afford to be at point A. 199. No. The point (0, 40000) is the horizontal intercept of the budget constraint at any interest rate. The budget constraint becomes steeper at higher interest rates, but it cannot become upward-sloping. 200. No, only inferior goods can be Giffen goods. 201. Giffen 202. In response to a higher interest rate, Meg will save more. 203. In response to a wage increase, Sally will work more hours. 204. In response to a wage increase, Brent will work fewer hours. 205. In response to a higher interest rate, Antonio will save less. 206. a. $24
b. c. d.
.
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Ch 22: The Theory of Consumer Choice
207.
208. The price of good Y is relatively higher in Panel A than Panel B. Said another way, the a. price of X is relatively lower in Panel A than Panel B. b. $9 c. $12 Income in Panel A is twice the income in Panel B, and the price of "Y" in Panel B is 1/18 d. the price of "Y" in Panel A. 209. All people face scarcity of resources, regardless of how rich they are, because wants are assumed to be infinite. 210. 1: Higher indifference curves are preferred to lower ones, because consumers usually prefer more of something to less of it. 2: Indifference curves are downward sloping. The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for another while holding utility constant. If the quantity of one good is reduced, the quantity of the other good must increase in order for the consumer to be equally happy. 3: Indifference curves do not cross. If indifference curves did cross, the same point could be on two different curves, thus contradicting the assumption that consumers prefer more of both goods to less. 4: Indifference curves are bowed inward. This is because people are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have less. 211. (a)
(b)
(c)
(d)
.
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Ch 22: The Theory of Consumer Choice
212. Where M=Income
213. Because the budget constraint is tangent to the indifference curve at a consumer’s optimum, the slope of the budget constraint (relative market prices) and the slope of the indifference curve (the marginal rate of substitution) are equal at the optimal consumption point and only at that point.
214.
If Coke is a normal good, the consumption of Coke will increase when the price decreases. If Coke is an inferior good and the substitution effect dominates, the consumption of Coke will increase when the price decreases. If Coke is an inferior good and the income effect dominates, the consumption of Coke will decrease when the price decreases. If consumption .
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Ch 22: The Theory of Consumer Choice decreases, the demand curve is upward sloping, and Coke would be a Giffen good. Giffen goods are very rare in the real world, and Coke is not likely to be one.
215.
216.
The graph above illustrates a price decrease for potato chips. Moving from point A to point B illustrates the substitution effect, while moving from point B to point C illustrates the income effect. 217. Normal goods are those for which consumption increases as income rises. Inferior goods are those for which consumption decreases as income rises. We would expect the demand for inferior goods to decrease as developing countries experience increases in income. 218. a. see graph below b. see graph below c. see graph below .
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Ch 22: The Theory of Consumer Choice
Substitution effect: Retirement spending becomes less costly, so she should increase saving. Income effect: As income increases she should increase consumption in both periods (thus reducing her saving in the work period.)
.
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Ch 23: Frontiers of Microeconomics
Indicate the answer choice that best completes the statement or answers the question. 1. When one party is better informed about an economic situation than another party, economists describe the problem as a. asymmetric information. b. confirmation bias. c. political economy. d. behavioral economics. 2. The field of behavioral economics builds a more subtle and complex model of economic behavior using insights from a. physics. b. biology. c. psychology. d. anthropology. 3. Bill would like to buy a gift for Ann to convey his love for her. Which of the following areas of economics would most likely study this type of decision? a. Asymmetric information b. Political economy c. Behavioral economics d. Industrial organization 4. When asymmetric information affects a relationship between two parties, it is always the case that a. neither party is well informed. b. one party is better informed than the other party. c. both parties are equally well informed. d. the government is better informed than either of the two parties. 5. A driver knows more than their auto insurer about how cautiously they drive. This is an example of a. a hidden action. b. a hidden characteristic. c. an adverse selection. d. the Condorcet Paradox. 6. Asymmetric information a. is not an area of current research in economics. b. can take the form of a hidden action or a hidden characteristic. c. explains Arrow's impossibility theorem. d. is uncommon in corporate management. 7. The problem that arises when one person performs a task on behalf of another person is called a. the hidden characteristics problem. b. the lemons problem. c. moral hazard. d. adverse selection. .
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Ch 23: Frontiers of Microeconomics 8. The temptation of imperfectly monitored workers to shirk their responsibilities is an example of a. the moral hazard problem. b. the adverse selection problem. c. screening. d. signaling. 9. When a corporation decides to include its own corporate stock as part of the compensation for its employees, it is trying to solve the a. adverse selection problem. b. principal-agent problem. c. lemons problem. d. signaling problem. 10. Which of the following offers an explanation as to why the principal-agent problem exists for a firm? a. The firm cares less about profit and more about cost when there are many competitors in the market. b. The firm offers an employee-incentive program in which employees share in the firm's profits. c. The firm operates in a market with many competitors forcing the firm to pay its employees more to keep them from switching to another firm. d. The firm operates to maximize profit while the employees attempt to work as little as possible to earn their paychecks. 11. Which of the following practices are, at least in part, attempts to reduce moral hazard problems? a. The income of waiters and waitresses depends heavily on tips. b. An employer pays below equilibrium wages because they think their employees are not working as hard as they could be. c. The professors leave the room to prevent cheating on exams. d. Tenured professors are not supervised closely. 12. When new professors are hired, their job performance is monitored closely. If they meet their institution's standards, they will eventually receive tenure. After receiving tenure, professors' job performance is less closely monitored, and they become difficult to fire. Tenure thus creates a. adverse selection. b. a Condorcet paradox. c. a screening problem. d. a moral hazard problem. 13. Studies show that during the March Madness college basketball tournament, the productivity of the average company in the United States falls considerably. This is an example of a. the Condorcet Paradox. b. signaling. c. moral hazard. d. screening. 14. You own an ice cream store and are concerned that an employee may be giving generous scoops to friends and relatives and smaller scoops to some other customers. This may be reducing sales. In this example, you are the .
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Ch 23: Frontiers of Microeconomics a. principal and your employee is the agent. b. agent and your employee is the principal. c. signaler and your employee is the screener. d. screener and your employee is the signaler. 15. Employers can try to overcome the moral-hazard problem involving their employees by a. paying their employees more often. b. paying their employees below-equilibrium wages since the employees will likely shirk some of their responsibilities. c. better monitoring their employees' work efforts. d. requiring their employees to take a pre-employment work effort test. 16. Employers who choose to pay their workers a wage that exceeds the equilibrium wage are acting in accordance with a. efficiency-wage theories. b. equilibrium wage theories. c. screening theories. d. signaling theories. 17. A college professor hires a student to babysit their children and pays the student an efficiency wage. Which of the following is correct about the wage the student earns? a. The wage is higher than the wage the student could earn working a similar job elsewhere. b. The wage is the same as the wage the student could earn working a similar job elsewhere. c. The wage is lower than the wage the student could earn working a similar job elsewhere. d. The wage is likely to result in the student shirking responsibilities. 18. Which of the following is a plausible explanation for a firm paying above-equilibrium wages to its workers? a. It increases the probability that a worker who shirks will be caught. b. It discourages workers from shirking out of fear of losing their high-paying job. c. The Condorcet Paradox suggests that paying high wages will result in greater effort by employees. d. By paying a high wage, employers solve the adverse selection problem and motivate the employees to work harder. 19. When a night watchman only performs two walk-throughs per night when they are being paid to perform five walkthroughs per night, it is an example of a. both moral hazard and adverse selection. b. neither moral hazard nor adverse selection. c. moral hazard, but not adverse selection. d. adverse selection, but not moral hazard. 20. In corporations, which of the following are the principals in the principal-agent relationship? a. Shareholders b. The board of directors c. Managers d. Workers .
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Ch 23: Frontiers of Microeconomics 21. Adverse selection a. occurs when the overall quality of choices facing a consumer is very low. b. is a greater problem for employees than employers. c. occurs more frequently in the market for new cars than used cars. d. is not easily remedied by free markets. 22. Which of the following is an example of an adverse selection problem? a. A customer purchases four apples, two of which are bruised. b. A card shop puts its Halloween merchandise on sale on November 1st. c. A young job applicant fails to reveal that they were fired from their last job because they were incompetent. d. A man rents a car and then drives it less carefully and fills it with cheaper gas than he would if he owned it. 23. When the buyer knows less than the seller about the characteristics of the good being sold, there is a. a principal-agent problem. b. a moral hazard problem. c. an adverse selection problem. d. a signaling problem. 24. The classic example of adverse selection is the a. market for used cars. b. market for new cars. c. relationship between shareholders and managers. d. relationship between a coach and an athlete. 25. People with hidden health problems are more likely to buy health insurance than are other people. This is an example of a. moral hazard and makes the cost of health insurance higher than otherwise. b. moral hazard and makes the cost of health insurance lower than otherwise. c. adverse selection and makes the cost of health insurance higher than otherwise. d. adverse selection and makes the cost of health insurance lower than otherwise. 26. If the seller of a used car offers a limited warranty, the warranty is an example of a. a signal. b. a screen. c. an efficiency wage. d. an agent. 27. A firm with a very good product a. has a higher cost of signaling with advertising than does a firm with an inferior product. b. has more to gain by signaling with advertising than does a firm with an inferior product. c. does not need to signal with advertising because the product's quality speaks for itself. d. will signal with advertising effectively if signaling is free. 28. y, send her a check for $1,000.Which of the following events best exemplifies the concept of signaling? a. A college student's parents, having learned that their child is short of money, send them a check for $1,000. .
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Ch 23: Frontiers of Microeconomics b. A new company making high quality bicycles at a reasonable price sends free bikes to reviewers working for bicycle magazines. c. A grocery store maintains a policy of examining the driver's license of everyone who writes a personal check to purchase their groceries. d. A university maintains a policy of considering for admission only those students who graduated among the top 10 percent of their high school class. 29. A safe driver would likely choose an auto insurance policy with a a. low premium and a high deductible. b. high premium and a high deductible. c. high premium and a low deductible. d. high premium and no deductible. 30. An unhealthy person would likely choose a medical insurance policy with a a. low premium and a high deductible. b. high premium and a high deductible. c. high premium and no deductible. d. The unhealthy person would choose not to be insured. 31. Scenario 23-1 Katie owns a boutique that sells high-end women's clothing and accessories. Shana works part-time at the boutique and frequently is the only employee in this small store. Katie pays Shana a wage that is higher than the market wage for this type of job. When the store is not full of customers, Shana diligently works on displays and cleans to keep the store looking its best. Magda is a customer in the store who asks Shana's opinion on the quality of some jeans she is considering purchasing. Even though she's had several other customers return them due to flaws, Shana tells Magda the quality is great. Belinda is another customer who is returning a necklace without revealing that she lost a gem from it while wearing it. Refer to Scenario 23-1. Which of the ladies is an agent? a. Shana b. Katie c. Belinda d. Magda 32. Scenario 23-1 Katie owns a boutique that sells high-end women's clothing and accessories. Shana works part-time at the boutique and frequently is the only employee in this small store. Katie pays Shana a wage that is higher than the market wage for this type of job. When the store is not full of customers, Shana diligently works on displays and cleans to keep the store looking its best. Magda is a customer in the store who asks Shana's opinion on the quality of some jeans she is considering purchasing. Even though she's had several other customers return them due to flaws, Shana tells Magda the quality is great. Belinda is another customer who is returning a necklace without revealing that she lost a gem from it while wearing it. Refer to Scenario 23-1. Which of the ladies is a principal? a. Shana b. Katie .
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Ch 23: Frontiers of Microeconomics c. Belinda d. Magda 33. Scenario 23-1 Katie owns a boutique that sells high-end women's clothing and accessories. Shana works part-time at the boutique and frequently is the only employee in this small store. Katie pays Shana a wage that is higher than the market wage for this type of job. When the store is not full of customers, Shana diligently works on displays and cleans to keep the store looking its best. Magda is a customer in the store who asks Shana's opinion on the quality of some jeans she is considering purchasing. Even though she's had several other customers return them due to flaws, Shana tells Magda the quality is great. Belinda is another customer who is returning a necklace without revealing that she lost a gem from it while wearing it. Refer to Scenario 23-1. Which of the ladies is causing a moral hazard problem? a. Shana b. Katie c. Belinda d. Magda 34. Scenario 23-1 Katie owns a boutique that sells high-end women's clothing and accessories. Shana works part-time at the boutique and frequently is the only employee in this small store. Katie pays Shana a wage that is higher than the market wage for this type of job. When the store is not full of customers, Shana diligently works on displays and cleans to keep the store looking its best. Magda is a customer in the store who asks Shana's opinion on the quality of some jeans she is considering purchasing. Even though she's had several other customers return them due to flaws, Shana tells Magda the quality is great. Belinda is another customer who is returning a necklace without revealing that she lost a gem from it while wearing it. Refer to Scenario 23-1. Which of the ladies is the victim of an adverse selection problem? a. Shana b. Katie c. Belinda d. Magda 35. A Principles of Microeconomics professor wants to know how much prior knowledge their students have before beginning the class so they give them a pre-test. This action is an example of a. signaling. b. screening. c. adverse selection. d. moral hazard. 36. Which of the following would violate transitivity? a. Vanessa likes A more than B, C more than B, and C more than A. b. Jay likes C more than B, A more than B, B more than D, and C more than D. c. Maddy likes C more than A, B more than D, A more than B, and D more than C. d. Victoria likes C more than B, C more than D, and B more than D. .
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Ch 23: Frontiers of Microeconomics 37. The Condorcet paradox a. proved that the Arrow impossibility theorem is wrong. b. was proved wrong by the Arrow impossibility theorem. c. serves as an example of the Arrow impossibility theorem. d. pertains to voting systems, whereas Arrow's impossibility theorem does not. 38. The Condorcet voting paradox demonstrates that democratic outcomes do not always obey the property of a. narrowness of preferences. b. concavity of preferences. c. asymmetry of preferences. d. transitivity of preferences. 39. Which of the following is a lesson from the Condorcet paradox? a. If voters are choosing a point along a line, then majority rule will pick the most preferred point of the median voter. b. Under certain conditions, there is no scheme for aggregating individual preferences. c. When there are more than two options, deciding the order in which to pairwise vote can have a powerful influence over the outcome of an election. d. Majority voting always indicates what outcome a society really wants. 40. As an alternative to pairwise majority voting, each voter could be asked to rank the possible outcomes, giving 1 point to their lowest choice, 2 points to their second-lowest choice, 3 points to their third-lowest choice, and so on. This voting method is called a. a median vote. b. a pairwise minority vote. c. a Borda count. d. an Arrow count. 41. Table 23-1 Three friends—Linda, Stephanie, and Jamie—are deciding where to go together for vacation. They all agree that they should go to one of the three places: France, Greece, or Italy. They also agree that they will have two pairwise votes to determine where to go on vacation, with the majority determining the outcome on each vote. The first, second, and third choices for each person are as indicated in the following table.
First choice Second choice Third choice
Linda France Greece Italy
Stephanie Greece Italy France
Jamie Italy France Greece
Refer to Table 23-1. If the first vote pits France against Greece and the second vote pits Italy against the winner of the first vote, then the outcome is as follows: a. France wins the first vote and Italy wins the second vote, so they go to Italy. b. France wins the first vote and France wins the second vote, so they go to France. .
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Ch 23: Frontiers of Microeconomics c. Greece wins the first vote and Greece wins the second vote, so they go to Greece. d. Greece wins the first vote and Italy wins the second vote, so they go to Italy. 42. Table 23-1 Three friends—Linda, Stephanie, and Jamie—are deciding where to go together for vacation. They all agree that they should go to one of the three places: France, Greece, or Italy. They also agree that they will have two pairwise votes to determine where to go on vacation, with the majority determining the outcome on each vote. The first, second, and third choices for each person are as indicated in the following table.
First choice Second choice Third choice
Linda France Greece Italy
Stephanie Greece Italy France
Jamie Italy France Greece
Refer to Table 23-1. If the first vote pits France against Italy and the second vote pits Greece against the winner of the first vote, then the outcome is as follows: a. France wins the first vote and Greece wins the second vote, so they go to Greece. b. France wins the first vote and France wins the second vote, so they go to France. c. Italy wins the first vote and Italy wins the second vote, so they go to Italy. d. Italy wins the first vote and Greece wins the second vote, so they go to Greece. 43. Table 23-1 Three friends—Linda, Stephanie, and Jamie—are deciding where to go together for vacation. They all agree that they should go to one of the three places: France, Greece, or Italy. They also agree that they will have two pairwise votes to determine where to go on vacation, with the majority determining the outcome on each vote. The first, second, and third choices for each person are as indicated in the following table.
First choice Second choice Third choice
Linda France Greece Italy
Stephanie Greece Italy France
Jamie Italy France Greece
Refer to Table 23-1. If the first vote pits Greece against Italy and the second vote pits France against the winner of the first vote, then the outcome is as follows: a. Greece wins the first vote and France wins the second vote, so they go to France. b. Greece wins the first vote and Greece wins the second vote, so they go to Greece. c. Italy wins the first vote and Italy wins the second vote, so they go to Italy. d. Italy wins the first vote and France wins the second vote, so they go to France. 44. Table 23-1 Three friends—Linda, Stephanie, and Jamie—are deciding where to go together for vacation. They all agree that they .
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Ch 23: Frontiers of Microeconomics should go to one of the three places: France, Greece, or Italy. They also agree that they will have two pairwise votes to determine where to go on vacation, with the majority determining the outcome on each vote. The first, second, and third choices for each person are as indicated in the following table.
First choice Second choice Third choice
Linda France Greece Italy
Stephanie Greece Italy France
Jamie Italy France Greece
Refer to Table 23-1. Depending on the order of the pairwise voting, the friends could go to either a. France, Italy, or Greece. b. France or Italy, but they will not go to Greece. c. Italy or Greece, but they will not go to France. d. France or Greece, but they will not go to Italy. 45. Table 23-1 Three friends—Linda, Stephanie, and Jamie—are deciding where to go together for vacation. They all agree that they should go to one of the three places: France, Greece, or Italy. They also agree that they will have two pairwise votes to determine where to go on vacation, with the majority determining the outcome on each vote. The first, second, and third choices for each person are as indicated in the following table.
First choice Second choice Third choice
Linda France Greece Italy
Stephanie Greece Italy France
Jamie Italy France Greece
Refer to Table 23-1. If the friends change their minds and decide to choose a vacation destination using a Borda count, then a. the friends will go to France. b. the friends will go to Greece. c. the friends will go to Italy. d. a Borda count will not result in a single winner in this case. 46. Table 23-2 Three longtime friends—Allen, Brian, and Cody—are deciding how they will spend their Sunday afternoon. They all agree that they should do one of the three things: go to a movie, play golf, or go to a baseball game. They also agree that they will have two pairwise votes to determine how to spend their afternoon, with the majority determining the outcome on each vote. The first, second, and third choices for each person are as indicated in the following table.
First choice Second choice .
Allen Baseball game Golf
Brian Golf Movie
Cody Movie Baseball game Page 9
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Ch 23: Frontiers of Microeconomics Third choice
Movie
Baseball game
Golf
Refer to Table 23-2. If (1) the first vote pits "baseball game" against "movie," and (2) the second vote pits "golf" against the winner of the first vote, then the outcome is as follows: a. "Baseball game" wins the first vote and "baseball game" wins the second vote, so they go to a baseball game. b. "Baseball game" wins the first vote and "golf" wins the second vote, so they go to the golf. c. "Movie" wins the first vote and "movie" wins the second vote, so they go to a movie. d. "Movie" wins the first vote and "golf" wins the second vote, so they play golf. 47. Table 23-2 Three longtime friends—Allen, Brian, and Cody—are deciding how they will spend their Sunday afternoon. They all agree that they should do one of the three things: go to a movie, play golf, or go to a baseball game. They also agree that they will have two pairwise votes to determine how to spend their afternoon, with the majority determining the outcome on each vote. The first, second, and third choices for each person are as indicated in the following table.
First choice Second choice Third choice
Allen Baseball game Golf Movie
Brian Golf Movie Baseball game
Cody Movie Baseball game Golf
Refer to Table 23-2. If (1) the first vote pits "baseball game" against "golf," and (2) the second vote pits "movie" against the winner of the first vote, then a. "Baseball game" wins the first vote and "baseball game" wins the second vote, so they go to a baseball game. b. "Baseball game" wins the first vote and "movie" wins the second vote, so they go to a movie. c. "golf" wins the first vote and "golf" wins the second vote, so they play golf. d. "golf" wins the first vote and "movie" wins the second vote, so they go to a movie. 48. Table 23-2 Three longtime friends—Allen, Brian, and Cody—are deciding how they will spend their Sunday afternoon. They all agree that they should do one of the three things: go to a movie, play golf, or go to a baseball game. They also agree that they will have two pairwise votes to determine how to spend their afternoon, with the majority determining the outcome on each vote. The first, second, and third choices for each person are as indicated in the following table.
First choice Second choice Third choice
Allen Baseball game Golf Movie
Brian Golf Movie Baseball game
Cody Movie Baseball game Golf
Refer to Table 23-2. Which of the following statements is correct regarding the Condorcet paradox and the results of .
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Ch 23: Frontiers of Microeconomics pairwise voting by Allen, Brian, and Cody? a. The paradox implies that pairwise voting never produces transitive preferences, and so the voting by Allen, Brian, and Cody fails to produce transitive preferences. b. The paradox implies that pairwise voting sometimes (but not always) produces transitive preferences, and the voting by Allen, Brian, and Cody does produce transitive preferences. c. The paradox implies that pairwise voting sometimes (but not always) fails to produce transitive preferences, and the voting by Allen, Brian, and Cody fails to produce transitive preferences. d. The paradox does not apply to the case at hand, because Brian's preferences are not individually transitive. 49. In his 1951 book, Social Choice and Individual Values, Kenneth Arrow used the term "transitivity" to mean a. A beats B only if everyone prefers A to B. b. if everyone prefers A to B, then A beats B. c. if A beats B and B beats C, then A must beat C. d. everyone who is eligible to vote must vote; otherwise, the outcome is invalid. 50. Table 23-3
Number of Voters First choice Second choice Third choice
Type 1 40 C B A
Voter Type Type 2 15 B A C
Type 3 45 A C B
Refer to Table 23-3. The table shows the preferences of 100 voters over three possible outcomes: A, B, and C. If a Borda count election were held among these voters, giving three points to each voter's first choice, two points to the second choice, and one point to the last choice, which outcome would win the election? a. Outcome A b. Outcome B c. Outcome C d. Either outcome A or outcome C since these have the same total score. 51. Table 23-3
Number of Voters First choice Second choice Third choice
Type 1 40 C B A
Voter Type Type 2 15 B A C
Type 3 45 A C B
Refer to Table 23-3. The table shows the preferences of 100 voters over three possible outcomes: A, B, and C. Which of the following statements is true? a. In pairwise majority voting, B is preferred to A, A is preferred to C, and B is preferred to C. b. In pairwise majority voting, C is preferred to B, B is preferred to A, and C is preferred to A. c. In pairwise majority voting, B is preferred to A, A is preferred to C, and C is preferred to B. .
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Ch 23: Frontiers of Microeconomics d. In pairwise majority voting, A is preferred to C, C is preferred to B, and A is preferred to B. 52. Table 23-3
Number of Voters First choice Second choice Third choice
Type 1 40 C B A
Voter Type Type 2 15 B A C
Type 3 45 A C B
Refer to Table 23-3. The table shows the preferences of 100 voters over three possible outcomes: A, B, and C. In pairwise majority voting in which voters choose first between A and B and then choose between the winner of the first vote and C, a. outcome A will win the election. b. outcome B will win the election. c. outcome C will win the election. d. the outcome of the election cannot be determined with the given information. 53. In his 1951 book Social Choice and Individual Values, Arrow argues that a perfect voting system satisfies all of the following properties except a. unanimity. b. transitivity. c. reflexivity. d. independence of irrelevant alternatives. 54. The Borda count fails to satisfy which of Kenneth Arrow's properties of a "perfect" voting system? a. No dictator b. Unanimity c. Transitivity d. Independence of irrelevant alternatives 55. The Arrow impossibility theorem shows that a. democracy should be abandoned as a form of government. b. it is impossible to improve upon democratic voting methods as a mechanism for social choice. c. all voting systems are flawed as a mechanism for social choice. d. the median voter’s preferences will always win in a two-way vote. 56. What is the name of the mathematical result showing that no voting system can simultaneously satisfy the properties of unanimity, transitivity, independence of irrelevant alternatives, and no dictators? a. The fundamental theorem of behavioral economics b. Arrow's impossibility theorem c. The fundamental theorem of voting d. The median voter theorem .
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Ch 23: Frontiers of Microeconomics 57. Majority rule will produce the outcome most preferred by the median voter, as demonstrated by the a. Arrow impossibility theorem. b. Condorcet paradox. c. pairwise voting proposition. d. median voter theorem. 58. The median voter's preferred outcome is the same as the a. average preferred outcome. b. outcome preferred by the greatest number of voters. c. outcome produced by majority rule. d. outcome preferred by Arrow's "perfect" voter. 59. The median-voter theorem explains why a. politicians take extreme stands on issues. b. voters are attracted to political outsiders. c. two opposing politicians tend to take opposite sides of each issues. d. politicians tend to take middle-of-the-road positions. 60. When Republicans and Democrats offer similar platforms in an election campaign, a likely explanation is the a. Arrow impossibility theorem. b. Condorcet paradox. c. median voter theorem. d. fact that politicians are more interested in the national interest than their own self-interest. 61. Assume there are nine voters in a certain small town and let x = the preferred number of dollars spent per person per month on garbage collection. For Voters 1, 2, and 3, x = $10; for Voter 4, x = $15; for Voter 5, x = $18; and for Voters 6, 7, 8 and 9, x = $20. Based on these preferences, which of these dollar amounts will win over any one of the others? a. $10 b. $15 c. $18 d. $20 62. Scenario 23-2 At issue in a particular city vote is how much to spend, per person, on road repair next year. Among the 10,000 voters, 2,900 prefer to spend $500 per person, but no more; 2,200 prefer to spend $600 per person, but no more; 1,900 prefer to spend $800 per person, but no more; 1,600 prefer to spend $1,200 but no more, and 1,400 prefer to spend $1,400 per person, but no more. Refer to Scenario 23-2. If there is a vote on whether to spend $600 per person or $800 per person, the median voter will vote to spend a. $800 per person and the voting outcome will be $800 per person. b. $800 per person and the voting outcome will be $600 per person. c. $600 per person and the voting outcome will be $800 per person. d. $600 per person and the voting outcome will be $600 per person. .
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Ch 23: Frontiers of Microeconomics 63. Table 23-4
Percent of Electorate First choice Second choice Third choice
Type 1 55 C B A
Voter Type Type 2 30 B A C
Type 3 15 A B C
Refer to Table 23-4. The table shows the preferences of three types of voters over three possible outcomes: A, B, and C. In addition, the table shows the percentage of voters of each type. Based on this information, which of the following statements is true? a. As the Condorcet Paradox predicts, majority rule fails to produce transitive preferences for society. b. As Arrow's impossibility theorem demonstrates, it is impossible from this information to determine which outcome the voters prefer. c. The median voter theorem allows us to conclude that in a vote between B and C, B will win since the Type 2 voter is the median voter. d. While the Condorcet Paradox predicts that majority rule may not produce transitive preferences for society as a whole, society's preferences in this case are transitive. 64. Table 23-4
Percent of Electorate First choice Second choice Third choice
Type 1 55 C B A
Voter Type Type 2 30 B A C
Type 3 15 A B C
Refer to Table 23-4. The table shows the preferences of three types of voters over three possible outcomes: A, B, and C. The table also shows the percentage of voters of each type. Based on this information, which voter type is the median voter? a. Type 1 b. Type 2 c. Type 3 d. The median voter cannot be determined without knowing the pair of outcomes from which the voters will be choosing. 65. Table 23-4
Percent of Electorate First choice Second choice Third choice .
Type 1 55 C B A
Voter Type Type 2 30 B A C
Type 3 15 A B C Page 14
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Ch 23: Frontiers of Microeconomics Refer to Table 23-4. The table shows the preferences for three types of voters over three possible outcomes: A, B, and C. The table also shows the percentage of voters of each type. Based on this information, which of the following statements is true? a. In a vote between B and C, C loses since only the Type 1 voters prefer C to B. b. In a vote between A and B, B wins getting 85% of the total vote. c. In a vote between A and C, C loses getting only 45% of the total vote. d. In a vote between A and any other option, A always wins. 66. Table 23-5 The following table shows the number of voters preferring various amounts of spending to develop a river to make it more attractive for canoeing and kayaking. Number of Voters 1 4 20 22 25 35 15
Preferred Spending (Millions of dollars) $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0
Refer to Table 23-5. Suppose the voters are asked to choose between $1 million and $2.5 million. If all voters cast a vote for the spending amount closest to their own preference, how many votes will the $1 million spending amount receive? a. 25 b. 47 c. 72 d. 102 67. Table 23-5 The following table shows the number of voters preferring various amounts of spending to develop a river to make it more attractive for canoeing and kayaking. Number of Voters 1 4 20 22 25 35 15
Preferred Spending (Millions of dollars) $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0
Refer to Table 23-5. The city council is considering two alternative ballots. The first would allow voters to choose .
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Ch 23: Frontiers of Microeconomics between $1.5 million and $2 million. The second would allow voters to select between $2 million and $2.5 million. If the first ballot is used, a. voters will select $1.5 million. If the second ballot is used voters will select $2 million. b. voters will select $1.5 million. If the second ballot is used voters will select $2.5 million. c. voters will select $2 million. If the second ballot is used voters will select $2 million. d. voters will select $2 million. If the second ballot is used voters will select $2.5 million. 68. Table 23-5 The following table shows the number of voters preferring various amounts of spending to develop a river to make it more attractive for canoeing and kayaking. Number of Voters 1 4 20 22 25 35 15
Preferred Spending (Millions of dollars) $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0
Refer to Table 23-5. Suppose on election day that the voters with a preference for less than $1.5 million do not show up to vote on a choice to spend either $2 million or $2.5 million. In this case, what is the preferred spending amount of the median voter (among those who actually cast a vote)? a. $2 million and $2 million wins. b. $2 million but $2.5 million wins. c. $2.5 million and $2.5 million wins. d. $2.5 million but $2 million wins. 69. When economists assume that people are rational, they assume that a. consumers maximize profits. b. firms maximize revenues. c. consumers maximize utility. d. firms maximize output. 70. Which of the following is an example of satisficing behavior? a. You continue studying for your economics exam until you believe you'll get a score that's good enough. b. You spend time looking over the lettuce at the grocery store in order to make sure you get the best head of lettuce. c. You clean your room to the point where you think it's clean enough that further time can be used for more productive purposes. d. You carefully plan your day in order to get "the most out of life." 71. Studies of human decision-making show that a. firms are less likely to maximize profits than consumers are to maximize utility. .
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Ch 23: Frontiers of Microeconomics b. firms are more likely to maximize profits than consumers are to maximize utility. c. people are irrational more often than they are rational. d. people are reluctant to change their minds. 72. Evidence from studies of workers' choices on whether to participate in 401(k) plans suggests that the workers' behavior appears to exhibit a. indifference. b. ignorance. c. inertia. d. indecision. 73. Students of microeconomic principles often say they are going to study "tonight," because the only way to pass the exam is to study some every night. When "tonight" comes, some students choose to do something else. Come exam day, these students do not do well on their exam. This observation is an example of how people are a. inconsistent over time. b. consistent over time. c. mainly interested in fairness. d. rational. 74. Most economic models a. incorporate the assumption of rational behavior on the part of economic actors. b. incorporate the notion that people are usually reluctant to change their minds. c. are meant to precisely duplicate reality. d. assume that people often make sub-optimal choices. 75. Some of the systematic mistakes that people make include a. being overconfident. b. placing too little weight on events that are more vivid compared to those with greater statistical probability. c. being ready to change their minds. d. second guessing their every choice. 76. Your city newspaper publishes a “Best of” poll that lists its readers’ favorite restaurants. Mundo Bar and Grill is ranked as the best casual restaurant. Your best friend had dinner at Mundo Bar and Grill last week and commented that the food was mediocre and the service was slow. You decide not to have dinner at Mundo Bar and Grill based on your friend’s experience. Your decision illustrates that people a. are reluctant to change their minds. b. are overconfident. c. give too much weight to a small number of vivid observations. d. are satisficers. 77. People interpret evidence to confirm beliefs they already hold. This statement is an example of which of the following systematic mistakes that people make? a. People are overconfident. b. People give too much weight to a small number of vivid observations. c. People are reluctant to change their minds. .
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Ch 23: Frontiers of Microeconomics d. People tend to second guess every choice. 78. “Thousand Friends” Social Networking firm had a remarkably profitable year. As a result, its employees expect to receive bonus checks. Which of the following insights into human behavior do the employees exhibit? a. People are overconfident. b. People care about fairness. c. People are reluctant to change their minds. d. People are inconsistent over time.
Indicate whether the statement is true or false. 79. The science of economics is a finished jewel, perfect and unchanging. a. True b. False 80. In economics, a difference in access to relevant knowledge is called a behavioral asymmetry. a. True b. False 81. Informational asymmetry may apply to a hidden action or hidden characteristic where the informed party may be reluctant to reveal relevant information. a. True b. False 82. An example of asymmetric information is when a seller of a house knows more than the buyer about the house’s condition. a. True b. False 83. Economists have found that asymmetric information is not very prevalent. a. True b. False 84. An example of an information asymmetry is when a worker knows more than their employer about their work effort. a. True b. False 85. The criminal actions of the top managers of corporations such as Enron, Tyco, WorldCom, and Adelphia are an example of moral hazard. a. True b. False 86. The problem of moral hazard is a problem of hidden action. a. True b. False .
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Ch 23: Frontiers of Microeconomics 87. The problem that arises when one person performs a task on behalf of another person is called the lemons problem. a. True b. False 88. One of the things that employers can do to lessen the moral hazard problem involving their employees is to pay them in advance for their work. a. True b. False 89. In the employer-worker relationship, the employer is regarded as the "principal" and the worker is regarded as the "agent." a. True b. False 90. In a moral hazard problem, the agent is unable to perfectly monitor the principal’s behavior so the principal applies less effort than the agent considers desirable. a. True b. False 91. One way that employers respond to the moral-hazard problem is by monitoring their employees. a. True b. False 92. The moral-hazard problem and the desire of firms to lessen that problem serve as a plausible explanation for a firm paying above-equilibrium wages to its workers. a. True b. False 93. The classic example of adverse selection is the market for used cars. a. True b. False 94. The two major problems caused by asymmetric information are the moral-hazard problem and the principal-agent problem. a. True b. False 95. Moral hazard and adverse selection are similar asymmetric information problems but moral hazard involves hidden actions while adverse selection involves hidden characteristics. a. True b. False 96. Signaling is an action taken by an uninformed party to induce an informed party to reveal information. a. True b. False 97. An example of signaling is a boyfriend giving an expensive, romantic gift to his girlfriend to convey his love for her. .
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Ch 23: Frontiers of Microeconomics a. True b. False 98. Screening is an action taken by an uninformed party to induce an informed party to reveal information. a. True b. False 99. An example of screening is a company spending a large sum on advertising to convey the high quality of its product. a. True b. False 100. Valerie prefers A to B and she prefers B to C. If Valerie's preferences are transitive, then she prefers A to C. a. True b. False 101. If A is preferred to B and C is preferred to D, then B must be preferred to C to satisfy transitivity. a. True b. False 102. The Condorcet voting paradox shows that outcomes based on dictatorial preferences do not always obey the property of transitivity. a. True b. False 103. The Condorcet paradox implies that the order in which items are voted on under majority rule is unimportant. a. True b. False 104. Condorcet explained his paradox in a 1951 book called Social Choice and Individual Values. a. True b. False 105. The Condorcet paradox demonstrates that the order in which people vote on choices may influence the final outcome. a. True b. False 106. The Condorcet paradox shows that there is no scheme for aggregating individual preferences into a valid set of social preferences. a. True b. False 107. The Condorcet paradox tells us that, even though it is impossible to satisfy all of Arrow’s properties of a desirable voting system, pairwise majority voting will always satisfy transitivity. a. True b. False .
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Ch 23: Frontiers of Microeconomics 108. Borda count is a voting method often used in polls that rank sports teams. a. True b. False 109. Arrow’s impossibility theorem demonstrates the impossibility of the median voter theorem. a. True b. False 110. Arrow's impossibility theorem shows that it is impossible to find a better voting system than pairwise majority voting. a. True b. False 111. Arrow’s impossibility theorem illustrates the difficulties in creating the perfect voting system. a. True b. False 112. Arrow’s impossibility theorem states that the majority rule fails to produce transitive preferences for society. a. True b. False 113. The unanimity property states that the ranking between any two outcomes should not depend on whether some third outcome is available. a. True b. False 114. Majority rule will produce the outcome most preferred by the median voter. a. True b. False 115. According to the median voter theorem, majority rule will produce an outcome that is inconsistent with transitive preferences. a. True b. False 116. An implication of the median voter theorem is that Republicans and Democrats will try to align their views with those of the median voter. a. True b. False 117. Political leaders are always aiming for an optimal combination of efficiency and equality. a. True b. False 118. In the field of study called political economy, economists make use of insights from the field of psychology. .
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Ch 23: Frontiers of Microeconomics a. True b. False 119. The field of behavioral economics applies the methods of economics to study how government works. a. True b. False 120. A "satisficer" is a person whose decision making is the same as that predicted by mainstream economic models. a. True b. False 121. Researchers have found that the systematic mistakes that people make in their decision making include a lack of confidence in their own abilities. a. True b. False 122. Most economic models incorporate the assumption of rational behavior on the part of economic actors. a. True b. False 123. Studies of human decision-making have found that people do not give enough weight to a small number of vivid observations. a. True b. False 124. Studies of human decision making have found that people are reluctant to change their minds. a. True b. False 125. Evidence from experiments in which real people play the ultimatum game supports the idea that people care about fairness as well as about maximization of their personal wealth. a. True b. False 126. Based on studies of human decision making, many people care more about the fairness of a game than about their personal winnings. a. True b. False 127. The tendency of many people to procrastinate supports the view that people are consistent over time. a. True b. False 128. Economic experiments show that people care more about winning a game than about its intrinsic fairness. a. True b. False .
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Ch 23: Frontiers of Microeconomics 129. A person’s tendency to smoke a cigarette after promising themself that they will quit is an example of the behavioral economics insight that people are inconsistent over time. a. True b. False 130. When an individual purchases health insurance and knows more about their family medical history than the insurance company, this is an example of adverse selection. a. True b. False 131. Adverse selection can only occur when there is asymmetric information. a. True b. False 132. The median voter theorem states that majority-rule political systems will produce policies that are most preferable for the median voter. a. True b. False 133. Smoking cessation tools (e.g., nicotine gum) provide evidence that people behave in a time inconsistent manner. a. True b. False 134. People are willing to give up monetary rewards to promote fairness. a. True b. False
135. When some people are better informed than others and the imbalance affects the choices they make, economists say there is 136. The field of economics in which the tools of economics are used to understand the functioning of government is 137. The field of economics that combines the study the psychology of human behavior and economic issues is 138. The problem that results from an agent, who is imperfectly monitored by the principal, engaging in dishonest or otherwise undesirable behavior is called 139. The problem that arises in markets in which the seller knows more about the characteristics of the good being sold than the buyer knows is 140. People with hidden health problems are more likely to buy health insurance than other people. As a result, people in average health may observe the high prices of insurance and decide not to buy it. This is an example of 141. Pete owns a small store. He has noticed that when he is not at the store monitoring his employees, his revenue goes down. What are two changes Pete could make to wages he pays his employees to correct this problem? .
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Ch 23: Frontiers of Microeconomics 142. Maria and Jose installed a “nanny-camera” in their home so that they can view how the nanny is interacting with their children while they are at work. What type of problem are they trying to combat? 143. Brandon is considering buying a used car but he first downloads a report from the internet that shows the history of accidents and major repairs conducted on the car. This action is called 144. An action taken by an informed party to reveal private information to an uninformed party is called 145. A travel agency offers a money-back guarantee for vacationers taking their first cruise in case they do not enjoy the experience. This guarantee is an example of 146. Table 23-6 A wireless telephone service provider offers three service plans to its consumers. Plan A Plan B Plan C
Peak Minutes 450 900 Unlimited
Messaging 200 1000 Unlimited
Data Usage 2GB/month 5GB/month Unlimited
Monthly Fee $69.99 $119.99 $149.99
Refer to Table 23-6. By offering consumers these choices and allowing them to select the plan that best meets their needs, the wireless service provider is engaging in 147. Scenario 23-3 Shana owns a boutique that sells high-end women’s clothing and accessories. Katie works part-time at the boutique and frequently is the only employee in this small store. Shana pays Katie a wage that is higher than the market wage for this type of job. When the store is not full of customers, Katie diligently works on displays and cleans to keep the store looking its best. Belinda is a customer in the store who asks Katie’s opinion on the quality of some jeans she is considering purchasing. Katie tells her the quality is great even though she’s had several other customers return them due to flaws. Magda is another customer who is returning a necklace without volunteering that a gem is missing. Refer to Scenario 23-3. Which of the ladies, if any, is committing a moral hazard? 148. Scenario 23-3 Shana owns a boutique that sells high-end women’s clothing and accessories. Katie works part-time at the boutique and frequently is the only employee in this small store. Shana pays Katie a wage that is higher than the market wage for this type of job. When the store is not full of customers, Katie diligently works on displays and cleans to keep the store looking its best. Belinda is a customer in the store who asks Katie’s opinion on the quality of some jeans she is considering purchasing. Katie tells her the quality is great even though she’s had several other customers return them due to flaws. Magda is another customer who is returning a necklace without volunteering that a gem is missing. Refer to Scenario 23-3. What is the term for the type of wage Shana pays Katie? 149. Scenario 23-3 Shana owns a boutique that sells high-end women’s clothing and accessories. Katie works part-time at the boutique and frequently is the only employee in this small store. Shana pays Katie a wage that is higher than the market wage for this type of job. When the store is not full of customers, Katie diligently works on displays and cleans to keep the store looking its best. Belinda is a customer in the store who asks Katie’s opinion on the quality of some jeans she is considering purchasing. Katie tells her the quality is great even though she’s had several other customers return them due .
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Ch 23: Frontiers of Microeconomics to flaws. Magda is another customer who is returning a necklace without volunteering that a gem is missing. Refer to Scenario 23-3. Why do you suppose Shana pays Katie a wage higher than the market wage? 150. Scenario 23-3 Shana owns a boutique that sells high-end women’s clothing and accessories. Katie works part-time at the boutique and frequently is the only employee in this small store. Shana pays Katie a wage that is higher than the market wage for this type of job. When the store is not full of customers, Katie diligently works on displays and cleans to keep the store looking its best. Belinda is a customer in the store who asks Katie’s opinion on the quality of some jeans she is considering purchasing. Katie tells her the quality is great even though she’s had several other customers return them due to flaws. Magda is another customer who is returning a necklace without volunteering that a gem is missing. Refer to Scenario 23-3. What is the name for the problem Katie creates by lying about the quality of the jeans? 151. Scenario 23-3 Shana owns a boutique that sells high-end women’s clothing and accessories. Katie works part-time at the boutique and frequently is the only employee in this small store. Shana pays Katie a wage that is higher than the market wage for this type of job. When the store is not full of customers, Katie diligently works on displays and cleans to keep the store looking its best. Belinda is a customer in the store who asks Katie’s opinion on the quality of some jeans she is considering purchasing. Katie tells her the quality is great even though she’s had several other customers return them due to flaws. Magda is another customer who is returning a necklace without volunteering that a gem is missing. Refer to Scenario 23-3. Suppose Shana is tired of all of the problems with the brand of jeans she carries and decides to carry a different, higher quality brand instead. She is concerned that her customers will not trust the quality of the new brand so she offers a 60 day money-back guarantee. The action taken by Shana is called 152. State one reason why government intervention may not be a good solution to an asymmetric information problem. 153. If A is preferred to B and B is preferred to C, then we would expect A to be preferred to C. This property is called 154. The failure of majority rule to produce transitive preferences for society is called the 155. Table 23-7 The town of Franklin is facing a severe budget shortage. The town administrator has proposed four options to balance the budget: increase property taxes (taxes), cut the school arts budget (arts), turn off half of the streetlights in the town (streetlights), reduce police patrols (police). Exactly one of the four choices will prevail, and the choice will be made by way of pairwise voting, with the majority determining the outcome on each vote. The preferences of the voters are summarized in the table below.
% of Electorate First choice Second choice Third choice Fourth choice
.
Type A 14 Taxes Police Streetlights Arts
Type B 40 Streetlights Arts Taxes Police
Voter Type Type C Type D 28 18 Arts Police Taxes Arts Police Streetlights Streetlights Taxes
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Ch 23: Frontiers of Microeconomics Refer to Table 23-7. If the town administrator asks the people to first choose between cutting the arts program and turning off half of the streetlights, and then choose between the winner of the first election and reducing police patrols, and then choose between the winner of the second election and increasing taxes, which option will win each vote? 156. Table 23-7 The town of Franklin is facing a severe budget shortage. The town administrator has proposed four options to balance the budget: increase property taxes (taxes), cut the school arts budget (arts), turn off half of the streetlights in the town (streetlights), reduce police patrols (police). Exactly one of the four choices will prevail, and the choice will be made by way of pairwise voting, with the majority determining the outcome on each vote. The preferences of the voters are summarized in the table below.
% of Electorate First choice Second choice Third choice Fourth choice
Type A 14 Taxes Police Streetlights Arts
Type B 40 Streetlights Arts Taxes Police
Voter Type Type C Type D 28 18 Arts Police Taxes Arts Police Streetlights Streetlights Taxes
Refer to Table 23-7. If a Borda count is used, which option will win? 157. Table 23-8 The citizens of Mayville are having a severe budget shortage and are faced with eliminating athletics from the town high school. The town administrator has determined that the town can afford to maintain one sport. Exactly one of the three choices will prevail, and the choice will be made by way of pairwise voting, with the majority determining the outcome on each vote. The preferences of the voters are summarized in the table below.
Type A Percent of Electorate First choice Second choice Third choice
Voter Type Type B
Type C
20
42
38
Hockey Football Basketball
Football Basketball Hockey
Basketball Hockey Football
Refer to Table 23-8. If the town administrator asks voters to choose first between hockey and basketball and then between the winner of the first vote and football, which sport will win the final vote? 158. Table 23-8 The citizens of Mayville are having a severe budget shortage and are faced with eliminating athletics from the town high school. The town administrator has determined that the town can afford to maintain one sport. Exactly one of the three .
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Ch 23: Frontiers of Microeconomics choices will prevail, and the choice will be made by way of pairwise voting, with the majority determining the outcome on each vote. The preferences of the voters are summarized in the table below.
Type A Percent of Electorate First choice Second choice Third choice
Voter Type Type B
Type C
20
42
38
Hockey Football Basketball
Football Basketball Hockey
Basketball Hockey Football
Refer to Table 23-8. If the town administrator asks voters to choose first between basketball and football and then between the winner of the first vote and hockey, which sport will win the final vote? 159. Table 23-8 The citizens of Mayville are having a severe budget shortage and are faced with eliminating athletics from the town high school. The town administrator has determined that the town can afford to maintain one sport. Exactly one of the three choices will prevail, and the choice will be made by way of pairwise voting, with the majority determining the outcome on each vote. The preferences of the voters are summarized in the table below.
Type A Percent of Electorate First choice Second choice Third choice
Voter Type Type B
Type C
20
42
38
Hockey Football Basketball
Football Basketball Hockey
Basketball Hockey Football
Refer to Table 23-8. Explain why the Condorcet paradox applies to this voting situation. 160. Table 23-8 The citizens of Mayville are having a severe budget shortage and are faced with eliminating athletics from the town high school. The town administrator has determined that the town can afford to maintain one sport. Exactly one of the three choices will prevail, and the choice will be made by way of pairwise voting, with the majority determining the outcome on each vote. The preferences of the voters are summarized in the table below.
Type A Percent of Electorate First choice Second choice .
Voter Type Type B
Type C
20
42
38
Hockey Football
Football Basketball
Basketball Hockey Page 27
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Ch 23: Frontiers of Microeconomics Third choice
Basketball
Hockey
Football
Refer to Table 23-8. If the town decides to use a Borda count, which sport will win? 161. Table 23-8 The citizens of Mayville are having a severe budget shortage and are faced with eliminating athletics from the town high school. The town administrator has determined that the town can afford to maintain one sport. Exactly one of the three choices will prevail, and the choice will be made by way of pairwise voting, with the majority determining the outcome on each vote. The preferences of the voters are summarized in the table below.
Type A Percent of Electorate First choice Second choice Third choice
Voter Type Type B
Type C
20
42
38
Hockey Football Basketball
Football Basketball Hockey
Basketball Hockey Football
Refer to Table 23-8. Suppose the townspeople vote and choose hockey but the town administrator overrules the vote and chooses football because the town’s football team has a chance of winning the state championship. Which of the properties of Arrow’s impossibility theorem is violated? 162. Table 23-9 Sophie, Huan, and Santiago are lost with no map or GPS available. They come to an intersection at which they can turn left, turn right, or continue going straight. Their preferences are summarized in the table. First choice Second choice Third choice
Sophie Left Right Straight
Huan Right Straight Left
Santiago Straight Left Right
Refer to Table 23-9. The travelers decide to conduct pairwise voting with the majority determining the outcome of each vote to decide their next move. If they first choose between going left and going right, and then choose between the winner of the first vote and going straight, which direction will they go? 163. Table 23-9 Sophie, Huan, and Santiago are lost with no map or GPS available. They come to an intersection at which they can turn left, turn right, or continue going straight. Their preferences are summarized in the table. First choice Second choice Third choice .
Sophie Left Right Straight
Huan Right Straight Left
Santiago Straight Left Right Page 28
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Ch 23: Frontiers of Microeconomics
Refer to Table 23-9. The travelers decide to conduct pairwise voting with the majority determining the outcome of each vote to decide their next move. If they first choose between going left and going straight, and then choose between the winner of the first vote and going right, which direction will they go? 164. Table 23-9 Sophie, Huan, and Santiago are lost with no map or GPS available. They come to an intersection at which they can turn left, turn right, or continue going straight. Their preferences are summarized in the table. First choice Second choice Third choice
Sophie Left Right Straight
Huan Right Straight Left
Santiago Straight Left Right
Refer to Table 23-9. The travelers decide to conduct pairwise voting with the majority determining the outcome of each vote to decide their next move. Sophie is very confident that the travelers need to go left but she is having a difficult time convincing her friends. If she wants to ensure that the result of the voting is “left,” how should she organize the voting? 165. Table 23-9 Sophie, Huan, and Santiago are lost with no map or GPS available. They come to an intersection at which they can turn left, turn right, or continue going straight. Their preferences are summarized in the table. First choice Second choice Third choice
Sophie Left Right Straight
Huan Right Straight Left
Santiago Straight Left Right
Refer to Table 23-9. If the travelers decide to use a Borda count, what is the result? 166. The mathematical result showing that, under certain assumptions, there is no scheme for aggregating individual preferences into a valid set of social preferences is called 167. Frank is given the choice between pizza and hotdogs and chooses pizza. Then, before serving him, his host tells Franks he could have a hamburger. Frank says he wants a hot dog. Which of the properties of Arrow’s impossibility theorem does Frank violate? 168. The mathematical result showing that a majority rule voting system will produce the outcome most preferred by the voter exactly in the middle of the distribution is called the 169. Suppose a community is debating how much money to spend on improvements to the high school. The members of the community who have children advocate spending $20 million to make improvements. The remaining 60% of the community thinks the high school is just fine and does not want to spend anything. What will the outcome be? 170. Herbert Simon, one of the first social scientists to work at the boundary of economics and psychology, suggested that humans should be viewed not as rational maximers but as .
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Ch 23: Frontiers of Microeconomics 171. Rather than always choosing the best course of action, humans make decisions that are merely good enough. In other words, they are 172. The majority of Americans, when asked how many states they could name, think they could name all fifty. However, when they are asked to do so, very few are able to come up with all fifty. This is an example of which systematic mistake that people make? 173. When asked to give a range for the height of the tallest mountain in North America such that people were 90 percent confident the true number falls within it, most people gave ranges that were 174. Your friend tells you that her dad just suffered from a stroke because his blood pressure and cholesterol were too high. You know that your own father also has high blood pressure so you become worried that he will also have a stroke. This is an example of which systematic mistake that people make? 175. Harold has always driven cars made by Universal Motors. The last two Universal Motors cars that Harold purchased have had major engine problems resulting in Harold incurring significant cost. Consumer Reports has consistently given Universal Motors poor ratings. Still, Harold plans to purchase another Universal Motors car next fall. Harold’s behavior is an example of which systematic mistake that people make? 176. Ed promises his wife that he will mow the lawn on Saturday morning, but when Saturday morning arrives he changes his mind and says he will do it on Sunday. What insight about human behavior can be deduced from Ed’s decision? 177. The proposal to place a tax on soda is intended to address what insight about human behavior? 178. What insight into human behavior do economist learn from observing people playing the ultimatum game? 179. Lindsay and Tim are playing the ultimatum game starting with $100. Based on the coin toss, Lindsay is the player to propose a division of the $100. If Lindsay acts as economic theory assumes and Tim acts as experimental evidence shows, Tim will 180. Lindsay and Tim are playing the ultimatum game starting with $100. Based on the coin toss, Lindsay is the player to propose a division of the $100. If Lindsay acts as economic theory assumes, she should propose that 181. Explain what is meant by "asymmetric information." Identify and explain the two basic types of problems that arise when there is asymmetric information. 182. Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers or even average drivers to choose not to buy car insurance unless the law requires it. 183. Explain the Condorcet paradox. To which type of voting system does it apply? 184. Assume there are two major political parties: the Conservatives and the Liberals. What does the median voter theorem imply about the nature of the platforms (that is, policy stances) of the Conservatives and Liberals? 185. How have insights from the field of psychology influenced the thinking of economists in recent years?
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Ch 23: Frontiers of Microeconomics Answer Key 1. a 2. c 3. a 4. b 5. a 6. b 7. c 8. a 9. b 10. d 11. a 12. d 13. c 14. a 15. c 16. a 17. a 18. b 19. c 20. a 21. d 22. c 23. c 24. a 25. c .
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Ch 23: Frontiers of Microeconomics 26. a 27. b 28. b 29. a 30. c 31. a 32. b 33. a 34. d 35. b 36. c 37. c 38. d 39. c 40. c 41. a 42. d 43. a 44. a 45. d 46. d 47. b 48. c 49. c 50. c 51. c .
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Ch 23: Frontiers of Microeconomics 52. c 53. c 54. d 55. c 56. b 57. d 58. c 59. d 60. c 61. c 62. d 63. d 64. a 65. b 66. b 67. c 68. c 69. c 70. a 71. d 72. c 73. a 74. a 75. a 76. c .
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Ch 23: Frontiers of Microeconomics 77. c 78. b 79. False 80. False 81. True 82. True 83. False 84. True 85. True 86. True 87. False 88. False 89. True 90. False 91. True 92. True 93. True 94. False 95. True 96. False 97. True 98. True 99. False 100. True 101. False 102. False .
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Ch 23: Frontiers of Microeconomics 103. False 104. False 105. True 106. False 107. False 108. True 109. False 110. False 111. True 112. False 113. False 114. True 115. False 116. True 117. False 118. False 119. False 120. False 121. False 122. True 123. False 124. True 125. True 126. True 127. False .
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Ch 23: Frontiers of Microeconomics 128. False 129. True 130. True 131. True 132. True 133. True 134. True 135. asymmetric information. 136. political economy. 137. behavioral economics. 138. moral hazard. 139. adverse selection. 140. adverse selection. 141. delay payment/tie payment to sales Pay efficiency wages 142. moral hazard 143. screening. 144. signaling. 145. signaling. 146. screening. 147. Magda 148. efficiency wage 149. to avoid a moral hazard problem 150. adverse selection 151. signaling. 152. Possible answers: 1. The private market can sometimes deal with information asymmetries using signaling and/or screening. .
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Ch 23: Frontiers of Microeconomics 2. The government rarely has more information than the private parties. 3. The government itself is an imperfect institution. 153. transitivity. 154. Condorcet paradox 155. streetlights, police, taxes 156. arts 157. Football 158. Hockey 159. The majority rule does not produce transitive preferences. 160. Basketball 161. No dictators 162. straight 163. right 164. first vote: right vs. straight; second vote: winner of the first vote vs. left 165. a three-way tie 166. Arrow’s impossibility theorem 167. Independence of irrelevant alternatives 168. median voter theorem. 169. $0 spent on improvements to the high school 170. satisfiecers. 171. satisficers. 172. People are overconfident. 173. too small. 174. People give too much weight to a small number of vivid observations. 175. People are reluctant to change their minds. 176. People are inconsistent over time. .
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Ch 23: Frontiers of Microeconomics 177. People are inconsistent over time. 178. People care about fairness. 179. reject Lindsay’s proposal of keeping $99 and offering Tim $1. 180. she gets $99 and Tim gets $1. 181. Asymmetric information is present when there is a difference in access to relevant information. Examples include information differences between (1) a worker and his employer, (2) a buyer and seller, and (3) an insured person and his insurer. The two basic types of problems are (1) moral hazard, which is a problem of hidden actions and ordinarily involves a principal and an agent, and (2) adverse selection, which is a problem of hidden characteristics or "lemons." 182. Drivers (buyers and potential buyers of car insurance) know more about their driving habits than do the insurance companies (sellers of car insurance). The price of car insurance is likely to reflect the information asymmetry in that it incorporates more of a risk component than is really necessary to insure good and average drivers. Consequently, good and average drivers are priced out of the market and they rationally choose not to buy the insurance unless they are required to do so. 183. The Condorcet paradox applies directly to pairwise majority voting. It shows that even if individual voters' preferences exhibit transitivity, that property does not follow through to outcomes of pairwise majority voting. Consequently, the order in which choices are put up, in pairwise fashion, affects the final outcome. Using choices A, B, and C, it may be the case, for example, that under pairwise voting voters choose A over B and B over C, but then they may choose C over A. This result can obtain even when individual voters' preferences are transitive; hence, the paradox. 184. The median voter theorem implies that political parties will set their platforms so as to appeal to the median ("middle of the distribution") voter. Therefore, rather than adopting extreme views, the Conservatives and Liberals will both adopt platforms that are toward the "middle of the road." 185. Insights from psychology have led some economists to question the assumption of rationality that pervades mainstream economic models. Evidence from experimental economics does raise serious questions about the rationality assumption. For example, most people may be concerned with the fairness of outcomes, in addition to the impact of those outcomes on their own well-being. An open question is: If the rationality assumption does not really reflect the behavior of real economic actors, then how important is it that we model other motivations, such as the desire for fairness, the tendency to procrastinate, overconfidence, etc.?
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Ch 24: Appendix: How Economists Use Data
Indicate the answer choice that best completes the statement or answers the question. 1. Why is data analysis increasingly central to modern economics? a. Sherlock Holmes once said that to solve a mystery we need data. b. Policy-makers rely less on casual observation and more on the on data. c. Unlike in the past, nowadays, a person’s income, a firm’s profit, and market prices are quantitative. d. Many colleges charge lower price for courses in econometrics. 2. Why is data analysis increasingly central to modern economics? a. Sherlock Holmes once said that to solve a mystery we need data. b. Many colleges charge lower price for courses in econometrics. c. Unlike in the past, nowadays, a person’s income, a firm’s profit, and market prices are quantitative. d. Data attach real numbers to the conceptual variables found in economic theory. 3. What is a randomized controlled trial? a. An experiment conducted by Sherlock Holmes to solve his mysteries. b. An experiment in which subjects randomly choose groups they want to be in; then researchers compare how the groups respond to their treatments. c. An experiment that randomly divides subjects into groups, treats the groups differently, and compares how the groups respond to their treatments. d. An experiment designed to demonstrate causality between an intervention and an outcome. 4. An experiment that randomly divides subjects into groups and compares how the groups respond to their treatments is called a. a quasi-experiment. b. a randomized controlled trial. c. a non-randomized controlled trial. d. a deductive method. 5. What is experimental data? a. Data gathered from the controlled group that received no treatment. b. Economic data gathered from individuals with income below a specified threshold. c. Data gathered from randomized controlled trials. d. Economic data gathered from individuals with young children. 6. Data gathered from randomized controlled trials is called a. deductive data. b. confounding variable. c. observational data. d. experimental data. 7. What is observational data? a. Data gathered from the group of subjects that received no treatment. b. Economic data gathered from individuals with income below a specified threshold. c. Data gathered from randomized controlled trials. .
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Ch 24: Appendix: How Economists Use Data d. Data obtained from observing the world as it is. 8. Data gathered from observing the world as is is called a. deductive data. b. confounding variable. c. observational data. d. experimental data. 9. Which of the following is a confounding variable? a. A variable whose variation does not depend on that of another. b. A variable whose value depends on that of another variable. c. A variable that takes only the value 0 or 1. d. An omitted variable that is related to the variables being measured and studied. 10. An omitted variable that is related to the variables being measured and studied is called a. an independent variable. b. a confounding variable. c. a dummy variable. d. a dependent variable. 11. Suppose researchers use observational data to study the effect of calories intake and exercise on weight. Which of the following is a confounding variable? a. Exercise b. Calories intake c. Weight d. Metabolic rate 12. Suppose researchers use observational data to study the effect of class size and teacher experience on student score. Which of the following is a confounding variable? a. Class size b. Teacher experience c. Family income d. Student score 13. Suppose you have to review a research that uses observational data and concludes that the lack of exercise leads to weight. What is likely to be one of your questions to the research team? a. Does your data account for the age of subjects' parents? b. Does your data set also include people's calories intake? c. How large is your data set? d. Does your data account for whether subjects have children? 14. Suppose you have to review a research that uses an observational data and concludes that the lack of exercise leads to weight. What is likely to be one of your questions to the research team? a. How many dependent variables do you include in the study? b. How large is your data set? .
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Ch 24: Appendix: How Economists Use Data c. Do you account for confounding variables? d. How many independent variables do you study? 15. Which of the following is an accurate definition of the problem of reverse causality? a. A situation when variation of the independent variable does not depend on that of the confound variable. b. A situation when variation of the independent variable depends on that of the depended variable. c. A situation when variation of the independent variable does not depend on that of the depended variable. d. A situation in which a researcher believes that one variable influences a second variable, when in fact it is the second variable that influences the first. 16. A situation when in an observational study a researcher believes that one variable influences a second variable, when in fact it is the second variable that influences the first is called a. the problem of reverse causality. b. the moral hazard problem. c. the asymmetric information problem. d. the confounding variable problem. 17. A situation when in an observational study a researcher believes that one variable influences a second variable, when in fact it is the second variable that influences the first is called a. the randomized trial problem. b. the reverse causality problem. c. the excessive data problem. d. the observational variable problem. 18. The problem of reverse causality is more likely to occur in a. studies that use observational data. b. randomized controlled trials. c. studies that use experimental data. d. studies that use big data. 19. Data showing the characteristics of multiple subjects at a given time is called a. cross-sectional data. b. experimental data. c. time-series data. d. panel data. 20. Data showing the characteristics of a single subject at various times is called a. cross-sectional data. b. experimental data. c. time-series data. d. panel data. 21. Data showing the characteristics of a single subject at various times, as well as characteristics of multiple subjects at a given time is called a. cross-sectional data. .
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Ch 24: Appendix: How Economists Use Data b. experimental data. c. time-series data. d. panel data. 22. A data set containing information about wages, education, age, education, experience, race, and gender for a group of workers is called a. experimental data. b. panel data. c. time-series data. d. cross-sectional data. 23. A data set containing annual information about the U.S. GDP, inflation rates, and population for the past 30 years is called a. experimental data. b. panel data. c. time-series data. d. cross-sectional data. 24. A data set containing annual information about Canada's GDP, inflation and unemployment rates for the past 100 years is called a. experimental data. b. panel data. c. time-series data. d. cross-sectional data. 25. A data set containing annual information about GDP, inflation and unemployment rates for the past 60 years for countries members of the Organization of the Petroleum Exporting Countries (OPEC) is called a. experimental data. b. panel data. c. time-series data. d. cross-sectional data. 26. A data set containing annual information about GDP per capita, inflation and unemployment rates for European countries for the past 100 years is called a. experimental data. b. panel data. c. time-series data. d. cross-sectional data. 27. Suppose that researchers learned from the data on U.S. life expectancy over the past century that between 1900 and 2020, life expectancy has increased by nearly 40%. This is an example of a. qualifying relationships between certain variables. b. describing the economy. c. testing hypothesis. d. predicting the future. .
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Ch 24: Appendix: How Economists Use Data 28. Marco and Sarah are economists. Marco believes that raising taxes on capital gains will divert people from investing in capital stock market. To the contrary, Sarah is confident that investing in capital market is similar to gambling and no tax can stop people from buying stocks. They decide to use data and resolve their debate empirically. This is an example of a. qualifying relationships between certain variables. b. describing the economy. c. testing hypothesis. d. predicting the future. 29. Gia and Sasha are economists. They advise the government that sales of designer shoes will fall should a tax on designer shoes be introduced. This is because price elasticity of demand for expensive shoes is more elastic than that of supply. This is an example of a. qualifying relationships between certain variables. b. describing the economy. c. testing hypothesis. d. predicting the future. 30. Gia and Sasha are economists. They find out that a 5% increase in the tax on of designer shoes will reduce sales by 7%. This is an example of a. qualifying relationships between certain variables. b. describing the economy. c. testing hypothesis. d. predicting the future. 31. What is the Federal Reserve Board’s model of the U.S. economy (FRB/US)? a. A model describing the main macroeconomic elements of the U.S. economy such as GDP, inflation, unemployment, and interest rates. b. A model designed to replicate the operation of the global economy. c. A model designed to replicate the operation of the U.S. economy. d. A model of economic growth as a result of changes in the population growth rate, the savings rate, and the rate of technological progress. 32. A model describing the main macroeconomic elements of the U.S. economy such as GDP, inflation, unemployment, and interest rates is called a. the supply and demand model. b. the Solow model. c. a macroeconomic model. d. the Federal Reserve Board’s model of the U.S. economy (FRB/US). 33. Which of the following is true about the Federal Reserve Board’s model of the U.S. economy (FRB/US)? a. It includes hundreds of equations, all of which are identities. b. It includes 60 equations which are equations describing how households or firms respond to economic conditions. c. It includes hundreds of equations, none of which are identities. d. It includes 10 equations which are equations describing how households or firms respond to economic .
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Ch 24: Appendix: How Economists Use Data conditions. 34. Which of the following is true about the Federal Reserve Board’s model of the U.S. economy (FRB/US)? a. It is used exclusively to predict the future. b. It is used exclusively to test hypothesis. c. It is used for forecasting and policy analysis. d. It is used exclusively for quantifying the relationships among variables. 35. What do Federal Reserve economists use the Federal Reserve Board’s model of the U.S. economy for? a. It is used only to describe the economy. b. It is used only for policy analysis. c. It is used only for forecasting. d. It is used for forecasting and policy analysis. 36. Which of the following is a method of data analysis used by economists? a. Formatting data tables. b. Printing scatter plots. c. Finding the best estimate. d. Publishing articles using observational data. 37. Which of the following is a method of data analysis used by economists? a. Formatting data tables. b. Plotting observational data. c. Applying the model of supply and demand. d. Gauging uncertainty. 38. Which of the following is a method of data analysis used by economists? a. Accounting for confounding variables. b. Plotting observational data. c. Applying the model of supply and demand. d. Creating uncertainty. 39. Which of the following is a method of data analysis used by economists? a. Eliminating confounding variables. b. Establishing causal effects . c. Replacing experimental data with observational data. d. Creating uncertainty. 40. A variable that correlated with the independent variable but does not directly affect the dependent variable is called a. an instrumental variable. b. a dummy variable. c. a significant variable. d. an experimental variable.
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Ch 24: Appendix: How Economists Use Data 41. Which of the following is an accurate definition of instrumental variable? a. A variable that takes only the value 0 or 1. b. A variable that is correlated with the independent variable of interest but does not directly affect the dependent variable. c. A variable that is manipulated by the researcher to determine its relationship to dependent variable. d. A variable that takes any value between a certain set of real numbers. 42. Scenario 38.1. Consider the following OLS model applied to the data for workers wages and years of schooling, where
stands for the residual:
Refer to Scenario 38.1. Suppose that the residual term has a zero mean and is uncorrelated with the independent variable. According to the estimated model, each year of schooling a. increases a worker’s wage by $10.7. b. increases a worker’s wage by $3.16. c. decreases a worker’s wage by $3.16. d. decreases a worker’s wage by $10.7. 43. Scenario 38.1. Consider the following OLS model applied to the data for workers wages and years of schooling, where
stands for the residual:
Refer to Scenario 38.1. Suppose that the residual term has a zero mean and is uncorrelated with the independent variable. Suppose that the standard error is 1.35. This means that we can be 95 percent confident that the true wage benefit of a year of schooling a. lies between $8 and $13.4. b. is equal to $0.46. c. is equal to $8. d. lies between $0.46 and $5.86. 44. Scenario 38.1. Consider the following OLS model applied to the data for workers wages and years of schooling, where
.
stands for the residual:
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Ch 24: Appendix: How Economists Use Data Refer to Scenario 38.1. Suppose that the residual term other than years of schooling. If
is non zero and reflects all the forces that influence wages
is correlated with schooling, the estimate OLS makes on the effect of schooling on
wages a. lies between $8 and $13.4. b. is accurate. c. is inaccurate. d. lies between $0.46 and $5.86. 45. Scenario 38.1. Consider the following OLS model applied to the data for workers wages and years of schooling, where
stands for the residual:
Refer to Scenario 38.1. Suppose that the residual term has a zero mean and is uncorrelated with the independent variable. Suppose that the standard error is 1.35. This means that we can be 95 percent confident that the true wage benefit of a year of schooling a. lies between $8 and $13.4. b. is equal to $0.46. c. is equal to $8. d. lies between $0.46 and $5.86. 46. Scenario 38.2. Consider the following OLS model applied to the data on workers salaries and years of job tenure:
Refer to Scenario 38.2. Suppose that some workers are simply more talented than others. If talent and schooling are not correlated, then a. all the coefficients that OLS yields are biased. b. all the coefficients that OLS yields are unbiased. c. the coefficient by SCHOOLING is biased upward. d. researchers will need to use workers' as a confounding variable. 47. Scenario 38.2. Consider the following OLS model applied to the data on workers salaries and years of job tenure:
.
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Ch 24: Appendix: How Economists Use Data Refer to Scenario 38.2. Suppose that the residual term has a zero mean and is uncorrelated with the independent variable. Suppose that the standard error is 7.35. This means that we can be 95 percent confident that the true wage benefit of a year of schooling a. lies between $96.4 and $111.1. b. is equal to $96.4. c. is equal to $507.75. d. lies between $493.05 and $507.75. 48. Scenario 38.2. Consider the following OLS model applied to the data on workers salaries and years of job tenure:
Refer to Scenario 38.2. Suppose that the residual term other than years of tenure. If
is non zero and reflects all the forces that influence salary
is correlated with years of tenure, the estimate OLS makes on the effect of schooling
on wages a. lies between $96.4 and $111.1. b. is accurate. c. is inaccurate. d. lies between $493.05 and $507.75. 49. Scenario 38.2. Consider the following OLS model applied to the data on workers salaries and years of job tenure:
Refer to Scenario 38.2. Suppose that some workers are more capable than others, which is not easily measurable. Will the estimates OLS makes be unbiased? a. Yes, if ability and years of tenure are correlated. b. No, if ability and years of tenure are not correlated. c. No if all workers are older than 30 years old. d. Yes if some workers are younger than 30 years old. 50. Scenario 38.2. Consider the following OLS model applied to the data on workers salaries and years of job tenure:
.
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Ch 24: Appendix: How Economists Use Data Refer to Scenario 38.2. Suppose that some workers are more capable than others, which is not easily measurable. If ability and years of tenure are not correlated, then a. the estimates OLS makes will be unbiased. b. the estimates OLS makes will be biased. c. researchers will need to use workers' age as a confounding variable. d. researchers will need to use workers' parents education as a confounding variable. 51. Scenario 38.3. Consider the following statistical model of workers salaries and years of job tenure, where
stands
for the random error:
Refer to Scenario 38.3. This model is called a. a singular regression. b. an instrumental regression. c. a multiple regression. d. a biased regression. 52. Scenario 38.3. Consider the following statistical model of workers salaries and years of job tenure, where
stands
for the random error:
Refer to Scenario 38.3. Suppose that some people are simply more capable than others. When would the estimate of β1 be unbiased? a. As long as the model is applied to observational data b. As long as the underlying data comes from a natural experiment c. As long as ability and tenure are correlated d. As long as ability and tenure are not correlated 53. Scenario 38.3. Consider the following statistical model of workers salaries and years of job tenure, where
stands
for the random error:
Refer to Scenario 38.3. Suppose that some people are simply more capable than others. Researchers know that people with greater ability get more years of schooling than people with less ability. What can you say about the the estimate of β1 ? a. OLS would confound the effect of schooling on ability and as a result, the estimate of β1 would be biased downward. b. OLS would confound the effect of schooling on ability and as a result, the estimate of β1 would be biased .
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Ch 24: Appendix: How Economists Use Data upward. c. The estimate of β1 would be unbiased as long as all workers are younger than 25 years. d. The estimate of β1 would be unbiased as long as the underlying data comes from a natural experiment. 54. Scenario 38.4. Consider the following OLS model estimating the effect of job tenure and IQ on worker salary:
Refer to Scenario 38.4. This model is an example of a. a multiple regression. b. a singular regression. c. a natural experiment. d. a control experiment. 55. Scenario 38.4. Consider the following OLS model estimating the effect of job tenure and IQ on worker salary:
Refer to Scenario 38.4.What can you say about the effect of the tenure on salary? a. Each year of schooling decreases salary by $1.86 per hour. b. Each year of schooling increases salary by $1.86 per hour. c. Each year of schooling increases salary by $0.85 per hour. d. Each year of schooling decreases salary by $0.85 per hour. 56. Scenario 38.4. Consider the following OLS model estimating the effect of job tenure and IQ on worker salary:
Refer to Scenario 38.4.What can you say about the effect of IQ on salary? a. Each year of schooling decreases salary by $0.57 per hour. b. Each year of schooling increases salary by $0.57 per hour. c. Each year of schooling increases salary by $1.86 per hour. d. Each year of schooling decreases salary by $1.86 per hour. 57. The Federal law was amended in 1986 to begin Daylight Saving Time at 2:00 a.m. on the first Sunday of April and ended at 2:00 a.m. on the last Sunday of October. Researchers used the data on road traffic accidents before and after 1986 to the short run and long run effects of daylight saving on automobile crashes. This is an example of a. an instrumental variable. b. a natural experiment. c. a randomized experiment. .
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Ch 24: Appendix: How Economists Use Data d. a sampling variation. 58. Researchers study the effect of a local law banning smoking in public places on hospital admissions for acute myocardial infarction. This study is based in Helena, Montana. This is an example of a. an instrumental variable. b. a natural experiment. c. a randomized experiment. d. a sampling variation. 59. Scenario 38.5. Researchers are interested in the height of the average person in San Francisco, California. Using a random sample of 1,000 people, they find that the average height in the sample is 68 inches. Refer to Scenario 38.5.What can you say about the sample and the results of the research? a. The sample is likely to be representative of the population because of the randomness. b. The sample is not representative of the population because of the randomness. c. The sample suffers from too much uncertainty. d. The finding has a huge margin of error. 60. Scenario 38.5. Researchers are interested in the height of the average person in San Francisco, California. Using a random sample of 1,000 people, they find that the average height in the sample is 68 inches. Refer to Scenario 38.5. Researchers compute that the standard deviation of heights is 3 inches. This means that if you pick a San Franciscan at random, the probability is 95 percent that this individual’s height a. lies between 62 and 68 inches. b. lies between 62 and 74 inches. c. lies between 68 and 74 inches. d. lies between 65 and 71 inches. 61. Scenario 38.5. Researchers are interested in the height of the average person in San Francisco, California. Using a random sample of 1,000 people, they find that the average height in the sample is 68 inches. Refer to Scenario 38.5. If the standard deviation of heights is 3 inches, what is the standard error in this sample? a. zero b. 0.003 c. 0.095 d. 18.26 62. Scenario 38.5. Researchers are interested in the height of the average person in San Francisco, California. Using a random sample of 1,000 people, they find that the average height in the sample is 68 inches. Refer to Scenario 38.5. If the standard deviation of heights is 3 inches, we can be 95% confident that the true mean height of the population is between ___________ . (Hint: Be sure to calculate the standard error of the estimate.) a. between 68 inches and 68.095 inches. b. between 67.905 inches and 68 inches. .
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Ch 24: Appendix: How Economists Use Data c. between 67.997 inches and 68.003 inches. d. between 67.905 inches and 68.095 inches.
Indicate whether the statement is true or false. 63. Interpreting observational data requires extra care due to the problems of confounding variables and reverse causality. a. True b. False 64. Interpreting experimental data requires extra care due to the problems of confounding variables and reverse causality. a. True b. False 65. Experimental data are obtained from randomized controlled trials whereas observational data are obtained from surveys and administrative records. a. True b. False 66. Observational data are obtained from randomized controlled trials whereas experimental data are obtained from surveys and administrative records. a. True b. False 67. Cross-sectional data present information about a single subject over time. a. True b. False 68. Panel data present information about a single subject over time. a. True b. False 69. Cross-sectional data present information about a single subject over time. a. True b. False 70. Panel data present information about a single subject over time whereas time-series data present information about multiple subjects over time. a. True b. False 71. Time-series data present information about a single subject over time whereas panel data present information about multiple subjects over time. a. True b. False 72. Data gathered from randomized controlled trials are called experimental data. .
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Ch 24: Appendix: How Economists Use Data a. True b. False 73. Data gathered from randomized controlled trials are called observational data. a. True b. False 74. Observational data has the advantage of being widely available. a. True b. False 75. Observational data has the advantage of solving the problem of reverse causality. a. True b. False 76. In a randomized controlled trial, subjects are placed into treatment and control groups based on chance. a. True b. False 77. In a randomized controlled trial, subjects are placed into treatment and control groups based on income. a. True b. False 78. When an omitted variable directly influences the dependent variable, and the omitted variable is correlated with the independent variable , OLS makes accurate predictions. a. True b. False 79. When an omitted variable directly influences the dependent variable, and the omitted variable is correlated with the independent variable, OLS yields misleading results. a. True b. False 80. The standard method for finding the best-fitting line is called ordinary least squares. a. True b. False 81. The standard method for finding the best-fitting line is called multiple regression. a. True b. False 82. Ordinary least squares is a statistical technique to avoid the problem of reverse causality. a. True b. False 83. A natural experiment is a chance event that generates variation in the data similar to a randomized controlled trial that .
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Ch 24: Appendix: How Economists Use Data had been conducted. a. True b. False 84. The instrument is correlated with the independent variable of interest but may affect the dependent variable. a. True b. False 85. The Federal law was amended in 1986 to begin Daylight Saving Time at 2:00 a.m. on the first Sunday of April and ended at 2:00 a.m. on the last Sunday of October. Researchers used the data on road traffic accidents before and after 1986 to the short run and long run effects of daylight saving on automobile crashes. This is an example of a randomized experiment. a. True b. False 86. The Federal law was amended in 1986 to begin Daylight Saving Time at 2:00 a.m. on the first Sunday of April and ended at 2:00 a.m. on the last Sunday of October. Researchers used the data on road traffic accidents before and after 1986 to the short run and long run effects of daylight saving on automobile crashes. This is an example of a natural experiment. a. True b. False 87. Researchers study the effect of a local law banning smoking in public places on hospital admissions for acute myocardial infarction in Helena, Montana. This is an example of a randomized experiment. a. True b. False 88. Researchers study the effect of a local law banning smoking in public places on hospital admissions for acute myocardial infarction in Helena, Montana. This is an example of a natural experiment. a. True b. False 89. A measure of variability across observations is called the standard deviation. a. True b. False 90. A measure of variability across observations is called an instrumental variable. a. True b. False 91. The square root of the average squared deviation from the mean is called the standard deviation. a. True b. False 92. The square root of the average squared deviation from the mean is called an instrumental variable. a. True b. False .
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Ch 24: Appendix: How Economists Use Data 93. For a normal bell-shaped distribution, about 95 percent of observations fall within two standard deviations of the mean. a. True b. False
94. In your own words, explain why data analysts can be led astray if a confounding variable is correlated with the independent variable and omitted from the statistical model. Describe at least two methods to deal with this situation. 95. Describe the characteristics of a randomized controlled trial. Give an example. 96. Explain why economists often rely on observational data, where observational data come from, and why using this kind of data may cause problems for the researchers? 97. Describe the Federal Reserve Board’s model of the U.S. economy (FRB/US). 98. Describe three types of data used in empirical research. Give an example for each type. 99. Explain what economists hope to achieve through data analysis. (Hint: Be sure to mention four objectives.) 100. Describe what is a linear regression. Give an example.
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Ch 24: Appendix: How Economists Use Data Answer Key 1. b 2. d 3. c 4. b 5. c 6. d 7. d 8. c 9. d 10. b 11. d 12. c 13. b 14. c 15. d 16. a 17. b 18. a 19. a 20. c 21. d 22. d 23. c 24. c 25. b .
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Ch 24: Appendix: How Economists Use Data 26. b 27. b 28. c 29. d 30. a 31. a 32. d 33. b 34. c 35. d 36. c 37. d 38. a 39. b 40. a 41. b 42. b 43. d 44. c 45. d 46. b 47. a 48. c 49. b 50. a 51. c .
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Ch 24: Appendix: How Economists Use Data 52. d 53. b 54. a 55. b 56. b 57. b 58. b 59. a 60. b 61. c 62. d 63. True 64. False 65. True 66. False 67. False 68. False 69. True 70. False 71. True 72. True 73. False 74. True 75. False 76. True .
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Ch 24: Appendix: How Economists Use Data 77. False 78. False 79. True 80. True 81. False 82. False 83. True 84. False 85. False 86. True 87. False 88. False 89. True 90. False 91. True 92. False 93. True 94. OLS would confound the effect of the independent variable with the effect of a related omitted variable. As a result, the estimate of coefficients would be biased. This is a serious problem in observational data. To deal with it, one approach is to find some way to measure the confounding variable. Another way is to use a natural experiment, an experiment created by a chance event that generates variation in the data as if a randomized controlled trial had been conducted. 95. A randomized controlled trial is an experiment in which researchers randomly divide subjects into groups, treat the groups differently, and compare how the groups respond to their treatments. An example is a pharmaceutical company testing a new drug to prove that the drug is safe and effective. Researchers recruit a number of patients. Half of them are randomly are assigned to the treatment group and given the drug. The other half are assigned to the control group and given a placebo. The researchers then follow the health of the two groups. If the patients in the treatment group feel better than those in the control group, the drug is likely to be safe. Otherwise, the drug is ineffective. 96. Experimental data are not always available and economists often rely on observational data, which are obtained from simply observing the world as it is. Observational data can come from surveys of households and firms and from administrative records. Observational data present two challenges to data analysts: .
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Ch 24: Appendix: How Economists Use Data 1) A confounding variable (a variable that is omitted from the analysis but related to the variables being measured and studied) can lead the researcher to an incorrect conclusion. Because many variables can be correlated with one another in observational data, researchers need to carefully distinguish the effects of one variable from the effects of another. 2) The problem of reverse causality, which is a situation in which a researcher believes that one variable influences a second variable, when in fact it is the second variable that influences the first. 97. The FRB/US model tries to describe the main macroeconomic elements of the U.S. economy, including the relationships among key variables such as GDP, inflation, unemployment, and interest rates. The FRB/US model includes hundreds of equations, each describing a piece of the economy. Many of these equations are identities. About 60 equations in the FRB/US model are equations that describe how households or firms respond to economic conditions, and these equations include crucial parameters. With the estimated FRB/US model, Fed economists use the model for forecasting and policy analysis. Reliability of the forecasts depends on the accuracy of the FRB/US model, Fed economists are always looking for ways to improve it. 98. There a three types of data: cross-sectional, time-series, and panel. 1) Cross-sectional data show the characteristics of multiple subjects (people, firms, or nations) at a given time. For example, a survey of a group of workers showing their wage, education, age, experience, profession, race, gender. 2) Time-series data show the characteristics of a single subject (one person, firm, or nation) at various times. For example, the US unemployment rate and its GDP in the past century. 3) Panel data combine the elements of cross-sectional and time-series data to show the characteristics of multiple subjects ( people, firms, or nations) at various times. For example, a study of how winning the lottery affects a person’s labor-force participation by comparing the changing behavior over time of lottery winners and losers. 99. Economists use data (either observational or experimental) for describing the economy, quantifying relationships, testing hypotheses, predicting the future. 1) Using numbers to describing the economy, economists develop theories to understand how the world works and consider policies to improve it. Data gives them a better sense of the world as it is. 2) Although economic theory often suggests that certain variables are related, they do not tell how strongly they are related. Data allow the quantification of relationships by estimating parameters of the models, that is, find the numerical values of the relationships among variables. 3) Economic theory just offers hypotheses. To confirm or refute the hypotheses, researchers test the hypotheses using data. 4) Economists use models to make predictions. In order to make reliable predictions, they use data to make quantitative predictions. They do so using the relevant data to estimate the model’s parameters. 100. A linear regression is a statistical model draws a line through the cloud of points. The line shows the best guess of a dependent variable based on independent variables. The residual represents deviation of the actual values of the dependent from the predicted by the line. No regression fits the data perfectly. The standard method for finding the best-fitting line is called ordinary least squares (OLS).
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