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Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 1 Introduction: What Is Economics? 1.1 What Is Economics? 1) Economics is best defined as the study of: A) financial decision-making. B) how consumers make purchasing decisions. C) the choices made by people faced with scarcity. D) inflation, unemployment, and economic growth. Answer: C Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 2) Economics is the study of: A) how to invest in the stock market. B) how society uses limited resources. C) the role of money in markets. D) how government officials decide which goods and services are produced. Answer: B Diff: 1 Topic: What Is Economics? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 3) Scarcity can best be defined as a situation in which: A) there are no buyers willing to purchase what sellers have produced. B) there are not enough goods to satisfy all of the buyers' demand. C) the resources we use to produce goods and services are limited. D) there is more than enough money to satisfy consumers' wants. Answer: C Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

4) An arrangement that allows buyers and sellers to exchange things is called: A) a contract. B) a market. C) money. D) efficient. Answer: B Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 5) Because resources are limited: A) only the very wealthy can get everything they want. B) firms will be forced out of business. C) the availability of goods will be limited but the availability of services will not. D) people must make choices. Answer: D Diff: 1 Topic: What Is Economics? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 6) A trade-off refers to: A) allowing the government and other organizations to choose for us. B) sacrificing one thing for another. C) deciding who consumes the products produced in an economy. D) holding other variables fixed. Answer: B Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

7) Resources are all of the following EXCEPT: A) unlimited and in abundance. B) the things we use to produce goods and services. C) limited in quantity and can be used in different ways. D) scarce and therefore require choices to be made. Answer: A Diff: 1 Topic: What Is Economics? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 8) The knowledge and skills acquired by a worker through education and experience is a description of which factor of production? A) physical capital B) human capital C) labor D) entrepreneurship Answer: B Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 9) The physical and mental effort people use to produce goods and services is a description of which factor of production? A) physical capital B) human capital C) labor D) entrepreneurship Answer: C Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

10) The effort used to coordinate the factors of production is a description of: A) physical capital. B) human capital. C) labor. D) entrepreneurship. Answer: D Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 11) All of the following are considered natural resources EXCEPT: A) a coral reef. B) gold. C) labor. D) a redwood forest. Answer: C Diff: 1 Topic: What Is Economics? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 12) Normative economics: A) is the focus of most modern economic reasoning. B) answers the question "What ought to be?" C) predicts the consequences of alternative actions. D) answers the question "What is?" Answer: B Diff: 1 Topic: Positive versus Normative Analysis Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

13) Which of the following is an example of a normative question? A) How will an increase in the inheritance tax affect tax revenues? B) What fraction of an income tax cut will be spent on imported goods? C) Should Florida implement a state income tax to reduce its deficit? D) How will an increase in unemployment benefits affect the unemployment rate? Answer: C Diff: 1 Topic: Positive versus Normative Analysis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 14) Which of the following is a question answered with positive economic analysis? A) Should the college reduce tuition for out-of-state residents? B) Should the college charge higher tuition for part-time students? C) If the college increased its eligibility requirements for enrollment, will class sizes decline? D) Should the college eliminate its athletic program to cut its costs? Answer: C Diff: 2 Topic: Positive versus Normative Analysis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 15) Which of the following is a question answered with normative economic reasoning? A) If the college offers free textbooks for students, will more students read their textbooks? B) If the college provided less financial aid for out-of-state students, would more in-state students benefit? C) If the college increased its enrollment requirements, would class size decline? D) Should the college increase tuition to fund its athletic programs? Answer: D Diff: 2 Topic: Positive versus Normative Analysis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

16) The 3 key economic questions include all of the following EXCEPT: A) "What products do we produce?" B) "How do we produce these products?" C) "Where should these products be produced?" D) "Who consumes the products?" Answer: C Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 17) Deciding how a society's products are distributed among its citizens answers the economic question of: A) "Who consumes the products produced?" B) "What products will be produced?" C) "Where will the products be consumed?" D) "How will the products be produced?" Answer: A Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 18) Deciding if a company will produce automobiles by robotics or manual labor answers the economic question of: A) "Who consumes the products produced?" B) "What products will be produced?" C) "Where will the products be consumed?" D) "How will the products be produced?" Answer: D Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

19) Deciding if a power company will generate electricity from wind power or coal answers the economic question of: A) "Who consumes the products produced?" B) "What products will be produced?" C) "Where will the products be consumed?" D) "How will the products be produced.?" Answer: D Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 20) An economic model is a: A) realistic version of an economic environment. B) detailed version of an economic issue. C) fictional representation of an entire economy. D) simplified representation of an economic environment. Answer: D Diff: 1 Topic: Economic Models Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 21) Economic models are used to: A) explain every detail of an economic theory. B) explore decision making by individuals, firms and other organizations. C) build physical renditions of government construction projects. D) represent the complexities of economic environments. Answer: B Diff: 1 Topic: Economic Models Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

22) Talking about alternatives is the first step in a process that helps us make better choices about how we use our resources. Answer: TRUE Diff: 1 Topic: What Is Economics? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 23) In the past few centuries, choices have led to a substantial decline in the standards of living around the globe. Answer: FALSE Diff: 1 Topic: What Is Economics? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 24) Scarcity is a situation in which resources are unlimited in quantity and can be used in different ways. Answer: FALSE Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 25) Positive economics answers the question, "What ought to be?" Normative economics predicts the consequences of alternative actions, answering the questions, "What is?" or "What will be?" Answer: FALSE Diff: 1 Topic: Positive versus Normative Analysis Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

26) Normative economics answers the question, "What ought to be?" Positive economics predicts the consequences of alternative actions, answering the questions, "What is?" or "What will be?" Answer: TRUE Diff: 1 Topic: Positive versus Normative Analysis Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 27) Most modern economic analysis is normative in nature, but involves questions with positive aspects. Answer: FALSE Diff: 1 Topic: Positive versus Normative Analysis Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 28) Economists will always reach the same conclusion in their positive analyses. Answer: FALSE Diff: 1 Topic: Positive versus Normative Analysis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 29) One of the key economic questions is, "Where should products be produced?" Answer: FALSE Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 30) One of the key economic questions is, "Who consumes the products?" Answer: TRUE Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 9 Copyright © 2020 Pearson Education, Inc.

31) An economic model is a detailed version of an economic environment. Answer: FALSE Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 32) Economic models explore decision making by individuals, firms and other organizations. Answer: TRUE Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 33) Would an economist consider clean air a scarce resource? Explain. Answer: Yes, because the air has alternative uses. We can choose to use it to either breathe or to undertake activities that pollute it. The more we want to breathe clean air the more we must limit the production of pollutants. The more we pollute the air the less we can breathe clean air. Diff: 2 Topic: What Is Economics? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 34) List and briefly describe the five factors of production. Answer: Natural resources—those resources provided by nature. Labor—the physical and mental effort used by people to produce goods and services. Physical capital—the infrastructure, equipment, machines and structures used to produce goods and services. Human capital—the knowledge and skills obtained by workers through education and experience. Entrepreneurship—the organizing and coordination of the other four factors of production needed to produce and sell products. Diff: 2 Topic: What Is Economics? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

35) Give an example of something that is scarce in your life and explain the choices you've made because of scarcity. Answer: Responses are numerous and will vary by students. Diff: 1 Topic: What Is Economics? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 36) Positive economic analysis answers what question? Answer: Positive economic analysis answers the question "what is?" or "what will be?" Diff: 1 Topic: Positive versus Normative Analysis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 37) Normative economic analysis answers what question? Answer: Normative economic analysis answers the question "what ought to be?" Diff: 1 Topic: Positive versus Normative Analysis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 38) Richard runs a pizza delivery restaurant. List the three basic types of decisions studied in economics and give an example from Richard's restaurant. Answer: How to produce? With what resources will the pizzas be produced? What to produce? What sorts of pizza do people order? Who consumes the products? Which people decided to come to the restaurant on a given day? Diff: 2 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

1.2 Economic Analysis and Modern Problems 1) According to the Texas Transportation Institute, the typical U.S. commuter wastes approximately how much time per year due to traffic congestion? A) 47 hours B) 22 hours C) 42 hours D) 96 hours Answer: C Diff: 1 Topic: Economic View of Traffic Congestion Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 2) In the U.S., which of the following government programs assist workers find jobs when they lose their jobs due to trade? A) Trade Adjustment Assistance program B) Social Security C) workers' compensation D) Obamacare Answer: A Diff: 1 Topic: Trade-offs from International Trade Skill: Fact AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 3) When Canada buys lemons from Mexico instead of growing lemons in heated greenhouses: A) Canadian consumers will gain because lemon prices will drop. B) Canadian lemon producers will gain because lemon prices will drop. C) Canadian consumers will gain because lemon prices will rise. D) Mexican lemon producers will lose because lemon prices in Canada will rise. Answer: A Diff: 1 Topic: Trade-offs from International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

4) When countries trade with each other, does it result in a gain for everybody? A) No. Producers of a good that is imported would be hurt. B) No. Consumers of a good that is imported would be hurt. C) No. Producers of a good that is exported would be hurt. D) Yes. All producers and consumers from both exporting and importing countries will gain. Answer: A Diff: 1 Topic: Trade-offs from International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 5) The financial crisis and recession which began in 2007: A) impacted only high-income countries. B) did not impact the United States. C) impacted many countries in the world. D) impacted only low-income countries. Answer: C Diff: 1 Topic: Economic View of the Managing the U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 6) To combat the financial crisis and recession which began in 2007, governments worldwide made it: A) easier for firms and households to borrow money for investment and consumer goods. B) easier for other countries to borrow money for infrastructure projects. C) easier for firms to pay their taxes by providing a tax amnesty. D) easier for workers to purchase health insurance through their employers. Answer: A Diff: 1 Topic: Economic View of the Managing the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 7) Congestion taxes tend to cause an increase in traffic volume during rush hours. Answer: FALSE Diff: 1 Topic: Economic View of Traffic Congestion Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 13 Copyright © 2020 Pearson Education, Inc.

8) Economic expansion and growth are the only objectives that U.S. policymakers consider when they implement tax, spending and financial policies that affect the U.S. economy. Answer: FALSE Diff: 1 Topic: Economic View of the Managing the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 1.3 The Economic Way of Thinking 1) Who is associated with the following summary of the economic way of thinking: "The theory of economics does not furnish a body of settled conclusions immediately acceptable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its processer draw correct conclusions." A) John Maynard Keynes B) Alfred Marshall C) Adam Smith D) President Harry Truman Answer: A Diff: 1 Topic: The Economic Way of Thinking Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 2) To make things simpler and focus attention on what really matters, economists: A) use assumptions. B) ignore all variables. C) think at the margin. D) respond to incentives. Answer: A Diff: 1 Topic: Use Assumptions to Simplify Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

3) A variable measures: A) something that always has the same value. B) something that can take on different values. C) factors that occur with high degrees of uncertainty. D) the degree to which something varies over time. Answer: B Diff: 1 Topic: Isolate Variables - Ceteris Paribus Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 4) The Latin phrase ceteris paribus means that when a relationship between two variables is being studied: A) both are treated as unpredictable. B) neither of those two variables is allowed to change. C) all other variables are held fixed. D) we recognize that some factors are unknown. Answer: C Diff: 1 Topic: Isolate Variables - Ceteris Paribus Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 5) To think at the margin means to consider: A) how nothing remains constant over time. B) how a small change in one variable affects another variable. C) how people behave in their own self-interest. D) how people will decide what to purchase. Answer: B Diff: 1 Topic: Think at the Margin Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

6) Jerome has a "C" average in his philosophy course and a "B" average in his economics course. He decides to study an extra hour for his philosophy exam. This is an example of: A) thinking at the margin. B) using assumptions to simplify. C) ceteris paribus. D) caveat emptor. Answer: A Diff: 1 Topic: Think at the Margin Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 7) A small change in a variable is: A) an average change. B) a ceteris paribus change. C) an efficient change. D) a marginal change. Answer: D Diff: 1 Topic: Think at the Margin Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 8) Adam Smith: A) is considered the founder of economics. B) introduced the concept of ceteris paribus to the discussion of supply and demand. C) is responsible for refining the model of supply and demand. D) is the author of this text. Answer: A Diff: 1 Topic: Rational People Respond to Incentives Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

9) When economists assume that people are rational and respond to incentives, they mean: A) people act with kindness. B) people are altruistic. C) people act in their own self-interest. D) people are selfish. Answer: C Diff: 1 Topic: Rational People Respond to Incentives Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 10) When deciding to implement a congestion tax, economists and the government would use the elements of the economic way of thinking to primarily determine: A) if the tax would be allocated equitably. B) what congestion tax amount should be charged. C) who should be exempt from the tax. D) where to spend the revenue generated. Answer: B Diff: 1 Topic: Example: Southern California addresses its Congestion Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 11) The book cites a result where after of the implementation of the congestion tax in Stockholm, Sweden of $1.50-$3.00, traffic volume was reduced and travel time for cars and buses was cut in half. This is an example of: A) responding to incentives. B) the role of pricing in allocating resources. C) caveat emptor. D) comparative advantage. Answer: A Diff: 1 Topic: Example: Southern California addresses its Congestion Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

12) To reduce traffic congestion, the Southern California Council of Governments (SCAG) advocate the implementation of: A) a congestion tax. B) a gas tax C) a bus subsidy D) a car sales tax. Answer: A Diff: 1 Topic: Example: Southern California addresses its Congestion Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention Recall the Application about the incentives to install rooftop solar panels to answer the following question(s). 13) According to the Application, a 10 percent increase in the tax credits for solar panels results in an increase in the number of households that install solar panels by 7.6 percent. The increase in sales due to this subsidy is an example of which element of the economic way of thinking? A) responding to incentives B) isolating variables C) thinking at the margin D) using assumptions to simplify Answer: A Diff: 1 Topic: Application 1, Incentives to Install Rooftop Solar Panels Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 14) According to the Application, another factor that was responsible for solar power deployment was the rising price of electricity. The increase in sales due to higher electricity prices describes the economic concept of: A) using assumptions to simplify. B) ceteris paribus. C) rational self-interest. D) marginal thinking. Answer: C Diff: 1 Topic: Application 1, Incentives to Install Rooftop Solar Panels Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 18 Copyright © 2020 Pearson Education, Inc.

15) According to the Application, the value of the federal tax credits equaled 30 percent of solar panel installation costs. If you purchase a rooftop solar panel for $20,000, then on the year you installed your solar panels, you should expect a decrease in your liabilities to the federal taxes by: A) $6,000 B) $12,000 C) $15,000 D) $1,500 Answer: A Diff: 1 Topic: Application 1, Incentives to Install Rooftop Solar Panels Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention Recall the Application about housing prices in Cuba to answer the following question(s). 16) According to the Application, in 1960 the Cuban government: A) confiscated most housing in the country. B) did not allow people to sell or rent their homes. C) caused a large shortage of housing as a result of its policies. D) all of the above. Answer: D Diff: 1 Topic: Application 2, Housing Prices in Cuba Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 17) Recent housing reforms in Cuba should give homeowners ________ incentives to repair their homes and therefore ________ construction of new homes. A) more; decrease B) more; increase C) fewer; decrease D) fewer; increase Answer: B Diff: 2 Topic: Application 2, Housing Prices in Cuba Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

18) Using assumptions to make things simpler and focus attention on what really matters is like using a road map to plan a trip. Answer: TRUE Diff: 1 Topic: Use Assumptions to Simplify Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 19) Ceteris paribus means "Let the buyer beware." Answer: FALSE Diff: 1 Topic: Isolate Variables - Ceteris Paribus Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 20) Ceteris paribus is the same as rise / run. Answer: FALSE Diff: 1 Topic: Isolate Variables - Ceteris Paribus Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 21) A small, one-unit change in value is called a marginal change. Answer: TRUE Diff: 1 Topic: Think at the Margin Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 22) A key assumption of most economic analysis is that people act rationally, meaning they respond to incentives. Answer: TRUE Diff: 1 Topic: Rational People Respond to Incentives Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 20 Copyright © 2020 Pearson Education, Inc.

23) A key assumption of most economic analysis is that people are altruistic, meaning that they act in their own self-interest. Answer: FALSE Diff: 1 Topic: Rational People Respond to Incentives Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 24) Economists assume that individuals make informed decisions and act in their own selfinterest. Answer: TRUE Diff: 1 Topic: Rational People Respond to Incentives Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 25) The congestion tax implemented in Stockholm reduced traffic volume and cut travel time for cars and buses by 20%. Answer: TRUE Diff: 1 Topic: Example: Southern California addresses its Congestion Problem Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 26) To determine an appropriate congestion tax, an economist has to assume that people respond to incentives. Answer: TRUE Diff: 1 Topic: Example: Southern California addresses its Congestion Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

Recall the Application about housing prices in Cuba to answer the following question(s). 27) According to the Application, recent reforms in Cuba have relied less on the free market in determining prices in the housing market. Answer: FALSE Diff: 1 Topic: Application 2, Housing Prices in Cuba Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 28) What is meant by the term "marginal change"? Answer: A marginal change is a small, one unit change in value. Diff: 1 Topic: Think at the Margin Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 1.4 Employability: Economic Logic on the Job 1) Which of the following occupations would a major in economics be useful for? A) management-analyst B) real estate appraiser C) financial analyst D) All of the above are correct. Answer: D Diff: 1 Topic: Employability: Economic Logic on the Job Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

2) Which of the following occupations would use economic analyses in their real world jobs? A) store manager B) teacher C) environmental regulator D) All of the above are correct. Answer: D Diff: 1 Topic: Employability: Economic Logic on the Job Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 3) Which of the following skills would the study of economics help promote? A) problem solving B) memorization C) critical thinking D) A and C only Answer: D Diff: 1 Topic: Employability: Economic Logic on the Job Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 4) Which of the following occupations would a major in economics be least useful for? A) management-analyst B) real estate appraiser C) financial analyst D) medical doctor Answer: D Diff: 1 Topic: Employability: Economic Logic on the Job Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

5) Why does economics fit well as a liberal arts education? Answer: A liberal arts education provides broad knowledge and thinking skills, so a worker is more flexible in responding to changes in the workplace. Economics fits naturally into the liberal arts because it provides a framework for problem-solving that can be applied everywhere, from making a personal decision about where to live, to a national decision about when to stimulate the economy with a tax cut, to a global decision about how to respond to climate change. Diff: 1 Topic: Employability: Economic Logic on the Job Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 1.5 Preview of Coming Attractions: Macroeconomics 1) Macroeconomics is best described as the study of: A) very large issues. B) the choices made by individual households, firms, and governments. C) the nation's economy as a whole. D) the relationship between inflation and wage inequality. Answer: C Diff: 1 Topic: Preview of Coming Attractions: Macroeconomics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 2) Which of the following is a macroeconomic question? A) Should we have a constitutional amendment requiring the government to implement a national consumption tax to replace the current income tax? B) Why did a leading computer manufacturer establish call centers in India? C) Why does a pharmaceutical manufacturer try to lower its production costs? D) Should the government put a tax on alcohol in an attempt to assist in the funding of support groups like Alcoholics Anonymous? Answer: A Diff: 2 Topic: Preview of Coming Attractions: Macroeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns

3) Which of the following is NOT a macroeconomic question? A) Should we have a constitutional amendment requiring the federal government to balance the budget each year? B) Should restaurants be required to list the number of calories for each product on their menus? C) How does a fiscal stimulus package affect gross domestic product? D) Should Congress enact tougher immigration laws to reduce unemployment? Answer: B Diff: 2 Topic: Preview of Coming Attractions: Macroeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 4) We can use macroeconomic analysis to: A) learn how to balance a checkbook. B) study the choices made by households. C) understand marginal changes in the macroeconomy. D) understand why economies grow. Answer: D Diff: 2 Topic: Using Macroeconomics to Understand Why Economies Grow Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 5) Macroeconomics involves the study of the decision-making of individual firms or individuals. Answer: FALSE Diff: 1 Topic: Preview of Coming Attractions: Macroeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 6) Macroeconomics helps explain economic fluctuations, why the economy shrinks and expands and why some of the economy's resources are idle. Answer: TRUE Diff: 1 Topic: Using Macroeconomics to Understand Economic Fluctuations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns

7) Define the field of economics known as macroeconomics. Answer: Macroeconomics is the study of the nation's economy as a whole. Macroeconomics focuses on the issues of inflation, unemployment and economic growth. Diff: 1 Topic: Preview of Coming Attractions: Macroeconomics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 8) Identify and explain the three ways we can use macroeconomic analysis. Answer: Macroeconomics explains why some resources increase over time and how an increase in these resources translates into a higher standard of living. In the fastest-growing countries, citizens save a large fraction of the money they earn. Firms can then borrow the funds saved to purchase machinery and equipment that make their workers more productive. The fastest growing countries also have well-educated workforces, allowing firms to quickly adopt new technologies that increase worker productivity. All economies, including ones that experience a general trend of growth, are subject to economic fluctuations including periods when the economy shrinks. During an economic downturn, some of the economy's resources are idle. Many workers are unemployed, and many factories and stores are closed. By contrast, sometimes the economy grows too rapidly, causing inflation. Macroeconomics helps us understand why these fluctuations occur, why the economy sometimes cools and sometimes overheats and what we can do to moderate the fluctuations. A third reason for studying macroeconomics is to make informed business decisions. A manager who intends to borrow money for a new factory or store could use her knowledge of macroeconomics to predict the effects of current public policies on interest rates and then decide whether to borrow the money now or later. Diff: 2 Topic: Preview of Coming Attractions: Macroeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 1.6 Preview of Coming Attractions: Microeconomics 1) The study of the choices made by individual households, firms, and government is called: A) macroeconomics. B) microeconomics. C) managerial economics. D) market economics. Answer: B Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

2) Microeconomics is best described as the study of: A) the choices made by individual households, firms, and governments. B) inflation, unemployment, gross national product, and the nation's economy as a whole. C) how markets interact in the aggregate economy. D) marginal changes in the economy. Answer: A Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 3) Which of the following is a microeconomic question? A) Should companies pay for employees' health insurance? B) Why do some countries have higher economic growth rates than other countries? C) Should Congress and the president take action to reduce the unemployment rate? D) Should the Fed attempt to influence the interest rate to control potential inflation? Answer: A Diff: 1 Topic: Using Microeconomics to Evaluate Public Policies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 4) Which of the following is a microeconomic question? A) Should the government decrease unemployment benefits to reduce the unemployment rate? B) Why do some countries have higher inflation rates than other countries? C) Should the government subsidize corn farmers to encourage the production of ethanol? D) Should congress decrease taxes to help stimulate the economy? Answer: C Diff: 2 Topic: Using Microeconomics to Evaluate Public Policies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

5) Microeconomics helps explain economic fluctuations, why the economy shrinks and expands and why some of the economy's resources are idle. Answer: FALSE Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 6) Microeconomics is the study of aggregate behavior in the economy. Answer: FALSE Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 7) One example of a microeconomic question is, "How will prices in the clothing industry change if the government bans imports from China?" Answer: TRUE Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 8) One example of a microeconomic question is, "Should unemployment benefits be increased?" Answer: FALSE Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 9) Describe the field of economics known as microeconomics. Answer: Microeconomics is the study of the choices made by individual households, firms and government and how these choices affect the markets for goods and services. Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 28 Copyright © 2020 Pearson Education, Inc.

10) Identify and explain the three ways we can use microeconomic analysis. Answer: 1. To understand markets and predict changes: One reason for studying microeconomics is to better understand how markets work. Once you know how markets operate, you can use economic analysis to predict how various events affect product prices and quantities. 2. To make personal and managerial decisions: On the personal level, we use economic analysis to decide how to spend our time, what career to pursue, and how to spend and save the money we earn. As workers, we use economic analysis to decide how to produce goods and services, how much to produce, and how much to charge for them. 3. To evaluate public policies: While societies use markets to make the most of decisions concerning production and consumption, the government has several important roles in a marketbased society. We can use economic analysis to determine how well the government performs its roles in the market economy. We can also explore the trade-offs associated with various public policies. Diff: 2 Topic: Preview of Coming Attractions: Microeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 1.7 Appendix: Using Graphs and Percentages 1) There is a positive relationship between two variables if: A) they move in opposite directions. B) they move in the same direction. C) one variable changes and the other does not. D) neither variable moves. Answer: B Diff: 1 Topic: Graphing Two Variables Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs

2) There is a negative relationship between two variables if: A) they move in opposite directions. B) they move in the same direction. C) one variable changes and the other does not. D) neither variable moves. Answer: A Diff: 1 Topic: Graphing Two Variables Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 3) The slope of a curve measures: A) the change in the vertical variable in response to the change in the horizontal variable. B) the length of the curve. C) only the change in the horizontal variable. D) only the change in the vertical variable. Answer: A Diff: 1 Topic: Computing the Slope Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 4) Slope is calculated as the: A) change in the vertical variable divided by the change in the horizontal variable. B) change in the horizontal variable divided by the change in the vertical variable. C) the vertical axis divided by the horizontal axis. D) change in the vertical variable. Answer: A Diff: 1 Topic: Computing the Slope Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs

5) The slope of a straight line: A) is constant. B) is negative. C) is zero. D) changes along the curve. Answer: A Diff: 1 Topic: Computing the Slope Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 6) If the variable on the vertical axis increases by 20 and the variable on the horizontal axis increases by 5, the slope of the line is: A) 0.25. B) 4. C) 15. D) 100. Answer: B Diff: 1 Topic: Computing the Slope Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 7) If the variable on the vertical axis increases by 24 and the variable on the horizontal axis decreases by 3, the slope of the line is: A) -24. B) -8. C) 3. D) 72. Answer: B Diff: 1 Topic: Computing the Slope Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs

Figure 1A.1 8) Refer to Figure 1A.1. If the hours worked per week are 20, the income per week is: A) 50. B) 100. C) 150. D) 200. Answer: C Diff: 1 Topic: Graphing Two Variables, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 9) Refer to Figure 1A.1. If the hours worked per week are 30, the income per week is: A) 50. B) 100. C) 150. D) 200. Answer: D Diff: 1 Topic: Graphing Two Variables, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs

10) Refer to Figure 1A.1. The slope of the line between the points where income equals 50 and income equals 200 is: A) 0.2. B) 5. C) 10. D) 50. Answer: B Diff: 1 Topic: Computing the Slope, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 11) Refer to Figure 1A.1. The slope of the line between the points where hours worked per week are 20 and hours worked per week are 30 is: A) 0.2. B) 5. C) 10. D) 50. Answer: B Diff: 1 Topic: Computing the Slope, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs

Figure 1A.2 12) Refer to Figure 1A.2. If this consumer rents zero DVDs, how many movie tickets will she purchase? A) 0 B) 5 C) 10 D) 15 Answer: D Diff: 1 Topic: Graphing Negative Relationships, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 13) Refer to Figure 1A.2. If this consumer rents 60 DVDs, how many movie tickets will she purchase? A) 0 B) 5 C) 10 D) 15 Answer: B Diff: 1 Topic: Graphing Negative Relationships, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 34 Copyright © 2020 Pearson Education, Inc.

14) Refer to Figure 1A.2. The slope of the curve: A) is negative. B) is positive. C) is zero. D) changes along the curve. Answer: A Diff: 1 Topic: Computing the Slope, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 15) Refer to Figure 1A.2. The slope between points a and c is: A) -5. B) -6. C) 10. D) 30. Answer: B Diff: 1 Topic: Computing the Slope, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 16) The slope of a nonlinear curve: A) is constant. B) is negative. C) is zero. D) changes along the curve. Answer: D Diff: 1 Topic: Graphing Nonlinear Relationships Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs

17) If the price of monthly satellite TV service increases from $40 to $50, the percentage change is: A) 5 percent. B) 20 percent. C) 25 percent. D) 45 percent. Answer: C Diff: 2 Topic: Computing Percentage Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 18) If the price of monthly satellite TV service increases from $50 to $60, the percentage change (using the average value (or the midpoint) is: A) 18.2%. B) 16.7%. C) 10%. D) 60%. Answer: A Diff: 2 Topic: Computing Percentage Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 19) If the price of a 32 GB memory card decreases from $25 to $20, the percentage change is: A) -20 %. B) -33 %. C) -50 %. D) -60 %. Answer: A Diff: 2 Topic: Computing Percentage Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs

20) If the price of a 32 GB memory card decreases from $25 to $20, the percentage change using the average value (or the midpoint) is: A) -22.2%. B) -20%. C) -25%. D) -5%. Answer: A Diff: 2 Topic: Computing Percentage Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs Recall the Application about the government of Mexico City repainting highway lane lines to transform a 4-lane highway into a 6-lane highway to answer the following question(s). 21) When the government converted the highway from 4 lanes into 6 lanes, they claimed the capacity had increased by 50 percent. When the government switched the highway back from 6 lanes to 4 lanes, they claimed the capacity had been decreased by 33 percent. Had the government used the midpoint method, the percentage increase would have been ________ percent and the percentage decrease would have been ________ percent. A) 33; 50 B) 33; 33 C) 40; 40 D) 50; 50 Answer: C Diff: 2 Topic: Application 3, The Perils of Percentages Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 22) When computing percentage changes, using the simple approach results in increases and decreases which are: A) identical. B) symmetric. C) not symmetric. D) more accurate than using the midpoint method. Answer: C Diff: 1 Topic: Application 3, The Perils of Percentages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 37 Copyright © 2020 Pearson Education, Inc.

23) If you work 4 extra hours, and the slope of the curve showing the relationship between your income and work hours is 8, your income will increase by: A) $2. B) $4. C) $12. D) $32. Answer: D Diff: 2 Topic: Using Equations to Compute Missing Values Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 24) To increase income by $120 when the slope of the curve showing the relationship between your income and work hours is 8, how many extra hours will you need to work? A) 8 B) 15 C) 112 D) 960 Answer: B Diff: 2 Topic: Using Equations to Compute Missing Values Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 25) Suppose you find that by studying one extra hour for your exam, you can increase your score by 4 points. How many hours of studying do you need it you want to increase your score from 60 to 80 points (assuming that the relationship is linear)? A) 5 hours B) 6 hours C) 20 hours D) 80 hours Answer: A Diff: 2 Topic: Using Equations to Compute Missing Values Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs

26) The origin of a graph is the intersection of the two axes, where the value of both variables is zero. Answer: TRUE Diff: 1 Topic: Graphing Two Variables Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 27) Positive relationships are also referred to as inverse relationships. Answer: FALSE Diff: 1 Topic: Graphing Two Variables Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 28) Negative relationships are also referred to as inverse relationships. Answer: TRUE Diff: 1 Topic: Graphing Two Variables Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 29) Slope is calculated as rise / run. Answer: TRUE Diff: 1 Topic: Computing the Slope Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 30) Slope is calculated as a change in the variable on the horizontal axis divided by a change in the variable on the vertical axis. Answer: FALSE Diff: 1 Topic: Computing the Slope Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 39 Copyright © 2020 Pearson Education, Inc.

31) The relationship between the number of hours you study and your economics score is linear. Answer: FALSE Diff: 1 Topic: Graphing Nonlinear Relationships Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 2 The Key Principles of Economics 2.1 The Principle of Opportunity Cost 1) The opportunity cost of something is: A) the cost of the labor used to produce it. B) what you sacrifice to get it. C) the price charged for it. D) the search cost required to find it. Answer: B Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 2) The principle of opportunity cost: A) is more relevant for firms than for individuals. B) only refers to monetary payments. C) is only relevant in economics. D) is applicable to all decision-making. Answer: D Diff: 2 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 3) The principle that the cost of something is equal to what is sacrificed to get it is known as the: A) marginal principle. B) principle of opportunity cost. C) principle of diminishing returns. D) reality principle. Answer: B Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

4) The saying that "There's no such thing as a free lunch" refers to the: A) marginal principle. B) spillover principle. C) principle of opportunity cost. D) reality principle. Answer: C Diff: 1 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 5) Jacinda quit her job as a blackjack dealer where she made $42,000 per year to start her own florist business. Her business expenses are $14,000 per year on rent, $21,000 per year on supplies, and $9,000 per year on part time help. As for her personal expenses, her apartment costs her $12,000 per year and her personal bills are an extra $6,000 per year. What is Jacinda's opportunity cost of running the business? A) $104,000 B) $86,000 C) $62,000 D) $44,000 Answer: B Diff: 2 Topic: The Principle of Opportunity Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 6) An unemployed individual decides to spend the day fishing. The opportunity cost of fishing is: A) the cost of bait and any other monetary expenses. B) zero, because the person doesn't have a job. C) the cost of bait, any other monetary expenses, and the value of the individual's wages while he was working. D) the cost of bait, any other monetary expenses, and the value of the best alternative use of the individual's time. Answer: D Diff: 2 Topic: The Principle of Opportunity Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

7) Suppose that you own a house. What is the opportunity cost of living in the house? A) There is no opportunity cost because you own the house. B) There is no opportunity cost unless you could set up a business in the house. C) The opportunity cost is the rent you could have received from a tenant if you didn't live there. D) The opportunity cost is the cost of your monthly mortgage payment plus bills. Answer: C Diff: 2 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 8) Steven lives in a big city where there is a shortage of parking spots. He has a parking spot in his driveway where he parks his car. Which of the following statements is most correct? A) Steven has a lower opportunity cost of owning a car than his neighbor, who must rent a parking spot. B) The opportunity cost of using the spot is zero, because Steven owns the house. C) The opportunity cost of using the parking spot is the price he could charge someone else for using the spot. D) The opportunity cost depends on how much Steven's mortgage payment is. Answer: C Diff: 2 Topic: The Principle of Opportunity Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 9) You rent a DVD of The Dark Knight Rises. The rental is for seven days and you watch the movie on the first day. You tell a friend about the film and your friend asks to come over and watch the movie with you before it is due back. What is your opportunity cost if you decide to watch the movie a second time instead of going to a football game? A) the entire cost of the movie rental, since you have already watched the movie B) one half the rental cost, because you have already watched the movie one time C) zero, because you already paid for the rental. D) the football game you forego by watching the movie again Answer: D Diff: 2 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

10) Angelina, age seven, decides to dress up like Princess Fiona for Halloween. What is the opportunity cost of her decision? A) the cost of the costume B) the fact that she can't dress up like Dora the Explorer, her second choice C) zero, because seven-year-olds don't have opportunity costs D) the cost of the Lady Gaga costume which she did not want Answer: B Diff: 2 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 11) Spending money on a new car instead of a used car when you are on a fixed budget is an example of: A) the incursion of an opportunity cost. B) isolating variables. C) a bad thing to do because you run out of money. D) living on the edge. Answer: A Diff: 1 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 12) Suppose that your tuition to attend college is $24,000 per year and you spend $8,000 per year on room and board. If you were working full time, you could earn $30,000 per year. What is your opportunity cost of attending college for one year? A) $32,000 B) $38,000 C) $54,000 D) $62,000 Answer: C Diff: 1 Topic: The Cost of College Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

13) Suppose that your tuition to attend college is $14,000 per year and you spend $5,000 per year on room and board. If you were working full time, you could earn $26,000 per year. What is your opportunity cost of attending college? A) $19,000 B) $31,000 C) $40,000 D) $45,000 Answer: C Diff: 1 Topic: The Cost of College Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 14) The opportunity cost of going to college: A) is zero if your parents pay your tuition. B) is equal to the cost of tuition, room and board, and other expenses. C) includes wages you lose by going to school instead of working. D) is the same for all students at a particular school who pay full tuition. Answer: C Diff: 1 Topic: The Cost of College Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 15) You have an hour between your economics and math classes. What is the opportunity cost of that time if you use it to complete your math homework instead of your economics homework? A) the economics homework you could have completed B) the math homework you chose to complete C) the cost of your calculator and math textbook D) zero, because it doesn't cost any money to do your math homework Answer: A Diff: 2 Topic: The Cost of College Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

16) The sacrifices made by societies in order to engage in military spending represent: A) the nominal costs of military spending. B) the real costs of military spending. C) the opportunity costs of military spending. D) the excessive costs of military spending. Answer: C Diff: 1 Topic: The Cost of Military Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 17) The trade-offs made by the U.S. government to fund the war in Iraq: A) prove that the government is spending too much on the war. B) show that the government is justified in its war spending. C) exceed the benefits derived from the war. D) represent what was potentially sacrificed to engage in the war. Answer: D Diff: 1 Topic: The Cost of Military Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 18) According to the possible trade-off example between warships and drinking water in the text, the policy question that should be considered in Malaysia is: A) Do the opportunity costs of the warships exceed their nominal costs? B) Do the nominal costs of the warships exceed their real costs? C) Do the benefits of the warships exceed their opportunity costs? D) Do the real costs of the warships exceed their nominal costs? Answer: C Diff: 1 Topic: The Cost of Military Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

Bathe Groom 0 6 7 5 13 4 18 3 22 2 25 1 27 0 Table 2.1 19) Kaitlyn and Larissa have formed a dog bathing and grooming business. The number of dogs they can bathe or groom in any given day is depicted in Table 2.1. The opportunity cost of grooming the first dog in a day is bathing ________ dog(s). A) 1 B) 2 C) 24 D) 25 Answer: B Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 20) Kaitlyn and Larissa have formed a dog bathing and grooming business. The number of dogs they can bathe or groom in any given day is depicted in Table 2.1. The opportunity cost of grooming the third dog in a day is bathing ________ dog(s). A) 3 B) 4 C) 5 D) 18 Answer: B Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

21) Kaitlyn and Larissa have formed a dog bathing and grooming business. The number of dogs they can bathe or groom in any given day is depicted in Table 2.1. The opportunity cost of grooming the sixth dog in a day is bathing ________ dog(s). A) 0 B) 5 C) 6 D) 7 Answer: D Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 22) Kaitlyn and Larissa have formed a dog bathing and grooming business. The number of dogs they can bathe or groom in any given day is depicted in Table 2.1. As they groom more dogs, the opportunity cost of grooming additional dogs: A) falls. B) rises. C) remains constant. D) depends on the prices being charged. Answer: B Diff: 2 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 23) Kaitlyn and Larissa have formed a dog bathing and grooming business. The number of dogs they can bathe or groom in any given day is depicted in Table 2.1. As they groom more dogs, the opportunity cost of bathing additional dogs: A) falls. B) rises. C) remains constant. D) depends on the prices being charged. Answer: A Diff: 2 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

Figure 2.1 24) Referring to Figure 2.1, if you increase the production of agricultural goods, what other area is affected? A) the price of produce B) the production of manufactured goods C) how much people can purchase D) the wages earned by agricultural workers Answer: B Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 25) The production possibilities curve in Figure 2.1 illustrates the notion of: A) increased factory goods production. B) increased agricultural production. C) diminishing resources. D) opportunity cost. Answer: D Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

26) Refer to Figure 2.1. If you are producing 600 tons of agricultural products per year, what is the maximum amount of manufactured products you can produce per year? A) 300 tons B) 500 tons C) 600 tons D) 700 tons Answer: A Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 27) Refer to Figure 2.1. If you choose to produce only agricultural products, what is the maximum quantity you can produce per year? A) 200 tons B) 400 tons C) 600 tons D) > 600 tons Answer: D Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 28) Refer to Figure 2.1. What is the opportunity cost of increasing production of manufactured products from 500 tons to 600 tons per year? A) 200 tons of agricultural products per year B) 400 tons of agricultural products per year C) 500 tons of agricultural products per year D) 600 tons of agricultural products per year Answer: A Diff: 2 Topic: Opportunity Cost and the Production Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

29) If an economy is fully utilizing its resources, it can produce more of one product only if it: A) doubles manufacturing of the product. B) produces less of another product. C) adds more people to the labor force. D) reduces the prices of the most expensive products. Answer: B Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 30) If you remove resources from factory production, the quantity of factory goods will: A) increase. B) decrease. C) remain the same but their price will decrease. D) be diverted to other production. Answer: B Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 31) If an economy is represented by a point inside its production possibilities curve: A) it can produce more of one product even if it does not produce less of another product. B) it can produce more of one product only if it produces less of another product. C) it cannot produce more of one product unless it stops producing the other product entirely. D) it cannot possibly produce more of one product, even if it produces less of another product. Answer: A Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

32) If an economy is represented by a point along its production possibilities curve: A) it can produce more of one product even if it does not produce less of another product. B) it can produce more of one product only if it produces less of another product. C) it cannot produce more of one product unless it stops producing the other product entirely. D) it cannot possibly produce more of one product, even if it produces less of another product. Answer: B Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 33) Points outside the production possibilities curve represent combinations of products that are: A) attainable only if the economy's resources are fully employed. B) attainable only if the economy's resources are not fully employed. C) attainable if the economy's resources are either fully employed or not fully employed. D) unattainable. Answer: D Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions Recall the Application about running a software programming business to answer the following question(s). 34) The time and invested funds involved in starting a software (app) development business addresses the economic concept of: A) the marginal principle. B) opportunity cost. C) the real-nominal principle. D) the principle of diminishing returns. Answer: B Diff: 1 Topic: Application 1, Don't Forget the Costs of Time and Invested Funds Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

35) If by starting your own software development business you are forced give up your job as a janitor, then the income you could have earned as a janitor is: A) part of the opportunity cost of operating your software business. B) not part of the opportunity cost of operating your software business. C) part of the benefit of operating your software business. D) is an example of the principle of diminishing returns. Answer: A Diff: 1 Topic: Application 1, Don't Forget the Costs of Time and Invested Funds Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 36) The current income you would sacrifice to start your own software development business is part of the: A) opportunity cost of invested funds. B) opportunity cost of starting a business. C) cost of doing business. D) present value of your initial investment. Answer: B Diff: 1 Topic: Application 1, Don't Forget the Costs of Time and Invested Funds Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 37) If you have $10,000 to start a software development business, the interest rate is 4 percent, your cost of your computer is $5,000, and the earnings you sacrifice from working at another job are $32,000, your yearly cost of doing business would be: A) $47,000. B) $47,400. C) $37,400. D) $37,000. Answer: C Diff: 2 Topic: Application 1, Don't Forget the Costs of Time and Invested Funds Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

38) A principle is a self-evident truth that most people readily understand and accept. Answer: TRUE Diff: 1 Topic: The Key Principles of Economics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 39) Opportunity cost is the difference between the nominal and real cost of some action. Answer: FALSE Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 40) The opportunity cost of something is the gain you receive as a result of your sacrifice. Answer: FALSE Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 41) The opportunity cost of something is the nominal price paid for the product. Answer: FALSE Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 42) Trade-offs involve an exchange of one thing for another because resources are limited and can be used in different ways. Answer: TRUE Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

43) The notion of opportunity cost allows the measurement of trade-offs. Answer: TRUE Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 44) In order to get his bachelor's degree, Timothy gave up an offer for a full time job as a bartender. Therefore, Timothy incurred an opportunity cost. Answer: TRUE Diff: 1 Topic: The Cost of College Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 45) The opportunity cost of going to a particular college is not the same for everyone. Answer: TRUE Diff: 1 Topic: The Cost of College Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 46) The cost of a bachelor's degree in philosophy equals the tuition plus the cost of room and board. Answer: FALSE Diff: 1 Topic: The Cost of College Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 47) What is an opportunity cost? Answer: An opportunity cost is what you sacrifice to get something. Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 15 Copyright © 2020 Pearson Education, Inc.

48) Suppose that you lend $5,000 to a friend who pays you back $5,400 the next year. Suppose that prices that year rose by six percent and the real rate of return in the stock market was five percent. Your friend says that he or she was being more than fair by giving you more than the rate of inflation as a return. What do you think? Answer: The opportunity cost of that money was not just the six percent inflation, but also the real rate of return that would have been enjoyed had the money been put in the stock market. For you to have been indifferent between loaning your money versus keeping it, your friend should have reimbursed you by $5,550, or an 11% return. This is another example of considering all the costs, both the loss in purchasing power of the money due to inflation and the implicit cost of the return that could have been earned if the money was invested in the stock market. Diff: 2 Topic: The Principle of Opportunity Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 49) What is the opportunity cost of investing $10,000 of your own money into a business you wish to start? Answer: The opportunity cost of your $10,000 is the monetary gain you forego because you cannot invest the money elsewhere. Diff: 1 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 50) What do economists mean when they say that "there is no such thing as a free lunch?" Answer: Everything has a cost, even when you do not pay money for it. Suppose that somebody bought you lunch. Resources from the economy were used to make that lunch, even though those resources may not belong to you. Consequently, the economy gave up anything else it could have made with the resources it used to make the lunch. The opportunity cost of that lunch is the lost opportunity to use those resources in some other way. Diff: 2 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

51) What is the opportunity cost of your college degree? Answer: A quick answer would be to say that the cost is the tuition, room and board, and books expenditures that are borne during the college years. But such a statement would be incorrect. First, it understates one aspect of costs: one is giving up income while a student. But it also overstates the costs in another dimension: people would eat and sleep somewhere regardless of their attendance in college. Therefore, one should not consider room and board to be part of the cost of college attendance. Diff: 1 Topic: The Cost of College Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 2.2 The Marginal Principle 1) The extra benefit resulting from a small increase in an activity is called the: A) opportunity cost. B) marginal benefit. C) marginal cost. D) diminishing returns of the activity. Answer: B Diff: 1 Topic: The Marginal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 2) The additional cost resulting from a small increase in some activity is called the: A) opportunity cost. B) marginal benefit. C) marginal cost. D) diminishing returns of the activity. Answer: C Diff: 1 Topic: The Marginal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

3) The principle that individuals and firms pick the activity level where the incremental benefit of that activity equals the incremental cost of that activity is known as the: A) marginal principle. B) principle of opportunity cost. C) principle of diminishing returns. D) spillover principle. Answer: A Diff: 1 Topic: The Marginal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 4) The marginal principle implies that an individual should produce or consume where: A) marginal benefit exceeds marginal cost. B) marginal benefit is less than marginal cost. C) marginal benefit equals marginal cost. D) total benefit equals total cost. Answer: C Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

5) Joe runs a business and needs to decide how many hours to stay open. Figure 2.2 illustrates his marginal benefit of staying open for each additional hour. Suppose that Joe's marginal cost of staying open per hour is $24. How many hours should Joe stay open? A) 3 hours B) 4 hours C) 5 hours D) 6 hours Answer: D Diff: 1 Topic: The Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

6) Joe runs a business and needs to decide how many hours to stay open. Figure 2.2 illustrates his marginal benefit of staying open for each additional hour. Suppose that Joe's marginal cost of staying open per hour is $32. How many hours should Joe stay open? A) 4 hours B) 5 hours C) 6 hours D) 7 hours Answer: B Diff: 1 Topic: The Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 7) Joe runs a business and needs to decide how many hours to stay open. Figure 2.2 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 5 hours per day. If he is following the marginal principle, what must his marginal cost per hour be? A) $16 B) $24 C) $32 D) $40 Answer: C Diff: 1 Topic: The Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 8) Joe runs a business and needs to decide how many hours to stay open. Figure 2.2 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 3 hours per day. If he is following the marginal principle, what must his marginal cost per hour be? A) $24 B) $32 C) $40 D) $48 Answer: D Diff: 1 Topic: The Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 20 Copyright © 2020 Pearson Education, Inc.

9) Joe runs a business and needs to decide how many hours to stay open. Figure 2.2 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 6 hours per day. If he is following the marginal principle, what must his marginal cost per hour be? A) $16 B) $24 C) $32 D) $48 Answer: B Diff: 1 Topic: The Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions Hours of Operation 1 2 3 4 5 6 7

Marginal Cost 6 12 18 24 30 36 42

Table 2.2 10) Krystal runs a nail salon and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Krystal's marginal benefit of staying open per hour is $30. If she is following the marginal principle, how many hours should Krystal stay open? A) 4 hours B) 5 hours C) 6 hours D) 7 hours Answer: B Diff: 1 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

11) Krystal runs a nail salon and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Krystal's marginal benefit of staying open per hour is $18. If she is following the marginal principle, how many hours should Krystal stay open? A) 3 hours B) 4 hours C) 6 hours D) 7 hours Answer: A Diff: 1 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 12) Krystal runs a nail salon and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Krystal staying open 4 hours per day. If she is following the marginal principle, what must her marginal benefit be? A) $12 B) $18 C) $24 D) $30 Answer: C Diff: 1 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 13) Krystal runs a nail salon and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Krystal staying open 2 hours per day. If she is following the marginal principle, what must her marginal benefit be? A) $6 B) $12 C) $15 D) $18 Answer: B Diff: 1 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 22 Copyright © 2020 Pearson Education, Inc.

14) Krystal runs a nail salon and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Krystal staying open 5 hours and her marginal benefit of staying open per hour is $18. If she is following the marginal principle, Krystal should: A) stay open 2 more hours. B) stay open 3 more hours. C) stay open 2 fewer hours. D) stay open 3 fewer hours. Answer: C Diff: 2 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 15) Krystal runs a nail salon and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Krystal staying open 5 hours and her marginal benefit of staying open per hour is $36. If she is following the marginal principle, Krystal should: A) stay open 1 more hour. B) stay open 2 more hours. C) stay open 1 fewer hour. D) stay open 2 fewer hours. Answer: A Diff: 2 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 16) Considering how a change in one variable affects the value of another variable is called: A) the Peter Principle. B) the marginal principle. C) the principle of supply and demand. D) functional decision making. Answer: B Diff: 1 Topic: The Marginal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

17) When referring to "marginal" changes, the economic focus is on: A) changes which affect only a few people or products. B) large changes on the low end. C) graduated changes on the high end. D) small or incremental changes. Answer: D Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 18) When deciding whether to engage in an activity or how much to do, people should follow: A) the principle of microeconomics. B) the principle of macroeconomics. C) the marginal principle. D) the law of supply and demand. Answer: C Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions Recall the Application about the best speed at which to sail an ocean cargo ship to answer the following question(s). 19) Weighing the benefits and costs of the different speeds at which to sail an ocean cargo ship addresses the economic concept known as: A) the principle of opportunity cost. B) the marginal principle. C) the principle of voluntary exchange. D) the principle of diminishing returns. Answer: B Diff: 1 Topic: Application 2, How Fast to Sail? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

20) Sailing an ocean cargo ship slower to save on the expense of fuel as opposed to sailing it faster to save time and therefore allow it to make more deliveries makes sense if the ________ of sailing slower is less than the ________ of sailing slower. A) marginal benefit; marginal cost B) marginal cost; marginal benefit C) marginal benefit; opportunity cost D) marginal cost; opportunity cost Answer: B Diff: 1 Topic: Application 2, How Fast to Sail? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 21) The use of seat belts and other automobile safety features making bicycling more hazardous can be explained by the economic concept known as: A) the real-nominal principle. B) the marginal principle. C) the principle of voluntary exchange. D) the principle of diminishing returns. Answer: B Diff: 1 Topic: Driving Speed and Safety Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 22) Saving time by driving faster is an example of a ________ of driving faster. Increasing the severity of injuries from a potential accident due to driving faster is a(n) ________ of driving faster. A) nominal cost; real cost B) marginal cost; nominal cost C) marginal benefit; marginal cost D) normative benefit; opportunity cost Answer: C Diff: 1 Topic: Driving Speed and Safety Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

23) When applying the marginal principle, you should pick the level at which the activity's marginal benefit equals its marginal cost. Answer: TRUE Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 24) When applying the marginal principle, you should pick the level at which the activity's marginal benefit is less than its marginal cost. Answer: FALSE Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 25) Basically, the marginal principle helps us to evaluate the factors involved in taking an action or if doing something is worth the effort. Answer: TRUE Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 26) When Lonnie produces 1 pair of cowboy boots his costs total $300. When he produces 2 pairs of cowboy boots his total costs are $500. This means that Lonnie's marginal cost of producing the second pair of cowboy boots is $200. Answer: TRUE Diff: 2 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

27) Economists argue that individuals should continue to consume until total benefit equals total cost. Answer: FALSE Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 28) If a company's total costs per day increase from $200 to $400 by adding another worker, but its additional benefits are $300, it is sensible to add that additional worker. Answer: TRUE Diff: 2 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 29) What is a marginal cost? Answer: A marginal cost is the additional cost resulting from a small increase in the production of a good. Diff: 1 Topic: The Marginal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 30) What is a marginal benefit? Answer: A marginal benefit is the additional benefit resulting from a small increase in the production of a good. Diff: 1 Topic: The Marginal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

31) When a firm hired its tenth worker, its factory output increased by four units per month. Would you expect the firm's output to increase by eight more units per month if the firm hired two more workers? Answer: No. The principle of diminishing marginal returns suggests that after some point of increasing returns, each incremental worker should have a progressively lower level of marginal productivity. Diff: 2 Topic: Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 32) Consider a firm that is trying to determine how many hours to remain open in a day. How would the firm make this decision? Answer: The firm would continue to stay open as long as the marginal benefit of staying open (say, the increased revenues) each extra hour exceeds (or at least equals) the incremental, or marginal, costs (e.g., electricity, wages, etc.) incurred from staying open that hour. Diff: 2 Topic: Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 33) Different people eat different amounts of food when they go to buffet restaurants, even though they all pay the same price. Explain how this relates to the marginal principle. Answer: The marginal monetary cost of eating more is zero, so people will eat until they would not enjoy eating another bite. There is an implicit cost of eating more once you are full (such as extra weight gain and physical discomfort). Therefore, people will eat until the marginal benefit equals the marginal cost, and this will occur at different amounts of food for different people. Diff: 2 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

34) Use the marginal principle to explain why government mandated safety features in automobiles during the 1960s and 1970s resulted in an increase in collisions between automobiles and bicycles. Answer: The mandated safety features decreased the marginal cost of speed: People who wear seat belts suffer less severe injuries in a collision, so every additional unit of speed is less costly to the driver. Drivers felt more secure because they were better insulated from harm in the event of a collision, and so they drove faster. As a result, the number of collisions between cars and bicycles increased, meaning that a safer environment for drivers led to a more hazardous environment for bicyclists. Diff: 2 Topic: Driving Speed and Safety Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 2.3 The Principle of Voluntary Exchange 1) People acting in their own self-interest is the basis of the: A) principle of supply and demand. B) principle of voluntary exchange. C) real-nominal principle. D) principle of scarcity. Answer: B Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 2) The principle of voluntary exchange is based on the idea of: A) making assumptions. B) isolating variables. C) thinking at the margin. D) rational self-interest. Answer: D Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

3) Who among the following stressed the importance the voluntary exchange as a distinctly human trait? A) Adam Smith B) Alfred Marshall C) John Keynes D) Karl Marx Answer: A Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 4) The alternative to voluntary exchange is: A) self-sufficiency B) dependency C) cooperation D) marginal analysis. Answer: A Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade Recall the Application about Rory McIlroy and weed-whacking to answer the following question(s). The Application assumes that Rory McIlroy could whack down all the weeds on his estate in one hour at an opportunity cost of $1,000, but it would take 20 hours for a gardener to do it at a price of $10 per hour. 5) This Application addresses the economic concept of: A) the marginal principle. B) diminishing returns. C) specialization and exchange. D) real versus nominal costs. Answer: C Diff: 1 Topic: Application 3, Rory McIlroy and Weed-Whacking Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

6) Based on the assumptions in the Application, should Rory hire a gardener or cut the weeds himself? A) He should hire the gardener because he would save $1,000. B) He should hire the gardener because he would save $800. C) He should cut the weeds himself because he would save $200. D) He should cut the weeds himself because he would save $1,000. Answer: B Diff: 2 Topic: Application 3, Rory McIlroy and Weed-Whacking Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 7) If Rory McIlroy only earned $500 per hour playing golf instead of $1,000 per hour, what should he do? A) He should still hire the gardener. B) He should do the weed-whacking himself. C) He should hire a less-productive gardener. D) He should be indifferent as to who does the weed-whacking, for the difference in hourly earnings would now be insignificant. Answer: A Diff: 2 Topic: Application 3, Rory McIlroy and Weed-Whacking Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 8) When you have a job and your employer compensates you for your time with money, resulting in both of you being better off, it is an example of a voluntary exchange. Answer: TRUE Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

9) The principle of voluntary exchange is the concept that a voluntary exchange between two people makes both people better off. Answer: TRUE Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 10) A "market" is an arrangement that allows people to exchange things. Answer: TRUE Diff: 1 Topic: Exchange and Markets Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 11) The alternative to voluntary exchange is self-sufficiency. Answer: TRUE Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 2.4 The Principle of Diminishing Returns 1) The principle of diminishing returns implies that as one input increases while the other inputs are held fixed, output: A) increases at an increasing rate. B) increases at a decreasing rate. C) decreases at a decreasing rate. D) decreases at an increasing rate. Answer: B Diff: 1 Topic: The Principle of Diminishing Returns Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

2) The principle that "as one input increases while the other inputs are held fixed, output increases at a decreasing rate" is known as the: A) marginal principle. B) principle of opportunity cost. C) principle of diminishing returns. D) spillover principle. Answer: C Diff: 1 Topic: The Principle of Diminishing Returns Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 3) According to the principle of diminishing returns, if all factors of production but one are held constant and if that one factor is doubled, then eventually output will most likely: A) double too. B) less than double. C) more than double. D) remain unchanged. Answer: B Diff: 2 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 4) A firm produces its product using both capital and labor. When it does not change its capital usage, but doubles its labor input, its output increases by less than 50 percent. Which of the following is the most likely explanation of this finding? A) the principle of opportunity cost B) the principle of diminishing returns C) the marginal principle D) the spillover principle Answer: B Diff: 2 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

5) According to the principle of diminishing returns, if the number of workers is increased beyond the point of diminishing returns, then the additional worker: A) increases total output by the same amount as previous workers. B) increases total output by more than the amount of previous workers. C) increases total output by less than the amount of previous workers. D) decreases total output. Answer: C Diff: 2 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist Units of Capital 5 5 5 5 5 5

Number of Workers Output/Day 0 0 1 40 2 90 3 150 4 200 5 235 Table 2.3

6) Refer to Table 2.3. What can be observed about the given resources? A) Capital and labor are both fixed. B) Capital is variable. C) Capital is fixed. D) Labor is fixed. Answer: C Diff: 1 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

7) Refer to Table 2.3. Increasing the number of workers from 2 to 3 will increase output per day by: A) 60 units. B) 90 units. C) 150 units. D) 240 units. Answer: A Diff: 1 Topic: The Principle of Diminishing Returns Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 8) Refer to Table 2.3. The principle of diminishing returns first occurs when how many workers are hired? A) 2 B) 3 C) 4 D) 5 Answer: C Diff: 2 Topic: The Principle of Diminishing Returns Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

Acres of Land Tanks of Fertilizer 20 0 20 1 20 2 20 3 20 4 20 5

Truckloads of Potatoes 28 70 105 135 152 141

Table 2.4 9) Refer to Table 2.4. What can be observed about the given resources? A) Land is variable but fertilizer is fixed. B) Land and fertilizer are both fixed. C) Land and fertilizer are both variable. D) Land is fixed but fertilizer is variable. Answer: D Diff: 1 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 10) Refer to Table 2.4. Increasing the tanks of fertilizer from 3 to 4 will increase the truckloads of potatoes by: A) 152. B) 35. C) 17. D) 11. Answer: C Diff: 1 Topic: The Principle of Diminishing Returns Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

11) Refer to Table 2.4. Increasing the tanks of fertilizer from 4 to 5 will: A) increase truckloads of potatoes. B) decrease truckloads of potatoes. C) have no effect on truckloads of potatoes. D) require more acres of land. Answer: B Diff: 1 Topic: The Principle of Diminishing Returns Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 12) Refer to Table 2.4. The principle of diminishing returns sets in with the addition of the ________ tank of fertilizer. A) second B) third C) fourth D) fifth Answer: A Diff: 2 Topic: The Principle of Diminishing Returns Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 13) Diminishing returns occurs because: A) not enough people have jobs. B) one of the inputs in the production process is fixed. C) consumers don't buy enough of the products produced. D) two people have not satisfied their self-interests. Answer: B Diff: 1 Topic: The Principle of Diminishing Returns Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

Recall the Application about the use of fertilizer and its impact on crop yields to answer the following question(s). The table is taken from this Application. Fertilizer and Corn Yield Bags of Fertilizer Bushels of Corn 0 85 1 120 2 135 3 144 4 147 14) Based on the data in the table, this Application addresses the economic concept of: A) the marginal principle. B) the principle of voluntary exchange. C) the principle of diminishing returns. D) the real-nominal principle. Answer: C Diff: 1 Topic: Application 4, Fertilizer and Crop Yields Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 15) Refer to the table above. After applying the second bag of fertilizer, the farmer experienced: A) increasing returns. B) diminishing returns. C) constant returns. D) negative returns. Answer: B Diff: 1 Topic: Application 4, Fertilizer and Crop Yields Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

16) Refer to the table above. The farmer increased his total production of corn by 9 bushels per acre after applying: A) the first bag of fertilizer. B) the second bag of fertilizer. C) the third bag of fertilizer. D) the fourth bag of fertilizer. Answer: C Diff: 2 Topic: Application 4, Fertilizer and Crop Yields Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 17) Refer to the table above. The farmer began to experience diminishing returns after applying how many bags of fertilizer? A) 1 B) 2 C) 3 D) 4 Answer: A Diff: 2 Topic: Application 4, Fertilizer and Crop Yields Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 18) According to the principle of diminishing returns, an additional worker decreases total output. Answer: FALSE Diff: 1 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist

19) Explain the concept of diminishing returns. Answer: The principle of diminishing returns shows that in the short run, beyond some point, output will increase at a decreasing rate. For example, producing more output in an existing production facility by increasing the number of workers sharing the facility will bring into effect the principle of diminishing returns, as output will eventually increase but at a decreasing rate. Diff: 1 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 20) You are running a small yard maintenance business for the summer. What do you expect to happen to the number of yards you can maintain in a day as you add workers if you don't purchase more capital equipment (like mowers and leaf blowers)? Answer: It is likely that as you add workers, you will get incrementally less output out of each additional worker. Holding constant your materials, such as trucks, lawnmowers, etc., you'll almost surely be able to maintain more yards per day. But as you hire more workers, there might be waits for use of the tools, or for transportation to the next job. This is the prediction of the principle of diminishing returns. Diff: 2 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 2.5 The Real-Nominal Principle 1) The real-nominal principle states that: A) people respond more to explicit, or real, costs than to implicit costs. B) people respond more to implicit costs than to explicit costs. C) what matters to people is the face value of money or income. D) what matters to people is the purchasing power of money or income. Answer: D Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

2) The principle that states that what matters to people is the real value or purchasing power of money is the: A) marginal principle. B) principle of diminishing returns. C) spillover principle. D) real-nominal principle. Answer: D Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 3) The face value of money or income is called its ________ value. A) real B) marginal C) nominal D) external Answer: C Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 4) The value of money or income in terms of the quantity of goods the money can buy is called its: A) real value. B) marginal value. C) nominal value. D) implicit value. Answer: A Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

5) The real value of money: A) is another word for the face value. B) reflects the purchasing power of money. C) matters less to people than its nominal value. D) is the same as its nominal value. Answer: B Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 6) If real salaries increase but nominal salaries do not, this means that: A) the purchasing power of money has decreased. B) prices have not changed. C) prices have risen. D) prices have fallen. Answer: D Diff: 2 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 7) If real salaries decrease but nominal salaries do not, this means that: A) the purchasing power of money has increased. B) prices have not changed. C) prices have risen. D) prices have fallen. Answer: C Diff: 2 Topic: The Real-Nominal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

8) A Major League Baseball player signs a contract that pays $27 million over 5 years. The $27 million is the contract's ________ value. A) real B) implicit C) external D) nominal Answer: D Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 9) Suppose your bank pays you 4 percent interest per year on your savings account, so that $1,000 grows to $1,040 over a one-year period. If prices increase by 1 percent per year over that time, approximately how much real value do you gain by keeping $1000 in the bank for a year? A) $0 B) $10 C) $30 D) $50 Answer: C Diff: 2 Topic: The Real-Nominal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 10) Suppose your bank pays you 5 percent interest per year on your savings account. If prices increase by 5 percent per year over that time, approximately how much real value do you gain by keeping $100 in the bank for a year? A) $0 B) $1 C) $3 D) $6 Answer: A Diff: 2 Topic: The Real-Nominal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

11) Suppose that you lend $1,000 to a friend and he or she pays you back one year later. What is the opportunity cost of lending the money? A) There is no cost. B) the real interest rate that would have been earned on the money C) the nominal interest rate that would have been earned on the money D) the implicit cost of the money Answer: B Diff: 3 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12) You borrow money to buy a house in 2009 at a fixed interest rate of 5.5 percent. By 2012, the inflation rate has steadily fallen to 1.5 percent from the recent high of 3.0 percent in 2009. Considering only your mortgage, is inflation good news or bad news for you? A) bad news, because inflation hurts everyone B) bad news, because it makes the real value of your mortgage payments increase C) good news, because it makes the real value of your mortgage payments decrease D) bad news, because it makes the nominal value of your mortgage payments increase Answer: B Diff: 2 Topic: The Real-Nominal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 13) What is the nominal value of money? A) what can be purchased with the money B) discounts taken by multiple purchases C) savings by shopping on specific days of the week D) its actual face value Answer: D Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

14) What is the real value of money? A) its face value B) its compounded earnings in banks C) the quantity of goods it can buy D) the ability of shop at market prices Answer: C Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

Minimum wage per hour Weekly income from minimum wage Cost of a standard basket of goods Number of baskets per week

1974 $ 2.00 $80.00 $47.00 1.70

2015 $ 7.25 $290.00 $236 1.23

Table 2.5 15) Use Table 2.5 above to answer the question. Comparing the minimum wages between 1974 and 2015 addresses the economic concept of: A) the marginal principle. B) the principle of voluntary exchange. C) the principle of diminishing returns. D) the real-nominal principle. Answer: D Diff: 1 Topic: The Value of the Minimum Wage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

16) Use Table 2.5 above to answer the question. The nominal value of the minimum wage in 2015 was: A) $2.00 per hour. B) $3.63 per hour. C) $5.62 per hour. D) $7.25 per hour. Answer: D Diff: 1 Topic: The Value of the Minimum Wage Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 17) Use Table 2.5 above to answer the question. What happened to the real value of the minimum wage between 1974 and 2015? A) It remained the same. B) It increased. C) It decreased. D) It could not be determined from the given information. Answer: C Diff: 2 Topic: The Value of the Minimum Wage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 18) Use Table 2.5 above to answer the question. By what percentage did the federal minimum wage increase between 1974 to 2015? A) 72.41 percent B) 262.5 percent C) 362.5 percent D) 525.0 percent Answer: B Diff: 2 Topic: The Value of the Minimum Wage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

19) Use Table 2.5 above to answer the question. By what percentage did the real value of the federal minimum wage change between 1974 to 2015? A) -38.5% B) 38.5% C) 262.5% D) -262.5% Answer: A Diff: 2 Topic: The Value of the Minimum Wage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation Recall the Application about the impact inflation has on your potential future salary and the repayment of student loans to answer the following question(s). 20) In analyzing the costs involved for student loans in the face of rising prices, this Application is addressing the economic concept of: A) the marginal principle. B) the principle of voluntary exchange. C) the principle of diminishing returns. D) the real-nominal principle. Answer: D Diff: 1 Topic: Application 5, Repaying Student Loans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 21) According to this Application, more years of work would be required to pay off a student loan if all prices (including your salary): A) remained stable. B) increased by 20 percent. C) decreased by 10 percent. D) increased by 40 percent. Answer: C Diff: 1 Topic: Application 5, Repaying Student Loans Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

22) According to this Application, if you earn a salary of $80,000 in the first year and all prices (including your salary) decrease by half in the next 5 years, what will your nominal annual salary be in 5 years? A) $8,000 B) $10,000 C) $20,000 D) $40,000 Answer: D Diff: 2 Topic: Application 5, Repaying Student Loans Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 23) According to this Application, if you earn a salary of $40,000 in the first year and all prices (including your salary) triple in the next 10 years, what will your nominal annual salary be in 10 years? A) $20,000 B) $60,000 C) $120,000 D) $180,000 Answer: C Diff: 2 Topic: Application 5, Repaying Student Loans Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 24) According to this Application, if you earn a salary of $40,000 in the first year and all prices triple in the next year. How will this affect the time it takes to pay off your school loans, assuming that you put all your earnings into paying it off? Assume that your debt is $40,000. A) It will cut the payoff time to 1/3 of the original time. B) It will cut the payoff time to 1/2 of the original time. C) It will cut the payoff time to 2/3 of the original time. D) It will triple your payoff time. Answer: A Diff: 2 Topic: Application 5, Repaying Student Loans Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

25) According to this Application, if you earn a salary of $40,000 in the first year and all prices are cut in half in the next year. How will this affect the time it takes to pay off your school loans, assuming that you put all your earnings into paying it off? Assume that your debt is $40,000. A) It will cut the payoff time to 1/3 of the original time. B) It will cut the payoff time to 1/2 of the original time. C) It will cut the payoff time to 2/3 of the original time. D) It will double your payoff time. Answer: B Diff: 2 Topic: Application 5, Repaying Student Loans Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 26) If product prices increase slower than nominal wages increase, then the real value of wages decreases. Answer: FALSE Diff: 2 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 27) If product prices decrease more than nominal wages decrease, then the real value of wages will increase. Answer: TRUE Diff: 2 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 28) What matters to people is the face value of money or income. Answer: FALSE Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

29) What matters to people is the real value of money or income. Answer: TRUE Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 30) The government uses the buying power of wages rather than face value or nominal value in reporting changes in "real wages" in the economy. Answer: TRUE Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 31) The government uses the buying power of wages in reporting changes in "nominal wages" in the economy. Answer: FALSE Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 32) Is it possible for nominal wages to decrease while real wages increase? Answer: Yes, though unlikely. This would imply that prices have fallen, and that the decrease is sufficiently negative to offset any losses in nominal wages. Diff: 2 Topic: The Real-Nominal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

33) Explain the real-nominal principle. Answer: The real-nominal principle explains that what matters to people is the real value of money or income, its purchasing power and not the face value of money or income. Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 34) How would an increase in prices in retail stores change the real value of the money you earn as wages? Answer: The real value would decrease. Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 35) If your salary increases at a slower rate than prices are increasing, what would happen to your buying power? Answer: Your money would have less buying power. Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 36) Explain why an increase in a person in debt who experiences a wage increase that is exactly equal to the inflation rate may make him or her better off. Answer: If prices and wages increase at the same rate, a person may end up being able to afford exactly what they could buy before the price increase. However, a person in debt will see their nominal wages increase but have their debt (measured also in nominal terms) not change. This will make it easier for the debtor to pay their debts off when they experience inflation. Diff: 2 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 3 Demand, Supply, and Market Equilibrium 3.1 The Demand Curve 1) If a competitive market operates perfectly, it relies on: A) the number of people buying goods. B) the laws of supply and demand. C) how many products can be produced for sale. D) how much people are willing to pay for the products. Answer: B Diff: 1 Topic: Demand, Supply and Market Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 2) A change in the quantity demanded of a product is the result of a change in: A) the price of the product. B) the price of related goods. C) consumer income. D) the cost of producing the product. Answer: A Diff: 1 Topic: The Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 3) A demand curve is defined as the relationship between: A) the price of a good and the quantity of that good that consumers are willing to buy. B) the price of a good and the quantity of that good that producers are willing to sell. C) the income of consumers and the quantity of a good that consumers are willing to buy. D) the income of consumers and the quantity of a good that producers are willing to sell. Answer: A Diff: 1 Topic: The Demand Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

4) The quantity demanded of a product increases as: A) consumer income rises. B) the prices of other products fall. C) the price of the product rises. D) the price of the product falls. Answer: D Diff: 1 Topic: The Demand Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 5) The law of demand can be explained as: A) a lot of people wanting the same thing. B) the higher the price, the smaller the quantity demanded, ceteris paribus. C) people are willing to make limited sacrifices to acquire products. D) legal reasons people make purchases in the marketplace. Answer: B Diff: 2 Topic: The Individual Demand Curve and the Law of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 6) In considering the relationships between price and quantity demanded, ceteris paribus directs the economist to assume that: A) price increases affect quantity. B) quantity increases affect prices. C) neither price nor quantity affect demand. D) all other variables remain unchanged. Answer: D Diff: 2 Topic: The Individual Demand Curve and the Law of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

7) When there is a change in the quantity demanded it means that: A) the hours the customer can buy products each day have increased. B) the number of products in inventory have increased. C) the quantity a consumer is willing to buy changes when the price changes. D) the selling price of the products has not changed. Answer: C Diff: 2 Topic: The Individual Demand Curve and the Law of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 8) The market demand curve: A) shows the relationship between the price of a good and the quantity that all consumers together are willing to buy. B) is drawn assuming that variables such as income and tastes are variable. C) is drawn assuming that the number of consumers is variable. D) is drawn assuming that the selling price is fixed. Answer: A Diff: 1 Topic: From Individual Demand to Market Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 9) Suppose that there are only three consumers of a product. At a price of $6 per unit, the first consumer would buy 12 units of the product, the second consumer would buy 8 units of the product, and the third consumer would buy 3 units of the product. If you drew a market demand curve for this product, the quantity demanded at a price of $6 would be: A) 23 units. B) 20 units. C) 12 units. D) 11 units. Answer: A Diff: 1 Topic: From Individual Demand to Market Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

Figure 3.1 10) Refer to Figure 3.1, which shows Molly's and Ryan's individual demand curves for compact discs per month. Assuming Molly and Ryan are the only consumers in the market, what is the market quantity demanded at a price of $3? A) 6 B) 9 C) 15 D) 20 Answer: D Diff: 1 Topic: From Individual Demand to Market Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 11) Refer to Figure 3.1, which shows Molly's and Ryan's individual demand curves for compact discs per month. Assuming Molly and Ryan are the only consumers in the market, what is the market quantity demanded at a price of $9? A) 2 B) 4 C) 6 D) 10 Answer: D Diff: 1 Topic: From Individual Demand to Market Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 4 Copyright © 2020 Pearson Education, Inc.

12) Refer to Figure 3.1, which shows Molly's and Ryan's individual demand curves for compact discs per month. Assuming Molly and Ryan are the only consumers in the market, if the market quantity demanded is 15, the price must be: A) $0. B) $6. C) $9. D) $15. Answer: B Diff: 1 Topic: From Individual Demand to Market Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 13) Refer to Figure 3.1, which shows Molly's and Ryan's individual demand curves for compact discs per month. Assuming Molly and Ryan are the only consumers in the market, if the market quantity demanded is 5, the price must be: A) $3. B) $6. C) $9. D) $12. Answer: D Diff: 1 Topic: From Individual Demand to Market Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Recall the Application about the decrease in taxes on cigarettes in several Canadian provinces in 1994 to answer the following question(s). 14) According to this Application, after the government deceased cigarette taxes in several Canadian provinces, demand for cigarettes ________ in these provinces, shifting the demand curve to the ________. A) increased; right B) increased; left C) decreased; right D) decreased; left Answer: A Diff: 1 Topic: Application 1, The Law of Demand for Young Smokers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

15) Recall the Application. The change in demand for cigarettes resulting from the decrease in taxes would normally create, ceteris paribus: A) an increase in their supply. B) a decrease in their supply. C) an increase in their quantity supplied. D) a decrease in their quantity supplied. Answer: C Diff: 2 Topic: Application 1, The Law of Demand for Young Smokers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 16) According to this Application, after the government deceased cigarette taxes in several Canadian provinces in 1994, the price of cigarettes in these provinces decreased by roughly ________ percent. A) 8 B) 17 C) 50 D) 88 Answer: C Diff: 1 Topic: Application 1, The Law of Demand for Young Smokers Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 17) According to this Application, after the government deceased cigarette taxes in several Canadian provinces in 1994, the decrease in the price of cigarettes in these provinces: A) more than doubled the smoking rate. B) created no noticeable change in the smoking rate. C) increased the smoking rate by roughly 17 percent. D) was accompanied by a slight decrease in the rate of smoking. Answer: C Diff: 1 Topic: Application 1, The Law of Demand for Young Smokers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 18) As the price of a product falls, the demand for the product increases, ceteris paribus. Answer: FALSE Diff: 1 Topic: The Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 6 Copyright © 2020 Pearson Education, Inc.

19) On the "demand side" of a market, consumers indicate what they are willing to buy, in what quantity and at what price. Answer: TRUE Diff: 1 Topic: The Demand Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 20) The law of demand states that there is a negative relationship between price and quantity demanded, ceteris paribus. Answer: TRUE Diff: 1 Topic: The Individual Demand Curve and the Law of Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 21) The market demand curve shows the relationship between the price and the quantity demanded by all consumers, everything else being equal. Answer: TRUE Diff: 2 Topic: From Individual Demand to Market Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 3.2 The Supply Curve 1) A supply curve is defined as the relationship between: A) the price of a good and the quantity that consumers are willing to buy. B) the price of a good and the quantity that producers are willing to sell. C) the income of consumers and the quantity of a product that consumers are willing to buy. D) the income of consumers and the quantity of a product that producers are willing to sell. Answer: B Diff: 1 Topic: The Supply Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

2) A change in quantity supplied of a product is the result of a change in: A) consumer income. B) the state of production technology. C) the cost of producing the product. D) the price of the product. Answer: D Diff: 1 Topic: The Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 3) The law of supply states that: A) producers should only produce what they can sell. B) producers should only sell the items when the price is right. C) there is a positive relationship between price and quantity supplied, ceteris paribus. D) producers are legally required to make necessary items available in the marketplace. Answer: C Diff: 1 Topic: The Individual Supply Curve and the Law of Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Quantity of Frozen Latte-On-A-Stick Supplied Price Flo's Supply Rita's Supply 1 0 0 2 0 3 3 4 6 4 9 9 5 15 12 Table 3.1 4) Refer to Table 3.1, which shows Flo's and Rita's individual supply schedules for frozen latteon-a-stick. Assuming Flo and Rita are the only suppliers in the market, what is the market quantity supplied at a price of $2? A) 0 B) 2 C) 3 D) 5 Answer: C Diff: 1 Topic: From Individual Supply to Market Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 8 Copyright © 2020 Pearson Education, Inc.

5) Refer to Table 3.1, which shows Flo's and Rita's individual supply schedules for frozen latteon-a-stick. Assuming Flo and Rita are the only suppliers in the market, what is the market quantity supplied at a price of $5? A) 3 B) 12 C) 15 D) 27 Answer: D Diff: 1 Topic: From Individual Supply to Market Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 6) Refer to Table 3.1, which shows Flo's and Rita's individual supply schedules for frozen latteon-a-stick. Assuming Flo and Rita are the only suppliers in the market, what is the market quantity supplied at a price of $1? A) 0 B) 1 C) 3 D) 5 Answer: A Diff: 1 Topic: From Individual Supply to Market Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 7) Refer to Table 3.1, which shows Flo's and Rita's individual supply schedules for frozen latteon-a-stick. Assuming Flo and Rita are the only suppliers in the market, if the market quantity supplied is 18, the price must be: A) $2. B) $3. C) $4. D) $5. Answer: C Diff: 1 Topic: From Individual Supply to Market Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

8) Refer to Table 3.1, which shows Flo's and Rita's individual supply schedules for frozen latteon-a-stick. Assuming Flo and Rita are the only suppliers in the market, if the market quantity supplied is 3, the price must be: A) $0. B) $2. C) $4. D) $5. Answer: B Diff: 1 Topic: From Individual Supply to Market Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

David's Supply Schedule

Celeste's Supply Schedule

Figure 3.2 9) Refer to Figure 3.2, which shows David's and Celeste's individual supply curves for flower arrangements per week. Assuming David and Celeste are the only producers in the market, what is the market quantity supplied at a price of $30? A) 200 B) 250 C) 300 D) 350 Answer: B Diff: 1 Topic: From Individual Supply to Market Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

10) Refer to Figure 3.2, which shows David's and Celeste's individual supply curves for flower arrangements per week. Assuming David and Celeste are the only producers in the market, what is the market quantity supplied at a price of $20? A) 0 B) 100 C) 150 D) 200 Answer: B Diff: 1 Topic: From Individual Supply to Market Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 11) Refer to Figure 3.2, which shows David's and Celeste's individual supply curves for flower arrangements per week. Assuming David and Celeste are the only producers in the market, if the market quantity supplied is 350, the price must be: A) $10. B) $20. C) $30. D) $40. Answer: D Diff: 1 Topic: From Individual Supply to Market Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 12) Refer to Figure 3.2, which shows David's and Celeste's individual supply curves for flower arrangements per week. Assuming David and Celeste are the only producers in the market, if the market quantity supplied is 50, the price must be: A) $0. B) $10. C) between $10 and $20. D) $30. Answer: C Diff: 2 Topic: From Individual Supply to Market Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

Recall the Application about the decrease in the price of wool in the 1990s to answer the following question(s). In the 1990s, the world price of wool decreased by about 30 percent and prices have remained relatively low since then. In 2012, an organization in New Zealand proposed that sheep shearing be added to the Commonwealth Games and the Olympics as a spectator sport in an effort to increase the awareness and the demand for wool. 13) Recall the Application. As the world price of wool decreased, the quantity of wool supplied by individual ranchers would ________, and the quantity supplied in the world market would ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Diff: 1 Topic: Application 2, Law of Supply and Woolympics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 14) Recall the Application. The decrease in the price of wool would be reflected by a movement ________ on the market supply curve for wool. A) down and to the right B) down and to the left C) up and to the right D) up and to the left Answer: B Diff: 1 Topic: Application 2, Law of Supply and Woolympics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

15) Recall the Application. If the organization in New Zealand was successful in getting the Olympics to include sheep shearing as a spectator sport, and this helped to raise the world price of wool, the quantity of wool supplied would ________ because the market supply curve for wool is ________ sloped. A) increase; positively B) increase; negatively C) decrease; positively D) decrease; negatively Answer: A Diff: 1 Topic: Application 2, Law of Supply and Woolympics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 16) As the price of a product rises, the quantity supplied decreases. Answer: FALSE Diff: 1 Topic: The Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 17) On the "supply side" of a market, producers indicate to consumers what they are willing to sell, in what quantity and at what price. Answer: TRUE Diff: 1 Topic: The Supply Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 18) The law of supply states that there is a positive relationship between price and quantity supplied, ceteris paribus. Answer: TRUE Diff: 1 Topic: The Individual Supply Curve and the Law of Supply Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

3.3 Market Equilibrium: Bringing Demand and Supply Together

Figure 3.3 1) Figure 3.3 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $7, there is an: A) excess demand of 8 t-shirts. B) excess supply of 8 t-shirts. C) excess demand of 10 t-shirts. D) excess supply of 10 t-shirts. Answer: A Diff: 1 Topic: Market Equilibrium: Bringing Demand and Supply Together Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

2) Figure 3.3 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $15, there is an: A) excess demand of 8 t-shirts. B) excess supply of 8 t-shirts. C) excess demand of 10 t-shirts. D) excess supply of 10 t-shirts. Answer: B Diff: 1 Topic: Market Equilibrium: Bringing Demand and Supply Together, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 3) Figure 3.3 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $7, we would expect that: A) demand will decrease until quantity demanded equals quantity supplied. B) supply will increase until quantity demanded equals quantity supplied. C) price will increase until quantity demanded equals quantity supplied. D) there will be no change in the price since the market is in equilibrium. Answer: C Diff: 1 Topic: Market Equilibrium: Bringing Demand and Supply Together, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 4) Figure 3.3 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $15, we would expect that: A) demand will decrease until quantity demanded equals quantity supplied. B) supply will increase until quantity demanded equals quantity supplied. C) price will decrease until quantity demanded equals quantity supplied. D) there will be no change in the price since the market is in equilibrium. Answer: C Diff: 1 Topic: Market Equilibrium: Bringing Demand and Supply Together, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

5) Figure 3.3 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $10, we would expect that: A) demand will decrease until quantity demanded equals quantity supplied. B) supply will increase until quantity demanded equals quantity supplied. C) price will increase until quantity demanded equals quantity supplied. D) there will be no change in the price since the market is in equilibrium. Answer: D Diff: 1 Topic: Market Equilibrium: Bringing Demand and Supply Together, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 6) What happens if the price of a product is below the equilibrium price? A) The buyers will stop purchasing a "cheap" product. B) The producer will lower the price to sell more product. C) There will be an excess demand for the product. D) There will be a surplus of the product. Answer: C Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 7) In the event of excess supply in the coffee market: A) the price of coffee will increase. B) the price of coffee will decrease. C) the supply of coffee will decrease (supply will shift to the left) to meet the demand. D) the demand for coffee will increase (demand will shift to the right) to meet the supply. Answer: B Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

8) When consumers are willing to buy more than producers are willing to sell: A) there is excess supply of the product in the market. B) there is excess demand for the product in the market. C) the market is in equilibrium. D) the demand curve will shift until the quantity supplied equals the quantity demanded. Answer: B Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 9) Suppose that the quantity of cars demanded exceeds the quantity of cars supplied. We would expect that: A) the price of cars will increase. B) the price of cars will decrease. C) the supply will increase (supply will shift to the right) to meet the demand. D) the demand will decrease (demand will shift to the left) to meet the supply. Answer: A Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 10) Suppose that a market for a product is in equilibrium at a price of $5 per unit. At any price above $5 per unit: A) there will be an excess demand for the product. B) there will be an excess supply of the product. C) the quantity supplied of the product will be less than the quantity demanded of that product. D) there will be a shortage of that product. Answer: B Diff: 2 Topic: Excess Demand Causes the Price to Rise Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

11) The government sometimes creates an excess demand for a product by setting a maximum price at which the product may be sold to consumers. This is sometimes called a: A) price ceiling. B) price floor. C) tax. D) subsidy. Answer: A Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 12) Suppose that the quantity of cars supplied exceeds the quantity of cars demanded. We would expect that: A) the price of cars will increase. B) the price of cars will decrease. C) the supply will increase (supply will shift to the right) to meet the demand. D) the demand will decrease (demand will shift to the left) to meet the supply. Answer: B Diff: 1 Topic: Excess Supply Causes the Price to Drop Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 13) Suppose that a market for a product is in equilibrium at a price of $3 per unit. At any price below $3 per unit: A) there will be an excess demand for the product. B) there will be an excess supply of the product. C) the quantity demanded of the product will be less than the quantity supplied of that product. D) there will be a surplus of that product. Answer: A Diff: 2 Topic: Excess Supply Causes the Price to Drop Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

14) A government sometimes creates an excess supply of a product by setting a minimum price at which the product may be sold to consumers. This is sometimes called a: A) price ceiling. B) price floor. C) tax. D) subsidy. Answer: B Diff: 1 Topic: Excess Supply Causes the Price to Drop Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Recall the Application about the policies used by the European Union to support the agricultural sectors of is member countries to answer the following question(s). 15) According to this Application, the policies used by the European Union to support the agricultural sectors of its member countries created excess supply. This would occur if these policies set a ________ price which was ________ the market equilibrium price. A) maximum; above B) maximum; below C) minimum; above D) minimum; below Answer: C Diff: 2 Topic: Application 3, Shrinking Wine Lakes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 16) According to this Application, the policies used by the European Union to support the agricultural sectors of its member countries created excess supply. Excess supply can be generated if a government establishes a: A) price ceiling below the market equilibrium price. B) price ceiling above the market equilibrium price. C) price floor below the market equilibrium price. D) price floor above the market equilibrium price. Answer: D Diff: 2 Topic: Application 3, Shrinking Wine Lakes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

17) According to this Application, in recent years the European Union has reformed its agriculture policies by reducing or eliminating minimum prices. Ceteris paribus, these policy reforms would ________ excess supply by ________ prices. A) reduce; raising B) reduce; lowering C) increase; raising D) increase; lowering Answer: B Diff: 2 Topic: Application 3, Shrinking Wine Lakes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 18) If the quantity of a product demanded is greater than the quantity of a product supplied, there is pressure in the market to push the price downward. Answer: FALSE Diff: 1 Topic: Market Equilibrium: Bringing Demand and Supply Together Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 19) Governments sometime create an excess demand for a product by setting a maximum price that is less than the equilibrium price, resulting in a permanent excess demand for the product. This is known as a price floor. Answer: FALSE Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 20) Excess demand in an unregulated market will cause the price of a product to fall. Answer: FALSE Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

21) Excess supply in an unregulated market will cause the price of a product to fall. Answer: TRUE Diff: 1 Topic: Excess Supply Causes the Price to Drop Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 22) Governments sometime create an excess supply of a product by setting a minimum price that is greater than the equilibrium price, resulting in a permanent excess supply of the product. This is known as a price ceiling. Answer: FALSE Diff: 1 Topic: Excess Supply Causes the Price to Drop Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

3.4 Market Effects of Changes in Demand

Figure 3.4 1) Figure 3.4 illustrates the demand for tacos. An increase in the demand for tacos is represented by the movement from: A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D1. Answer: D Diff: 1 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

2) Figure 3.4 illustrates the demand for tacos. A decrease in the demand for tacos is represented by the movement from: A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D1. Answer: C Diff: 1 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 3) Figure 3.4 illustrates the demand for tacos. Assume that tacos are normal goods. An increase in income would bring about a movement from: A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D1. Answer: D Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 4) Figure 3.4 illustrates the demand for tacos. Assume that tacos are inferior goods. An increase in income would bring about a movement from: A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D1. Answer: C Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

5) Figure 3.4 illustrates the demand for tacos. Assume that tacos and beer are complements. An increase in the price of beer would bring about a movement from: A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D2. Answer: C Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 6) Figure 3.4 illustrates the demand for tacos. Assume that tacos and beer are complements. A decrease in the price of beer would bring about a movement from: A) point a to point c. B) point c to point a. C) D2 to D0. D) D0 to D2. Answer: D Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 7) Figure 3.4 illustrates the demand for tacos. Assume that tacos and burritos are substitutes. A decrease in the price of burritos would bring about a movement from: A) point a to point c. B) point c to point b. C) D2 to D0. D) D1 to D2. Answer: C Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

8) Figure 3.4 illustrates the demand for tacos. An increase in the number of consumers in the market would bring about a movement from: A) point a to point b. B) point c to point a. C) D2 to D1. D) D0 to D2. Answer: D Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 9) the Figure 3.4 illustrates the demand for tacos. An increase in price of tacos would bring about a movement from: A) point a to point c. B) point c to point a. C) D2 to D0. D) D0 to D1. Answer: B Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 10) Figure 3.4 illustrates the demand for tacos. A decrease in the price of tacos would bring about a movement from: A) point a to point c. B) point c to point a. C) D2 to D0. D) D0 to D2. Answer: A Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

11) Figure 3.4 illustrates the demand for tacos. A successful advertising campaign to sell tacos would bring about a movement from: A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D1. Answer: D Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 12) Figure 3.4 illustrates the demand for tacos. If people expect the price of tacos to decrease in the near future, this would most likely bring about a movement from: A) point a to point b. B) point c to point a. C) D2 to D0. D) D0 to D1. Answer: C Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 13) When the price of apples goes up: A) the demand for apples will decrease, ceteris paribus. B) the demand for apples will increase, ceteris paribus. C) the quantity of apples demanded will decrease, ceteris paribus. D) the quantity of apples demanded will increase, ceteris paribus. Answer: C Diff: 1 Topic: Change in Quantity Demanded versus Change in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

14) When the price of almonds falls: A) the demand for almonds decreases, ceteris paribus. B) the demand for almonds increases, ceteris paribus. C) the quantity of almonds demanded decreases, ceteris paribus. D) the quantity of almonds demanded increases, ceteris paribus. Answer: D Diff: 1 Topic: Change in Quantity Demanded versus Change in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 15) Landon demands more sushi as his income increases. From this we can conclude that, for Landon: A) sushi is a normal good. B) sushi is an inferior good. C) sushi is a complementary good. D) sushi is a substitute good. Answer: A Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 16) Assume that coffee and tea are substitutes. When the price of coffee increases: A) the demand for tea decreases. B) the demand for tea increases. C) the supply of tea increases. D) the supply of tea decreases. Answer: B Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

17) Suppose that a product benefits from a successful advertising campaign. The result is that: A) the demand for the product increases. B) the demand for the product decreases. C) the supply of the product increases. D) the supply of the product decreases. Answer: A Diff: 3 Topic: Increases in Demand Shift the Demand Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 18) Suppose that consumers expect that the price of a product will increase in the future. The result is that: A) the current demand for the product increases. B) the current demand for the product decreases. C) the current supply of the product increases. D) the current supply of the product decreases. Answer: A Diff: 2 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 19) Assume that tortilla chips and salsa are complements. When the price of tortilla chips decreases: A) the demand for salsa increases. B) the demand for salsa decreases. C) the supply of salsa decreases. D) the demand for tortilla chips decreases. Answer: A Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

20) If the population increases, the market demand for most products will: A) not change. B) decrease. C) increase. D) depend on supply. Answer: C Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 21) Suppose that in October the price of a cup of cafe latte was $2.50 and 400 lattes were consumed. In November the price of a latte was $2.00 and 300 lattes were consumed. What might have caused this change? A) The price of tea (a substitute for cafe lattes) fell. B) The price of tea (a substitute for cafe lattes) rose. C) The price of coffee beans (an input of production of cafe lattes) rose. D) The price of coffee beans (an input of production of cafe lattes) fell. Answer: A Diff: 3 Topic: An Increase in Demand Increases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 22) If demand for a product increases, ceteris paribus, the equilibrium: A) price increases. B) price decreases. C) price remains unchanged. D) quantity decreases. Answer: A Diff: 1 Topic: An Increase in Demand Increases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

23) A good for which demand decreases when income decreases is known as a(n) ________ good. A) normal B) inferior C) complementary D) substitute Answer: A Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 24) If the demand for one good decreases when the price of another good decreases, the two goods are ________ goods. A) normal B) inferior C) complementary D) substitute Answer: D Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 25) If the demand for one good decreases when the price of another good increases, the two goods are ________ goods. A) normal B) inferior C) complementary D) substitute Answer: C Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

26) Suppose that consumers expect the price of a product to decrease in the future. The result is that: A) the current demand for the product increases. B) the current demand for the product decreases. C) the current supply of the product increases. D) the current supply of the product decreases. Answer: B Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 27) A good for which demand decreases when income increases is known as a(n) ________ good. A) normal B) inferior C) complementary D) substitute Answer: B Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 28) Suppose that in 2011, 4 million plasma TVs were purchased at $950 each, while in 2012, 3 million plasma TVs were purchased at $800 each. What might have caused this change? A) The price of LCD TVs (a substitute for plasma TVs) fell. B) The price of LCD TVs (a substitute for plasma TVs) rose. C) Plasma TV manufacturing technology increased. D) Plasma TV manufacturing technology decreased. Answer: A Diff: 3 Topic: A Decrease in Demand Decreases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

29) If the equilibrium price of a good decreases and the equilibrium quantity of the good decreases, we can conclude that: A) demand increased. B) demand decreased. C) supply increased. D) supply decreased. Answer: B Diff: 2 Topic: A Decrease in Demand Decreases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Recall the Application about craft beer and the increase in the price of hops to answer the following question(s). 30) Recall the Application. An increase in the production of beer resulted in the demand for hops because hops are ________ to beer. A) inputs B) completely unrelated C) complements D) substitutes Answer: A Diff: 1 Topic: Application 4, Craft Beer and the Price of Hops Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 31) Recall the Application. Because hops are inputs in the production of beer, an increase in the production of beer resulted in: A) an increase in the demand for hops. B) a decrease in the demand for hops. C) an increase in the quantity demanded for hops. D) a decrease in the quantity demanded for hops. Answer: A Diff: 1 Topic: Application 4, Craft Beer and the Price of Hops Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

32) According to this Application, between 2012 and 2017, the increase in craft beer production increased the price of hops: A) from $3.17 to $3.92 per pound. B) from $3.17 to $5.92 per pound. C) from $3.92 to $5.17 per pound. D) from $4.17 to $5.92 per pound. Answer: B Diff: 1 Topic: Application 4, Craft Beer and the Price of Hops Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 33) According to this Application, between 2012 and 2017, the increase in craft beer production increased the price of hops: A) by about 118 percent. B) by about 87 percent. C) by about 18 percent. D) by about 78 percent Answer: B Diff: 2 Topic: Application 4, Craft Beer and the Price of Hops Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 34) Based this Application, between 2012 and 2017, a decrease in craft beer production will ________ the demand for hops and ________ the price of hops. A) decrease; increase B) decrease; decrease C) increase; increase D) increase; decrease Answer: B Diff: 2 Topic: Application 4, Craft Beer and the Price of Hops Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 35) Two goods are complements if an increase in the price of one good leads to an increase in demand for the other. Answer: FALSE Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 33 Copyright © 2020 Pearson Education, Inc.

36) People will buy more of an inferior good when their income decreases. Answer: TRUE Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 37) Two goods are substitutes if an increase in the price of one good leads to a decrease in demand for the other. Answer: FALSE Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 38) An increase in demand will cause the equilibrium price and quantity to rise, ceteris paribus. Answer: TRUE Diff: 1 Topic: An Increase in Demand Increases the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 39) If consumer preference for a product increases, this will cause the equilibrium price of the product to go down, and the equilibrium quantity of the product to go up. Answer: FALSE Diff: 2 Topic: An Increase in Demand Increases the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 40) People will buy more of a normal good when their income decreases. Answer: FALSE Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

41) A decrease in population would shift the demand curve to the left. Answer: TRUE Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 42) A decrease in demand will cause the equilibrium price and quantity of a good to fall, ceteris paribus. Answer: TRUE Diff: 1 Topic: A Decrease in Demand Decreases the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Recall the Application about craft beer and the increase in the price of hops to answer the following question(s). 43) Hops are substitutes in the production of beer. Answer: FALSE Diff: 1 Topic: Application 4, Craft Beer and the Price of Hops Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 44) The reason why the demand for hops increased is because hops are inputs to the production of beer, and beer demand was rising. Answer: FALSE Diff: 1 Topic: Application 4, Craft Beer and the Price of Hops Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 45) Explain the difference between a change in quantity demanded and a change in demand. Answer: A change in quantity demanded of a product is caused by a change in the price of the product. It is represented by a movement along the product's demand curve. A change in demand for a product is caused by a change in a variable other than the price of the product. It is represented by a shift of the demand curve. Diff: 2 Topic: Change in Quantity Demanded versus Change in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 35 Copyright © 2020 Pearson Education, Inc.

46) Describe the changes in the variables that will cause the demand for a product to increase, shifting the demand curve to the right. Answer: an increase in income if the product is a normal good; a decrease in income if the product is an inferior good; an increase in the price of a substitute good; a decrease in the price of a complementary good; an increase in population; an increase in consumer preference for the good; an increase in the expected future price of the good Diff: 2 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 47) Describe the changes in the variables that will cause the demand for a product to decrease, shifting the demand curve to the left. Answer: a decrease in income if the product is a normal good; an increase in income if the product is an inferior good; a decrease in the price of a substitute good; an increase in the price of a complementary good; a decrease in population; a decrease in consumer preference for the good; a decrease in the expected future price of the good Diff: 2 Topic: Decreases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 48) Draw a graph to illustrate the effect of an increase in demand on the price and quantity in a market. Answer:

As illustrated in the graph, an increase in demand causes the price and quantity sold of the product to increase. Diff: 2 Topic: An Increase in Demand Increases the Equilibrium Price, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

49) Draw a graph to illustrate the effect of higher gasoline prices on the demand for large SUVs. What is the relationship between gasoline and SUVs? Answer:

Gasoline and SUVs are complements. When the price of gasoline rises it becomes more expensive to drive an SUV, and so the demand for SUVs is likely to decrease (people may switch to smaller, more fuel-efficient vehicles). Note that as a result of the decrease in demand for SUVs their price should decrease and so should the quantity of SUVs sold. Diff: 1 Topic: A Decrease in Demand Decreases the Equilibrium Price, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Recall the Application about craft beer and the increase in the price of hops to answer the following question(s). 50) According to the Application, why did the price of hops increase? Answer: Since 2017, craft beer production has increased. This, coupled with the fact that craft beer requires more hops, resulted in a large increase in the demand for hops. Holding the supply of hops constant, an increase in the demand for hops will result in a higher equilibrium price for hops. Diff: 1 Topic: Application 4, Craft Beer and the Price of Hops Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

3.5 Market Effects of Changes in Supply

Figure 3.5 1) Figure 3.5 illustrates the supply of tacos. An increase in the supply of tacos is represented by a movement from: A) point a to point b. B) point c to point b. C) S2 to S1. D) S0 to S1. Answer: D Diff: 1 Topic: Market Effects of Changes in Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

2) Figure 3.5 illustrates the supply of tacos. A decrease in the supply of tacos is represented by a movement from: A) point a to point b. B) point c to point b. C) S2 to S1. D) S0 to S1. Answer: C Diff: 1 Topic: Market Effects of Changes in Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 3) Figure 3.5 illustrates the supply of tacos. An increase in the price of ground beef, which is used to make tacos, would most likely cause a movement from: A) point a to point b. B) point c to point b. C) S2 to S1. D) S0 to S1. Answer: C Diff: 2 Topic: Market Effects of Changes in Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 4) Figure 3.5 illustrates the supply of tacos. A technological advancement which makes tacos cheaper to produce would most likely cause a movement from: A) point a to point c. B) point c to point a. C) S2 to S0. D) S0 to S2. Answer: D Diff: 2 Topic: Market Effects of Changes in Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

5) Figure 3.5 illustrates the supply of tacos. An increase in the number of Mexican food producers would most likely cause a movement from: A) point a to point c. B) point c to point a. C) S2 to S0. D) S0 to S2. Answer: D Diff: 2 Topic: Market Effects of Changes in Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 6) Figure 3.5 illustrates the supply of tacos. If the government offered a subsidy to Mexican restaurants for each taco they produce, this would most likely cause a movement from: A) point a to point c. B) point c to point b. C) S2 to S1. D) S0 to S1. Answer: D Diff: 2 Topic: Market Effects of Changes in Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 7) The price of pineapples has risen dramatically. Which of the following is likely to happen? A) The quantity of pineapples supplied will increase. B) The quantity of pineapples supplied will decrease. C) The supply of pineapples will decrease. D) The supply of pineapples will increase. Answer: A Diff: 1 Topic: Change in Quantity Supplied versus Change in Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

8) The price of iPhones has fallen dramatically. Which of the following is likely to happen? A) The quantity of iPhones supplied will decrease. B) The quantity of iPhones supplied will increase. C) The supply of iPhones will decrease. D) The supply of iPhones will increase. Answer: A Diff: 1 Topic: Change in Quantity Supplied versus Change in Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 9) Olives are used to produce olive oil. If the price of olives increases: A) the demand for olive oil increases. B) the demand for olive oil decreases. C) the supply of olive oil increases. D) the supply of olive oil decreases. Answer: D Diff: 1 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 10) If a technological advance makes it possible to produce computers at a lower cost: A) the demand for computers increases. B) the demand for computers decreases. C) the supply of computers increases. D) the supply of computers decreases. Answer: C Diff: 1 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 11) If the number of automobile manufacturers decreases: A) the demand for automobiles increases. B) the demand for automobiles decreases. C) the supply of automobiles increases. D) the supply of automobiles decreases. Answer: D Diff: 1 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 41 Copyright © 2020 Pearson Education, Inc.

12) If there is an advancement in the technology used to produce a product, what is the likely effect it may have on the supply? A) The company would not change its manufacturing. B) More people would be needed to produce the product. C) It would decrease the supply. D) It would increase the supply. Answer: D Diff: 1 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 13) An increase in supply of a product results when: A) taxes on the product are increased. B) the companies that produce the product have higher materials costs. C) technological innovations are introduced in the manufacturing process. D) the government reduces subsidies on the product. Answer: C Diff: 1 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 14) Suppose that in 2011, 3 million plasma TVs were purchased at $950 each, while in 2012, 4 million plasma TVs were purchased at $800 each. What might have caused this change? A) The price of LCD TVs (a substitute for plasma TVs) fell. B) The price of LCD TVs (a substitute for plasma TVs) rose. C) There was an advance in plasma TV manufacturing technology. D) There were fewer workers in plasma TV manufacturing. Answer: C Diff: 3 Topic: An Increase in Supply Decreases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

15) Suppose that a technological advancement substantially reduces the cost of laser eye surgery. This would cause the equilibrium: A) price of technology to increase. B) quantity of technology to decrease. C) quantity of laser eye surgery to increase. D) quantity of laser eye surgery to decrease. Answer: C Diff: 2 Topic: An Increase in Supply Decreases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 16) If the number of wine producers decreases: A) the demand for wine increases. B) the demand for wine decreases. C) the supply of wine increases. D) the supply of wine decreases. Answer: D Diff: 1 Topic: Decreases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 17) Corn is used to produce tortillas. If the price of corn increases: A) the demand for tortillas increases. B) the demand for tortillas decreases. C) the supply of tortillas increases. D) the supply of tortillas decreases. Answer: D Diff: 1 Topic: Decreases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

18) If producers have an expectation of higher future prices, the supply of the good that is currently available: A) will be all that is produced. B) will increase. C) will decrease. D) will not change. Answer: C Diff: 1 Topic: Decreases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 19) Suppose that in October the price of a cup of cafe latte was $2.50 and 400 lattes were consumed. In November the price of a latte was $2.00 and 600 lattes were consumed. What might have caused this change? A) The price of tea (a substitute for cafe lattes) fell. B) The price of tea (a substitute for cafe lattes) rose. C) The price of coffee beans (an input of production of cafe lattes) rose. D) The price of coffee beans (an input of production of cafe lattes) fell. Answer: D Diff: 3 Topic: A Decrease in Supply Increases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 20) If the equilibrium price of a good increases and the equilibrium quantity of the good decreases, we can conclude that: A) demand increased. B) demand decreased. C) supply increased. D) supply decreased. Answer: D Diff: 2 Topic: A Decrease in Supply Increases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

Figure 3.6 21) Figure 3.6 illustrates a set of supply and demand curves for hamburgers. An increase in supply and an increase in quantity demanded are represented by a movement from: A) point a to point b. B) point a to point c. C) point d to point b. D) point c to point d. Answer: A Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 22) Figure 3.6 illustrates a set of supply and demand curves for hamburgers. A decrease in demand and a decrease in quantity supplied are represented by a movement from: A) point c to point a. B) point a to point c. C) point b to point c. D) point d to point b. Answer: C Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 45 Copyright © 2020 Pearson Education, Inc.

23) Figure 3.6 illustrates a set of supply and demand curves for hamburgers. A decrease in supply and a decrease in quantity demanded are represented by a movement from: A) point a to point d. B) point c to point d. C) point c to point a. D) point b to point c. Answer: B Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 24) Figure 3.6 illustrates a set of supply and demand curves for hamburgers. An increase in demand and an increase in quantity supplied are represented by a movement from: A) point b to point a. B) point c to point d. C) point d to point a. D) point b to point d. Answer: C Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 25) Figure 3.6 illustrates a set of supply and demand curves for hamburgers. A decrease in supply and an increase in demand are represented by a movement from: A) point d to point c. B) point c to point b. C) point b to point d. D) point c to point a. Answer: D Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

26) Figure 3.6 illustrates a set of supply and demand curves for hamburgers. An increase in supply and a decrease in demand are represented by a movement from: A) point d to point b. B) point d to point a. C) point a to point c. D) point b to point d. Answer: C Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 27) Figure 3.6 illustrates a set of supply and demand curves for hamburgers. An increase in supply and an increase in demand are represented by a movement from: A) point d to point b. B) point d to point a. C) point c to point a. D) point b to point c. Answer: A Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 28) Figure 3.6 illustrates a set of supply and demand curves for hamburgers. A decrease in supply and a decrease in demand are represented by a movement from: A) point c to point a. B) point b to point d. C) point d to point a. D) point a to point b. Answer: B Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

29) Bananas and apples are substitutes. When the price of bananas falls, and a technological advance in apple production occurs at the same time: A) the equilibrium price of apples rises and the equilibrium quantity of apples falls. B) the equilibrium price of apples rises and the equilibrium quantity of apples rises. C) the equilibrium price of apples rises and the equilibrium quantity of apples might rise or fall. D) the equilibrium price of apples falls and the equilibrium quantity of apples might rise or fall. Answer: D Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 30) Bananas and apples are substitutes. When the price of bananas rises, and a technological advance in apple production occurs at the same time: A) the equilibrium price of apples rises and the equilibrium quantity of apples falls. B) the equilibrium price of apples rises and the equilibrium quantity of apples rises. C) the equilibrium price of apples rises and the equilibrium quantity of apples might rise or fall. D) the equilibrium quantity of apples rises and the equilibrium price of apples might rise or fall. Answer: D Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 31) If the demand for jelly decreases, and the price of grapes (used to make jelly) rises: A) the equilibrium price of jelly rises and the equilibrium quantity of jelly might rise or fall. B) the equilibrium price of jelly falls and the equilibrium quantity of jelly might rise or fall. C) the equilibrium price of jelly might rise or fall, and the equilibrium quantity of jelly falls. D) the equilibrium price of jelly might rise or fall, and the equilibrium quantity of jelly rises. Answer: C Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

32) If the demand for jelly increases, and the price of grapes (used to make jelly) rises: A) the equilibrium price of jelly rises and the equilibrium quantity of jelly might rise or fall. B) the equilibrium price of jelly falls and the equilibrium quantity of jelly might rise or fall. C) the equilibrium price of jelly falls and the equilibrium quantity of jelly rises. D) the equilibrium quantity of jelly falls and the equilibrium price of jelly might rise or fall. Answer: A Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 33) Suppose that a new advertising campaign extolling the virtues of apple juice is successful, and a major freeze destroys half of the country's apple crop. What happens to the price and quantity of apple juice? A) The equilibrium price of apple juice might rise or fall and the equilibrium quantity of apple juice falls. B) The equilibrium price of apple juice might rise or fall and the equilibrium quantity of apple juice rises. C) The equilibrium price of apple juice rises and the equilibrium quantity of apple juice might rise or fall. D) The equilibrium price of apple juice falls and the equilibrium quantity of apple juice might rise or fall. Answer: C Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 34) Suppose that a new study is released stating that consumption of orange juice (a substitute for apple juice) reduces the risk of cancer, and a major freeze destroys half of the country's apple crop. What happens to the price and quantity of apple juice? A) The price of apple juice might rise or fall and the quantity of apple juice falls. B) The price of apple juice might rise or fall and the quantity of apple juice rises. C) The price of apple juice falls and the quantity of apple juice falls. D) The quantity of apple juice might rise or fall, and the price of apple juice rises. Answer: A Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

Recall the Application about the harmattan and how it affects the price of cocoa to answer the following question(s). 35) According to this Application, the dry dust wind known as the harmattan has caused ________ of cocoa pods. A) a decrease in the supply B) an increase in the supply C) an increase in the demand D) a decrease in the demand Answer: A Diff: 1 Topic: Application 5, The Harmattan and the Price of Chocolate Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 36) According to this Application, the recent result of the harmattan was to ________ the equilibrium price and ________ the equilibrium quantity of cocoa. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 2 Topic: Application 5, The Harmattan and the Price of Chocolate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 37) According to this Application, the longer than usual harmattan has impacted the supply curve for cocoa pods, shifting the supply curve to the ________ due to a(n) ________ in cocoa yields. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Diff: 2 Topic: Application 5, The Harmattan and the Price of Chocolate Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

38) This Application illustrates how a change in weather conditions can adversely impact the ________ by ________ the price of a good. A) demand; decreasing B) demand; increasing C) supply; decreasing D) supply; increasing Answer: D Diff: 2 Topic: Application 5, The Harmattan and the Price of Chocolate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 39) A change in the price of a product will change the supply of that product. Answer: FALSE Diff: 1 Topic: Change in Quantity Supplied versus Change in Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 40) A decrease in the cost of production will shift the supply curve down and to the right. Answer: TRUE Diff: 1 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 41) An increase in wages will shift the supply curve up and to the left. Answer: TRUE Diff: 1 Topic: Decreases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 42) If supply of a product increases and demand for the product decreases, equilibrium quantity will definitely change. Answer: FALSE Diff: 2 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

43) If supply of a product increases and demand for the product decreases, equilibrium price will definitely change. Answer: TRUE Diff: 2 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 44) Explain the difference between a change in quantity supplied and a change in supply. Answer: A change in quantity supplied of a product is caused by a change in the price of the product. It is represented by a movement along the product's supply curve. A change in supply of a product is caused by a change in a variable other than the price of the product. It is represented by a shift of the supply curve. Diff: 2 Topic: Change in Quantity Supplied versus Change in Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 45) Describe the changes in the variables that will cause supply for a product to increase, shifting the supply curve down and to the right. Answer: a decrease in wages of workers who produce the product; a decrease in the prices of materials or capital used to produce the product; advances in technology which is used in the production of the product; government subsidies applied to the production of the product; a decrease in the expected future price of the product; an increase in the number of producers of the product Diff: 2 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 46) Describe the changes in the variables that will cause supply for a product to decrease, shifting the supply curve up and to the left. Answer: an increase in wages of workers who produce the product; an increase in the prices of materials or capital used to produce the product; an increase in the per-unit tax on the product; an increase in the expected future price of the product; a decrease in the number of producers of the product Diff: 2 Topic: Decreases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

47) As a result of advances in technology, cellular telephones have become cheaper to produce. Illustrate the effect of this change on the market for cellular telephones. Answer:

As illustrated on the graph, the decreased cost of production leads to an increase in the supply of cellular telephones, with the result that the price of the product decreases and the quantity sold increases. Diff: 2 Topic: An Increase in Supply Decreases the Equilibrium Price, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 48) Using a graph, illustrate the effect that an increase in production costs will have on the equilibrium price and quantity of a good. Answer:

The graph shows a decrease in supply. The supply curve shifts to the left, causing equilibrium price to rise, and equilibrium quantity to fall. Diff: 2 Topic: A Decrease in Supply Increases the Equilibrium Price, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

49) Explain what would happen to the equilibrium price and quantity of oranges if the supply of oranges increased while the demand for oranges decreased. Answer: Equilibrium price would decrease. Equilibrium quantity would depend on which change was larger. If the supply increase was larger than the demand decrease, equilibrium quantity would increase. If the demand decrease was larger than the supply increase, equilibrium quantity would decrease. Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 50) Explain what would happen to the equilibrium price and quantity of pineapples if the supply of pineapples decreased while the demand for pineapples increased. Answer: Equilibrium price would increase. Equilibrium quantity would depend on which change was larger. If the supply decrease was larger than the demand increase, equilibrium quantity would decrease. If the demand increase was larger than the supply decrease, equilibrium quantity would increase. Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 51) Explain what would happen to the equilibrium price and quantity of iPhones if the supply of iPhones increased while the demand for iPhones also increased. Answer: Equilibrium quantity would increase. Equilibrium price would depend on which change was larger. If the supply increase was larger than the demand increase, equilibrium price would decrease. If the demand increase was larger than the supply increase, equilibrium price would increase. Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 52) Explain what would happen to the equilibrium price and quantity of gasoline if the supply of gasoline decreased while the demand for gasoline also decreased. Answer: Equilibrium quantity would decrease. Equilibrium price would depend on which change was larger. If the supply decrease was larger than the demand decrease, equilibrium price would increase. If the demand decrease was larger than the supply decrease, equilibrium price would decrease. Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 54 Copyright © 2020 Pearson Education, Inc.

53) Explain what will happen to the equilibrium price and quantity of hybrid automobiles if there are technological advancements in the production of hybrid automobiles while at the same time consumer preference for hybrid automobiles increases. Answer: Technological advancements will cause supply to increase and increases in consumer preference will cause demand to increase. Equilibrium quantity will definitely increase. Equilibrium price will depend on whether the increase in supply or the increase in demand is larger. If the supply increase is larger than the demand increase, equilibrium price will decrease. If the demand increase is larger than the supply increase, equilibrium price will increase. Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 54) Explain what will happen to the equilibrium price and quantity of satellite TV service if the wages of the workers who provide the satellite TV service increase while at the same time the price of cable television service (a substitute for satellite TV service) also increases. Answer: The wage increases will cause supply to decrease and increases in the price of cable television service will cause demand for satellite TV service to increase. Equilibrium price will definitely increase. Equilibrium quantity will depend on whether the decrease in supply or the increase in demand is larger. If the supply decrease is larger than the demand increase, equilibrium quantity will decrease. If the demand increase is larger than the supply decrease, equilibrium quantity will increase. Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 3.6 Predicting and Explaining Market Changes 1) When demand increases and the demand curve shifts to the right, equilibrium price ________ and equilibrium quantity ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

2) When demand decreases and the demand curve shifts to the left, equilibrium price ________ and equilibrium quantity ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 3) When supply increases and the supply curve shifts to the right, equilibrium price ________ and equilibrium quantity ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 4) When supply decreases and the supply curve shifts to the left, equilibrium price ________ and equilibrium quantity ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

5) Suppose that the bakers of bread face an increase in the price of flour (an input). In the market for bread, this will cause the ________ and the equilibrium price to ________. A) supply of bread to decrease; increase B) supply of bread to decrease; decrease C) demand for bread to decrease; increase D) demand for bread to increase; increase Answer: A Diff: 3 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 6) Suppose that the bakers of bread face a decrease in the price of flour (an input). In the market for bread, this will cause the ________ and the equilibrium price to ________. A) supply of bread to decrease; increase B) supply of bread to increase; decrease C) demand for bread to decrease; increase D) demand for bread to increase; increase Answer: B Diff: 3 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 7) Suppose that the buyers of bread higher incomes and bread is a normal good. In the market for bread, this will cause the ________ and the equilibrium price to ________. A) supply of bread to decrease; increase B) supply of bread to increase; decrease C) demand for bread to decrease; increase D) demand for bread to increase; increase Answer: D Diff: 3 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

8) Suppose that the buyers of bread higher incomes and bread is an inferior good. In the market for bread, this will cause the ________ and the equilibrium price to ________. A) supply of bread to decrease; increase B) supply of bread to increase; decrease C) demand for bread to decrease; decrease D) demand for bread to increase; increase Answer: C Diff: 3 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 9) Suppose that only one curve shifts. If you observe that the equilibrium price increased while the equilibrium quantity decreased, then the market experienced a(n): A) decrease in supply. B) increase in demand. C) increase in supply. D) decrease in demand. Answer: A Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 10) Suppose that only one curve shifts. If you observe that the equilibrium price decreased while the equilibrium quantity increased, then the market experienced a(n): A) decrease in supply. B) increase in demand. C) increase in supply. D) decrease in demand. Answer: C Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

11) Suppose that only one curve shifts. If you observe that the equilibrium price and equilibrium quantity increased, then the market experienced a(n): A) decrease in supply. B) increase in demand. C) increase in supply. D) decrease in demand. Answer: B Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 12) Suppose that only one curve shifts. If you observe that the equilibrium price and equilibrium quantity decreased, then the market experienced a(n): A) decrease in supply. B) increase in demand. C) increase in supply. D) decrease in demand. Answer: D Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Recall the Application about the decrease in price of illegal drugs in the United States to answer the following question(s). 13) Recall the Application. The decrease in price of illegal drugs could be caused by either a(n) ________ in demand or a(n) ________ in supply of the drugs. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Diff: 2 Topic: Application 6, Why Lower Drug Prices? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

14) Recall the Application. If the decrease in price of illegal drugs is primarily due to a change in demand, the equilibrium quantity of drugs: A) will increase. B) will decrease. C) will not change. D) may or may not change. Answer: B Diff: 2 Topic: Application 6, Why Lower Drug Prices? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 15) Recall the Application. If the decrease in price of illegal drugs is primarily due to a change in supply, the equilibrium quantity of drugs: A) will increase. B) will decrease. C) will not change. D) may or may not change. Answer: A Diff: 2 Topic: Application 6, Why Lower Drug Prices? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 16) Recall the Application. If the decrease in price of illegal drugs is due to equal changes in demand and supply, the equilibrium quantity of drugs: A) will increase. B) will decrease. C) will not change. D) may or may not change. Answer: C Diff: 2 Topic: Application 6, Why Lower Drug Prices? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

17) Recall the Application. If it is not known whether the decrease in price of illegal drugs is primarily due to a change in supply, a change in demand, or equal changes in both, the equilibrium quantity of drugs: A) will increase. B) will decrease. C) will not change. D) may or may not change. Answer: D Diff: 2 Topic: Application 6, Why Lower Drug Prices? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 18) When demand changes and the demand curve shifts, equilibrium price and equilibrium quantity change in the same direction. Answer: TRUE Diff: 1 Topic: Predicting and Explaining Market Changes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 19) When supply increases and the supply curve shifts to the right, equilibrium price and equilibrium quantity will both increase. Answer: FALSE Diff: 1 Topic: Predicting and Explaining Market Changes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 20) When the demand and the supply for bread increases simultaneously, will we able determine their effects on the equilibrium price? Answer: No. An increase in the demand creates an upward pressure on the equilibrium price. An increase in supply creates a downward pressure on the equilibrium price. The only way to determine the effect of the shift of both curves is to determine which shift, supply of demand, is larger. Diff: 3 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

21) When the demand and the supply for bread increases simultaneously, will we able determine their effects on the equilibrium quantity? Answer: Yes. An increase in the demand increases the equilibrium. An increase in supply also increases the equilibrium quantity. Together, both shifts in supply and demand will increase the equilibrium quantity. Diff: 3 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 4 Elasticity: A Measure of Responsiveness 4.1 The Price Elasticity of Demand 1) The price elasticity of demand measures the responsiveness of: A) firms to changes in demand. B) demand to a change in price of a substitute good. C) demand to a change in price. D) quantity demanded to a change in price. Answer: D Diff: 1 Topic: The Price Elasticity of Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 2) Suppose that Victoria and her friends are running a fundraiser by selling donuts. They want to know what will happen to their revenue if they increase the price of each donut from $0.80 to $1. What concept do they need to apply to find out their expected revenue? A) price elasticity of supply B) price elasticity of demand C) cross elasticity of demand D) income elasticity of demand Answer: B Diff: 2 Topic: The Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 3) A good synonym for elasticity would be: A) change. B) demand. C) responsiveness. D) stickiness. Answer: C Diff: 1 Topic: The Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

4) The price elasticity of demand is calculated by: A) the change in price divided by the change in quantity demanded. B) the change in quantity demanded divided by the change in price. C) the percentage change in price divided by the percentage change in quantity demanded. D) the percentage change in quantity demanded divided by the percentage change in price. Answer: D Diff: 1 Topic: The Price Elasticity of Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 5) The ratio of the percentage change in quantity demanded to the percentage change in price is known as the: A) demand-side shift factor. B) income elasticity of demand. C) price elasticity of demand. D) cross elasticity of demand. Answer: C Diff: 1 Topic: The Price Elasticity of Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 6) If the price elasticity of demand is 0.5, this means that a ________ increase in price causes a ________ decrease in quantity demanded. A) 20%; 100% B) 30%; 15% C) 20%; 1% D) 5%; 1% Answer: B Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

7) If the price elasticity of demand is 2, this means that a ________ increase in price causes a ________ decrease in quantity demanded. A) 15%; 100% B) 15%; 10% C) 20%; 40% D) 30%; 20% Answer: C Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 8) The price of apples increases from $1 to $1.10. At the same time, the quantity of apples demanded decreases from 100 to 90. The price elasticity of demand for apples (calculated using the initial value formula) is: A) 0.02. B) 0.9. C) 1. D) 1.1. Answer: C Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 9) Suppose that in a month the price of milk increases from $2 to $3 a gallon. At the same time, the quantity of gallons of milk demanded decreases from 200 to 190. The price elasticity of demand for milk (calculated using the initial value formula) is: A) 0.1. B) 0.2. C) 1. D) 10. Answer: A Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

10) Suppose that in a month the price of a dozen of eggs increases from $1.50 to $2. At the same time, the quantity of dozens of eggs demanded decreases from 200 to 150. The price elasticity of demand for dozens of eggs is: A) perfectly inelastic. B) inelastic. C) unit elastic. D) elastic. Answer: C Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 11) Suppose that in a month the price of oranges increases from $.75 to $1. At the same time, the quantity of oranges demanded decreases from 100 to 80. The price elasticity of demand for oranges (calculated using the initial value formula) is: A) 0.75. B) 0.6. C) 0.25. D) 20. Answer: B Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 12) Suppose that in a month the price of tulips increases from $1 to $1.50. At the same time, the quantity of tulips demanded decreases from 200 to 190. The price elasticity of demand for tulips (calculated using the initial value formula) is: A) 0.1. B) 0.5. C) 10. D) 20. Answer: A Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

Table 4.1 13) Refer to Table 4.1. A change in the price of hamburgers caused the change in quantity demanded shown in the table. The price elasticity of demand for hamburgers (calculated using the initial value formula) is: A) 0.25. B) 0.50. C) 1. D) 1.75. Answer: D Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

Table 4.2 14) Refer to Table 4.2. A change in the price of calculators caused the change in quantity demanded shown in the table. The price elasticity of demand for calculators (calculated using the initial-value formula) is: A) 25. B) 1.75. C) 0.75. D) 0.25. Answer: C Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

Table 4.3 15) Refer to Table 4.3. A change in the price of computers caused the change in quantity demanded shown in the table. The price elasticity of demand (calculated using the initial value formula) is: A) 4. B) 1. C) 0.25. D) 0.125. Answer: A Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 16) Refer to Table 4.3. After calculating the price elasticity of demand for computers, we can say the demand for computers is: A) upward sloping. B) inelastic. C) unit elastic. D) elastic. Answer: D Diff: 1 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

17) The quantity of pencils sold is 1000 at the unit price $0.5. Suppose the price elasticity of demand for pencils by the initial value method is 2, and you would like to increase the quantity sold to 1200. Then the new price for pencils must be: A) $0.05. B) $0.25. C) $0.30. D) $0.45. Answer: D Diff: 3 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 18) At Tony's Restaurant, the quantity of large pizzas sold is 200 at the unit price $15. Suppose the price elasticity of demand for pizzas by the initial value method is 1.5, and you would like to increase the quantity sold to 250. Then the new price must be: A) $13. B) $12.50. C) $11.50. D) $11.25. Answer: B Diff: 3 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 19) The quantity of TVs sold is 100 at the unit price $200. Suppose the price elasticity of demand for TVs by the initial value method is 2.0, and you would like to decrease the unit price for TVs to $150. Then the new quantity sold must be: A) 125. B) 150. C) 200. D) 250. Answer: B Diff: 3 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

20) The midpoint formula for elasticity of demand solves the problem of: A) whether elasticity of demand is really positive or negative. B) whether to use quantity or price in the numerator. C) which price or quantity to use as the initial value of the variable. D) whether to use quantity demanded or supplied. Answer: C Diff: 3 Topic: Computing Percentage Changes and Elasticities Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 21) Suppose that in a month the price of a gallon of milk increases from $2 to $2.50. At the same time, the quantity of gallons of milk demanded decreases from 100 to 80. The price elasticity of demand for gallons of milk (calculated using the midpoint formula) is approximately: A) 0.11. B) 0.2. C) 1. D) 1.2. Answer: C Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 22) Suppose that in a month the price of movie rentals decreases from $3.25 to $3. At the same time, the quantity of movie rentals demanded increases from 100 to 120. The price elasticity of demand for movie rentals (calculated using the midpoint formula) is: A) zero. B) inelastic. C) unit elastic. D) elastic. Answer: D Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

23) Suppose that in a month the price of pizza increases from $4 to $5. At the same time, the quantity of pizzas demanded decreases from 200 to 190. The price elasticity of demand for pizza (calculated using the midpoint formula) is: A) 0.1. B) 0.23. C) 0.25. D) 4.35. Answer: B Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 24) Suppose that in a month the price of pizza increases from $4 to $5. At the same time, the quantity of pizzas demanded decreases from 200 to 190. The price elasticity of demand for pizza (calculated using the midpoint formula) is: A) zero. B) inelastic. C) unit elastic. D) elastic. Answer: B Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 25) Suppose that in a month the price of a cup of coffee increases from $1 to $1.50. At the same time, the quantity of cups of coffee demanded decreases from 200 to 190. The price elasticity of demand for cups of coffee (calculated using the midpoint formula) is approximately: A) 0.13. B) 0.5. C) 7.8. D) 20. Answer: A Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

26) Suppose that in a month the price of a cup of coffee increases from $1 to $1.50. At the same time, the quantity of cups of coffee demanded decreases from 200 to 190. The price elasticity of demand for cups of coffee (calculated using the midpoint formula) is: A) zero. B) inelastic. C) unit elastic. D) elastic. Answer: B Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 27) Suppose that David buys the same number of energy drinks every weekend no matter what happens to the price of the energy drinks. What does this suggest about David's demand for energy drinks? A) It is elastic. B) It is perfectly inelastic. C) It is unit elastic. D) It is not something that can be characterized without knowing the prices of the energy drinks. Answer: B Diff: 2 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 28) The price of pens increases from $2 to $2.20. At the same time, the quantity of pens demanded decreases from 100 to 90. Demand for pens is: A) perfectly inelastic. B) inelastic. C) unit elastic. D) elastic. Answer: C Diff: 2 Topic: Price Elasticity and the Demand Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

29) If the price elasticity of demand is 1.3, demand is: A) upward sloping. B) inelastic. C) unit elastic. D) elastic. Answer: D Diff: 1 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 30) If the price elasticity of demand is 1, demand is: A) upward sloping. B) inelastic. C) unit elastic. D) elastic. Answer: C Diff: 1 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 31) If the price elasticity of demand is infinite, demand is: A) upward sloping. B) inelastic. C) elastic. D) perfectly elastic. Answer: D Diff: 1 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

32) If the price elasticity of demand is very elastic, which of the following could be a possible value of the elasticity? A) 2 B) 1 C) 1/3 D) 0 Answer: A Diff: 1 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 33) If the price elasticity of demand for water is inelastic, which of the following could be a possible value of the elasticity? A) 2 B) 1 C) 0.5 D) all of the above Answer: C Diff: 1 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 34) If Juan purchases the same number of gallons of gasoline per week regardless of changes in gasoline price, Juan's demand for gasoline is: A) perfectly elastic. B) elastic. C) perfectly inelastic. D) inelastic. Answer: C Diff: 2 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

35) If the demand curve is a vertical line, it means that: A) regardless of price, the quantity demanded is a constant amount. B) regardless of quantity, the price is a constant amount. C) the good is inferior. D) the good has many substitutes. Answer: A Diff: 2 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 36) If, regardless of price, the quantity demanded is a constant amount, then the demand curve is: A) horizontal. B) vertical. C) upward sloping. D) downward sloping. Answer: B Diff: 2 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 37) If the quantity demanded is infinitely responsive to any change in price, the demand curve is: A) upward sloping. B) downward sloping. C) horizontal. D) vertical. Answer: C Diff: 2 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

38) In the case of perfectly elastic demand, the demand curve is: A) upward sloping. B) downward sloping. C) vertical. D) horizontal. Answer: D Diff: 2 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 39) In the case of perfectly inelastic demand, the demand curve is: A) upward sloping. B) downward sloping. C) vertical. D) horizontal. Answer: C Diff: 2 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 40) If demand is perfectly inelastic, the price elasticity of demand is equal to: A) 1. B) 0. C) infinity. D) a negative number between 0 and infinity. Answer: B Diff: 1 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

41) If demand is perfectly elastic, the price elasticity of demand is equal to: A) 1. B) 0. C) infinity. D) a positive number between 0 and infinity. Answer: C Diff: 2 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 42) If the price elasticity of demand is equal to zero and the price was to rise, the quantity demanded would: A) decrease slightly. B) fall to zero. C) not change. D) increase. Answer: C Diff: 2 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 43) If the demand curve facing a firm had a price elasticity of demand equal to zero and the firm raised its price, its total revenue would: A) decrease slightly. B) fall to zero. C) not change. D) increase. Answer: D Diff: 3 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

44) If the demand curve facing a firm had a price elasticity of demand equal to infinity and the firm raised its price, its total revenue would: A) decrease slightly. B) fall to zero. C) not change. D) increase. Answer: B Diff: 3 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

Figure 4.1 45) In Figure 4.1, the demand curve that is perfectly inelastic is on graph: A) A. B) B. C) C. D) D. Answer: A Diff: 2 Topic: Price Elasticity and the Demand Curve, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

46) In Figure 4.1, the demand curve that is perfectly elastic is on graph: A) A. B) B. C) C. D) D. Answer: B Diff: 2 Topic: Price Elasticity and the Demand Curve, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 47) In Figure 4.1, the demand curve along which price elasticity of demand changes as you move along it is on graph: A) A. B) B. C) C. D) D. Answer: C Diff: 2 Topic: Price Elasticity and the Demand Curve, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 48) In Figure 4.1, the demand curve that has a zero elasticity is show in graph: A) A. B) B. C) C. D) D. Answer: A Diff: 2 Topic: Price Elasticity and the Demand Curve, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

49) In Figure 4.1, the demand curve that has an infinite elasticity is shown on graph: A) A. B) B. C) C. D) D. Answer: B Diff: 2 Topic: Price Elasticity and the Demand Curve, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 50) Which of the following statements is INCORRECT? A) The price elasticity of demand tends to be greater for a specific brand of a product than for a product in general. B) The price elasticity of demand tends to be smaller when consumers have less time to adjust to price changes. C) The price elasticity of demand tends to be greater when a product accounts for a smaller portion of the consumer's budget. D) The price elasticity of demand tends to be greater for a product with more substitutes available. Answer: C Diff: 2 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 51) If a product is a necessity and has no substitutes at all, demand for the product is most likely to be: A) very inelastic. B) inelastic. C) unit elastic. D) elastic. Answer: A Diff: 1 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

52) If a product has only a few acceptable substitutes, demand for the product is most likely to be: A) very inelastic. B) inelastic. C) elastic. D) very elastic. Answer: B Diff: 1 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 53) Ceteris paribus, if more alternative forms of energy become available, we would expect the demand for gasoline to become: A) more elastic. B) more inelastic. C) perfectly elastic. D) perfectly inelastic. Answer: A Diff: 1 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 54) If a product has several good substitutes, demand for the product is most likely to be: A) very inelastic. B) inelastic. C) unit elastic. D) elastic. Answer: D Diff: 1 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

55) Which of the following products has the most elastic demand? A) Raspberry Mocha Kona coffee blend at Starbuck's B) Starbuck's coffee C) coffee D) all beverages Answer: A Diff: 2 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 56) Which of the following products has the least elastic demand? A) Raspberry Mocha Kona coffee blend at Starbuck's B) Starbuck's coffee C) coffee D) all beverages Answer: D Diff: 2 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 57) Which of the following products has the most elastic demand? A) Coca Cola in 12 oz. cans B) all cola drinks C) all carbonated beverages D) all beverages Answer: A Diff: 2 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

58) Which of the following products has the least elastic demand? A) Coca Cola in 12 oz. cans B) all cola drinks C) all carbonated beverages D) all beverages Answer: D Diff: 2 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 59) Which of the following products has the most elastic demand? A) Ben and Jerry's Chunky Monkey ice cream in the pint container B) all Ben and Jerry's ice cream C) all premium ice cream D) all ice cream Answer: A Diff: 2 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 60) If consumers have a long time to respond to an increase in electricity prices their demand is likely to be ________ than if they are only given a short time. A) no different B) higher C) more elastic D) less elastic Answer: C Diff: 1 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

61) Demand for low budget items, such as candy, is generally ________ than demand for large budget items, such as automobiles. A) higher B) lower C) more elastic D) less elastic Answer: D Diff: 1 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 62) Demand for items people do not really need for their survival, such as cars, is generally ________ than demand for items such as water. A) higher B) lower C) more elastic D) less elastic Answer: C Diff: 1 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 63) Which of the following goods is likely to have the most elastic demand? A) movie passes B) cigarettes C) electricity D) gasoline Answer: A Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

64) Which of the following goods is likely to have the most inelastic demand? A) restaurant meals B) air travel C) movies D) cigarettes Answer: D Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 65) Which of the following products has an elastic demand? A) water B) coffee C) cars D) salt Answer: C Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 66) The price elasticity of demand for a good is relatively elastic if: A) there are a large number of substitutes. B) the consumer has more time to make decisions about purchasing the good. C) the good is less of a necessity. D) all of the above Answer: D Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

67) In wealthy countries such as the United States, the price elasticity of the demand for food is ________ it is in poorer countries. A) greater than B) less than C) the same as D) None of the above; it is not possible to make international comparisons of price elasticity. Answer: B Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 68) Which of the following factors would indicate a more elastic demand? A) The good is a necessity, rather than a luxury. B) The good represents a small fraction of the budget. C) Demand is measured over a longer period of time. D) There are few substitutes for the good. Answer: C Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 69) Which of the following factors would indicate an inelastic demand? A) The good is a necessity, rather than a luxury. B) The good represents a small fraction of the budget. C) Demand is measured over a shorter period of time. D) all of the above Answer: D Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

70) Which of the following factors would indicate a less elastic demand? A) The good represents a large fraction of the budget. B) Demand is measured over a longer period of time. C) There are few substitutes. D) The price of the good is high. Answer: C Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 71) Which of the following factors would indicate a less elastic demand? A) The good represents a large fraction of the budget. B) Demand is measured over a shorter period of time. C) The price of the good is low. D) New substitutes are created. Answer: B Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 72) The price elasticity of demand measures the responsiveness of changes in price to the quantity demanded. Answer: FALSE Diff: 1 Topic: The Price Elasticity of Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 73) If a 10% increase in price decreases the quantity demanded by 12%, the price elasticity of demand is 1.2. Answer: TRUE Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

74) Suppose that the price elasticity of demand for bagels is 1.60, a 10% increase in price will decrease the quantity demanded by 6%. Answer: FALSE Diff: 2 Topic: Computing Percentage Changes and Elasticities Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 75) If we are on the upper portion of the market demand curve (above the midpoint) and the price increases by 10%, the quantity demanded will decrease by more than 10%. Answer: TRUE Diff: 2 Topic: Price Elasticity and the Demand Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 76) The demand for a particular brand of clothing is likely to be less elastic than the demand for all clothing. Answer: FALSE Diff: 2 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 77) In general, the demand for a product is more elastic in the long run than in the short run. Answer: TRUE Diff: 1 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

78) The price elasticity of demand for business travel tends to be greater than that of leisure travel. Answer: FALSE Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 79) The demand for a product tends to be less elastic as the product accounts for a larger fraction of a consumer's budget. Answer: FALSE Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 80) The market demand for school supplies is more elastic at the beginning of the semester than it is at the start of summer vacation. Answer: FALSE Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 81) Can you think of an example of a good whose demand could be perfectly inelastic? Answer: For a good to have a perfectly inelastic demand, the quantity demanded must not change at all if the price increases or decreases. Medications could be good examples of goods whose demand might be perfectly inelastic. For example, if a diabetic takes a certain dosage of insulin each day, he or she is not going to take more insulin if it is cheaper (that would make him or her very ill), nor would he or she take less if the price went up (again, the result would be becoming ill). Diff: 2 Topic: Price Elasticity and the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

82) Draw the demand curve for a good whose price elasticity of demand is equal to zero. Be sure to label both axes. Explain what the graph represents. Answer:

The demand curve in the graph is a vertical line, indicating that the quantity of the good demanded will not change no matter what happens to its price. In terms of the calculation of the price elasticity of demand, the change in quantity is zero and so, therefore, is the calculated value of the price elasticity. Diff: 2 Topic: Price Elasticity and the Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 83) Draw the demand curve for a good whose price elasticity of demand is equal to infinity. Be sure to label both axes. Answer:

The demand curve in the graph is a horizontal line, indicating that the quantity of the good is infinitely responsive to any change in price. Diff: 2 Topic: Price Elasticity and the Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

84) Gloria works for a museum in a large city with many other museums. Her boss proposes that the museum should raise the price of admission to increase revenues. Gloria was a good student in her economics principles course. How should she advise her boss? Answer: If there are many museums in the city demand for museum admissions is likely to be elastic. If Gloria's museum raises the price of admission, this will reduce revenues. She should advise her boss against a price increase. Diff: 2 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 85) Hotdogs are very cheap at the grocery store—about $2 for a package of 8, or 25 cents each. At a baseball game they cost $3 each. Use the concept of price elasticity of demand to explain why. Answer: At the grocery store there are many substitutes for hotdogs, including other foods and restaurant meals. At the baseball game there are fewer substitutes for hot dogs, and even fewer substitutes that are hot since one cannot cook one's own food in the stadium. Therefore grocery store hotdogs likely have an elastic demand, which means lower prices maximize profit. Baseball game hotdogs have an inelastic demand, which means that higher prices maximize profit. Diff: 2 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 86) Explain why the demand for a particular brand of fast food tends to be more elastic than demand for all fast food. Answer: One of the factors that affects the price elasticity of demand is the number of substitute goods available. For instance, a particular brand of hamburgers will face many substitutes, including not only other types of fast food but also other brands of hamburgers. If, however, the demand for hamburgers is broadly defined irrespective of different brands, the number of substitutes will be relatively small. Thus, the broader a market is defined, the less elastic is the demand. Diff: 2 Topic: Elasticity and the Availability of Substitutes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

87) Why do you think that the demand for coffee is less elastic than the demand for restaurant meals? Answer: It may have to do with the availability of good substitutes or percentage of the consumer's budget. People can always eat at home. But it's harder to find a good substitute for coffee, so people are less sensitive to coffee price changes than to restaurant meal price changes. Also, coffee is a much smaller percentage of the consumer's budget than meals. Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 88) Your boss, the mayor of a city, thought that she'd come up with a great way to raise city revenue: increase the tax on gasoline in the city! However, she discovered that the city was actually receiving less tax revenue after the gas tax increase than before. Incensed, she declared that the economic policy prescription of taxing goods with inelastic demand must be flawed. Comment on her conclusion. Answer: Your boss is right that the demand for gasoline is inelastic, but she's wrong because the demand for gas in a particular location is not. If taxes go up in the city, people might go to the suburbs to buy gas. So the demand for gasoline in the city might actually be elastic, leading to the observed outcome. Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 89) Restaurants and retail stores often give 10% senior citizen discounts. Use the concept of elasticity to explain how this can be profit-maximizing behavior. Answer: Senior citizens living on a low income and with more leisure time may have more price elastic demand than people who are still working. By lowering prices to people who have higher elasticity the restaurants and retail stores may actually be increasing their profits. Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

90) Is demand for electricity more price elastic when measured over a short period of time or a long period of time? Explain. Answer: It is more price elastic over a long period of time because there are more substitutes in a long period of time. If electricity prices get high people have little choice but to pay them in the short run. In the long run people can invest in solar heat, use gas stoves, add insulation, and do other things to reduce their consumption of electricity. Since there are more substitutes in the long run the elasticity is higher. Diff: 2 Topic: Other Determinants of the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 4.2 Using Price Elasticity 1) The price elasticity of demand for color printers is 1.6 and you would like to see the quantity demanded for color printers to increase by 32%. Then the percentage change in price should be: A) 10%. B) 15%. C) 20%. D) 25%. Answer: C Diff: 2 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 2) The price elasticity of demand for higher education is about 1.4. A 5% increase in tuition would lead to: A) a decrease in enrollment by 7%. B) a decrease in enrollment by 6.4%. C) a decrease in enrollment by 3.6%. D) a decrease in enrollment by 2.8%. Answer: A Diff: 2 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

3) Suppose that the elasticity of demand for hamburgers is 2.5 and price decreases by 14%. By what percentage will quantity demanded for hamburgers increase? A) 2.5% B) 5.6% C) 25% D) 35% Answer: D Diff: 2 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 4) Suppose that the elasticity of demand for newspapers is 2.0 and quantity demanded decreases by 40%. What must the percentage increase in price have been? A) 2% B) 20% C) 80% D) 200% Answer: B Diff: 2 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 5) Suppose that the elasticity of demand for chocolate is 3.0 and price decreases by 20%. By what percentage will quantity demanded for chocolate increase? A) 20% B) 30% C) 60% D) 200% Answer: C Diff: 2 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

6) Suppose that the elasticity of demand for a product is 4.0 and quantity demanded increases by 20%. What must the percentage decrease in price have been? A) 5% B) 20% C) 80% D) 200% Answer: A Diff: 2 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 7) Suppose that the elasticity of demand for a product is 0.5 and price decreases by 20%. By what percentage will quantity demanded increase? A) 0.5% B) 5% C) 10% D) 40% Answer: C Diff: 2 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 8) Suppose that the elasticity of demand for a product is 0.5 and quantity demanded increases by 20%. What must the percentage decrease in price have been? A) 0.5% B) 5% C) 10% D) 40% Answer: D Diff: 2 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

9) If the number of highway deaths among young people is roughly proportional to their beer consumption, and young people's elasticity of demand for beer is 1.5, then to decrease highway deaths of young people by 15 percent, taxes would need to be increased enough to increase the price of beer by: A) 1%. B) 1.5%. C) 10%. D) 15%. Answer: C Diff: 3 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 10) If the number of highway deaths among young people is roughly proportional to their beer consumption, and young people's elasticity of demand for beer is 1.5, then a tax increase that increases the price of beer by 20% would roughly reduce highway deaths of young people by: A) 1.5%. B) 13.33%. C) 20%. D) 30%. Answer: D Diff: 3 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 11) If the elasticity of demand for cigarettes by teenagers is 1.5, then to reduce teen smoking by 60 percent, tobacco companies would need to raise their prices by: A) 15%. B) 40%. C) 60%. D) 90%. Answer: B Diff: 2 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

12) If the elasticity of demand for cigarettes by teenagers is 1.5, then the price and total revenue from teens buying cigarettes are: A) zero. B) unrelated. C) inversely related. D) directly related. Answer: C Diff: 2 Topic: Predicting Changes in Quantity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 13) Suppose that if poor households have a price elasticity of demand for medical care of 0.50 and rich households have a price elasticity of demand for medical care of 0.25, then a price increase of 10% would lead to the poor households reducing their quantity demanded for medical care by: A) 2.5%. B) 5%. C) 25%. D) 50%. Answer: B Diff: 3 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

14) Suppose that if poor households have a price elasticity of demand for medical care of 0.70 and wealthy households have a price elasticity of demand for medical care of 0.10, then a 10% increase in the price of medical care would lead to poor households reducing their quantity demanded for medical care by: A) seven times the amount that wealthy household reduce their quantity demanded for medical care. B) one-seventh the amount that wealthy households reduce their quantity demanded for medical care. C) one-tenth the amount that wealthy households reduce their quantity demanded for medical care. D) ten times the amount that wealthy household reduce their quantity demanded for medical care. Answer: A Diff: 3 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 15) What is the total revenue of a shoe company equal to? A) income minus explicit and implicit costs B) the change in quantity sold divided by the change in price C) price of shoes times quantity sold D) elasticity of demand divided by percentage change in quantity Answer: C Diff: 1 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 16) The total revenue of Grandma's Fudge Factory is equal to the: A) average cost times quantity sold. B) elasticity of demand divided by percentage change in quantity. C) price of fudge times quantity sold. D) income minus explicit and implicit costs. Answer: C Diff: 1 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

17) If Maria spends a fixed dollar amount per week on movie rentals regardless of changes in the price, Maria's demand for movie rental can be considered: A) elastic. B) unit elastic. C) inelastic. D) There is not sufficient information to determine the price elasticity. Answer: B Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 18) Suppose that OPEC currently sets the oil price at $1.50 per gallon, and the current consumption is 100 million gallons per day. The price elasticity of demand for oil is estimated to be 0.7 by the initial value method. If OPEC raises the oil price to $1.80 per gallon: A) quantity demanded decreases by 10 million gallons while total sales revenue increases by $4.4 million per day. B) quantity demanded decreases by 14 million gallons while total sales revenue increases by $4.8 million per day. C) quantity demanded decreases by 10 million gallons and total sales revenue decreases by $4.4 million per day. D) quantity demanded decreases by 14 million gallons and total sales revenue decreases by $4.8 million per day. Answer: B Diff: 3 Topic: Price Elasticity and Total Revenue Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 19) Suppose that there is only one seller in the computer industry. If the demand curve that the only seller in the industry faces is a straight-line, downward-sloping curve, at which point would the seller's total revenue be maximized? A) at the highest point on the demand curve, where price is the highest B) at a point high on the demand curve, where elasticity is elastic C) at the midpoint of the demand curve, where elasticity is unitary D) at a point low on the demand curve, but not at the very bottom Answer: C Diff: 3 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 38 Copyright © 2020 Pearson Education, Inc.

20) Suppose you observe that as a TV manufacturer increases its price its total revenue decreases. This could be due to: A) demand being price inelastic. B) demand being price elastic. C) demand being unit elastic. D) demand being perfectly price inelastic. Answer: B Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 21) Suppose that when a particular firm decreases its price its total revenue decreases. What kind of demand does this particular firm face? A) Demand is price inelastic. B) Demand is price elastic. C) Demand is unit elastic. D) Demand is perfectly price elastic. Answer: A Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 22) Assume that when a lamp manufacturer decreases its price its total revenue does not change. What do we know? A) Demand is price inelastic. B) Demand is price elastic. C) Demand is unit elastic. D) Demand is perfectly price elastic. Answer: C Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

23) Suppose that the elasticity of demand for a product is 2.0. What will happen to total revenue as a firm increases the price? A) Total revenue will increase. B) Total revenue will decrease. C) Total revenue will stay the same. D) It cannot be determined from the information provided. Answer: B Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 24) Suppose that the elasticity of demand for a product is 0.5. What will happen to total revenue as a firm increases the price? A) Total revenue will increase. B) Total revenue will decrease. C) Total revenue will stay the same. D) It cannot be determined from the information provided. Answer: A Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 25) Suppose we observe that as a firm increases its price its total revenue decreases. Which of the following is a possible value of its price elasticity of demand? A) 0.25 B) 0.5 C) 1 D) 2 Answer: D Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

26) Assume that as a firm decreases its price its total revenue decreases. Which of the following is a possible value of its price elasticity of demand? A) 0.4 B) 1 C) 1.4 D) 4 Answer: A Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 27) Suppose we observe that a firm's total revenue doesn't change when price and quantity change by the same percentage. Which of the following is a possible value of its price elasticity of demand? A) 0 B) 0.5 C) 1 D) 2 Answer: C Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 28) If the demand for school ball caps is inelastic, an increase in price will result in: A) a decrease in profits. B) an increase in total revenue. C) a decrease in total revenue. D) an increase in the quantity demanded. Answer: B Diff: 2 Topic: Using Elasticity to Predict the Revenue Effects of Price Changes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

29) If the demand for new cars is elastic, an increase in price will result in: A) an increase in profits. B) an increase in total revenue. C) a decrease in total revenue. D) an increase in the quantity demanded. Answer: C Diff: 2 Topic: Using Elasticity to Predict the Revenue Effects of Price Changes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 30) Governments like to know the price elasticity of demand because it helps them determine how changes in sales tax rates will affect: A) tax revenues. B) government spending. C) income. D) profits. Answer: A Diff: 2 Topic: Using Elasticity to Predict the Revenue Effects of Price Changes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 31) Why would a bumper crop be bad news for farmers? A) Their crop has an inelastic demand, and the resulting drop in price reduces their total revenue. B) Their crop has an elastic demand, and the resulting drop in price reduces their total revenue. C) Their crop has an inelastic demand, and the resulting drop in price raises their total revenue. D) Their crop has an elastic demand, and the resulting drop in price raises their total revenue. Answer: A Diff: 2 Topic: Using Elasticity to Predict the Revenue Effects of Price Changes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

32) A bumper crop would be bad news for farmers if their crop has an inelastic demand because their total revenue would: A) rise along with price. B) rise as price falls. C) fall as price rises. D) fall along with price. Answer: D Diff: 2 Topic: Using Elasticity to Predict the Revenue Effects of Price Changes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 33) If the demand for illegal drugs is inelastic, then a government policy to cause their price to increase would cause total revenue from drug sales to: A) rise. B) fall. C) stay the same. D) drop to zero. Answer: A Diff: 2 Topic: Using Elasticity to Predict the Revenue Effects of Price Changes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 34) If the demand for illegal drugs is inelastic, then a government policy that causes illegal drug price to rise would cause those who support their drug habit by property theft to: A) increase their theft to pay for their drugs. B) increase their drug dependency. C) reduce their theft to pay for their drugs. D) end their drug dependency. Answer: A Diff: 2 Topic: Using Elasticity to Predict the Revenue Effects of Price Changes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

Recall the Application regarding the elasticity of demand for public transit varying over time to answer the following question(s). 35) According to the Application, the demand for public transit is: A) inelastic. B) elastic. C) perfectly inelastic. D) perfectly elastic. Answer: A Diff: 2 Topic: Application 1, The Elasticity of Demand for Public Transit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 36) According to the Application, the demand for public transit is in the short run is ________, so a 10 percent increase in the transit fare will decrease ridership by ________. A) 0.40; 4 percent B) 0.60; 6 percent C) 0.50; 5 percent D) 0.7; 7 percent Answer: A Diff: 2 Topic: Application 1, The Elasticity of Demand for Public Transit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 37) According to the Application, the demand for public transit in the long run is ________, so a 10 percent increase in the transit fare will decrease ridership by ________. A) 0.80; 8 percent B) 0.60; 6 percent C) 0.50; 5 percent D) 0.7; 7 percent Answer: A Diff: 2 Topic: Application 1, The Elasticity of Demand for Public Transit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

38) According to the Application, the demand for public transit is: A) more elastic in the long run because riders have time to respond to changes in price. B) less elastic in the long run because consumers have less opportunity to change their behavior. C) is perfectly inelastic and does not vary over time. D) is perfectly elastic and does not vary over time. Answer: A Diff: 2 Topic: Application 1, The Elasticity of Demand for Public Transit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both Use the Application about the price of vanity license plates in Virginia to answer the following question(s). 39) Recall the Application. Which of the following is a reason for the state of Virginia to increase its revenue while the price for vanity plates increases? A) The demand for vanity plates in Virginia is inelastic. B) The demand for vanity plates in Virginia is elastic. C) The demand for vanity plates in Virginia is equal to 1. D) There is insufficient information to draw a conclusion. Answer: A Diff: 2 Topic: Application 2, Vanity Plates and the Elasticity of Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 40) Recall the Application. Because the elasticity of demand for vanity plates is 0.26, then a decrease in the price of vanity plates will: A) decrease total revenues. B) cause no change in the total revenues. C) increase total revenues. D) There is insufficient information to draw a conclusion. Answer: A Diff: 2 Topic: Application 2, Vanity Plates and the Elasticity of Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

41) Recall the Application. Because the elasticity of demand for vanity plates is 0.26, then an increase in the price of vanity plates will: A) decrease total revenues. B) cause no change in the total revenues. C) increase total revenues. D) There is insufficient information to draw a conclusion. Answer: C Diff: 2 Topic: Application 2, Vanity Plates and the Elasticity of Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 42) If the elasticity of demand for sugar cookies is 2.5, then a 10% change in price will lead to a 5% change in quantity demanded. Answer: FALSE Diff: 2 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 43) If the elasticity of demand for cheddar cheese is 1.5, then a 20% change in price will lead to a 10% change in quantity demanded. Answer: FALSE Diff: 2 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 44) If an increase in the price of accordions does not change total revenue from accordion sales, we can infer that demand for accordions is inelastic. Answer: FALSE Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

45) If total revenue is unrelated to price, then demand is unitary elastic. Answer: TRUE Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 46) If demand is inelastic, then price and total revenue are directly related. Answer: TRUE Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 47) If demand is elastic, then when price rises, total revenue will decrease. Answer: TRUE Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 48) A bumper crop of wheat could be bad news to farmers if the price elasticity of demand for wheat is greater than one. Answer: FALSE Diff: 2 Topic: Using Elasticity to Predict the Revenue Effects of Price Changes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

49) How do you calculate a percentage change in quantity if given an elasticity of demand and a percentage change in price? Answer: Since demand elasticity is the absolute value of percentage change in quantity divided by percentage change in price, then percentage change in quantity is equal to elasticity times percentage change in price. Diff: 2 Topic: Predicting Changes in Quantity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 50) If demand elasticity of airline tickets is 3, what percentage change in quantity would the airlines expect from a 10% increase in price? Answer: A 30% decrease in quantity Diff: 2 Topic: Predicting Changes in Quantity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 51) What is total revenue for a firm? Answer: Total revenue is the amount of its product a firm sells times the price of its product. Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 52) Suppose that you're the manager of a firm. You notice that when you raised your price from $10 to $11, sales fell from 500 to 400. Should you raise your price more? Answer: No. In fact, you should lower your price. At this price, the elasticity of demand is 2, so you're operating on the elastic portion of your demand curve. Here, it makes sense to lower the price to increase revenues. Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

53) What is the relationship between price elasticity of demand and total revenue for the firm? Answer: If demand is elastic then price and total revenue are inversely related, while if demand is inelastic, price and total revenue are directly related, and if demand is unitary elastic, then price and total revenue are unrelated. Diff: 2 Topic: Price Elasticity and Total Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 4.3 Elasticity and Total Revenue for a Linear Demand Curve 1) Which of the following are characteristics of a linear demand curve? A) It has a constant slope. B) It has a constant elasticity of demand. C) The upper half of the liner demand curve is inelastic. D) All of the above Answer: A Diff: 2 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 2) Which of the following is NOT a characteristic of a linear demand curve? A) It has a constant elasticity. B) A higher price makes the demand more elastic. C) It has a constant slope. D) The midpoint of the demand curve is unit elastic. Answer: A Diff: 2 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

3) On a linear demand curve, demand is ________ at small quantities than it is at the middle of the demand curve. A) more elastic B) less elastic C) equally elastic D) There is insufficient information in the question. Answer: A Diff: 2 Topic: Price Elasticity along a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 4) As we move upward along a linear demand curve, the price elasticity of the demand: A) increases. B) decreases. C) remains the same. D) increases up to the midpoint and then decreases. Answer: A Diff: 1 Topic: Price Elasticity along a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 5) On a linear demand curve, demand is ________ at large quantities than it is at the middle of the demand curve. A) more elastic B) less elastic C) equally elastic D) There is insufficient information in the question. Answer: B Diff: 2 Topic: Price Elasticity along a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

6) On a linear demand curve, demand is ________ at the middle of the demand curve than it is at small quantities. A) more elastic B) less elastic C) equally elastic D) There is insufficient information in the question. Answer: B Diff: 3 Topic: Price Elasticity along a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

Figure 4.2 7) In Figure 4.2, at quantities larger than Q1, demand is: A) inferior. B) elastic. C) inelastic. D) unit elastic. Answer: C Diff: 2 Topic: Price Elasticity along a Linear Demand Curve, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 8) In Figure 4.2, at quantities smaller than Q1, demand is: A) inferior. B) elastic. C) inelastic. D) unit elastic. Answer: B Diff: 2 Topic: Price Elasticity along a Linear Demand Curve, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 52 Copyright © 2020 Pearson Education, Inc.

9) In Figure 4.2, at quantities at Q1: A) price and total revenue are unrelated. B) total revenue is maximized. C) price elasticity equals 1. D) all of the above Answer: D Diff: 2 Topic: Price Elasticity along a Linear Demand Curve, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 10) In Figure 4.2, at quantities smaller than Q1: A) total revenue is falling. B) price elasticity is greater than 1. C) price and total revenue are directly related. D) all of the above Answer: B Diff: 2 Topic: Price Elasticity along a Linear Demand Curve, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 11) In Figure 4.2, at quantities larger than Q1: A) total revenue is rising. B) price elasticity is less than 1. C) price and total revenue are directly related. D) all of the above Answer: B Diff: 2 Topic: Price Elasticity along a Linear Demand Curve, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

12) Suppose that ABC Beer Brewer faces a linear demand curve and that the current price for its beer is set at a point where the price elasticity is 1.6. If ABC Beer Brewer increases the product price: A) the demand becomes more elastic and total revenue increases. B) the demand becomes less elastic and total revenue increases. C) the demand becomes more elastic and total revenue decreases. D) the demand becomes less elastic and total revenue decreases. Answer: C Diff: 2 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 13) Suppose that ABC Beer Brewer faces a linear demand curve and that the current price for its beer is set at a point where the price elasticity is 0.6. If ABC Beer Brewer increases the product price, then the total revenue will: A) increase if at the new price, the elasticity is still lower than 1. B) increase regardless of the size of the price increase. C) decrease regardless of the size of the price increase. D) increase if at the new price, the elasticity is greater than 1. Answer: A Diff: 3 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 14) Suppose that an Italian ice cream firm is facing a linear demand curve and that the current price for the Italian ice cream is set at a point where the price elasticity is 0.7. If the firm decreases the product price: A) the demand becomes more inelastic and total revenue increases. B) the demand becomes more inelastic and total revenue decreases. C) the demand becomes less inelastic and total revenue increases. D) the demand becomes less inelastic and total revenue decreases. Answer: B Diff: 2 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

15) Suppose that an Italian ice cream firm is facing a linear demand curve and that the current price for the Italian ice cream is set at a point where the price elasticity is 1.7. If the firm decreases the product price, the total revenue will: A) increase if at the new price, the elasticity is still greater than 1. B) increase if at the new price, the elasticity is lower than 1. C) decrease regardless of the size of the price decrease. D) increase regardless of the size of the price decrease. Answer: A Diff: 3 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 16) If a firm facing a linear demand curve experiences an increase in total revenue after lowering the price: A) the initial price was set at a point where the demand is inelastic. B) the initial price was set at a point where the demand is elastic. C) the new price is set where the demand is perfectly elastic. D) the new price is set where the demand is perfectly inelastic. Answer: B Diff: 3 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 17) A firm facing a linear demand curve maximizes its total revenue where demand is: A) perfectly inelastic. B) inelastic. C) elastic. D) unit elastic. Answer: D Diff: 3 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

18) Firms like to know the price elasticity of demand because it determines how price changes affect: A) the supply curve. B) costs. C) revenues. D) taxes. Answer: C Diff: 2 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both Recall the Application about choosing a price for drones based on a linear demand curve to answer the following question(s). 19) Recall the Application. Suppose a firm that produces drones has a linear demand curve for its product, with a vertical intercept of $1,500. If the firm does NOT want the demand for its product to be price-inelastic, the minimum price it should charge is: A) $500. B) $750. C) $1,000. D) $1,500. Answer: B Diff: 2 Topic: Application 3, Drones and the Lower Half of a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 20) Recall the Application. Suppose a firm that produces drones has a linear demand curve for its product, with a vertical intercept of $1,500. If the firm initially charged a price of $500 and then raised its price to $750, the firm's total revenue would ________, and total cost would ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decease Answer: B Diff: 2 Topic: Application 3, Drones and the Lower Half of a Linear Demand Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 56 Copyright © 2020 Pearson Education, Inc.

21) Recall the Application. Suppose a firm that produces drones has a linear demand curve for its product, with a vertical intercept of $1,500. If the firm initially charged a price of $500 and then raised its price to $750, the firm's profit will ________. A) increase B) decrease C) stay the same. D) decrease until it becomes zero. Answer: A Diff: 2 Topic: Application 3, Drones and the Lower Half of a Linear Demand Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 22) Demand is elastic along the upper half of a linear demand curve, which means that a decrease in price will increase the quantity sold by a larger percentage amount. Answer: TRUE Diff: 2 Topic: Price Elasticity along a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 23) If the slope of a demand curve is constant, then so is the elasticity on that demand curve. Answer: FALSE Diff: 2 Topic: Price Elasticity along a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 24) If a firm currently sells a product at a point where the price elasticity of demand is 0.5, the firm needs to raise the price to maximize its total revenue. Answer: TRUE Diff: 2 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

25) On a straight line demand curve, total revenue is maximized where demand is unitary elastic. Answer: TRUE Diff: 2 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 26) On a straight line demand curve, total revenue is the same at every point on the demand curve. Answer: FALSE Diff: 2 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 27) Explain why the price elasticity varies even when a firm faces a linear demand curve. Answer: A linear demand curve has a constant slope. A constant slope implies only that absolute changes in quantity demanded remain unchanged with respect to a unit change in price. However, the concept of price elasticity is based on percentage change rather than absolute change. Thus, even if the slope of a demand curve is constant, percentage change in quantity demanded and percentage change in price between two different points vary. Diff: 2 Topic: Price Elasticity along a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 28) What happens to total revenue associated with a linear demand curve as price falls? Answer: At first total revenue increases as demand is elastic, then total revenue reaches a maximum where price elasticity is unit elastic and finally total revenue falls as demand is inelastic. Diff: 2 Topic: Elasticity and Total Revenue for a Linear Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

4.4 Other Elasticities of Demand 1) The demand for a particular good depends on variables such as: A) consumer income. B) price of substitutes. C) price of complements. D) all of the above. Answer: D Diff: 1 Topic: Other Elasticities of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 2) A good is said to be "inferior" if: A) it is of low quality. B) consumers buy less of it at a high price. C) it has a negative income elasticity of demand. D) it has many substitutes. Answer: C Diff: 1 Topic: Income Elasticity of Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 3) A good is said to be "normal" if: A) it is of high quality. B) consumers buy more of it at a high price. C) it has few substitutes. D) it has a positive income elasticity of demand. Answer: D Diff: 1 Topic: Income Elasticity of Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

4) If the income elasticity of a good is greater than zero, we say that the good is a: A) normal good. B) inferior good. C) complementary good. D) substitute good. Answer: A Diff: 2 Topic: What Determines the Price Elasticity of Supply? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 5) The income elasticity of demand is: A) the percentage change in quantity demanded divided by the percentage change in price. B) the percentage change in quantity demanded divided by the percentage change in income. C) the percentage change in income divided by the percentage change quantity demanded. D) the percentage change in price divided by the percentage change in income. Answer: B Diff: 2 Topic: Income Elasticity of Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 6) If the quantity demanded of restaurant meals increases by 20% when income increases by 10%, restaurant meals are: A) normal goods. B) inferior goods. C) complementary goods. D) substitute goods. Answer: A Diff: 2 Topic: What Determines the Price Elasticity of Supply? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

7) If the quantity demanded of a good falls by 2% when income falls by 10%, the good's demand elasticity is: A) 0.2. B) 5. C) 1. D) 0.5. Answer: A Diff: 2 Topic: What Determines the Price Elasticity of Supply? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 8) If the quantity demanded of peanut butter falls by 12% when income rises by 10%, then peanut butter is: A) an inferior good. B) a normal good. C) a necessity D) both A and C Answer: A Diff: 2 Topic: Income Elasticity of Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 9) Suppose that the income elasticity of demand for new clothes is positive. Other things being equal, which of the following statements is correct? A) New clothes are a normal good. B) The quantity demanded of new clothes decreases as a consumer's income declines. C) There exists a positive relationship between income and the demand for new clothes. D) all of the above Answer: D Diff: 2 Topic: Income Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

10) Suppose that the income elasticity of demand for frozen dinners is negative. Other things being equal, which of the following statements is INCORRECT? A) Frozen dinners are an inferior good. B) The quantity demanded of frozen dinners increases as a consumer's income declines. C) There exists a negative relationship between income and the demand for frozen dinners. D) The share of income spent on frozen dinners must decrease as a consumer's income decreases. Answer: D Diff: 2 Topic: Income Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 11) Suppose that the income elasticity of demand for good X is positive but less than 1. Other things being equal, which of the following statements is INCORRECT? A) Good X is a normal good. B) The quantity demanded of good X decreases as a consumer's income declines. C) A consumer buys more X as income rises, but the share of income spent on good X falls. D) A consumer buys more X as income rises and the share of income spent on good X also rises. Answer: D Diff: 2 Topic: Income Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 12) Suppose that the income elasticity of demand for good X is greater than 1. Other things being equal, which of the following statements is INCORRECT? A) Good X is a normal good. B) The quantity demanded of good X decreases as a consumer's income declines. C) A consumer buys more X as income rises, but the share of income spent on good X falls. D) A consumer buys more X as income rises and the share of income spent on good X also rises. Answer: D Diff: 2 Topic: Income Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

13) The cross-price elasticity of demand measures: A) the relationship between the demand for one good and the supply of another. B) the relationship between the demand for one good and the price of another. C) the relationship between the demand and supply of one good at the intersection of the curves. D) the elasticity of demand at the intersection of the supply and demand curves. Answer: B Diff: 1 Topic: Cross-Price Elasticity of Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 14) The percentage change in the quantity of peanut butter demanded divided by the percentage change in price of jelly measures: A) the price elasticity of demand for peanut butter. B) the price elasticity of demand for jelly. C) the cross-price elasticity of demand for peanut butter with respect to the price of jelly. D) the cross-price elasticity of demand for jelly with respect to the price of peanut butter. Answer: C Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 15) The percentage change in the quantity of bread demanded divided by the percentage change in price of jelly measures: A) the cross-price elasticity of demand for bread with respect to jelly. B) the cross-price elasticity of demand for jelly with respect to bread. C) the price elasticity of demand for bread. D) the price elasticity of demand for jelly. Answer: A Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

16) The cross-price elasticity of demand between spaghetti and spaghetti sauce is most likely: A) positive. B) negative. C) zero. D) More information is needed to determine. Answer: B Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 17) The cross-price elasticity of demand between bananas and apples is most likely: A) positive. B) negative. C) zero. D) More information is needed to determine. Answer: A Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 18) The cross-price elasticity of demand between telephones and ramen noodles is most likely: A) positive. B) negative. C) zero. D) greater than one. Answer: C Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

19) When the price of hamburger went from $3 to $4 a pound, the quantity demanded of buns changed from 30 to 25 packages a day. The cross-price elasticity of demand for buns (using the initial value formula) is: A) 1.4. B) 0.5. C) -0.5. D) -1.4. Answer: C Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 20) When the price of hamburger went from $3 to $4 a pound, the quantity demanded of buns changed from 30 to 25 packages a day. The cross-price elasticity of demand for hamburger (using the initial value formula) is: A) 1.4. B) 0.6. C) -0.6. D) There is not enough information to answer this question. Answer: D Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 21) When the price of pens went from $1 to $1.50, the quantity demanded of pencils changed from 50 to 75 a day. The cross-price elasticity of demand for pencils (using the initial value formula) is: A) 1. B) 0.4. C) 0.2. D) -0.2. Answer: A Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

22) When the price of pens went from $1 to $1.50, the quantity demanded of pencils changed from 50 to 75 a day. The cross-price elasticity of demand for pens (using the initial value formula) is: A) 0.8. B) 0.4. C) 0.2. D) It cannot be determined from the information provided. Answer: D Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 23) When the price of tacos went from $2 to $3 dollars each, the quantity demanded of burritos changed from 100 to 120 a day. The cross-price elasticity of demand for burritos calculated using the initial value method is: A) 1.33. B) 0.75. C) 0.4. D) -0.75. Answer: C Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 24) The cross-price elasticity between good X and good Y is positive. Other things being equal, if the price of X rises: A) quantity of Y demanded decreases. B) quantity of Y demanded increases. C) a consumer spends more on good Y than on good X. D) a consumer spends more on good X than on good Y. Answer: B Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

25) If an increase in the price of good X results in a decrease in the quantity of Y demanded: A) good X and good Y are substitutes. B) good X and good Y are complements. C) the cross-price elasticity of demand for good Y is positive. D) There is not sufficient information to determine the relationship between good X and good Y. Answer: B Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 26) If a decrease in the price of good X results in a decrease in the quantity of Y demanded: A) good X and good Y are substitutes. B) good X and good Y are complements. C) the cross-price elasticity of demand for good Y is negative. D) There is not sufficient information to determine the relationship between good X and good Y. Answer: A Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both Recall the Application about finding estimates of elasticities of demand to answer the following question(s). 27) According to the Application, ________ has a website that provides estimates of demand elasticities for hundreds of food products for dozens of countries. A) the U.S. Department of Agriculture B) the U.S. State Department C) the United Nations D) the World Bank Answer: A Diff: 2 Topic: Application 4, I Can Find That Elasticity in Four Clicks! Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

28) According to the Application, the regular price elasticities of demand found at www.ers.usda.gov are reported as: A) positive numbers. B) negative numbers. C) dollars per unit of foreign currency. D) foreign currency units per dollar. Answer: B Diff: 2 Topic: Application 4, I Can Find That Elasticity in Four Clicks! Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 29) Suppose that income increases and the quantity demanded of guitars stays the same. This means that the income elasticity of guitars is unit elastic. Answer: FALSE Diff: 2 Topic: Income Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 30) Inferior goods are substandard. Answer: FALSE Diff: 2 Topic: Income Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 31) If the cross-price elasticity of salt and pepper is positive the goods must be complements. Answer: FALSE Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

32) The Department of Justice could use the cross-price elasticity between products sold at Staples and Office Max to show that the firms are very similar. Answer: TRUE Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 33) If peanut butter and jelly are complements, then an increase in the price of peanut butter will reduce the demand for jelly. Answer: TRUE Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 34) If butter and margarine are substitutes, then an increase in the price of butter will reduce the demand for margarine. Answer: FALSE Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 35) For most goods and services, income elasticity of demand tends to be smaller in the short run than in the long run. However, a recent study shows that the demand for a durable good such as automobiles tends to be more income-elastic in the short run than in the long run. Explain why. Answer: Since durable goods are typically consumed over a relatively longer period of time, consumers have a higher degree of flexibility to replace old goods with new ones. Demand for automobiles is a good example. Suppose that consumers' income falls due to a recession. Considering that the purchase of an automobile represents a large share of a consumer's budget, the consumer may put off the purchase of a new automobile until next year. In the long run, automobiles will eventually break down and new purchases will be made. Diff: 3 Topic: Income Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

36) How do you interpret the value of income elasticity? Answer: If income elasticity is negative, a good is inferior, while if income elasticity is positive a good is normal. Diff: 2 Topic: Income Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 37) How do you interpret the value of cross-price elasticity? Answer: If cross-price elasticity is negative, the two goods are complements, while if cross-price elasticity is positive, the two goods are substitutes. Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 38) Put the following products in order from lowest to highest based on their cross-price elasticity of demand with peanut butter: bread, bologna, floppy disks. Justify your answer. Answer: Bread has a negative cross-price elasticity because bread and peanut butter are complements. Floppy disks have a zero cross-price elasticity because they are unrelated to peanut butter. Bologna will have a positive cross-price elasticity because it is a substitute for peanut butter. Diff: 2 Topic: Cross-Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 4.5 The Price Elasticity of Supply 1) The price elasticity of supply is a measure of the responsiveness of: A) the change in price to the quantity supplied. B) the suppliers with respect to the change in price. C) the quantity supplied to the change in income. D) the quantity supplied to the changes in price. Answer: D Diff: 1 Topic: The Price Elasticity of Supply Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 70 Copyright © 2020 Pearson Education, Inc.

2) The price elasticity of supply is calculated by: A) dividing the percentage change in quantity supplied by the price. B) dividing the percentage change in income by the percentage quantity supplied. C) dividing the percentage change in price by the percentage quantity supplied. D) dividing the percentage change in quantity supplied by the percentage change in price. Answer: D Diff: 1 Topic: The Price Elasticity of Supply Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 3) Suppose that in a month the price of movie rentals increases from $2 to $2.20. At the same time, the quantity of movie rentals supplied increases from 100 to 110. The price elasticity of supply for movie rentals (calculated using the initial value formula) is: A) 0.02. B) 0.2. C) 1. D) 50. Answer: C Diff: 2 Topic: The Price Elasticity of Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 4) Suppose that in a month the price of movie rentals increases from $2 to $2.20. At the same time, the quantity of movie rentals supplied increases from 100 to 110. The price elasticity of supply for movie rentals (calculated using the initial value formula) is: A) negative. B) inelastic. C) unit elastic. D) elastic. Answer: C Diff: 2 Topic: The Price Elasticity of Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

5) Suppose that in a month the price of a liter of soda increases from $1 to $1.50. At the same time, the quantity of liters of soda supplied increases from 200 to 210. The price elasticity of supply for liters of soda (calculated using the initial value formula) is: A) 0.1. B) 0.5. C) 10. D) 20. Answer: A Diff: 2 Topic: The Price Elasticity of Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 6) Suppose that in a month the price of a liter of soda increases from $1 to $1.50. At the same time, the quantity of liters of soda supplied increases from 200 to 210. The price elasticity of supply for liters of soda (calculated using the initial value formula) is: A) negative. B) inelastic. C) unit elastic. D) elastic. Answer: B Diff: 2 Topic: The Price Elasticity of Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 7) If the price elasticity of supply is 3, supply is: A) unaffected by price changes. B) inelastic. C) unit elastic. D) elastic. Answer: D Diff: 1 Topic: The Price Elasticity of Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

8) If the price elasticity of supply is 0.3, supply is: A) unaffected by price changes. B) inelastic. C) unit elastic. D) elastic. Answer: B Diff: 1 Topic: The Price Elasticity of Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 9) If the price elasticity of supply is 1.3, supply is: A) unaffected by price changes. B) inelastic. C) unit elastic. D) elastic. Answer: D Diff: 1 Topic: The Price Elasticity of Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 10) If the price elasticity of supply is 1, supply is: A) unaffected by price changes. B) inelastic. C) unit elastic. D) elastic. Answer: C Diff: 1 Topic: The Price Elasticity of Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

11) If the price elasticity of supply is elastic, which of the following could be a possible value of the elasticity? A) 3 B) 1 C) 0.3 D) 0 Answer: A Diff: 1 Topic: The Price Elasticity of Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 12) If the price elasticity of supply is inelastic, which of the following could be a possible value of the elasticity? A) 3 B) 1 C) 0.3 D) -0.3 Answer: C Diff: 1 Topic: The Price Elasticity of Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 13) If the percentage change in price is 2 and the percentage change in quantity supplied is 10, supply is: A) unaffected by price changes. B) inelastic. C) unit elastic. D) elastic. Answer: D Diff: 2 Topic: The Price Elasticity of Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

14) If the percentage change in price is 20 and the percentage change in quantity supplied is 10, supply is: A) unaffected by price changes. B) inelastic. C) unit elastic. D) elastic. Answer: B Diff: 2 Topic: The Price Elasticity of Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 15) If the percentage change in price is 10 and the percentage change in quantity supplied is 10, supply is: A) unaffected by price changes. B) inelastic. C) unit elastic. D) elastic. Answer: C Diff: 2 Topic: The Price Elasticity of Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

Figure 4.3 16) In Figure 4.3, the most elastic supply curve: A) is Supply1. B) is Supply2. C) is Supply3. D) cannot be determined. Answer: C Diff: 2 Topic: The Price Elasticity of Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

17) In Figure 4.3, the most inelastic supply curve: A) is Supply1. B) is Supply2. C) is Supply3. D) cannot be determined. Answer: A Diff: 2 Topic: The Price Elasticity of Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 18) The supply curve for gasoline will be more elastic in: A) the short run because of the principle of diminishing returns. B) the long run because of the principle of diminishing returns. C) the short run because firms have more time in which to respond to the price change. D) the long run because firms have more time in which to respond to the price change. Answer: D Diff: 1 Topic: What Determines the Price Elasticity of Supply? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 19) The quantity supplied of bagels is 100 at the unit price $1. Suppose the price elasticity of supply by the initial value method is 1.5, and you would like to induce sellers to increase the quantity of bagels supplied to 130. Then the new price for bagels must be: A) $11. B) $10.20. C) $1.20. D) $1.10. Answer: C Diff: 3 Topic: What Determines the Price Elasticity of Supply? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

20) The quantity supplied of hot dogs is 200 at the unit price of $3.50. Suppose the price elasticity of supply by the initial value method is 2, and you would like to induce sellers to increase the quantity of hot dogs supplied to 220. Then new price must be: A) $1.5. B) $2. C) $2.5. D) $3. Answer: B Diff: 3 Topic: What Determines the Price Elasticity of Supply? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 21) The supply curve will be more inelastic when: A) inputs to production are scarce. B) firms' response to a price change is limited by the limited capacity of their production facilities. C) a good has many substitutes. D) the firm is experiencing diminishing returns to a variable input. Answer: B Diff: 3 Topic: What Determines the Price Elasticity of Supply? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 22) Which of the following statements is correct with respect to price elasticity of supply? A) The price elasticity of supply tends to be greater as new firms can easily enter the market. B) The price elasticity of supply tends to be greater as expanding existing production facilities is less costly. C) The price elasticity of supply tends to be smaller as firms have limited production facilities. D) All of the above are correct. Answer: D Diff: 2 Topic: What Determines the Price Elasticity of Supply? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

23) If the supply curve is a vertical line, it means that: A) regardless of price, the quantity supplied is a constant amount. B) regardless of quantity, the price is a constant amount. C) the good is inferior. D) the good has many substitutes. Answer: A Diff: 1 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 24) If, regardless of price, the quantity supplied is a constant amount, then the supply curve is: A) horizontal. B) vertical. C) upward sloping. D) downward sloping. Answer: B Diff: 2 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 25) If the quantity supplied is infinitely responsive to any change in price, the supply curve is: A) upward sloping. B) downward sloping. C) horizontal. D) vertical. Answer: C Diff: 2 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

26) In the case of perfectly elastic supply, the supply curve is: A) upward sloping. B) downward sloping. C) vertical. D) horizontal. Answer: D Diff: 1 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 27) If supply is perfectly inelastic, the price elasticity of supply is equal to: A) 1. B) 0. C) infinity. D) a negative number between 0 and infinity. Answer: B Diff: 1 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 28) If supply is perfectly elastic, the price elasticity of supply is equal to: A) 1. B) 0. C) infinity. D) a positive number between 0 and infinity. Answer: C Diff: 1 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

29) If the price elasticity of supply is equal to infinity and the price was to fall, the quantity supplied would: A) decrease slightly. B) fall to zero. C) not change. D) increase. Answer: B Diff: 2 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 30) If the price elasticity of supply is equal to zero and the price was to rise, the quantity supplied would: A) decrease slightly. B) fall to zero. C) not change. D) increase. Answer: C Diff: 2 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

Figure 4.4 31) In Figure 4.4, supply is perfectly inelastic in graph: A) A. B) B. C) C. D) D. Answer: A Diff: 2 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 32) In Figure 4.4, supply elasticity is zero in graph: A) A. B) B. C) C. D) D. Answer: A Diff: 2 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

33) In Figure 4.4, supply is perfectly elastic in graph: A) A. B) B. C) C. D) D. Answer: B Diff: 2 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 34) In Figure 4.4, supply elasticity is infinite in graph: A) A. B) B. C) C. D) D. Answer: B Diff: 2 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 35) Suppose that the price elasticity of supply is 0.8 and the price increases by 10%. We would predict: A) an 8% increase in quantity supplied. B) a 12.5% increase in quantity supplied. C) a 0.8% increase in quantity supplied. D) a 1.25% increase in quantity supplied. Answer: A Diff: 2 Topic: Predicting Changes in Quantity Supplied Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

36) Suppose that the price elasticity of supply is 1.25 and the quantity supplied increases by 10%. Other things being equal, the percentage change in the price should be: A) a 0.8% increase in the price. B) an 8% increase in the price. C) a 1.25% increase in the price. D) a 12.5% increase in the price. Answer: B Diff: 2 Topic: Predicting Changes in Quantity Supplied Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 37) Suppose that the price elasticity of supply is 0.5 and the price increases by 4%. We would predict: A) an 8% increase in quantity supplied. B) a 2% increase in quantity supplied. C) a 0.8% increase in quantity supplied. D) a 0.2% increase in quantity supplied. Answer: B Diff: 2 Topic: Predicting Changes in Quantity Supplied Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 38) Suppose that the price elasticity of supply is one and the quantity supplied increases by 5%. Other things being equal, the percentage change in the price should be: A) a 0.5% increase in the price. B) a 5% increase in the price. C) a 0.2% increase in the price. D) a 2% increase in the price. Answer: B Diff: 2 Topic: Predicting Changes in Quantity Supplied Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

Recall the Application about the short-run and long-run elasticity of supply of coffee to answer the following question(s). 39) Recall the Application. If the price of coffee beans increases by 20 percent and stays there for a year, the quantity of coffee supplied will ________ by a relatively ________ amount. A) increase; large B) increase; small C) decrease; large D) decrease; small Answer: B Diff: 2 Topic: Application 5, The Short-Run and Long-Run Elasticity of Supply of Coffee Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 40) Recall the Application. In the long run, the supply curve for coffee is ________ and the elasticity of supply is ________ than in the short run. A) steeper; larger B) steeper; smaller C) flatter; larger D) flatter; smaller Answer: C Diff: 2 Topic: Application 5, The Short-Run and Long-Run Elasticity of Supply of Coffee Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 41) Recall the Application. What is the reason identified in the Application regarding why the short-run elasticity of supply of coffee is more inelastic than in the long run? A) It takes at least 3 years for a newly planted coffee bush to yield marketable beans. B) Coffee production is capital intensive, and the farmers cannot afford the additional capital. C) Fertilizers are expensive in countries that produce coffee. D) The government controls the supply of coffee in those countries. Answer: A Diff: 2 Topic: Application 5, The Short-Run and Long-Run Elasticity of Supply of Coffee Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

42) If a 10% increase in price increases the quantity supplied by 15%, the price elasticity of supply is 0.67. Answer: FALSE Diff: 2 Topic: The Price Elasticity of Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 43) Suppose that the price elasticity of supply of cheese is 0.80. If the price of cheese rises by 20%, the quantity supplied will increase by 16%. Answer: TRUE Diff: 2 Topic: The Price Elasticity of Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 44) If the quantity supplied is infinitely responsive to any change in price, the supply curve has a price elasticity of supply equal to infinity. Answer: TRUE Diff: 2 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 45) If the quantity supplied is perfectly inelastic then quantity does not respond to price changes. Answer: TRUE Diff: 2 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 46) A vertical supply curve is infinitely elastic. Answer: FALSE Diff: 2 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 86 Copyright © 2020 Pearson Education, Inc.

47) Suppose that last year the Tulane University men's basketball team, the Green Wave, won the NCAA tournament. As a result, attendance at Green Wave basketball games has increased dramatically. Explain the difference between the supply of seats for Green Wave games in the short-run and in the long-run. How would you describe the elasticity of supply of seats in the long-run? Answer: In the short-run, the supply of seats in the arena is perfectly inelastic. There is no way to expand the arena during a basketball season or to play more games. In the long-run, however, if demand stays very high the school might decide to increase the number of seats in the arena. Thus supply elasticity is more elastic in the long-run than in the short-run. Diff: 2 Topic: The Role of Time: Short-Run versus Long-Run Supply Elasticity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 48) One of the business revolutions of the 1980s is "just in time" inventory, a system where businesses estimate their requirements for raw materials and keep no more on hand than is necessary to complete that period's production. What affect did the change to "just in time" inventory have on short-term supply elasticities? Answer: "Just in time" inventory made supply more inelastic since there are not enough inputs to production on hand to allow quick increases in the rate of production. Diff: 2 Topic: The Role of Time: Short-Run versus Long-Run Supply Elasticity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

49) Draw the supply curve for a good whose price elasticity of supply is equal to zero. Be sure to label both axes. Answer:

The supply curve in the graph is a vertical line, indicating that the quantity of the good supplied will not change no matter what happens to its price. In terms of the calculation of the price elasticity of supply, the change in quantity is zero and so therefore is the calculated value of the price elasticity. Diff: 2 Topic: Extreme Cases: Perfectly Inelastic Supply and Perfectly Elastic Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 4.6 Using Elasticities to Predict Changes in Prices 1) Under which of the following conditions will an increase in demand cause a relatively small increase in price? A) If the shift of the demand curve is relatively small, the gap between the new demand and the old supply will be relatively small. B) If there is highly elastic demand, consumers are very responsive to changes in price. C) If there is highly elastic supply, producers are very responsive to changes in price. D) All of the above. Answer: D Diff: 2 Topic: The Price Effects of a Change in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

2) How is the price-change formula to predict the change in the equilibrium price resulting from a change in demand calculated? A) by dividing the percentage change in price by the sum of the price elasticities of supply and demand B) by dividing the percentage change in demand by the sum of the price elasticities of supply and demand C) by dividing the percentage change in supply by the sum of the price elasticities of supply and demand D) by dividing the percentage change in income by the sum of the price elasticities of supply and demand Answer: B Diff: 2 Topic: The Price Effects of a Change in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 3) Suppose that the percentage change in demand is 10%, the price elasticity of supply is 2, and the percentage change in the equilibrium price is 3.33%. What is the price elasticity of demand? A) 0 B) 1 C) 2 D) 3 Answer: B Diff: 3 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 4) Suppose that the percentage change in demand is 20%, the price elasticity of demand is 3, and the price elasticity of supply is 2. What is the percentage change in the equilibrium price? A) 4% B) 5% C) 15% D) 20% Answer: A Diff: 3 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

5) Suppose that the percentage change in demand is -20%, the price elasticity of demand is 3, and the price elasticity of supply is 2. What is the percentage change in the equilibrium price? A) -4% B) 4% C) 100% D) -100% Answer: A Diff: 3 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 6) Suppose that the percentage change in demand is -10%, the price elasticity of demand is 2, and the price elasticity of supply is 2. The equilibrium price will: A) decrease by 2.5 percent. B) increase by 40 percent. C) increase by 2.5 percent. D) decrease by 40 percent. Answer: A Diff: 3 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 7) Suppose that the percentage change in demand is 10%, the price elasticity of demand is 2, and the price elasticity of supply is 2. The equilibrium price will: A) decrease by 2.5 percent. B) increase by 40 percent. C) increase by 2.5 percent. D) decrease by 40 percent. Answer: C Diff: 3 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

8) Suppose that the percentage change in demand is 20%, the price elasticity of demand is 3, and the percentage change in the equilibrium price is 4%. What is the price elasticity of supply? A) 0 B) 2 C) 4 D) 5 Answer: B Diff: 3 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 9) Suppose that the percentage change in demand is 20%, the price elasticity of supply is 2, and the percentage change in the equilibrium price is 4%. What is the price elasticity of demand? A) 0 B) 1 C) 2 D) 3 Answer: D Diff: 3 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 10) Suppose that the percentage change in supply is 20%, the price elasticity of demand is 3, and the price elasticity of supply is 2. What is the percentage change in the equilibrium price? A) 4% B) 5% C) 15% D) 20% Answer: A Diff: 2 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

11) Suppose that the percentage change in supply is 50%, the price elasticity of demand is 4, and the price elasticity of supply is 1. The equilibrium price will: A) decrease by 10 percent. B) increase by 55 percent. C) increase by 10 percent. D) decrease by 55 percent. Answer: A Diff: 3 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 12) Suppose that the percentage change in supply is -50%, the price elasticity of demand is 4, and the price elasticity of supply is 1. The equilibrium price will: A) decrease by 10 percent. B) increase by 55 percent. C) increase by 10 percent. D) decrease by 55 percent. Answer: C Diff: 3 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 13) Suppose that the percentage change in supply is 20%, the price elasticity of supply is 2, and the percentage change in the equilibrium price is 4%. What is the price elasticity of demand? A) 0 B) 1 C) 2 D) 3 Answer: D Diff: 2 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

14) An increase in demand will cause a relatively small increase in price when: A) the increase in demand is small. B) demand is highly elastic. C) supply is highly elastic. D) all of the above Answer: D Diff: 2 Topic: The Price Effects of a Change in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 15) An increase in demand will cause a relatively small increase in price when: A) the increase in demand is large. B) demand is highly inelastic. C) supply is highly elastic. D) all of the above Answer: C Diff: 2 Topic: The Price Effects of a Change in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 16) An increase in demand will cause a relatively small increase in price when: A) the increase in demand is large. B) demand is highly elastic. C) supply is highly inelastic. D) all of the above Answer: B Diff: 2 Topic: The Price Effects of a Change in Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

17) Suppose that the percentage change in demand is 10%, the price elasticity of demand is 1, and the percentage change in the equilibrium price is 3.33%. What is the price elasticity of supply? A) 0 B) 1 C) 2 D) 3 Answer: C Diff: 3 Topic: The Price Effects of a Change in Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 18) Suppose that the percentage change in supply is 20%, the price elasticity of demand is 3, and the percentage change in the equilibrium price is 4%. What is the price elasticity of supply? A) 0 B) 2 C) 4 D) 5 Answer: B Diff: 3 Topic: The Price Effects of a Change in Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both Recall the Application about how changes in supply affect the price of gasoline to answer the following question(s). 19) Recall the Application. Suppose the price elasticity of demand for gasoline is 0.20 and the price elasticity of supply for gasoline is 0.55. If supply decreases by 50 percent, the equilibrium price will increase by: A) 67 percent. B) 70 percent. C) 143 percent. D) 150 percent. Answer: A Diff: 3 Topic: Application 6, A Broken Pipeline and the Price of Gasoline Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 94 Copyright © 2020 Pearson Education, Inc.

20) Recall the Application. Suppose the price elasticity of demand for gasoline is 0.20 and the price elasticity of supply for gasoline is 0.55. If supply increases by 20 percent, the equilibrium price will decrease by: A) 27 percent. B) 57 percent. C) 175 percent. D) 375 percent. Answer: A Diff: 3 Topic: Application 6, A Broken Pipeline and the Price of Gasoline Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 21) If the demand for a product decreases by 16 percent, the supply elasticity is 1.2, and demand elasticity is 0.80, then the equilibrium price will decrease by 6 percent. Answer: FALSE Diff: 2 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 22) If demand increases, the increase in price will be smaller if demand and supply are highly inelastic. Answer: FALSE Diff: 2 Topic: The Price Effects of a Change in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 23) If supply decreases, the increase in price will be smaller if demand and supply are highly elastic. Answer: TRUE Diff: 2 Topic: The Price Effects of a Change in Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

24) Given percentage change in supply and the price elasticity of supply, percentage change in equilibrium price is zero if demand curve is perfectly inelastic Answer: FALSE Diff: 2 Topic: The Price Effects of a Change in Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 25) What will make a change in demand cause a large change in price? Answer: A large change in demand and highly inelastic supply and demand Diff: 2 Topic: The Price Effects of a Change in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 26) Given percentage change in supply and the price elasticity of supply, explain how percentage change in equilibrium price varies as the price elasticity of demand changes from 0 to infinity. Answer: The price-change formula to predict the change in equilibrium price resulting from a change in supply is . Consider two extreme cases. If Ed = 0 (demand is perfectly inelastic), percentage change in equilibrium price is just the negative value of the ratio of percentage change in supply to the price elasticity of supply. If Ed = ∞, percentage change in equilibrium price approaches zero. Diff: 2 Topic: The Price Effects of a Change in Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both 27) What will make a change in supply cause a small change in price? Answer: A small change in supply and highly elastic supply and demand Diff: 2 Topic: The Price Effects of a Change in Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 5 Production Technology and Cost 5.1 Economic Cost and Economic Profit 1) In the short run, ________ factors of production are fixed, while in the long run, ________ of them are. A) some; none B) all; none C) no; at least some D) all; at least some Answer: A Diff: 1 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 2) Which of the following is a short-run adjustment? A) Three new firms enter the computer chip industry. B) A firm hires six new workers. C) The number of farms in Kansas increases by 10%. D) A firm opens two new plants. Answer: B Diff: 2 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 3) Which of the following is a long-run adjustment? A) A firm lays off two workers. B) Two firms exit the asbestos removal industry. C) A manufacturer increases its purchase of raw materials. D) A farmer buys twice the usual amount of herbicide. Answer: B Diff: 2 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms

4) Which of the following is a long-run adjustment? A) A firm hires two new workers. B) The number of professional baseball teams increases by two. C) GM buys more steel for its auto plants in Michigan. D) A farmer buys twice the usual amount of fertilizer. Answer: B Diff: 2 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 5) In the short run: A) firms have the ability to enter or exit the industry. B) firms are able to alter some, but not all, of their factors of production. C) firms are unable to adjust their output choices. D) None of the above are correct. Answer: B Diff: 1 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 6) In the long run: A) firms have the ability to enter or exit the industry. B) firms are able to alter some, but not all, of their resources. C) firms are unable to adjust their output choices. D) None of the above are correct. Answer: A Diff: 1 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 7) In the long run: A) all factors of production are fixed. B) all factors of production are variable. C) some factors of production are variable, while at least one factor of production is fixed. D) None of the above are correct. Answer: B Diff: 1 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 2 Copyright © 2020 Pearson Education, Inc.

8) In the short run: A) all factors of production are fixed. B) all factors of production are variable. C) some factors of production are variable, while at least one factor of production is fixed. D) None of the above are correct. Answer: C Diff: 1 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 9) ________ are costs that do not require a monetary payment. A) Implicit costs B) Explicit costs C) Accounting costs D) All opportunity costs Answer: A Diff: 1 Topic: Economic Cost and Economic Profit Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 10) ________ are costs that require a monetary payment. A) Implicit costs B) Explicit costs C) Accounting costs D) Both B and C are correct. Answer: D Diff: 1 Topic: Economic Cost and Economic Profit Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

11) Which of the following are included in calculating economic costs? A) implicit costs B) explicit costs C) accounting costs D) All of the above are correct. Answer: D Diff: 1 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 12) Accountants include ________ costs as part of a firm's costs, while economists include ________ costs. A) explicit; no explicit B) implicit; no implicit C) explicit and implicit; implicit D) explicit; explicit and implicit Answer: D Diff: 1 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 13) Which of the following statements is INCORRECT? A) A firm's total economic cost is at least as large as the firm's total accounting cost. B) A firm's total economic cost includes both explicit cost and implicit cost of the firm. C) A firm's implicit cost is the opportunity cost of non-purchased inputs. D) A firm's total accounting cost is at least as large as the firm's implicit cost. Answer: D Diff: 2 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

14) Joe runs a restaurant. He pays his employees $200,000 per year. His ingredients cost him $50,000 per year. Prior to running his restaurant, Joe was a lawyer earning $150,000 per year. What would economists say is Joe's cost of running the restaurant? A) $150,000 B) $200,000 C) $250,000 D) $400,000 Answer: D Diff: 2 Topic: Economic Cost and Economic Profit Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 15) You are a student at a university. You pay $8,000 per year in tuition, $5,000 per year in living expenses, and $1,000 per year for books. Were you not in school, you could earn $15,000 per year and you would not live with your parents. What is your economic cost of a year in college? A) $9,000 B) $15,000 C) $24,000 D) $29,000 Answer: C Diff: 2 Topic: Economic Cost and Economic Profit Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 16) Jane is a student at a university. She pays $10,000 per year in tuition, $4,000 per year in living expenses, and $800 per year for books. Were she not in school, she could earn $20,000 per year working as a bookkeeper and she would not live with her parents. What is her economic cost of a year in college? A) $10,000 B) $13,000 C) $30,800 D) $34,800 Answer: C Diff: 2 Topic: Economic Cost and Economic Profit Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 5 Copyright © 2020 Pearson Education, Inc.

17) Which of the following is an example of something that economists would consider a cost but accountants would not? A) the cost of materials and supplies purchased by a firm B) the salary that the firm actually pays to the firm's owner C) the interest income foregone by the firm's owner because the owner invested funds into the firm D) the cost of advertising Answer: C Diff: 2 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 18) Which of the following is an example of something that economists would consider a cost but accountants would not? A) the wages paid to employees of a firm B) the wages that the owner of a firm could have earned in some alternative job C) rent paid to a business's landlord D) the cost of leather used in the production of footballs Answer: B Diff: 2 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 19) An example of an implicit cost is: A) the wages paid to workers. B) the interest on business loans. C) the imputed rent on a store owned by the firm. D) the materials used to produce the product. Answer: C Diff: 2 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms

Recall the Application about the opportunity cost of an entrepreneur to answer the following question(s). 20) According to this Application, which of the following is currently a popular way to earn an income? A) renting out your home through Airbnb B) selling your kidneys C) driving your car through Uber D) cleaning other people's homes Answer: A Diff: 1 Topic: Application 1, Opportunity Cost and Entrepreneurship Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 21) Recall the Application. Which of the following would be included as an opportunity cost of renting your house through Airbnb? A) opportunity cost of time sending emails B) opportunity cost of cleaning the house C) fees to Airbnb D) All of the above are part of the costs. Answer: D Diff: 1 Topic: Application 1, Opportunity Cost and Entrepreneurship Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 22) Economic cost differs from accounting cost because accountants do not consider implicit costs. Answer: TRUE Diff: 1 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 23) Economic profit is total revenue less economic costs. Answer: TRUE Diff: 1 Topic: Economic Cost and Economic Profit Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 7 Copyright © 2020 Pearson Education, Inc.

24) Since all costs are positive, then economic profit would always be smaller than accounting profit. Answer: TRUE Diff: 1 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 25) Economic cost is always less than accounting cost. Answer: FALSE Diff: 2 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 26) Implicit cost is the opportunity cost of the inputs that do not require monetary payment. Answer: TRUE Diff: 1 Topic: Economic Cost and Economic Profit Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 27) The interest on a business loan is an implicit cost. Answer: FALSE Diff: 1 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 28) What are the differences between economic cost and accounting cost? Answer: Accounting cost is explicit cost, while economic cost includes both explicit and implicit cost. Diff: 2 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms

29) What is economic profit? Answer: Total revenue - economic cost. Diff: 2 Topic: Economic Cost and Economic Profit Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 30) What are explicit cost and implicit cost? Answer: Explicit cost is the actual monetary payments for inputs while implicit cost is the opportunity cost of the inputs that do not require a monetary payment. Diff: 2 Topic: Economic Cost and Economic Profit Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 31) Can a firm's accounting profit be smaller than the economic profit? Assume that all costs are positive. Answer: No. If all costs, implicit and explicit, are positive, then accounting profit will almost always be larger than economic profit because economic profit equals accounting profit minus implicit costs. Accounting profit equals economic profit if the firm incurs no implicit cost. Diff: 2 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 32) Explain the difference between the short run and the long run. Answer: The short run is the period of time over which at least one factor of production is fixed. In the long run, firms are flexible to adjust all factors of production, and to enter or exit the industry. Diff: 1 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms

33) Explain the relationship between average fixed cost and marginal cost. Answer: By definition, the total fixed cost does not vary with the output level. On the other hand, the marginal cost is the change in total cost as an additional output is produced. With a fixed production facility, any change in total production cost comes from a change in total variable cost because total fixed cost does not change. Thus, there is no relationship between the average fixed cost and the marginal cost. Diff: 2 Topic: Economic Cost and Economic Profit Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 34) Explain the difference between fixed costs in the short run and in the long run. Answer: In the short run, at least one factor of production is fixed, so the firm must pay for this factor of production, and that cost is the firm's fixed cost. In the long run, there are no fixed factors of production, and consequently, there are no fixed costs. Diff: 2 Topic: Economic Cost and Economic Profit Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms 5.2 A Firm with a Fixed Production Facility: Short-Run Costs 1) Diminishing marginal returns implies that: A) marginal costs are decreasing. B) marginal costs are increasing. C) marginal costs are constant. D) marginal costs may be increasing or decreasing. Answer: B Diff: 1 Topic: Production and Marginal Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

2) Diminishing marginal returns occurs: A) only in the short run. B) both in the short run and the long run. C) only in the long run. D) only in time periods that are neither long run nor short run. Answer: A Diff: 1 Topic: Production and Marginal Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 3) Diminishing marginal returns implies that: A) marginal product is decreasing. B) marginal product is increasing. C) marginal product is constant. D) marginal product may be increasing or decreasing. Answer: A Diff: 1 Topic: Production and Marginal Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 4) A firm experiences diminishing marginal returns because: A) all factors of production are variable. B) people "learn by doing." C) all factors of production are fixed. D) at least one factor of production is fixed. Answer: D Diff: 1 Topic: Production and Marginal Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

5) In the short run, at least one factor of production is fixed. This implies that beyond some level of output a firm will: A) "learn by doing." B) experience diminishing marginal returns. C) experience increasing marginal returns. D) have a U-shaped long-run average cost curve. Answer: B Diff: 2 Topic: Production and Marginal Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 6) Which of the following is NOT true when the firm experiences diminishing marginal product? A) The total product is decreasing. B) The marginal product of the previous worker is higher than the current worker. C) The firm is operating in the short run. D) The firm's total cost is increasing. Answer: A Diff: 2 Topic: Production and Marginal Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 7) Diminishing marginal returns implies that firms: A) require fewer and fewer workers to produce each additional unit of output. B) require more and more workers to produce each additional unit of output. C) get decreasing amounts of revenue for each unit of output they produce. D) get increasing amounts of revenue for each unit of output they produce. Answer: B Diff: 1 Topic: Production and Marginal Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

8) When at least one factor of production is fixed, firms require more and more workers to produce each additional unit of output. This describes: A) increasing marginal returns. B) diminishing marginal returns. C) learning by doing. D) short-run adjustments. Answer: B Diff: 1 Topic: Production and Marginal Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

Number of workers 0 1 2 3 4

Units of output 0 10 30 44 55

Table 5.1 9) Refer to Table 5.1, which gives a firm's production function. Assume that all non-labor inputs are fixed. Diminishing marginal returns set in with the addition of the: A) third worker. B) fourth worker. C) fifth worker. D) sixth worker. Answer: A Diff: 2 Topic: Production and Marginal Product Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

10) Refer to Table 5.1, which gives a firm's production function. Assume that all non-labor inputs are fixed. The marginal product of the fourth worker is: A) 12 units. B) 11 units. C) 5 units. D) 0 units. Answer: B Diff: 2 Topic: Production and Marginal Product Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 11) Refer to Table 5.1, which gives a firm's production function. Assume that all non-labor inputs are fixed. Marginal product is maximized when the firm hires: A) 2 workers. B) 3 workers. C) 4 workers. D) 5 workers. Answer: A Diff: 2 Topic: Production and Marginal Product Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

Number of workers 0 1 2 3 4 5

Units of output 0 25 55 95 125 150

Table 5.2 12) Refer to Table 5.2, which gives a firm's production function. Assume that all non-labor inputs are fixed. Diminishing returns set in with the addition of the: A) third worker. B) fourth worker. C) fifth worker. D) sixth worker. Answer: B Diff: 2 Topic: Production and Marginal Product Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 13) Refer to Table 5.2, which gives a firm's production function. Assume that all non-labor inputs are fixed. The marginal product is maximized when the firm hires: A) 2 workers. B) 3 workers. C) 4 workers. D) 5 workers. Answer: B Diff: 2 Topic: Production and Marginal Product Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

14) Refer to Table 5.2, which gives a firm's production function. Assume that all non-labor inputs are fixed. The marginal product of the fifth worker is: A) 0 units. B) 10 units. C) 25 units. D) 30 units. Answer: C Diff: 1 Topic: Production and Marginal Product Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 15) Refer to Table 5.2, which gives a firm's production function. Assume that all non-labor inputs are fixed. The marginal product of the fourth worker is: A) 0 units. B) 10 units. C) 25 units. D) 30 units. Answer: D Diff: 1 Topic: Production and Marginal Product Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 16) Marginal product in the short run: A) increases at all levels of production. B) diminishes at all levels of production. C) may initially increase, then eventually decrease. D) may initially decrease, then eventually increase. Answer: C Diff: 1 Topic: Production and Marginal Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

17) Marginal product is defined as the change in ________ resulting from a one-unit increase in ________. A) total product; input B) total product; output C) output; total product D) total cost; output Answer: A Diff: 1 Topic: Production and Marginal Product Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 18) In the short run, the firm's total cost equals: A) the total fixed costs + the total variable costs. B) the average fixed costs + average variable costs. C) the average fixed cost + the marginal cost. D) the total variable costs only. Answer: A Diff: 1 Topic: Short-Run Total Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 19) ________ is a cost that is independent of the quantity produced by the firm and is incurred by the firm in the short run. A) Fixed cost B) Economic cost C) Variable cost D) Average total cost Answer: A Diff: 1 Topic: Short-Run Total Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

20) ________ is a cost that changes with the quantity produced by the firm and is incurred by the firm in the short run. A) Fixed cost B) Economic cost C) Variable cost D) Average total cost Answer: C Diff: 1 Topic: Short-Run Total Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

Figure 5.1 21) One can tell that Figure 5.1 shows short run costs because: A) the slope of total costs and variable costs are the same. B) costs are rising. C) total costs are positive when output is zero implying fixed costs. D) all of the above. Answer: C Diff: 2 Topic: Short-Run Total Cost, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 18 Copyright © 2020 Pearson Education, Inc.

22) In Figure 5.1, the difference between total costs and variable cost is: A) average total cost. B) fixed cost. C) total costs are positive when output is zero implying fixed costs. D) all of the above. Answer: B Diff: 2 Topic: Short-Run Total Cost, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 23) Average variable cost is defined as: A) total variable cost divided by quantity. B) quantity divided by total variable cost. C) the change in total variable cost divided by the change in quantity. D) the change in quantity divided by the change in total variable cost. Answer: A Diff: 1 Topic: Short-Run Average Costs Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 24) Average fixed cost is defined as: A) total variable cost divided by quantity. B) quantity divided by total variable cost. C) the change in total variable cost divided by the change in quantity. D) total fixed cost divided by quantity. Answer: D Diff: 1 Topic: Short-Run Average Costs Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

25) Average total cost is defined as: A) total variable cost divided by quantity. B) quantity divided by total variable cost. C) the change in total variable cost divided by the change in quantity. D) total cost divided by quantity. Answer: D Diff: 1 Topic: Short-Run Average Costs Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 26) Average total cost equals: A) total fixed cost plus total variable cost. B) average fixed cost minus average variable cost. C) average fixed cost plus average variable cost. D) total cost minus average cost. Answer: C Diff: 1 Topic: Short-Run Average Costs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 27) Average variable cost equals: A) total fixed cost plus total variable cost. B) average total cost minus average fixed cost. C) average total cost plus average fixed cost. D) total cost minus average cost. Answer: B Diff: 1 Topic: Short-Run Average Costs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

28) Mark's Baseballs produces baseballs. Mark's Baseballs has total fixed costs of $500. Mark's average variable cost is $20, and his average total cost is $25. Mark is currently producing: A) 5 baseballs. B) 25 baseballs. C) 100 baseballs. D) a number of baseballs that cannot be determined from the information provided. Answer: C Diff: 3 Topic: Short-Run Average Costs Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

Figure 5.2 29) Refer to Figure 5.2, which shows a family of average cost curves. The average total cost curve is represented by: A) Curve 1. B) Curve 2. C) Curve 3. D) the vertical sum of curve 1 and curve 2. Answer: A Diff: 2 Topic: Short-Run Average Costs, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 21 Copyright © 2020 Pearson Education, Inc.

30) Refer to Figure 5.2, which shows a family of average cost curves. The average variable cost curve is represented by: A) Curve 1. B) Curve 2. C) Curve 3. D) the vertical sum of curve 2 and curve 3. Answer: B Diff: 2 Topic: Short-Run Average Costs, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 31) Refer to Figure 5.2, which shows a family of average cost curves. The average fixed cost curve is represented by: A) Curve 1. B) Curve 2. C) Curve 3. D) the vertical sum of curve 1 and curve 2. Answer: C Diff: 2 Topic: Short-Run Average Costs, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 32) Refer to Figure 5.2, which shows a family of average cost curves. The average total cost at a given level of output is represented by: A) the vertical distance between Curve 1 and Curve 2 at a given level of output. B) the vertical sum of Curve 1 and Curve 2 at a given level of output. C) the vertical sum of Curve 2 and Curve 3 at a given level of output. D) the vertical distance between Curve 2 and Curve 3 at a given level of output. Answer: C Diff: 2 Topic: Short-Run Average Costs, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

33) Refer to Figure 5.2, which shows a family of average cost curves. The average variable cost at a given level of output is represented by: A) the vertical distance between Curve 1 and Curve 3 at a given level of output. B) the vertical distance between Curve 1 and Curve 2 at a given level of output. C) the vertical sum of Curve 1 and Curve 3 at a given level of output. D) the vertical sum of Curve 1 and Curve 2 at a given level of output. Answer: A Diff: 2 Topic: Short-Run Average Costs, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 34) Refer to Figure 5.2, which shows a family of average cost curves. The average fixed cost at a given level of output is represented by: A) the vertical distance between Curve 1 and Curve 2 at a given level of output. B) the vertical distance between Curve 1 and Curve 3 at a given level of output. C) the vertical sum of Curve 1 and Curve 2 at a given level of output. D) the vertical sum of Curve 1 and Curve 3 at a given level of output. Answer: A Diff: 2 Topic: Short-Run Average Costs, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 35) Refer to Figure 5.2, which shows a family of average cost curves. Why does the vertical distance between Curve 1 and Curve 2 decrease as output increases from Q1 to Q2? A) Because average variable cost first decreases, then increases as output increases from Q1 to Q2. B) Because average fixed cost decreases as output increases from Q1 to Q2. C) Because average total cost first decreases, then increases as output increases from Q1 to Q2. D) Because average variable cost increases faster than average fixed cost as output level approaches Q2. Answer: B Diff: 3 Topic: Short-Run Average Costs, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

36) Which of the following is true? A) ATC = AVC - AFC B) TVC/Q = TC/Q + TFC/Q C) ΔTC/ΔQ = ΔAVC/ΔQ D) ΔTC/ΔQ = MC Answer: D Diff: 2 Topic: Short-Run Marginal Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 37) In the short run, the marginal cost of the first unit of output is $20, the marginal cost of producing the second unit of output is $16, and the marginal cost of producing the third unit of output is $12. The firm's total variable cost of producing three units of output is: A) $12. B) $16. C) $20. D) $48. Answer: D Diff: 2 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 38) In the short run, the marginal cost of producing the first unit of output is $50, the marginal cost of the second unit of output is $20, and the marginal cost of producing the third unit of output is $16. The firm's total cost of producing three units of output is: A) $16. B) $48. C) $86. D) cannot be determined from the information provided Answer: D Diff: 2 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

39) In the short run, the marginal cost of the first unit of output is $20, the average variable cost of producing three units of output is $16, and the marginal cost of producing the second unit of output is $16. What is the marginal cost of producing the third unit of output? A) $12 B) $16 C) $20 D) $48 Answer: A Diff: 2 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 40) In the short run, the marginal cost of the first unit of output is $40, the average variable cost of producing three units of output is $32, and the marginal cost of producing the second unit of output is $32. What is the marginal cost of producing the third unit of output? A) $24 B) $32 C) $40 D) $96 Answer: A Diff: 2 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 41) If a firm's total fixed costs are $30, the firm's marginal cost of producing the first unit of output is $30, and the average total cost of producing two units of output is $42, the marginal cost of the second unit of output is: A) $84. B) $54. C) $42. D) $24. Answer: D Diff: 2 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

Number of Cakes 0 1 2 3 4

AVC

FC 50

ATC

30 50 25 155 Table 5.3

42) Table 5.3 presents the cost schedule for Candy's Cakes. If Candy produces zero cake, Candy's total costs are: A) $0. B) $50. C) $100. D) $150. Answer: B Diff: 2 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 43) Table 5.3 presents the cost schedule for Candy's Cakes. If Candy produces one cake, Candy's total variable costs are: A) $0. B) $30. C) $50. D) $80. Answer: B Diff: 2 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

44) Table 5.3 presents the cost schedule for Candy's Cakes. If Candy produces two cakes, Candy's marginal cost is: A) $0. B) $20. C) $25. D) $50. Answer: B Diff: 3 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 45) Table 5.3 presents the cost schedule for Candy's Cakes. If Candy produces three cakes, Candy's marginal costs are: A) $0. B) $25. C) $41.67. D) $75. Answer: B Diff: 3 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

Number of Figs 0 1 2 3 4

AVC

FC 100

ATC 135

80 400 Table 5.4

46) Table 5.4 presents the cost schedule for David's Figs. If David produces zero figs, David's total costs are: A) $0. B) $90. C) $100. D) $130. Answer: C Diff: 2 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 47) Table 5.4 presents the cost schedule for David's Figs. If David produces two figs, David's average variable costs are: A) $80. B) $85. C) $90. D) $170. Answer: B Diff: 2 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

48) Table 5.4 presents the cost schedule for David's Figs. If David produces three figs, David's total variable costs are: A) $0. B) $41.67. C) $80. D) $240. Answer: D Diff: 2 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 49) Table 5.4 presents the cost schedule for David's Figs. If David produces four figs, David's average total costs are: A) $60. B) $75. C) $100. D) $400. Answer: C Diff: 1 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 50) Table 5.4 presents the cost schedule for David's Figs. If David produces two figs, David's marginal costs are: A) $80. B) $90. C) $100. D) $170. Answer: A Diff: 3 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

51) When a firm is experiencing diminishing returns: A) average cost is always increasing. B) average cost is always decreasing. C) marginal costs are always less than average costs. D) none of the above Answer: D Diff: 2 Topic: Short-Run Marginal Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 52) When a firm is experiencing diminishing marginal returns: A) average cost is increasing. B) average cost is decreasing. C) marginal costs are increasing. D) marginal costs are decreasing. Answer: C Diff: 2 Topic: Short-Run Marginal Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 53) When marginal costs are increasing: A) a firm is experiencing diminishing returns. B) average cost is always increasing. C) average cost is always decreasing. D) marginal costs are always greater than average costs. Answer: A Diff: 2 Topic: Short-Run Marginal Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

54) Marginal cost is defined as: A) total variable cost resulting from a one-unit increase in quantity. B) quantity resulting from a one-unit increase in total variable cost. C) the change in total cost resulting from a one-unit increase in the change in quantity. D) the change in quantity resulting from a one-unit increase in the change in total variable cost. Answer: C Diff: 1 Topic: Short-Run Marginal Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 55) The change in total cost resulting from a one-unit increase in the change in quantity is: A) average variable cost. B) marginal cost. C) average total cost. D) opportunity cost. Answer: B Diff: 1 Topic: Short-Run Marginal Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

Figure 5.3 56) Figure 5.3 presents a firm's marginal cost, average total cost, and average variable cost curves. The firm faces fixed costs of: A) $20. B) $110. C) $130. D) $4000. Answer: D Diff: 2 Topic: Short-Run Marginal Cost, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

57) Figure 5.3 presents a firm's marginal cost, average total cost, and average variable cost curves. The firm minimizes average total costs by producing ________ units. A) 50 B) 100 C) 150 D) 200 Answer: C Diff: 2 Topic: Short-Run Marginal Cost, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 58) Figure 5.3 presents a firm's marginal cost, average total cost, and average variable cost curves. The firm minimizes average variable costs by producing ________ units. A) 50 B) 100 C) 150 D) 200 Answer: B Diff: 2 Topic: Short-Run Marginal Cost, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

Figure 5.4 59) Figure 5.4 shows a firm's marginal cost, average total cost, and average variable cost curves. At Q = 50, the total cost is: A) $2,100. B) $2,800. C) $4,500. D) $6,300. Answer: C Diff: 2 Topic: Short-Run Marginal Cost, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 60) Figure 5.4 shows a firm's marginal cost, average total cost, and average variable cost curves. At Q = 50, the total variable cost is: A) $1,200. B) $1,500. C) $2,100. D) $2,800. Answer: B Diff: 2 Topic: Short-Run Marginal Cost, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

61) Figure 5.4 shows a firm's marginal cost, average total cost, and average variable cost curves. At Q = 50, the average fixed cost is: A) $30. B) $40. C) $50. D) $60. Answer: D Diff: 2 Topic: Short-Run Marginal Cost, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 62) Figure 5.4 shows a firm's marginal cost, average total cost, and average variable cost curves. At Q = 100, the total cost is: A) $2,800. B) $4,500. C) $6,300. D) $7,000. Answer: D Diff: 2 Topic: Short-Run Marginal Cost, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 63) Figure 5.4 shows a firm's marginal cost, average total cost, and average variable cost curves. At Q = 100, the total variable cost is: A) $2,800. B) $4,000. C) $4,500. D) $6,300. Answer: B Diff: 1 Topic: Short-Run Marginal Cost, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

64) Figure 5.4 shows a firm's marginal cost, average total cost, and average variable cost curves. At Q = 100, the average fixed cost is: A) $30. B) $40. C) $50. D) $60. Answer: A Diff: 2 Topic: Short-Run Marginal Cost, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 65) Figure 5.4 shows a firm's marginal cost, average total cost, and average variable cost curves. The firm's total fixed cost is: A) $2,800. B) $3,000. C) $4,500. D) $7,000. Answer: B Diff: 2 Topic: Short-Run Marginal Cost, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 66) Figure 5.4 shows a firm's marginal cost, average total cost, and average variable cost curves. The average total cost curve is downward-sloping as output increases from Q = 50 to Q = 100 because: A) increasing average variable cost outweighs decreasing average fixed cost. B) decreasing average fixed cost outweighs increasing average variable cost. C) diminishing returns are not severe enough to outweigh decreasing average fixed cost. D) marginal cost is increasing. Answer: B Diff: 2 Topic: Short-Run Marginal Cost, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

67) Figure 5.4 shows a firm's marginal cost, average total cost, and average variable cost curves. For an output level greater than Q = 100, the average total cost curve is upward-sloping because: A) decreasing average fixed cost outweighs increasing average variable cost. B) diminishing returns are not severe enough to outweigh decreasing average fixed cost. C) increasing average variable cost outweighs decreasing average fixed cost. D) marginal cost is increasing. Answer: C Diff: 2 Topic: Short-Run Marginal Cost, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve Output 0 1 2 3 4 5 6

Total Cost 15 25 33 40 48 58 70

Table 5.5 68) Refer to Table 5.5. The total fixed cost of producing two units is: A) $0. B) $8. C) $11. D) $15. Answer: D Diff: 1 Topic: Short-Run Total Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

69) Refer to Table 5.5. The marginal cost of the third unit of output is: A) $0. B) $7. C) $8. D) $40. Answer: B Diff: 1 Topic: Short-Run Marginal Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 70) Refer to Table 5.5. The average variable cost of producing five units of output is: A) $0. B) $8.60. C) $10. D) $11.60. Answer: B Diff: 2 Topic: Short-Run Average Costs Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 71) Refer to Table 5.5. The total variable cost of producing five units of output is: A) $8.60. B) $43. C) $48. D) $58. Answer: B Diff: 2 Topic: Short-Run Total Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

72) Refer to Table 5.5. The firm experiences diminishing returns beginning with the ________ unit. A) first B) second C) third D) fourth Answer: D Diff: 3 Topic: Short-Run Total Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 73) Average fixed costs in the short run: A) increase as the quantity produced increases. B) decrease as the quantity produced increases. C) first decrease, then increase eventually as the quantity produced increases. D) first increase, then decrease eventually as the quantity produced increases. Answer: B Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 74) When does a firm's average variable cost exceed the average total cost? A) never B) when the average variable cost is at its minimum C) when the average fixed cost is at its minimum D) when the average total cost equals the average fixed cost Answer: A Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

75) The short-run average total cost curve is U-shaped because average fixed costs ________ and average variable costs ________ eventually as quantity produced increases. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 76) The marginal cost curve intersects the short-run average total cost curve where: A) marginal cost is minimized in the short run. B) average variable costs are minimized in the short run. C) average total costs are minimized in the short run. D) average variable costs are maximized in the short run. Answer: C Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 77) Average total costs are minimized when: A) marginal costs begin to increase. B) marginal costs begin to decrease. C) marginal cost is greater than average total cost. D) marginal cost equals average total cost. Answer: D Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

78) Average variable costs are minimized when: A) marginal costs begin to increase. B) marginal costs begin to decrease. C) marginal cost is greater than average total cost. D) marginal cost equals average variable cost. Answer: D Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 79) If the marginal cost of producing the next unit of output exceeds the average total cost, then: A) the average total cost curve is increasing. B) the marginal cost curve is at its minimum. C) the average total cost curve is decreasing. D) the average total cost curve is at its minimum. Answer: A Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 80) If the marginal cost of producing the next unit of output is less than the average total cost, then: A) the average total cost curve is increasing. B) the marginal cost curve is at its minimum. C) the average total cost curve is decreasing. D) the average total cost curve is at its minimum. Answer: C Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

81) Suppose you know that at the current level of production average total cost equals marginal cost, then you know that it is also true that: A) fixed costs are zero. B) average fixed costs are increasing. C) average total cost will decrease if production is increased. D) average total cost is minimized at the current level of output. Answer: D Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 82) The effect of diminishing marginal returns outweighing the effect of spreading out the fixed costs is illustrated by the ________ average cost curve ________. A) long-run; decreasing B) long-run; increasing C) short-run; decreasing D) short-run; increasing Answer: D Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 83) The effect of spreading out the fixed costs outweighing the effect of diminishing returns is illustrated by the ________ average cost curve ________. A) long-run; decreasing B) long-run; increasing C) short-run; decreasing D) short-run; increasing Answer: C Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

84) You observe that at your current production of lunch boxes, the average total cost of producing lunch boxes is $5 and the marginal cost of producing lunch boxes is $2. What should always happen if you increase lunch box production? A) Marginal cost will rise. B) Marginal cost will fall. C) Average total cost will rise. D) Average total cost will fall. Answer: D Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 85) You observe that at your current production of rutabaga, the average total cost of producing rutabaga is $1 and the marginal cost of producing rutabaga is $2. What should always happen if you increase rutabaga production? A) Marginal cost will fall. B) Average total cost will rise. C) Average total cost will fall. D) Both A and B are correct. Answer: B Diff: 3 Topic: The Relationship between Marginal Cost and Average Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 86) Suppose that your firm's marginal cost of producing a pencil is 5 cents and the average cost of producing a pencil is 3 cents. If your firm is interested in minimizing average total costs, what should your firm do? A) Increase production. B) Decrease production. C) Maintain production at the current level. D) Look for ways to increase fixed costs. Answer: B Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

87) Suppose that your firm's marginal cost of producing a pencil is 5 cents and the average cost of producing a pencil is 7 cents. If your firm is interested in minimizing average total costs, what should your firm do? A) Increase production. B) Decrease production. C) Maintain production at the current level. D) Look for ways to increase fixed costs. Answer: A Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 88) Total cost of production is the sum of total variable cost and total fixed cost. If the total fixed cost alone increases: A) the average total cost curve shifts downward at all output levels. B) the marginal cost curve shifts upward at all output levels. C) the vertical distance between the average total cost curve and average variable cost curve increases at all output levels. D) the average variable cost curve shifts upward at all output levels. Answer: C Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 89) Total cost of production is the sum of total variable cost and total fixed cost. If the total fixed cost alone decreases: A) the average total cost curve shifts upward at all output levels. B) the marginal cost curve shifts downward at all output levels. C) the vertical distance between the average total cost curve and the average variable cost curve decreases at all output levels. D) the average variable cost curve shifts downward at all output levels. Answer: C Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

90) Other things being equal, if a firm's marginal cost curve shifts upward at all output levels: A) the average total cost curve remains unchanged at all output levels. B) the average variable cost curve remains unchanged at all output levels. C) the average fixed cost curve remains unchanged at all output levels. D) all of the above Answer: C Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 91) Other things being equal, if the average fixed cost curve shifts upward at all output levels: A) the marginal cost curve shifts upward at all output levels. B) the average variable cost curve shifts upward at all output levels. C) the average total cost curve remains unchanged at all output levels. D) the vertical distance between the average total cost curve and the average variable cost curve increases at all output levels. Answer: D Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve Recall the Application about the marginal cost involved in producing crude oil to answer the following question(s). 92) Recall the Application. As the volume of crude oil increases, the marginal cost of production initially ________ at a moderate rate and then eventually ________ at a much faster rate. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Diff: 2 Topic: Application 2, The Rising Marginal Cost of Crude Oil Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

93) Recall the Application. Why does the marginal cost of producing crude oil increase as the volume of crude oil increases? A) The different costs reflect the higher costs of extracting oil at different sources. B) The different costs reflect the different costs of transporting oil to the United States. C) The different costs reflect the higher taxes that the government imposes on higher production of oil. D) The different costs reflect the different exchange rates needed to buy the oil from different countries. Answer: A Diff: 2 Topic: Application 2, The Rising Marginal Cost of Crude Oil Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 94) Recall the Application. If the price of oil is only $15 per barrel, which country is most likely to be selling crude oil? A) Saudi Arabia B) the United States C) Canada D) Norway Answer: A Diff: 2 Topic: Application 2, The Rising Marginal Cost of Crude Oil Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 95) Recall the Application. Which country has the highest marginal cost of extracting oil? A) Saudi Arabia B) Russia C) United Arab Emirates D) Canada Answer: D Diff: 1 Topic: Application 2, The Rising Marginal Cost of Crude Oil Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

96) Diminishing marginal returns occur only in the long run. Answer: FALSE Diff: 1 Topic: Production and Marginal Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 97) Diminishing marginal returns occur in the short run. Answer: TRUE Diff: 1 Topic: Production and Marginal Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 98) Diminishing marginal returns always sets in with the hiring of the first worker. Answer: FALSE Diff: 2 Topic: Production and Marginal Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 99) The marginal product of an input is equal to the change in total product resulting from a oneunit increase in the quantity of that input. Answer: TRUE Diff: 1 Topic: Production and Marginal Product Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 100) Fixed costs do not vary as output changes. Answer: TRUE Diff: 1 Topic: Short-Run Total Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

101) Fixed costs are the same in the short run as they are in the long run. Answer: FALSE Diff: 1 Topic: Short-Run Total Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 102) There are no fixed costs in the long run. Answer: TRUE Diff: 1 Topic: Short-Run Total Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 103) The increase in total cost resulting from producing one more unit of output is the marginal cost. Answer: TRUE Diff: 1 Topic: Short-Run Marginal Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 104) If average cost is falling, marginal cost must also be falling. Answer: FALSE Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 105) If marginal cost is increasing, average variable cost must also be increasing. Answer: FALSE Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

106) If marginal cost is above average cost, average cost must be rising. Answer: TRUE Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 107) If average cost is above marginal cost, average cost must be falling. Answer: TRUE Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 108) If marginal cost is below average cost, marginal cost must be rising. Answer: FALSE Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 109) Diminishing marginal returns imply that marginal cost is falling. Answer: FALSE Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 110) Diminishing marginal returns imply that marginal cost is rising. Answer: TRUE Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

111) The marginal cost curve always intersects the average total cost curve at the minimum of average total cost. Answer: TRUE Diff: 1 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 112) If the marginal cost is increasing over a given output range, the average total cost must increase. Answer: FALSE Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 113) If the average total cost is increasing over a given output range, the average total cost must be smaller than the marginal cost. Answer: TRUE Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 114) Assuming that labor is the only variable input with a fixed production facility, explain the relationship between the marginal product of labor and the marginal production cost. Answer: The marginal product of labor is the change in output from one additional worker. Suppose the marginal product of labor decreases as more workers are added to the production. It implies that output will increase at a decreasing rate because the additional contribution to the output from an additional worker becomes smaller. In other words, an additional output becomes more costly as more output is produced. Thus diminishing marginal returns lead to an increase in marginal cost. Diff: 2 Topic: Short-Run Marginal Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

115) Explain why the marginal cost curve intersects average total cost at the point of minimum average total cost. Answer: Suppose that marginal cost is below average total cost. This will have the effect of dragging down the average (think about what happens to your 3.5 grade point average if you get a D in economics!). Now suppose that the marginal cost is above the average total cost. This will lead to the average total cost increasing. So average total cost is at a minimum when the marginal cost exactly equals the average total cost. Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 116) Draw a graph showing a short-run average variable cost curve, a short-run average total cost curve, and a short-run marginal cost curve. Briefly explain the shape of each curve and how they relate to each other. Answer:

As shown in the graph, the short-run average variable cost curve and the short-run average total cost curve have U shapes, and the short-run marginal cost curve intersects the other two at their minimum points. Diff: 2 Topic: The Relationship between Marginal Cost and Average Cost, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

5.3 Production and Cost in the Long Run 1) The long-run average cost of production is defined as: A) total cost divided by the quantity of output the firm chooses when at least one factor is fixed. B) total cost divided by the quantity of output the firm chooses when it can choose a production facility of any size. C) the quantity produced by a firm that can choose any size production facility. D) the quantity produced by a firm when at least one factor is fixed. Answer: B Diff: 1 Topic: Expansion and Replication Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 2) In the long run, diminishing returns would: A) not exist because no input is held constant. B) not exist because all inputs are held constant. C) still exist at a lesser degree because inputs are allowed to vary. D) exist at a greater degree, because all inputs are allowed to vary. Answer: A Diff: 1 Topic: Expansion and Replication Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 3) When the firm increases output and the costs rise proportionately, then the long-run average cost curve is ________ and the firm is experiencing ________. A) horizontal; constant returns to scale B) downward sloping; constant returns to scale C) upward sloping; diseconomies of scale D) downward sloping; economies of scale Answer: A Diff: 2 Topic: Expansion and Replication Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

4) The long-run marginal cost (LMC) is the increase in the cost incurred by the firm when producing one additional unit of output, holding: A) neither the workforce nor the production facility constant. B) the workforce and the production facility constant. C) the workforce constant. D) the production facility constant. Answer: A Diff: 1 Topic: Expansion and Replication Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 5) Total cost divided by the quantity of output the firm chooses when it can choose a production facility of any size describes: A) the short-run average cost of production. B) the long-run average cost of production. C) the short-run marginal cost of production. D) the long-run marginal cost of production. Answer: B Diff: 1 Topic: Expansion and Replication Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 6) Suppose a firm experiences lower average costs whenever output increases in the long run. Then we would expect the firm to have: A) a U-shaped long-run average cost curve. B) an L-shaped long-run average cost curve. C) a long-run average cost curve that always decreases. D) a minimum efficient scale relatively close to the origin. Answer: C Diff: 2 Topic: Expansion and Replication Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

7) Suppose McDonald's puts up five new stores in San Francisco using the exact same floor plan, capital equipment and number of workers, then the long run average cost curve of McDonald's would be ________ and the company experiences ________. A) horizontal; constant returns to scale B) horizontal; economies of scale C) upward sloping; economies of scale D) horizontal; diseconomies of scale Answer: A Diff: 2 Topic: Expansion and Replication Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 8) Suppose that in 2012 ABC Corp. produced 500 million units of a good at an average cost of $2, and in 2013 ABC Corp. expanded its plant capacity and produced 600 million units at an average cost of also $2. In this range, one can conclude that ABC Corp. is experiencing: A) economies of scale. B) diseconomies of scale. C) neither economies of scale or diseconomies of scale. D) diminishing marginal product. Answer: C Diff: 2 Topic: Expansion and Replication Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 9) Most empirical studies show that firms' long-run average cost curves: A) are L-shaped. B) are downward sloping. C) are upward sloping. D) are flat. Answer: A Diff: 1 Topic: Expansion and Replication Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

10) An input is indivisible if: A) it cannot be increased to produce a larger quantity of output. B) it cannot be used as a substitute for other inputs in the production process. C) it is sufficiently inexpensive to purchase that firms will want to buy as much as they can. D) it cannot be scaled down to produce a smaller quantity of output. Answer: D Diff: 1 Topic: Reducing Output with Indivisible Inputs Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 11) Which of the following is true if a firm has indivisible inputs? A) The long-run average cost curve is downward sloping at lower levels of output. B) The long-run fixed cost curve is downward sloping at lower levels of output. C) The long-run total cost curve is downward sloping at lower levels of output. D) The long-run marginal cost curve is downward sloping at lower levels of output. Answer: A Diff: 1 Topic: Reducing Output with Indivisible Inputs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 12) Which of the following is an example of an indivisible input? A) the amount of labor a firm hires B) flour used to produce bread C) wood used to produce paper D) train tracks between two cities Answer: D Diff: 1 Topic: Reducing Output with Indivisible Inputs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

13) Increased specialization in large firms might lead to: A) upward-sloping marginal cost curves. B) horizontal marginal cost curves. C) downward-sloping long-run average cost curves. D) upward-sloping long-run average cost curves. Answer: C Diff: 2 Topic: Scaling Down and Labor Specialization Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 14) When the firm increases output and the costs rise disproportionately slower, then the longrun average cost curve is ________ and the firm is experiencing ________. A) horizontal; constant returns to scale B) downward sloping; constant returns to scale C) upward sloping; diseconomies of scale D) downward sloping; economies of scale Answer: D Diff: 2 Topic: Economies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 15) The minimum efficient scale is: A) the quantity after which it makes no sense for a firm to produce. B) the minimum quantity where a firm would be able to produce profitably. C) the output level beyond which the firm will not experience scale economies. D) the output level beyond which the firm will experience scale economies. Answer: C Diff: 1 Topic: Economies of Scale Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

16) If the firm has already reached the minimum efficient scale, then: A) any additional output will not result in a lower long run average cost. B) any additional output will result in a lower long run average cost. C) additional output will result in a lower long run marginal cost. D) the firm is profit maximizing in the long run. Answer: A Diff: 2 Topic: Economies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 17) Under which conditions might economies of scale result? A) hampered coordination brought about by bureaucracy B) increasing costs of inputs C) increasing output prices D) workers having to spend less time switching back and forth between tasks. Answer: D Diff: 2 Topic: Economies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 18) Lower input prices in large firms might lead to: A) upward-sloping marginal cost curves. B) upward-sloping short-run average cost curves. C) upward-sloping long-run average cost curves. D) downward-sloping long-run average cost curves. Answer: D Diff: 2 Topic: Economies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

19) Suppose that in 2012 ABC Corp. produced 500 million units of a good at an average cost of $2, and in 2013 ABC Corp. expanded its plant capacity and produced 600 million units at an average cost of $1.80. In this range, one can conclude that ABC Corp. is experiencing: A) economies of scale. B) diseconomies of scale. C) neither economies of scale nor diseconomies of scale. D) diminishing marginal product. Answer: A Diff: 2 Topic: Economies of Scale Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 20) Suppose that Gigantic Company is increasing in size. As Gigantic Company grows, they are able to buy inputs in bulk, resulting in lower input prices. It is likely that continued growth will result in: A) economies of scale. B) Gigantic Company achieving the minimum efficient scale of production. C) diseconomies of scale. D) increasing marginal returns. Answer: A Diff: 2 Topic: Economies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 21) A firm scaled up its operation by increasing all inputs by 100%. If the firm experienced 150% increase in the output, the firm's long-run average cost exhibits: A) economies of scale at the current output level. B) diseconomies of scale at the current output level. C) a constant long-run average cost at the current output level. D) diminishing marginal returns at the current output level. Answer: A Diff: 2 Topic: Economies of Scale Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

22) A firm scaled down its operation by reducing all inputs by 50% and experienced a morethan-50% decrease in output. If all input prices remain unchanged, the firm's long-run average cost exhibits: A) economies of scale at the current output level. B) diseconomies of scale at the current output level. C) a constant long-run average cost at the current output level. D) diminishing marginal returns at the current output level. Answer: A Diff: 3 Topic: Economies of Scale Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 23) When the firm increases output and the costs rise disproportionately faster, then the long-run average cost curve is ________ and the firm is experiencing ________. A) horizontal; constant returns to scale B) downward sloping; constant returns to scale C) upward sloping; diseconomies of scale D) downward sloping; economies of scale Answer: C Diff: 2 Topic: Diseconomies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 24) Under which conditions might diseconomies of scale result? A) improved coordination brought about by bureaucracy B) decreasing costs of inputs C) increasing output prices D) increased bureaucracy Answer: D Diff: 2 Topic: Diseconomies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

25) Under which conditions might diseconomies of scale result? A) improved coordination brought about by bureaucracy B) increasing price of inputs C) increasing output prices D) usage of a large amount of indivisible inputs by the firm Answer: B Diff: 2 Topic: Diseconomies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 26) Under which conditions might diseconomies of scale result? A) hampered coordination brought about by bureaucracy B) decreasing costs of inputs C) increasing output prices D) usage of a large amount of indivisible inputs by the firm Answer: A Diff: 2 Topic: Diseconomies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 27) Coordination problems in large firms might lead to: A) horizontal marginal cost curves. B) downward-sloping marginal cost curves. C) upward-sloping short-run average cost curves. D) upward-sloping long-run average cost curves. Answer: D Diff: 2 Topic: Diseconomies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

28) Higher input prices in large firms might lead to: A) horizontal marginal cost curves. B) downward-sloping marginal cost curves. C) downward-sloping long-run average cost curves. D) upward-sloping long-run average cost curves. Answer: D Diff: 2 Topic: Diseconomies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 29) Suppose that in 2012 MBI Corp. produced 100 million units of a good at an average cost of $6, and in 2013 MBI Corp. expanded its plant capacity and produced 200 million units at an average cost of $6.20. In this range, one can conclude that MBI Corp. is experiencing: A) economies of scale. B) diseconomies of scale. C) neither economies of scale nor diseconomies of scale. D) increasing marginal product. Answer: B Diff: 2 Topic: Diseconomies of Scale Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 30) Under which conditions might diseconomies of scale result? A) hampered coordination brought about by bureaucracy B) increasing costs of inputs C) the firm uses a large amount of indivisible inputs D) both A and B Answer: D Diff: 2 Topic: Diseconomies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

31) Suppose that Gigantic Company is increasing in size. As Gigantic Company grows, coordination of work teams is becoming more difficult because of increased bureaucracy. It is likely that continued growth will result in: A) economies of scale. B) Gigantic Company achieving the minimum efficient scale of production. C) diseconomies of scale. D) increasing marginal returns. Answer: C Diff: 2 Topic: Diseconomies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 32) Suppose that Gigantic Company is increasing in size. As Gigantic Company grows, demand for inputs causes input prices to rise. It is likely that continued growth will result in: A) economies of scale. B) reduced fixed costs. C) diseconomies of scale. D) increasing marginal returns. Answer: C Diff: 2 Topic: Diseconomies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 33) A firm doubled all its inputs and experienced a 50% increase in output. If all input prices remain unchanged, the firm's long-run average cost exhibits: A) economies of scale at the current output level. B) diseconomies of scale at the current output level. C) a constant long-run average cost at the current output level. D) diminishing marginal returns at the current output level. Answer: B Diff: 3 Topic: Diseconomies of Scale Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

34) A firm scaled down its operation by reducing all inputs by 50% and experienced a less-than50% decrease in output. If all input prices remain unchanged, the firm's long-run average cost exhibits: A) economies of scale at the current output level. B) diseconomies of scale at the current output level. C) a constant long-run average cost at the current output level. D) diminishing marginal returns at the current output level. Answer: B Diff: 3 Topic: Diseconomies of Scale Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 35) If the firm is producing in the long run, then the firm's average total cost curve: A) equals the average variable cost curve. B) is less than the average variable cost curve. C) exceeds the average variable cost curve. D) equals zero. Answer: A Diff: 1 Topic: Actual Long-Run Average-Cost Curves Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve Recall the Application about the manufacture of fake killer whales used to scare sea lions off the Washington coast to answer the following question(s). 36) Recall the Application. If a fake killer whale to be used to scare sea lions away from steelhead and other threatened and commercially valuable species cost $11,000 for the mold and $5,000 for materials for each fake killer whale made, then the average or per unit cost of producing five fake killer whales would be: A) $5,000. B) $7,200. C) $11,000. D) $16,000. Answer: B Diff: 2 Topic: Application 3, Indivisible Inputs and the Cost of Fake Killer Whales Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 63 Copyright © 2020 Pearson Education, Inc.

37) Recall the Application. If a fake killer whale to be used to scare sea lions away from steelhead and other threatened and commercially valuable species cost $11,000 for the mold and $5,000 for materials for each fake killer whale made, then the variable cost of producing a fake killer whale is: A) $5,000. B) $16,000. C) $11,000. D) $21,000. Answer: A Diff: 2 Topic: Application 3, Indivisible Inputs and the Cost of Fake Killer Whales Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 38) Recall the Application. If a fake killer whale to be used to scare sea lions away from steelhead and other threatened and commercially valuable species cost $11,000 for the mold and $5,000 for materials for each fake killer whale made, then the fixed cost of producing a fake killer whale is: A) $5,000. B) $16,000. C) $11,000. D) $21,000. Answer: C Diff: 2 Topic: Application 3, Indivisible Inputs and the Cost of Fake Killer Whales Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 39) Recall the Application. If a fake killer whale to be used to scare sea lions away from steelhead and other threatened and commercially valuable species cost $11,000 for the mold and $5,000 for materials for each fake killer whale made, then the producer would face: A) increasing returns to scale. B) decreasing returns to scale. C) increasing average total costs. D) decreasing demand. Answer: A Diff: 2 Topic: Application 3, Indivisible Inputs and the Cost of Fake Killer Whales Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 64 Copyright © 2020 Pearson Education, Inc.

40) When the long-run average total cost curve is horizontal, a firm has economies of scale. Answer: FALSE Diff: 1 Topic: Expansion and Replication Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 41) The long-run marginal cost is the additional cost incurred by the firm when producing one more unit of output, holding the amount of capital constant. Answer: FALSE Diff: 1 Topic: Expansion and Replication Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 42) A large blast furnace is an example of an indivisible input that cannot be scaled down to reduce output. Answer: TRUE Diff: 2 Topic: Reducing Output with Indivisible Inputs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 43) If a firm has reached the minimum efficient scale, any additional output produced by the firm will result in a lower average cost in the long run. Answer: FALSE Diff: 2 Topic: Economies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 44) A firm reaches the minimum efficient scale in the short run. Answer: FALSE Diff: 1 Topic: Economies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 65 Copyright © 2020 Pearson Education, Inc.

45) The minimum efficient scale is the output at which the long-run average cost curve becomes horizontal. Answer: FALSE Diff: 2 Topic: Economies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 46) If the long-run average total cost curve is rising as output increases, then the firm faces diseconomies of scale. Answer: TRUE Diff: 1 Topic: Diseconomies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 47) A U-shaped long-run average cost curve implies that a firm faces only diseconomies of scale. Answer: FALSE Diff: 1 Topic: Actual Long-Run Average-Cost Curves Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve Recall the Application about the manufacture of fake killer whales used to scare sea lions off the Washington coast to answer the following question(s). 48) Recall the Application. The mold used to produce the fake killer whales is an indivisible input. Answer: TRUE Diff: 2 Topic: Application 3, Indivisible Inputs and the Cost of Fake Killer Whales Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

49) Can a firm experience diminishing returns in the long run? Answer: No. A firm will never experience diminishing returns in the long run because in the long run all inputs are allowed to vary. Diminishing returns occur when the marginal product decreases because a variable input is increased while at least one other variable is held constant. Diff: 2 Topic: Expansion and Replication Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 50) What are indivisible inputs and what are their implications for economies of scale? Answer: An indivisible input is something like a mold that cannot be scaled down to produce less output. Indivisible inputs are one source of economies of scale as costs per unit drop when an indivisible input is used to produce a larger output. Diff: 2 Topic: Reducing Output with Indivisible Inputs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 51) Why are some long-run average cost curves steeper on the downward side than others? Answer: The slope of the downward-sloping portion of the long-run average cost is a measure of the degree to which the firm experiences economies of scale. If the firm expends a large amount of its costs on indivisible inputs, the firm will spread this indivisible input's cost out over more and more units as output increases, implying significant economies of scale. Firms that require many individual tasks that can be learned easily will also have substantial increasing returns due to specialization. Diff: 2 Topic: Economies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

52) Draw a graph showing the long-run average cost curve for a firm that experiences economies of scale. Answer:

As shown in the graph, the long-run average cost curve for a firm that experiences economies of scale is "L" shaped. Diff: 2 Topic: Economies of Scale, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 53) Explain why some firms may suffer diseconomies of scale. Answer: Diseconomies of scale exist when average costs increase with firm size. This can happen for several reasons. First, it is possible that input prices are increasing. If this is the case, then the average amount spent on inputs increases as the scale of production increases. Also, there may be coordination problems associated with an increasing number of layers of bureaucracy. If more layers of management lead to increased inefficiency, then the firm may experience diseconomies of scale. Diff: 2 Topic: Diseconomies of Scale Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve Recall the Application about the manufacture of fake killer whales used to scare sea lions off the Washington coast to answer the following question(s). 54) Recall the Application. What is the indivisible input and what are its implications for economies or diseconomies of scale? Answer: The mold used to produce each fake killer whale is the indivisible input and it implies the firm will, at least for some increases in output, face economies of scale. Diff: 2 Topic: Application 3, Indivisible Inputs and the Cost of Fake Killer Whales Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 68 Copyright © 2020 Pearson Education, Inc.

5.4 Examples of Production Cost 1) Suppose that a large and a small wind turbine have similar installation, operating, and maintenance costs, but a large turbine has four times the generating capacity but costs less than three times as much as a small turbine. The average cost of generating electricity with wind is: A) constant at each output. B) increasing as output increases. C) decreasing as output increases. D) at first decreasing and then increasing as output rises. Answer: C Diff: 2 Topic: Scale Economies in Wind Power Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 2) Suppose that a large and a small wind turbine have similar installation, operating, and maintenance costs, but a large turbine has four times the generating capacity but costs less than three times as much as a small turbine. The wind power industry faces: A) constant returns to scale. B) economies of scale. C) diseconomies of scale. D) a hump-shaped cost curve. Answer: B Diff: 2 Topic: Scale Economies in Wind Power Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 3) Suppose that the installation, operating, and maintenance costs of a large wind turbine is four times that of a small turbine and has four times the generating capacity. The wind power industry faces: A) constant returns to scale. B) economies of scale. C) increasing marginal cost. D) diseconomies of scale. Answer: A Diff: 2 Topic: Scale Economies in Wind Power Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 69 Copyright © 2020 Pearson Education, Inc.

4) If the first copy cost of a music video is $223,000 and the marginal cost is $0, how much total cost would the firm incur if it produces 1 million copies? A) zero B) $223,000 C) $1 million D) $1 million + $223,000 Answer: B Diff: 2 Topic: The Average Cost of a Music Video Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 5) If the first copy cost of a music video is $223,000 and the marginal cost is $0, how much is the average total cost if the firm produces 1 million copies? A) 22.3 cents B) 0.223 cents C) 1,223,000 D) 223,000,000,000 Answer: A Diff: 2 Topic: The Average Cost of a Music Video Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 6) If the first copy cost of a music video is $223,000 and the marginal cost is $0, then how many copies should the firm sell in order to break even if the price was $10 each? A) zero B) 2,230 C) 22,300 D) 223,000 Answer: C Diff: 2 Topic: The Average Cost of a Music Video Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

7) If the first copy cost of a music video is $223,000 and the marginal cost is $0, then as the firm produces an infinite quantity of the video, the average total cost of producing the video will approach: A) zero. B) $1.00. C) $2,230. D) $1 million. Answer: A Diff: 2 Topic: The Average Cost of a Music Video Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 8) A tax levied on coal-fired plants that is based on the amount of carbon released in the atmosphere is considered by the firm as a: A) variable cost. B) fixed cost. C) source of revenue. D) sunk cost. Answer: A Diff: 1 Topic: Example: Solar vs. Nuclear: The Crossover Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 9) From 1998 to 2010, the cost of electricity produced with nuclear power has ________, and the cost of electricity produced with solar power has ________. A) increased; increased B) increased; decreased C) decreased; increased D) decreased; decreased Answer: B Diff: 1 Topic: Example: Solar vs. Nuclear: The Crossover Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

10) From 1998 to 2010, the cost of building a nuclear plant increased from $3 billion to $10 billion. If the marginal cost of producing electricity stays the same, then the average fixed cost of producing electricity ________ while the average total cost of producing electricity ________. A) increases; increases B) decreases; stays the same C) increases; stays the same D) decreases; increases Answer: A Diff: 1 Topic: Example: Solar vs. Nuclear: The Crossover Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 11) From 1998 to 2010, the cost of building a nuclear plant increased from $3 billion to $10 billion. If the marginal cost of producing electricity stays the same, then the average variable cost of producing electricity ________ while the average total cost of producing electricity ________. A) stays the same; increases B) decreases; stays the same C) increases; stays the same D) decreases; increases Answer: A Diff: 1 Topic: Example: Solar vs. Nuclear: The Crossover Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 12) Suppose that the only input used in the generation of solar energy is sunlight and has a zero cost. The average total cost of producing electricity is: A) zero. B) equal to the marginal cost. C) equal to the average fixed cost. D) immeasurably high. Answer: C Diff: 1 Topic: Example: Solar vs. Nuclear: The Crossover Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

13) Since a large and a small wind turbine have the same installation, operating, and maintenance costs, but a large turbine has four times the generating capacity but costs less than three times as much as a small turbine, the wind power industry faces decreasing returns to scale. Answer: FALSE Diff: 2 Topic: Scale Economies in Wind Power Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 14) Information goods such as a music video have an L-shaped average cost curve. Answer: TRUE Diff: 2 Topic: The Average Cost of a Music Video Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 15) Why does wind power have economies of scale? Answer: Wind power has economies of scale because a large wind turbine generates four times as much power but costs less than three times as much as a small wind turbine indicating that as production goes up, long run unit costs fall. Diff: 2 Topic: Scale Economies in Wind Power Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve 16) Does the text suggest that the falling prices in solar power generation come from economies of scale? Answer: No. The source of the falling cost of solar power generation as described by the text is recent innovations in photovoltaic technology. Diff: 2 Topic: Example: Solar vs. Nuclear: The Crossover Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 6 Perfect Competition 6.1 Preview of the Four Market Structures 1) What characteristic of a perfectly competitive firm that causes it to be a price taker? A) many buyers and sellers B) homogeneous product C) free entry and exit D) Both A and B are correct. Answer: D Diff: 1 Topic: Perfect Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 2) Which of the following is NOT a characteristic of a perfectly competitive market? A) a large number of firms in a market B) selling a standardized product C) substantial barriers to entry D) an individual firm having no control over price Answer: C Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 3) Which of the following is/are NOT a characteristic of a perfectly competitive market? A) a small number of firms in a market B) selling a standardized product C) no barriers to entry D) an individual firm having no control over price Answer: A Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

4) Which of the following is a characteristic of a perfectly competitive market? A) a large number of firms in a market B) selling a standardized product C) no barriers to entry D) all of the above Answer: D Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 5) Consumers do not have a strong preference for the output of one seller over that of another in a perfectly competitive market because: A) there a large number of firms in the market. B) the firms sell a standardized product. C) there are no barriers to entry. D) an individual firm has control over price. Answer: B Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 6) A perfectly competitive market: A) is dominated by one firm. B) consists of at most five firms. C) is made up of a large number of firms. D) consists of only one firm. Answer: C Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

7) Who are the price takers in a perfectly competitive market? A) both the buyers and the sellers B) the buyers C) neither the buyers nor the sellers D) the sellers Answer: A Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 8) A price taker is a buyer or a seller who: A) takes the market price as given. B) buys or sells only at a price where profits can be made. C) accepts whatever price that the government legislates as the price of the good or service. D) has the ability to influence the equilibrium price in the market. Answer: A Diff: 1 Topic: Preview of the Four Market Structures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 9) A price maker is a buyer or a seller who: A) takes the market price as given. B) buys or sells only at a price where profits can be made. C) accepts whatever price that the government legislates as the price of the good or service. D) has the ability to influence the equilibrium price in the market. Answer: D Diff: 1 Topic: Preview of the Four Market Structures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

10) Firms in a perfectly competitive market: A) sell a differentiated product. B) sell homogeneous products. C) usually have large advertising budgets. D) try to attract customers away from their competitors. Answer: B Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 11) A market in which firms sell a homogeneous product and cannot influence market price is most likely: A) a perfectly competitive market. B) an oligopoly. C) a monopolistically competitive market. D) a monopoly market. Answer: A Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 12) In a market for a homogeneous good, if sellers and buyers can enter or exit a market freely, the market is most likely: A) an oligopoly. B) a monopolistically competitive market. C) a monopoly. D) a perfectly competitive market. Answer: D Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

13) Which of the following statements about a perfectly competitive market is INCORRECT? A) There are many sellers, each supplying a small quantity. B) There are many buyers, each purchasing a small quantity. C) The market sells homogeneous products. D) Buyers and sellers cannot enter exit the market freely. Answer: D Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 14) Which of the following is the best example of a perfectly competitive firm? A) DeBeers Diamond Company B) your local cable television company C) Tino's Italian Eatery, a local restaurant D) Jones's wheat farm in eastern Washington Answer: D Diff: 2 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 15) A firm that can sell as much as it can produce at the market price is likely operating in: A) a perfectly competitive market. B) a monopoly C) a monopolistically competitive market. D) an oligopoly Answer: A Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

16) A perfectly competitive firm can: A) affect the market price for its good. B) sell as much as it can produce at the market price. C) prevent entry of other firms into their market. D) collude with its competitors to set prices. Answer: B Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 17) A market where individual firms cannot affect the market price of their good is most likely: A) a monopoly B) an oligopoly C) a monopolistically competitive market. D) perfectly competitive Answer: D Diff: 1 Topic: Preview of the Four Market Structures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 18) How does the firm-specific demand curve in a perfectly competitive market compare to that in a monopoly? A) The firm-specific demand curve in a perfectly competitive market is horizontal. The demand curve in a monopoly is downward sloping. B) They are the same. C) The firm-specific demand curve in a perfectly competitive market is horizontal. The demand curve in a monopoly is upward sloping. D) The firm-specific demand curve in a perfectly competitive market is vertical. The demand curve in a monopoly is horizontal. Answer: A Diff: 2 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

19) In which of the following market structures do you find many sellers? A) monopolistic competition B) perfect competition C) monopoly D) Both A and B are correct Answer: D Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 20) In which of the following market structures do you find only one seller? A) a monopoly B) an oligopoly C) a monopolistic competition D) a perfectly competitive market Answer: A Diff: 1 Topic: Preview of the Four Market Structures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 21) In which of the following market structures do you find barriers to entry? A) a monopoly B) a perfectly competitive market C) a monopolistic competition D) Both A and B are correct Answer: A Diff: 1 Topic: Preview of the Four Market Structures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

22) In which of the following market structures do you find no barriers to entry? A) perfect competition B) monopolistic competition C) monopoly D) Both A and B are correct Answer: D Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 23) In which of the following market structures can you find differentiated products? A) monopoly B) perfect competition C) oligopoly D) monopolistic competition and oligopoly Answer: D Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 24) Which of the following firms is considered a monopoly? A) The U.S. Postal Service B) Taco Bell C) United Airlines D) Macy's Department Store Answer: A Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

25) Which of the following firms is in an oligopoly? A) Verizon (a cellular phone company) B) United Airlines (an airline company) C) Marlboro (a cigarette manufacturer) D) All of the above are in an oligopolistic market structure. Answer: D Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 26) Which of the following firms is in a monopolistically competitive market? A) Oral-B (a toothbrush manufacturer) B) the U.S. Postal Service C) Marlboro (a cigarette manufacturer) D) United Airlines (an airline company) Answer: A Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 27) If a firm is a price taker, the demand curve faced by the firm is: A) horizontal. B) vertical. C) downward sloping. D) upward sloping. Answer: A Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

28) If the demand curve faced by a firm is horizontal, then the firm is ________ and a ________. A) perfectly competitive; price taker B) perfectly competitive; price maker C) a monopoly; price taker D) a monopoly; price maker Answer: A Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 29) A perfectly competitive market is one where: A) each firm controls the price charged for its product by changing the quantity they produce. B) each firm sells at the government mandated price. C) each firm within the market must sell its good at the market price. D) a firm can affect market price by increasing output. Answer: C Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 30) Toby sells wheat in a perfectly competitive market. The demand curve for Toby's wheat is: A) horizontal. B) vertical. C) downward sloping. D) U-shaped. Answer: A Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

Recall the Application about the wireless phone service provided by thousands of entrepreneurial women in Pakistan to answer the following question(s). 31) Recall the Application. What makes the wireless telephone market in Pakistan perfectly competitive? A) There are many buyers and many sellers B) Any entrepreneur who invests $310 can enter the market. C) Wireless phone calls are a standardized product. D) All of the above are correct. Answer: D Diff: 1 Topic: Application 1, Wireless Women in Pakistan Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 32) Recall the Application. What makes the wireless telephone market in the United States NOT perfectly competitive? A) There are many buyers and many sellers in the United States. B) It is very expensive to enter the market in the United States. C) Wireless phone calls are a standardized product. D) All of the above are correct. Answer: B Diff: 1 Topic: Application 1, Wireless Women in Pakistan Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 33) Recall the Application. Because the average earnings of the "wireless women" in Pakistan are three times the average wage rate, then we would expect that in the long run: A) more entrepreneurs would exit the market. B) more entrepreneurs would enter the market. C) the earnings of wireless women would increase. D) the cost of making a wireless call in Pakistan would increase. Answer: B Diff: 2 Topic: Application 1, Wireless Women in Pakistan Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

34) A perfectly competitive firm has no control over the price that it charges. Answer: TRUE Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 35) Oligopolies are characterized by many firms. Answer: FALSE Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 36) Monopolistically competitive industries are characterized by no barriers to entry. Answer: TRUE Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 37) Monopolies are characterized by a firm demand curve that is more elastic than the market demand curve. Answer: FALSE Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 38) Perfect competition is characterized by many firms and no barriers to entry. Answer: TRUE Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

39) What are the characteristics of perfect competition? Answer: Perfectly competitive industries have many firms, a homogeneous product, no barriers to entry, and demand is perfectly elastic. Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 40) What are the four types of market structure? Answer: monopoly, oligopoly, monopolistic competition, and perfect competition Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 41) What are the characteristics of monopolies? Answer: A monopoly has one firm, a unique product, the firm faces the market demand curve, and there are large barriers to entry. Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 42) What are the characteristics of oligopoly? Answer: Oligopolies have a few firms, a homogeneous or differentiated product, less elastic demand than competitive or monopolistically competitive firms, and large barriers to entry. Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

43) What are the characteristics of monopolistic competition? Answer: Monopolistically competitive industries have many firms, differentiated products, no barriers to entry, and face elastic (but not perfectly elastic) demand curves. Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 44) What are the similarities between perfect competition and monopolistic competition? Answer: In both market structures, there are many buyers and sellers and there are no barriers to entry. Diff: 1 Topic: Preview of the Four Market Structures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 6.2 The Firm's Short-Run Output Decision 1) Farmer Brown sells her wheat in a perfectly competitive market. Suppose the current market price of wheat is $2.50 per bushel. A) Farmer Brown can sell as much wheat as she likes at $2.50 per bushel. B) Farmer Brown can charge any price for her wheat, but will maximize profit if she sells for less than $2.50. C) Farmer Brown should charge more than $2.50. D) Farmer Brown can charge more than $2.50 and still sell some wheat. Answer: A Diff: 2 Topic: The Total Approach: Computing Total Revenue and Total Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

2) Brodie sells fish in a perfectly competitive market. Suppose the current market price of fish is $4.50 per pound. A) Brodie can sell as many fish as he can catch at $4.50 per pound. B) Brodie can charge any price he likes for his fish, but will maximize profit if he sells for less than $4.50. C) Brodie should charge more than $4.50. D) Brodie can charge more than $4.50 and still sell some fish. Answer: A Diff: 2 Topic: The Total Approach: Computing Total Revenue and Total Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 3) You sell your good in a perfectly competitive market where the market price is $7.00. When you sell 100 units your total revenue is $700. When you sell 101 units: A) total revenue increases by less than $7. B) total revenue increases by exactly $7. C) total revenue increases by more than $7. D) total revenue may increase or decrease. Answer: B Diff: 1 Topic: The Total Approach: Computing Total Revenue and Total Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 4) You sell your good in a perfectly competitive market where the market price is $33.00. When you sell 100 units your total revenue is $3,300. When you sell 101 units: A) total revenue increases by less than $33. B) total revenue increases by exactly $33. C) total revenue increases by more than $33. D) total revenue may increase or decrease. Answer: B Diff: 1 Topic: The Total Approach: Computing Total Revenue and Total Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

5) Marginal revenue is equal to price for a perfectly competitive firm because: A) total revenue increases by the price of the good when an additional unit is sold. B) total revenue increases by less than the price of the good when an additional unit is sold. C) firms need to lower price to increase the quantity sold. D) firms can increase price and still increase the quantity sold. Answer: A Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 6) If individual firms face a horizontal demand curve at a given market price: A) price is equal to average total cost. B) price is equal to marginal cost. C) price is equal to marginal revenue. D) price is equal to average variable cost. Answer: C Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 7) For the perfectly competitive firm: A) price always equals average cost. B) price always equals marginal cost. C) price always equals marginal revenue. D) price always equals average variable cost. Answer: C Diff: 2 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

8) Marginal revenue is equal to: A) the change in total revenue from selling one more unit of a good. B) the number of units sold times the price of the good. C) the change in average revenue from selling one more unit of a good. D) all of the above. Answer: A Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 9) If a firm can maximize its profit by producing the output where price is equal to its marginal cost, the firm is operating in: A) a perfectly competitive market. B) an oligopolistic market. C) a monopolistic market. D) a monopolistically competitive market. Answer: A Diff: 2 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 10) If a firm suffers an economic loss, its: A) price is less than its marginal cost. B) price is less than its marginal revenue. C) price is less than its average total cost. D) none of the above Answer: C Diff: 2 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

11) Jerry's Quarry sells building stone in a perfectly competitive market. At its current level of building stone production, Jerry's Quarry has marginal costs equal to $45, and AVC is rising. If the market price of building stone is $50, Jerry's Quarry should: A) decrease its level of building stone production. B) continue producing its current level of production. C) increase its production of building stone. D) shut down and produce no building stone. Answer: C Diff: 2 Topic: The Marginal Approach Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 12) Kevin's Golf-a-Rama sells golf balls in a perfectly competitive market. At its current level of golf ball production, Kevin has marginal costs equal to $1, and AVC is rising. If the market price of golf balls is $2, Kevin should: A) decrease the level of golf ball production. B) continue producing the current level of production. C) increase the production of golf balls. D) shut down and produce no golf balls. Answer: C Diff: 2 Topic: The Marginal Approach Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 13) Kevin's Golf-a-Rama sells golf balls in a perfectly competitive market. At its current level of golf ball production, Kevin has marginal costs equal to $2. If the market price of golf balls is $1, Kevin should: A) decrease the level of golf ball production. B) continue producing the current level of production. C) increase the production of golf balls. D) raise the price of its golf balls. Answer: A Diff: 2 Topic: The Marginal Approach Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

14) Alex's Furniture Mart produces and sells tables in a perfectly competitive market. When Alex's Furniture Mart produces and sells 250 tables, its marginal cost is equal to $200, and AVC is rising. If the market price of tables is equal to $150, Alex's Furniture Mart should: A) decrease its level of table production. B) increase its level of table production. C) continue producing 250 tables. D) raise the price of its tables. Answer: A Diff: 2 Topic: The Marginal Approach Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 15) Suppose Blu-ray discs are sold in a perfectly competitive market. The current market price of Blu-ray discs is $15. If at the current level of production of compact discs you calculate the marginal cost to your company is also $15, and that AVC is rising, in the short run your company should: A) produce more Blu-ray discs. B) produce fewer Blu-ray discs. C) continue producing the current level of Blu-ray discs. D) raise the price of its Blu-ray discs. Answer: C Diff: 2 Topic: The Marginal Approach Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 16) If a firm in a perfectly competitive market is currently producing the output where price = marginal cost = average total cost, the firm is: A) earning a positive economic profit. B) earning a zero economic profit. C) suffering an economic loss. D) all of the above Answer: B Diff: 2 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

17) If a firm in a perfectly competitive market is currently producing the output where price = marginal cost > average total cost, the firm is: A) earning a positive profit. B) earning a zero profit. C) suffering an economic loss. D) all of the above Answer: A Diff: 2 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

Figure 6.1 18) Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $40, the firm's profit-maximizing output level is: A) 500. B) 650. C) 900. D) 1,200. Answer: C Diff: 2 Topic: The Marginal Approach, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

19) Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $40 and the firm is currently producing the profit-maximizing output level, its total variable cost is: A) $12,500. B) $14,300. C) $19,800. D) $27,000. Answer: C Diff: 2 Topic: The Marginal Approach, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 20) Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $40 and the firm is currently producing the profit-maximizing output level, its total fixed cost is: A) $2,800. B) $5,200. C) $7,200. D) $9,000. Answer: C Diff: 2 Topic: The Marginal Approach, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 21) Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $40 and the firm is currently producing the profit-maximizing output level, the firm's profit is: A) $7,200. B) $9,000. C) $27,000. D) $36,000. Answer: B Diff: 2 Topic: The Marginal Approach, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

22) Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the firm's fixed cost increases by 3,000 due to a new government regulation: A) the marginal cost curve shifts upward. B) the average variable cost curve shifts upward. C) the average total cost curve shifts upward. D) none of the above Answer: C Diff: 2 Topic: The Marginal Approach, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

Figure 6.2 23) Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. If the market price is $10 and the firm chooses the profit-maximizing output level, its profit is: A) $1,000. B) $800. C) $720. D) $200. Answer: D Diff: 2 Topic: The Marginal Approach, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 24) Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. Suppose the 22 Copyright © 2020 Pearson Education, Inc.

current market price is $10 and the firm produces the profit-maximizing output level. If the firm's total fixed cost increases due to a new government regulation, the short-run response of the firm should be to: (Note: since the question does not restrict the firm's response to the short run, we can't rule out that the rise in fixed cost will push the firm below the breakeven point and that the firm will exit the industry in the long run, thus decreasing its current output level.) A) produce its current output level. B) increase its current output level. C) decrease its current output level. D) There isn't sufficient information. Answer: A Diff: 2 Topic: The Marginal Approach, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 25) Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. Suppose that market price falls to $6. If the firm produces at an output level that causes it to suffer an economic loss of $120, its average total cost (X) is: A) $8. B) $7.50. C) $6.50. D) $4. Answer: B Diff: 2 Topic: The Marginal Approach, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

26) Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. Suppose the current market price is $6 and the firm produces at a given output level. If the firm's total fixed cost increases due to a new government regulation, the short-run response of the firm should be to: (Note: since the question does not restrict the firm's response to the short run, we can't rule out that the rise in fixed cost will push the firm below the breakeven point and that the firm will exit the industry in the long run, thus decreasing its current output level.) A) produce its current output level. B) decrease its current output level. C) increase its current output level. D) There isn't sufficient information. Answer: A Diff: 2 Topic: The Marginal Approach, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 27) If a profit-maximizing firm in a perfectly competitive market is currently producing the output where (price - average variable cost) > average fixed cost, the firm is: A) making a positive economic profit. B) making a zero economic profit. C) suffering an economic loss. D) none of the above Answer: A Diff: 2 Topic: The Marginal Approach Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 28) If the firm is incurring losses in the short run, then which of the following is true? A) P < ATC B) P > ATC C) P > MC D) MC > ATC Answer: A Diff: 2 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

29) If a profit-maximizing firm in a perfectly competitive market is currently producing the output where (price - average variable cost) < average fixed cost, the firm is: A) making a positive economic profit. B) making a zero economic profit. C) suffering an economic loss. D) none of the above Answer: C Diff: 2 Topic: The Marginal Approach Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 30) If a profit-maximizing firm in a perfectly competitive market is currently producing the output where (price - average variable cost) = average fixed cost, the firm is: A) making a positive economic profit. B) making a zero economic profit. C) suffering an economic loss. D) none of the above Answer: B Diff: 2 Topic: The Marginal Approach Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 31) If your firm is producing a good at a level where marginal revenue equals marginal cost, and price is greater than average total cost, your firm: A) should shut down and suffer a loss equal to your fixed costs. B) is earning an economic profit greater than zero. C) should decrease output. D) should increase output. Answer: B Diff: 2 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

32) If the price a firm charges in a perfectly competitive industry is greater than average total cost: A) the firm is earning an economic profit equal to zero. B) the firm is earning an economic profit greater than zero. C) the firm is earning an economic profit less than zero. D) it is not possible to determine anything about profits. Answer: B Diff: 2 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 33) If the price a firm charges in a perfectly competitive industry is less than average total cost: A) the firm is earning positive economic profit. B) the firm is earning zero economic profit. C) the firm is earning negative economic profit. D) it is not possible to determine anything about profits. Answer: C Diff: 2 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 34) In a perfectly competitive market, if price is greater than average total cost at the level of output where marginal cost equals marginal revenue: A) the firm must be in long-run equilibrium. B) the firm is earning an economic profit greater than zero. C) the firm is earning an economic profit less than zero. D) We cannot determine whether the firm is earning positive or negative profits. Answer: B Diff: 2 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

35) In a perfectly competitive market, if price is less than average total cost, but greater than average variable cost at the level of output where marginal cost equals marginal revenue: A) the firm is earning positive economic profit. B) the firm is earning negative economic profit. C) the firm should shut down. D) We cannot determine whether the firm is earning positive or negative profits. Answer: B Diff: 2 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 36) If a competitive firm is in short-run equilibrium, then: A) marginal revenue is equal to marginal cost. B) price is greater than marginal cost. C) price is equal to average variable cost. D) price is greater than marginal revenue. Answer: A Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 37) In short-run equilibrium for a competitive firm: A) price will not equal marginal revenue. B) marginal revenue will be greater than marginal cost. C) price will equal marginal cost. D) price will be greater than marginal cost. Answer: C Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

38) In short-run equilibrium for a competitive firm, economic profits: A) will be positive. B) will be negative. C) will be zero. D) may be positive, negative, or zero. Answer: D Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 39) If a perfectly competitive firm charges a price that is equal to its average total cost: A) the firm is earning an economic profit equal to zero. B) the firm is earning an economic profit greater than zero. C) the firm is earning an economic profit less than zero. D) It is not possible to determine anything about the firm's profits. Answer: A Diff: 1 Topic: Economic Profit and the Break-Even Price Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 40) If the market demand increases for a good sold in a perfectly competitive market, individual firms in the market: A) will be able to charge a higher price for their product. B) will need to lower price in order to remain competitive. C) will not be able to change their price. D) will begin earning economic losses. Answer: A Diff: 1 Topic: Economic Profit and the Break-Even Price Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

41) In long-run equilibrium for a competitive firm, economic profits: A) will be positive. B) will be negative. C) will be zero. D) may be positive, negative, or zero. Answer: C Diff: 1 Topic: Economic Profit and the Break-Even Price Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition Recall the Application about the break-even price for growing switchgrass, a perennial grass that is native to the U.S. plains states and is used to create biofuel, to answer the following question(s). 42) Recall the Application. If the minimum average total cost for switchgrass farmers is $55 per ton and the minimum average variable cost is $40 per ton, then at a price of $35 per ton in the short run the switchgrass farmer will: A) shut down, that is, bring no switchgrass to market. B) operate and lose money. C) make a zero economic profit. D) make a positive economic profit. Answer: A Diff: 2 Topic: Application 2, The Break-Even Price for Switchgrass, a Feedstock for Biofuel Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 43) Recall the Application. If the minimum average total cost for switchgrass farmers is $55 per ton and the minimum average variable cost is $40 per ton, then at a price of $50 per ton in the short run the switchgrass farmer will: A) shut down, that is, bring no switchgrass to market. B) operate and lose money. C) make a zero economic profit. D) make a positive economic profit. Answer: B Diff: 2 Topic: Application 2, The Break-Even Price for Switchgrass, a Feedstock for Biofuel Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 29 Copyright © 2020 Pearson Education, Inc.

44) Recall the Application. If the minimum average variable cost for switchgrass farmers is $40 per ton and the current price is $35 per ton, in the long run the switchgrass farmer will: A) exit the industry. B) operate and lose money. C) make a positive economic profit. D) make a zero economic profit. Answer: A Diff: 2 Topic: Application 2, The Break-Even Price for Switchgrass, a Feedstock for Biofuel Skill: Analytical AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 45) A perfectly competitive firm that is maximizing profit produces the quantity of output at which price equals marginal cost. Answer: TRUE Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 46) Suppose that the market price of sugar is 25 cents per pound and a farmer's marginal cost of producing sugar is 28 cents per pound. The farmer should increase her sugar production. Answer: FALSE Diff: 1 Topic: The Marginal Approach Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 47) For a perfectly competitive firm, price always equals marginal revenue. Answer: TRUE Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

48) For a perfectly competitive firm, price always equals marginal cost. Answer: FALSE Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 49) A perfectly competitive firm maximizes profit where marginal revenue or pice equals marginal cost. Answer: TRUE Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 50) If marginal revenue is $10 and marginal costs is $8, the firm should increase its output. Answer: TRUE Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 51) If marginal revenue is $8 and marginal costs is $10, the firm should increase its output. Answer: FALSE Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 52) In the short run, a firm that is incurring losses would always be better off if it keeps producing. Answer: FALSE Diff: 1 Topic: The Marginal Approach Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 31 Copyright © 2020 Pearson Education, Inc.

53) What is marginal revenue? Answer: Marginal revenue is the change it total revenue from selling one more unit of output. Diff: 1 Topic: The Marginal Approach Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 6.3 The Firm's Shut-Down Decision 1) Which of the following is true about a perfectly competitive firm in the long run and in the short run? A) The supply curve in the short run is usually steeper than the supply curve in the long run. B) The supply curve in the short run is usually flatter than the supply curve in the long run. C) The demand curve in the short run is usually steeper than the marginal cost curve in the long run. D) The supply curve in the short run is usually steeper than the average total cost curve in the long run. Answer: A Diff: 2 Topic: The Firm's Shut-Down Decision Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 2) A firm will not shut down in the short run as long as\ it is at the point where MR = MC and: A) P > AVC. B) P > ATC. C) P > MC. D) P > AFC. Answer: A Diff: 1 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

3) A firm will not shut down in the long run as long as the firm's revenue: A) is larger than the firm's variable cost. B) is greater than the firm's marginal cost. C) is greater than the fixed cost. D) is less than the total cost. Answer: A Diff: 1 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 4) If in the short run the firm incurs zero marginal cost, then the firm will: A) never shut down. B) shut down if the price is greater than the average variable cost. C) shut down if the price is less than the average total cost. D) shut down if the marginal cost equals the marginal revenue. Answer: A Diff: 1 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 5) If average total cost > average variable cost > price, a profit-maximizing firm in a perfectly competitive market should: A) continue to produce its current output level. B) shut down in the short run. C) increase its output level to minimize its loss. D) none of the above Answer: B Diff: 1 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

6) A firm will not shut down in the short run as long as price exceeds: A) average fixed cost at the level of output where marginal revenue equals marginal cost. B) average variable cost at the level of output where marginal revenue equals marginal cost. C) marginal cost at the level of output where marginal revenue equals marginal cost. D) total revenue at the level of output where marginal revenue equals marginal cost. Answer: B Diff: 2 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

Figure 6.3 7) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. If the market price is $3 and the firm produces the output where MR = MC, its profit is: A) -$300. B) -$600. C) -$900. D) -$1,200. Answer: D Diff: 2 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

8) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. If the market price is $3 and the firm shuts down in the short run, its profit is: A) -$300. B) -$600. C) -$900. D) -$1,200. Answer: C Diff: 2 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 9) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. Assume the market price is $3 and the firm is currently producing 100 units. If the firm produces zero units in the short run, it will reduce its economic loss by: A) $300. B) $600. C) $900. D) $1,200. Answer: A Diff: 2 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 10) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. The price at which the firm is just as well off either operating or shutting down is: A) $3. B) $4.50. C) $6. D) $10. Answer: B Diff: 2 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

11) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. The firm will stay in the market in the long run only if the market price is greater than or equal to: A) $4.50. B) $6. C) $10. D) $15. Answer: C Diff: 2 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 12) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. If the market price is $6, then the firm will: A) be better off producing 150 units than shutting down. B) be better off exiting the market and using the resources for other production activities. C) be better off shutting down in the short run and waiting until the market price rises above $10. D) none of the above Answer: B Diff: 3 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

Output (Q) 0 1 2 3 4 5

Total Fixed Cost 20 20 20 20 20 20

Total Variable Cost 0 5 7 10 15 21

Table 6.1 13) Table 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $3: A) the firm suffers a loss and is better off shutting down. B) the firm suffers a loss but is better off producing the output level where MR = MC. C) the market price is greater than the minimum average variable cost. D) none of the above Answer: A Diff: 2 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 14) Table 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $5, A) the firm suffers a loss but is better off producing at the output where MR = MC. B) the firm suffers a loss and is better off shutting down. C) the market price is lower than its marginal cost at the profit-maximizing output level. D) the market price is lower than the average variable cost at the profit-maximizing output level. Answer: A Diff: 2 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

15) In the short run, the firm should shut down when: A) price is equal to the average total cost of production. B) price is less than the minimum of the average variable cost of production. C) price is equal to the minimum of the marginal cost of production. D) price is equal to the minimum of the average total cost of production. Answer: B Diff: 1 Topic: The Shut-Down Price Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 16) You are hired by Jimbo's Potato Farm to determine when Jimbo should shut down and produce no potatoes in the short run. Jimbo sells his potatoes in a perfectly competitive market. You tell Jimbo to shut down if: A) total cost is less than total revenue when marginal revenue equals marginal cost. B) price is less than average variable cost when marginal revenue equals marginal cost. C) price is less than average total cost when marginal revenue equals marginal cost. D) marginal revenue is less than marginal cost. Answer: B Diff: 2 Topic: The Shut-Down Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 17) Suppose Tim's Cowboy boot factory produces in a perfectly competitive market. Suppose the average total cost of cowboy boots is $65, the average variable cost of cowboy boots is $60, and the price of cowboy boots is $62. If the firm is producing the level of output where marginal cost equals price, then in the short run the firm: A) should shut down. B) should continue to produce since total revenue exceeds total variable cost. C) is earning a positive economic profit. D) can increase profit by increasing output. Answer: B Diff: 2 Topic: The Shut-Down Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

18) Suppose Robin's Clock Works produces in a perfectly competitive market. Suppose the average total cost of clocks is $95, the average variable cost of clocks is $90, and the price of clocks is $85. If the firm is producing the level of output where marginal cost equals price, then in the short run the firm: A) should shut down. B) should continue to produce since total revenue exceeds total variable cost. C) is earning a positive economic profit. D) can increase profit by increasing output. Answer: A Diff: 2 Topic: The Shut-Down Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 19) If your firm is producing a good at a level where marginal revenue equals marginal cost, and price is less than average variable cost, then in the short run your firm should: A) shut down and suffer a loss equal to your fixed costs. B) continue to produce, but increase output. C) continue to produce the same amount. D) continue to produce, but decrease output. Answer: A Diff: 2 Topic: The Shut-Down Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 20) If your firm is producing a good at a level where marginal revenue equals marginal cost, and price is between average variable cost and average total cost, then in the short run your firm should: A) shut down and suffer a loss equal to your fixed costs. B) continue to produce, but increase output. C) continue to produce at the same level of output. D) continue to produce, but decrease output. Answer: C Diff: 2 Topic: The Shut-Down Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

21) A perfectly competitive firm is producing a good at a level where P = $30 and MC = $30. The firm will continue to produce in the short run as long as: A) AVC is less than $30. B) AFC is less than $30. C) price does not increase. D) ATC is greater than $30. Answer: A Diff: 2 Topic: The Shut-Down Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 22) A perfectly competitive firm is producing a good at a level where P = $90 and MC = $90. The firm will continue to produce as long as: A) AVC is less than $90. B) AFC is less than $90. C) price does not increase. D) ATC is greater than $90. Answer: A Diff: 2 Topic: The Shut-Down Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 23) If price is less than average variable cost at a level of output where marginal revenue is equal to marginal cost, then in the short run the firm: A) should shut down. B) should produce the level of output where marginal revenue equals marginal cost. C) should gather more data to determine whether to shut down. D) will produce only if they can decrease their fixed costs. Answer: A Diff: 2 Topic: The Shut-Down Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

24) Suppose your firm is operating in a perfectly competitive market, and that the minimum average variable cost of producing your good is $13. If the price of the good is $15, your firm should: A) supply the amount of the good where the marginal cost of production is equal to $15. B) not produce anything since the price is above the minimum of average variable cost. C) not consider price when determining the amount to sell. D) not do any of the above. Answer: A Diff: 2 Topic: The Shut-Down Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 25) Suppose your firm is operating in a perfectly competitive market, and that the minimum average variable cost of producing your good is $30. If the price of the good is $32, your firm should: A) not produce anything since the price is above the minimum of average variable cost. B) not consider price when determining the amount to sell. C) supply the amount of the good where the marginal cost of production is equal to $32. D) supply the amount of the good where the marginal cost of production is $30. Answer: C Diff: 1 Topic: The Shut-Down Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 26) If a firm has already paid or has agreed to pay for something, we call that cost: A) a fixed cost. B) a spent cost. C) a sunk cost. D) a lost cost. Answer: C Diff: 1 Topic: Fixed Costs and Sunk Costs Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

27) In the short run, a firm considers its fixed cost as a(n): A) sunk cost. B) variable cost. C) implicit cost. D) marginal cost. Answer: A Diff: 1 Topic: Fixed Costs and Sunk Costs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition Recall the Application about the shutdown price for coal to answer the following question(s). 28) Recall the Application. Because the higher cost of keeping workers safe was the reason why 4 West Mine was shut down, then those costs are considered a part of: A) variable costs. B) fixed costs. C) total revenues. D) marginal revenues. Answer: A Diff: 1 Topic: Application 3, Shutting Down a Coal Mine Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 29) According to the Application, there are still some mines that are in operation in the United States. Because 4 West Mine has now shut down, what must be true about 4 West Mine and the other operational mines? A) 4 West Mine's AVC is higher than the other remaining mines. B) 4 West Mine's AVC is lower than the other remaining mines. C) 4 West Mine's ATC is higher than the other remaining mines. D) 4 West Mine's ATC is lower than the other remaining mines. Answer: A Diff: 1 Topic: Application 3, Shutting Down a Coal Mine Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

30) A firm should shut down in the short run if it s revenue is smaller than its variable costs. Answer: TRUE Diff: 1 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 31) A firm should shut down in the short run if it s AVC is less than the price it receives per unit of the good. Answer: FALSE Diff: 1 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 32) Firms earning negative profits in the short run should always shut down. Answer: FALSE Diff: 1 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 33) Firms that shut down must be earning negative profits in the short run. Answer: TRUE Diff: 1 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 34) A firm with total revenue of $500, total cost of $700, and variable cost of $400 should continue to operate its production facility. Answer: TRUE Diff: 1 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 43 Copyright © 2020 Pearson Education, Inc.

35) Perfectly competitive firms always produce the quantity that minimizes average total cost in the short run. Answer: FALSE Diff: 1 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 36) In the short run a manufacturing firm's production equipment is a sunk cost. Answer: TRUE Diff: 1 Topic: Fixed Costs and Sunk Costs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 37) Why does it make sense for unprofitable firms to stay in business? Answer: Even if a firm is losing money, it might still be better off producing. If the firm can recover its variable costs and some of its fixed costs by producing (that is, if the price it can receive exceeds the average variable cost of production), then it loses less by producing optimally than by shutting down and eating its fixed costs. Diff: 2 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 38) Suppose that a firm maximizes its profits by producing a quantity of 20 units. The market price is $5. The firm's variable costs are $70 and its fixed costs are $40. What should the firm do in the short run? In the long run? Answer: Alas, the firm is earning negative profits in the short run. However, the firm is better off producing and losing $10 than shutting down and losing $40. So it should produce in the short run. In the long run, the firm need not renew its fixed cost obligations, and it will shut down. Diff: 2 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

39) Explain why a firm's shut-down decision does not incorporate the fixed costs of the production facility. Answer: A firm's fixed costs are fixed no matter how many units of output the firm produces. Thus, the fixed costs of a production facility are not avoidable even when the firm is not using its production facility. Diff: 2 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

Figure 6.4 40) Figure 6.4 represents a perfectly competitive firm's costs. Illustrate the firm's shut-down price on the graph. Explain. Answer: The firm's shut-down price is defined as the price at which the firm is indifferent between operating and shutting down. In Figure 9.4, the shut-down price is $10. At the shutdown price, marginal cost equals price and average variable cost also equals the price. Therefore, marginal cost also equals average variable cost, and so the shut-down price is at the minimum point of the SAVC curve. Diff: 2 Topic: Total Revenue, Variable Cost, and the Shut-Down Decision, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

6.4 Short-Run Supply Curves 1) A firm's marginal cost curve above the minimum of the average variable cost curve is also: A) the firm's demand for production curve. B) the firm's producer surplus curve. C) the firm's short-run supply curve. D) the market supply curve. Answer: C Diff: 1 Topic: The Firm's Short-Run Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 2) The firm's short-run supply curve shows the relationship between the price of a good and the: A) quantity demanded of that good. B) quantity supplied of that good. C) willingness of consumers to purchase the good. D) firm's capacity output. Answer: B Diff: 1 Topic: The Firm's Short-Run Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 3) A firm's short-run supply curve is the firm's: A) marginal revenue curve. B) marginal cost curve above the minimum point of the average total cost curve. C) marginal cost curve above the minimum point of the average variable cost curve. D) average cost curve, below the minimum point of the marginal cost curve. Answer: C Diff: 1 Topic: The Firm's Short-Run Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

4) A firm's short-run supply curve is the firm's marginal cost above: A) the shut-down point. B) the zero-profit point. C) zero D) the point of diminishing returns. Answer: A Diff: 1 Topic: The Firm's Short-Run Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 5) The relationship between the market price of a good and the quantity supplied of that good by a firm in the short run is the firm's: A) short-run supply curve. B) average cost schedule. C) total revenue minus total cost schedule. D) optimal production level. Answer: A Diff: 1 Topic: The Firm's Short-Run Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 6) A perfectly competitive firm's marginal cost curve above the minimum of the average variable cost curve is its: A) short-run supply curve. B) average cost schedule. C) capacity output schedule. D) total revenue minus total cost schedule. Answer: A Diff: 1 Topic: The Firm's Short-Run Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

7) The supply curve for a perfectly competitive market: A) is the summation of all the average cost curves of each firm in a market. B) is the summation of all the marginal cost curves, above the minimum of the average variable cost curve, from all the individual firms in the market. C) is not related to the supply curves of individual firms. D) is independent of price. Answer: B Diff: 1 Topic: The Short-Run Market Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 8) The summation of all individual firm marginal cost curves above the minimum of the average variable cost curve: A) is the market shut-down point. B) is the market demand curve. C) is the market marginal revenue curve. D) is the market supply curve. Answer: D Diff: 1 Topic: The Short-Run Market Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 9) Suppose that 100 firms operate in a perfectly competitive industry and each firm has the same technology and cost structure. If each firm maximizes profits by selling 20 units of output at $5.00, then the quantity supplied in the market at $5.00 is: A) 2,000. B) less than 2,000. C) greater than 2,000. D) zero. Answer: A Diff: 1 Topic: The Short-Run Market Supply Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

10) Which of the following is true for a perfectly competitive market in short-run equilibrium? A) The quantity supplied equals the quantity demanded. B) The typical firm earns zero economic profit. C) The typical firm will always make a positive profit. D) All of the above are correct. Answer: A Diff: 2 Topic: Market Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 11) Which of the following is true for a perfectly competitive market in long-run equilibrium? A) There is no incentive for new firms to enter the market. B) Each firm in the market earns zero economic profit. C) There is no incentive for existing firms to leave the market. D) All of the above are correct. Answer: D Diff: 2 Topic: Market Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition Recall the Application about the supply of shipping services to answer the following question(s). 12) Recall the Application. The short-run supply curve for shipping services is: A) positively sloped. B) negatively sloped. C) perfectly vertical. D) perfectly horizontal. Answer: A Diff: 1 Topic: Application 4, Short-Run Supply Curve for Cargo Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

13) Recall the Application. The reason why the short-run supply curve for cargo is upward sloping is that its: A) marginal cost is upward sloping. B) market demand curve is upward sloping. C) average fixed cost is upward sloping. D) All of the above are correct. Answer: A Diff: 1 Topic: Application 4, Short-Run Supply Curve for Cargo Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 14) Recall the Application. As the price per ton of cargo drops low enough that it does not cover the AVC of smaller inefficient ships, then the smaller, more inefficient ships will decide to: A) shut-down. B) raise the price they charge. C) make up for it by raising their speeds. D) make up for it by accepting more cargo. Answer: A Diff: 1 Topic: Application 4, Short-Run Supply Curve for Cargo Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 15) According to the Application, at a relatively low freight rate, only the ________ efficient ships operate, and they save on cost by traveling at a ________ speed. A) most; fast B) most; slow C) least; fast D) least; slow Answer: B Diff: 1 Topic: Application 4, Short-Run Supply Curve for Cargo Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

16) A firm's short-run supply curve shows the relationship between price and quantity supplied. Answer: TRUE Diff: 1 Topic: The Firm's Short-Run Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 17) A firm's short-run supply curve is its marginal cost curve above its average total cost curve. Answer: FALSE Diff: 1 Topic: The Firm's Short-Run Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 18) A firm's short-run supply curve is its marginal cost curve above its average variable cost curve. Answer: TRUE Diff: 2 Topic: The Firm's Short-Run Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 19) A firm's short-run supply curve is its marginal cost curve above the shut-down point. Answer: TRUE Diff: 1 Topic: The Firm's Short-Run Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 20) A competitive firm's short-run supply curve is perfectly elastic. Answer: FALSE Diff: 1 Topic: The Firm's Short-Run Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

21) The short-run market supply curve shows the relationship between the market price and the quantity supplied in the short run. Answer: TRUE Diff: 1 Topic: The Short-Run Market Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 22) If there are 100 identical firms in a perfectly competitive industry, and the typical firm supplies 50 units of output at a price of $30, the industry output is 5,000 units at a price of $30. Answer: TRUE Diff: 2 Topic: The Short-Run Market Supply Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 23) In the long run, each firm in a perfectly competitive market earns zero economic profit. Answer: TRUE Diff: 1 Topic: Market Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 24) Describe and explain a perfectly competitive firm's short-run supply curve. Answer: A perfectly competitive firm's short-run supply curve is the portion of its marginal cost curve that lies above the minimum of its average variable cost curve. A profit-maximizing firm will always produce a quantity such that price is equal to marginal cost, provided that the price of the product is high enough so that it can cover its variable costs and at least part of its fixed costs. This means that price must exceed the minimum of average variable cost. Thus, by using the part of the marginal cost curve that lies above the minimum of average variable cost, we can determine the quantity that a firm will produce at every given price. This is precisely what the firm's supply curve is. Diff: 2 Topic: The Firm's Short-Run Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

Figure 6.4 25) Figure 6.4 represents a perfectly competitive firm's costs. Illustrate the firm's short-run supply curve on the graph. Explain. Answer: The firm's short-run supply curve is the part of its short-run marginal cost curve above the shut-down price. On Figure 9.4, the shut-down price is $10, which is at the minimum point of the SAVC curve. Thus, the firm's short-run supply curve is the part of its SMC curve above that point. Diff: 2 Topic: The Firm's Short-Run Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 6.5 The Long-Run Supply Curve for an Increasing-Cost Industry 1) An increasing-cost industry is one in which the average cost of production ________ as the total output of the industry ________. A) increases; increases B) increases; decreases C) decreases; increases D) None of the above; there are no increasing-cost industries. Answer: A Diff: 1 Topic: Long-Run Supply Curves for an Increasing-Cost Industry Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

2) Costs increase with output in an increasing-cost industry because: A) input prices increase as the industry competes for scarce resources. B) firms may be forced to use less productive inputs. C) the firms become monopolies. D) Both A and B are correct. Answer: D Diff: 2 Topic: Long-Run Supply Curves for an Increasing-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 3) Heterogeneous inputs in a perfectly competitive market will cause the industry to face ________ costs because as the firm produces a larger quantity, it is forced to use ________ productive inputs. A) increasing; less B) decreasing; less C) increasing; more D) decreasing; more Answer: A Diff: 2 Topic: Long-Run Supply Curves for an Increasing-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 4) In an increasing-cost industry, the long-run market supply curve is: A) positively sloped. B) negatively sloped. C) vertical. D) horizontal. Answer: A Diff: 1 Topic: Drawing the Long-Run Market Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

5) Increasing cost industries are consistent with ________ in the long run. A) the law of supply B) the law of diminishing marginal product C) the law of demand D) None of the above are correct. Answer: A Diff: 1 Topic: Drawing the Long-Run Market Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 6) Which of the following is an example of an increasing cost industry? A) coffee B) sugar C) apartments D) All of the above are correct. Answer: D Diff: 1 Topic: Drawing the Long-Run Market Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition Recall the Application about the production of coffee in China to answer the following question(s). 7) According to the Application, farmers in the city of Pu'er, China currently earn more growing ________ than they do growing ________. A) tea; coffee B) rice; coffee C) coffee; tea D) rice; tea Answer: C Diff: 1 Topic: Application 5, Chinese Coffee Growers Obey the Law of Supply Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

8) Recall the Application. Farmers in the city of Pu'er, China, by changing the acreage devoted to coffee production, illustrate the law of supply in that the ________ in the price of coffee ________ the quantity supplied. A) increase; increased B) increase; decreased C) decrease; increased D) decrease; decreased Answer: A Diff: 1 Topic: Application 5, Chinese Coffee Growers Obey the Law of Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 9) One reason for increasing costs industries is that as an industry grows, it drives up the prices of inputs. Answer: TRUE Diff: 1 Topic: Long-Run Supply Curves for an Increasing-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 10) An increasing cost industry is one where total costs rise as the industry grows. Answer: FALSE Diff: 1 Topic: Long-Run Supply Curves for an Increasing-Cost Industry Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 11) The long-run supply curve is upward sloping in an increasing cost industry. Answer: TRUE Diff: 1 Topic: Drawing the Long-Run Market Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

12) What is an increasing cost industry? Answer: An increasing cost industry is an industry in which the average cost of production increases as total output of the industry increases. Diff: 1 Topic: Long-Run Supply Curves for an Increasing-Cost Industry Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 13) Are increasing cost industries a result of the law of diminishing marginal returns? Answer: No, the law of diminishing marginal returns cause increasing costs in the short run, when at least one input is fixed. Increasing cost industries have higher long run marginal costs for other reasons, such as having limited inputs and firms have varying technologies. Diff: 2 Topic: Long-Run Supply Curves for an Increasing-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 14) What is a long-run supply curve? Answer: A long-run supply curve is a curve showing the relationship between market price and quantity supplied in the long run. Diff: 1 Topic: Long-Run Supply Curves for an Increasing-Cost Industry Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 15) Firms in the long run do not experience diminishing marginal returns. Then why do some industries have upward-sloping long-run supply curves? Answer: In the long run, firms can flexibly scale up or down their production facilities so they do not experience diminishing marginal returns. However, as an increased number of firms in an industry expand their production facilities, the prices of some inputs may rise quickly, as their quantities are limited. Also, some industries face inputs with varying degrees of quality or productivity. At low prices only low cost producers are able to produce; as price rises firms facing higher costs are able to start production. Diff: 2 Topic: Drawing the Long-Run Market Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

6.6 Short-Run and Long-Run Effects of Changes in Demand 1) If the market demand decreases for a good sold in a perfectly competitive market, firms in the market: A) will be able to charge a higher price for their product. B) will receive a lower price for their product. C) will not be able to change their price. D) will not be affected by the change in demand. Answer: B Diff: 1 Topic: The Short-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 2) Toby sells wheat in a perfectly competitive market. This month Toby receives a lower price for a bushel of wheat than he did last month. Which of the following might explain this? A) The market demand for wheat increased. B) The market demand for wheat decreased. C) Firms exited the market. D) Toby's costs have increased. Answer: B Diff: 1 Topic: The Short-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 3) Toby sells wheat in a perfectly competitive market. This month Toby receives a higher price for a bushel of wheat than he did last month. Which of the following might explain this? A) The market demand for wheat increased. B) The market demand for wheat decreased. C) Firms entered the market. D) Toby's costs have decreased. Answer: A Diff: 1 Topic: The Short-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

4) Sheila sells corn in a perfectly competitive market. This month Sheila receives a lower price for a bushel of corn than she did last month. This might have happened because: A) the market demand increased for corn. B) the market demand decreased for corn. C) firms exited the market. D) Sheila's costs have increased. Answer: B Diff: 1 Topic: The Short-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 5) Sheila sells corn in a perfectly competitive market. This month Sheila receives a higher price for a bushel of corn than she did last month. Which of the following might explain this? A) The market demand increased for corn. B) The market demand decreased for corn. C) Firms entered the market. D) Sheila's costs have decreased. Answer: A Diff: 1 Topic: The Short-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 6) A perfectly competitive industry is in long-run equilibrium. If demand for the product increases, we can expect: A) firms to enter the market. B) firms to exit the market. C) no change in the number of firms in the market. D) There is not enough information to tell what will happen to the number of firms in the market. Answer: A Diff: 1 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

7) A perfectly competitive industry is in long-run equilibrium. If demand for the product decreases, we can expect: A) firms to enter the market. B) firms to exit the market. C) no change in the number of firms in the market. D) There is not enough information to tell what will happen to the number of firms in the market. Answer: B Diff: 2 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 8) A perfectly competitive industry is in long-run equilibrium. If demand for the product increases, we can expect the price of the good to: A) rise at first and then fall. B) fall at first and then rise. C) rise and remain at the higher price. D) fall and remain at the lower price. Answer: A Diff: 2 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 9) A perfectly competitive industry is in long-run equilibrium. If demand for the product decreases, we can expect the price of the good to: A) rise at first and then fall. B) fall at first and then rise. C) rise and remain at the higher price. D) fall and remain at the lower price. Answer: B Diff: 2 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

10) Long-run equilibrium for a perfectly competitive industry occurs when: A) P = MC = ATC. B) P = MC = AVC. C) P = MC = AFC. D) P > MC = ATC. Answer: A Diff: 1 Topic: The Long-Run Response to an Increase in Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 11) You notice that the price of butter rises and then falls. The best explanation for this is that: A) demand for butter increased causing price to rise, which attracted other firms to enter the market causing supply to increase, which caused the price to go back down. B) demand for butter decreased causing price to rise, which attracted other firms to enter the market causing supply to increase, which caused the price to go back down. C) demand for butter increased causing price to rise, which induced other firms to exit the market causing supply to decrease, which caused the price to go back down. D) demand for butter increased causing price to rise, which attracted other firms to enter the market causing supply to decrease, which caused the price to go back down. Answer: A Diff: 2 Topic: The Long-Run Response to an Increase in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 12) You notice that the price of butter falls and then rises. The best explanation for this is that: A) demand for butter increased causing price to fall, which attracted other firms to enter the market causing supply to increase, which caused the price to go back up. B) demand for butter decreased causing price to fall, which attracted other firms to enter the market causing supply to increase, which caused the price to go back up. C) demand for butter decreased causing price to fall, which induced other firms to exit the market causing supply to decrease, which caused the price to go back up. D) demand for butter decreased causing price to fall, which attracted other firms to enter the market causing supply to decrease, which caused the price to go back up. Answer: C Diff: 2 Topic: The Long-Run Response to an Increase in Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 61 Copyright © 2020 Pearson Education, Inc.

13) If the demand for a product increases, we would expect that price will initially ________, and eventually ________. A) rise; fall B) rise; continue to rise C) fall; rise D) fall; continue to fall Answer: A Diff: 2 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 14) If the demand for a product decreases, we would expect that price will initially ________, and eventually ________. A) rise; fall B) rise; continue to rise C) fall; rise D) fall; continue to fall Answer: C Diff: 2 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 15) If the demand for a product in an increasing cost perfectly competitive industry decreases, we would expect that price in the long run would ________ and the number of firms in the market would ________. A) decrease; decrease B) increase; increase C) decrease; increase D) increase; decrease Answer: A Diff: 2 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

16) If the demand for a product in an increasing cost perfectly competitive industry increases, we would expect that price in the long run would ________ and the number of firms in the market would ________. A) decrease; decrease B) increase; increase C) decrease; increase D) increase; decrease Answer: B Diff: 2 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 17) In a perfectly competitive industry, in the long run: A) firms earn a positive economic profit. B) firms earn zero economic profit. C) firms earn a negative economic profit. D) firms might earn a positive, zero, or negative economic profit. Answer: B Diff: 1 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 18) One difference between the short run and the long run is that perfectly competitive firms: A) always earn positive economic profit in the short run, but never in the long run. B) can earn positive, negative, or zero economic profit in the short run, but will earn zero economic profit in the long run. C) earn zero economic profit in the short run, but will earn positive economic profit in the long run. D) always earn more economic profit in the long run. Answer: B Diff: 1 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

Figure 6.5 19) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry with increasing cost. The market is in equilibrium at point A, where 100 identical firms produce 6 units of a product per hour. If the market demand curve shifts to the right, what will happen to an individual firm's profit? A) Each firm earns a positive profit at point B. B) Each firm earns a zero profit at point B because the market is perfectly competitive. C) The profit of each firm decreases as more firms enter the market and share the benefits of an increase in demand pushing the market from point A to point B. D) none of the above Answer: A Diff: 2 Topic: The Long-Run Response to an Increase in Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

20) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry. The market is in equilibrium at point A, where 100 identical firms produce 6 units of a product per hour. If the market demand curve shifts to the right, what will happen to the number of firms in the industry as the industry moves from point A to point B? A) It increases. B) It decreases. C) It remains the same. D) either A or B or C Answer: C Diff: 2 Topic: The Long-Run Response to an Increase in Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 21) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry. The market is in equilibrium at point A, where 100 identical firms produce 6 units of a product per hour. If the market demand curve shifts to the right, what has happened to an individual firm's output level at point B? A) Each firm produces two more units per hour. B) Each firm produces relatively smaller level of output as more firms enter the market. C) Each firm will produce the same level of output. D) none of the above Answer: A Diff: 2 Topic: The Long-Run Response to an Increase in Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

22) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry. The market is in equilibrium at point A, where 100 identical firms produce 6 units of a product per hour. If the market demand curve shifts to the right, which of the following statements is true in the short run? A) The market price rises to $12, which is greater than the average total cost. B) Each existing firm maximizes its profit by producing the output where marginal cost equals $12. C) Each existing firm produces two more units per hour, compared to its initial profitmaximizing output level at point A. D) All of the above are correct. Answer: D Diff: 2 Topic: The Long-Run Response to an Increase in Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 23) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry. The market is in equilibrium at point A, where 100 identical firms produce 6 units of a product per hour. If the market demand curve shifts to the right, which of the following statements is true in the long run? A) The market price drops below $12 as more firms enter the market and build more plants. B) Both existing firms and new firms earn a zero economic profit. C) All firms in the industry maximize their profits by producing the output where the marginal cost equals $10. D) All of the above are correct. Answer: D Diff: 2 Topic: The Long-Run Response to an Increase in Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

24) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry. The market is in equilibrium at point A, where 100 identical firms produce 6 units of a product per hour. Suppose that the market demand curve shifts to the right. Why is the short-run supply curve steeper than the long-run supply curve? A) Because production facilities are fixed in the short run. B) Because each firm experiences diminishing returns in the short run. C) Because production becomes costlier as firms squeeze more output from the existing production facilities. D) All of the above are correct. Answer: D Diff: 2 Topic: The Long-Run Response to an Increase in Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 25) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry. The industry is: A) a constant-cost industry. B) an increasing-cost industry. C) a decreasing-cost industry. D) There isn't sufficient information. Answer: B Diff: 2 Topic: The Long-Run Response to an Increase in Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

Figure 6.6 26) In Figure 6.6 if price is P3, then the industry will: A) expand. B) contract. C) stay the same size. D) cease to exist. Answer: A Diff: 2 Topic: The Long-Run Response to an Increase in Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 27) In Figure 6.6 if price is P2, then the industry will: A) expand. B) contract. C) stay the same size. D) cease to exist. Answer: C Diff: 3 Topic: The Long-Run Response to an Increase in Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 68 Copyright © 2020 Pearson Education, Inc.

28) In Figure 6.6 if price is P1, then the industry will: A) expand. B) contract. C) stay the same size. D) merge. Answer: B Diff: 3 Topic: The Long-Run Response to an Increase in Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 29) If perfectly competitive firms are earning positive economic profits in the short run, then in the long run other firms will enter the market. Answer: TRUE Diff: 1 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 30) In the long-run perfectly competitive equilibrium, firms produce at the minimum of average total cost. Answer: TRUE Diff: 1 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 31) An increase in demand will lead to a decrease in supply in the long run. Answer: FALSE Diff: 1 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

32) An increase in demand will induce entry by firms in the long run. Answer: TRUE Diff: 1 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 33) If firms make a profit in the short run, firms will exit the market in the long run. Answer: FALSE Diff: 1 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 34) It is possible that a firm in a perfectly competitive market earns a negative profit in the long run. Answer: FALSE Diff: 1 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 35) Consider a perfectly competitive market. What do you expect to happen to the number of firms and firm profitability in the short run and long run if demand for the product falls? Answer: In the short run, firms will earn negative profit. In the long run, some of these firms will exit the industry, lowering market supply, and raising the market price until remaining firms are earning zero economic profit. Diff: 2 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

36) In a perfectly competitive market, what would you expect to happen to the number of firms and firm profitability in the short run and long run if demand for the product rises? Answer: In the short run, firms will earn positive economic profit as price rises. In the long run, some firms will enter the industry, increasing market supply, and reducing the market price until all firms are earning zero economic profit. Diff: 2 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 37) Explain why perfectly competitive firms make zero economic profit in the long run. Answer: If perfectly competitive firms are making a positive profit in the short run, this will attract other firms to enter the market in the long run. This will cause the industry supply to increase, which will lower the market price. This will continue until all firms are making zero economic profit. If firms are making negative economic profit in the short run, this will induce some firms to exit the market in the long run. This will cause the industry supply to decrease, which will raise the market price. This will continue until the firms that are left are making zero economic profit. Diff: 2 Topic: The Long-Run Response to an Increase in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 6.7 Long-Run Supply for a Constant-Cost Industry 1) A constant-cost industry is one in which: A) input prices do not change as output changes in the long run. B) supply is highly inelastic. C) the short-run supply curve is horizontal. D) all of the above Answer: A Diff: 1 Topic: Long-Run Supply Curve for a Constant-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

2) A constant-cost industry is more likely to arise in a market where: A) the industry takes only a small portion of the resources available. B) the industry takes only a large portion of the resources available. C) inputs have very different levels of quality. D) firms have large fixed costs and small marginal costs. Answer: A Diff: 2 Topic: Long-Run Supply Curve for a Constant-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 3) A constant-cost industry is one in which: A) the demand curve is horizontal. B) the long-run supply curve is horizontal. C) the short-run supply curve is horizontal. D) all of the above Answer: B Diff: 1 Topic: Long-Run Supply Curve for a Constant-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 4) In a constant-cost industry, an increase in price causes: A) some firms to exit the industry. B) quantity supplied to remain constant. C) some firms to enter the industry. D) price controls. Answer: C Diff: 2 Topic: Long-Run Supply Curve for a Constant-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

5) In a constant-cost industry, a decrease in price causes: A) some firms to exit the industry. B) quantity supplied to remain constant. C) some firms to enter the industry. D) price controls. Answer: A Diff: 2 Topic: Long-Run Supply Curve for a Constant-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 6) Which of the following products is the most likely to have constant costs in the long run? A) ice B) wine grapes C) housing D) copper Answer: A Diff: 2 Topic: Hurricane Andrew and the Price of Ice Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition Recall the Application about the price and supply of blueberries to answer the following question(s). 7) According to the Application, the supply of blueberries in the short run is ________, so an increase in demand causes the price to ________. A) flexible; rise B) flexible; fall C) inflexible; rise D) inflexible; fall Answer: C Diff: 1 Topic: Application 6, The Upward Jump and Downward Slide of Blueberry Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

8) According to the Application, as the quantity of blueberries demanded increases, prices ________ in the short run and ________ as supply catches up with demand. A) rise; stabilize B) fall; stabilize C) rise; fall D) fall; rise Answer: C Diff: 1 Topic: Application 6, The Upward Jump and Downward Slide of Blueberry Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 9) According to the Application, the upward jump of the price of blueberries from 2005-2007 followed by the drop in the price of blueberries to $1.44/ lb. shows that blueberries are in: A) a constant-cost industry. B) an increasing-cost industry. C) a decreasing-cost industry. D) a zero-cost industry. Answer: A Diff: 1 Topic: Application 6, The Upward Jump and Downward Slide of Blueberry Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition Recall the Application about the demand and price for margarine to answer the following question(s). 10) Recall the Application. Between 2000 and 2009, total U.S. consumption of margarine ________ and the price, in real terms, ________. A) doubled; doubled B) decreased by roughly half; decreased by roughly half C) decreased by roughly half; stayed roughly the same D) doubled; stayed roughly the same Answer: C Diff: 1 Topic: Application 7, Economic Detective and the Case of Margarine Prices Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

11) Recall the Application. The reason that the change in demand for margarine did not change the equilibrium price in the long run is because the margarine industry is an example of ________ industry. A) a decreasing-cost B) an increasing-cost C) a constant-cost D) a negative-cost Answer: C Diff: 1 Topic: Application 7, Economic Detective and the Case of Margarine Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 12) The long-run supply curve is upward sloping in a constant-cost industry. Answer: FALSE Diff: 1 Topic: Long-Run Supply Curve for a Constant-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 13) In a constant-cost industry, inputs prices do not change with changes in output. Answer: TRUE Diff: 1 Topic: Long-Run Supply Curve for a Constant-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 14) Large industries that employ most of the available resources tend to have constant costs in the long run. Answer: FALSE Diff: 2 Topic: Long-Run Supply Curve for a Constant-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

15) A constant-cost industry has an infinitely elastic long-run supply curve. Answer: TRUE Diff: 2 Topic: Long-Run Supply Curve for a Constant-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 16) An increase in price causes exit from a constant-cost industry. Answer: FALSE Diff: 2 Topic: Long-Run Supply Curve for a Constant-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 17) What characterizes a constant-cost industry and what causes it to be a constant-cost industry? Answer: A constant cost industry is one with a horizontal long-run supply curve. The long-run supply curve is horizontal because input prices do not change with quantity produced. Diff: 2 Topic: Long-Run Supply Curve for a Constant-Cost Industry Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition 18) What happens in the short run and long run in a constant-cost industry such as bags of ice after a natural disaster like a hurricane? Answer: In the short run the price of ice rises, maybe dramatically, but in the long run the quantity rises as the higher price induces more sellers into the market and the price quickly comes back down to the long-run constant cost. Diff: 2 Topic: Hurricane Andrew and the Price of Ice Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 7 Monopoly and Price Discrimination 7.1 The Monopolist's Output Decision 1) A market served by only one firm is called a(n): A) perfectly competitive market. B) monopoly. C) oligopoly. D) Any of the above could be correct. Answer: B Diff: 1 Topic: Monopoly and Price Discrimination Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 2) A firm that has market power has the ability: A) to affect the price of its own product. B) to conduct illegal activities without fear of prosecution. C) to command consumer to buy any quantity from them. D) to drive its competition out of the market. Answer: A Diff: 1 Topic: Monopoly and Price Discrimination Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 3) Which of the following firms have market power? A) private universities B) fast food chains such as McDonald's C) theme parks D) All of the above have market power. Answer: D Diff: 1 Topic: Monopoly and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

4) Which of the following firms have no market power? A) clothing companies B) fast food chains such as McDonald's C) theme parks D) gold panners during the gold rush Answer: D Diff: 1 Topic: Monopoly and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 5) Which of the following is NOT a characteristic of a monopoly? A) There is only one seller. B) A monopolist is a price-taker. C) There exist barriers to entry. D) A monopolist's sales revenue is constrained by the market demand. Answer: B Diff: 1 Topic: Monopoly and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 6) Which of the following is NOT a barrier to entry for monopoly? A) a patent B) government licensing C) large economies of scale D) a large number of existing firms in a market Answer: D Diff: 1 Topic: Monopoly and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

7) When economists say a market has "barriers to entry," they refer to: A) monopolists being prohibited from selling their products to certain customers. B) a policy that some countries establish to reduce imports from other countries. C) factors that prevent other firms from challenging a firm with market power. D) economic profits that are positive, but too high to encourage entry. Answer: C Diff: 1 Topic: Monopoly and Price Discrimination Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 8) Which of the following is an example of a barrier to entry? A) A firm is open for business only at certain hours of the day, and has its doors locked at other times. B) The government grants licenses to taxicab drivers, without which it is illegal to operate a taxicab. C) A newspaper sells advertising space to businesses. D) A firm is lacking a website. Answer: B Diff: 2 Topic: Monopoly and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 9) Which of the following is NOT an artificial barrier to entry? A) a patent B) government franchise C) large economies of scale D) government licensing Answer: C Diff: 3 Topic: Monopoly and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

10) When a firm is awarded a patent, it is given monopoly rights to the production of that product for ________ years. A) 10 B) 20 C) 30 D) 50 Answer: B Diff: 3 Topic: Monopoly and Price Discrimination Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 11) Which of the following firms rely on patents the most as the barrier to keep other firms from entering the industry? A) pharmaceutical firms B) textbook publishers C) law firms D) wine makers Answer: A Diff: 3 Topic: Monopoly and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 12) A monopoly may arise due to: A) a patent. B) network externalities. C) large economies of scale. D) all of the above Answer: D Diff: 2 Topic: Monopoly and Price Discrimination Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

13) ________ is a monopoly that exists in an industry where large economies of scale act as a barrier to entry. A) A natural monopoly B) A monopolistic competitor C) A regulated monopoly D) A price discriminator Answer: A Diff: 2 Topic: Monopoly and Price Discrimination Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 14) A network externality occurs when: A) a firm has a patent. B) the value of a product to a consumer increase with the number of other consumers who use it. C) a firm has large economies of scale. D) the value of a product to a consumer requires another product. Answer: B Diff: 2 Topic: Monopoly and Price Discrimination Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 15) Facebook is a social networking website that is used by a growing number of individuals. Because of its popularity, it is now more difficult for new networking websites to enter and compete with Facebook. Facebook enjoys ________ as a barrier for others to enter the market. A) a network externality B) price discrimination C) a negative externality D) economies of scale Answer: A Diff: 2 Topic: Monopoly and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

16) The demand curve that a monopolist faces is: A) the market demand curve. B) the same as the demand curve that faces a perfectly competitive firm. C) not affected by changes in the prices of other goods. D) generally flatter than the demand curve that faces a perfectly competitive firm. Answer: A Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Table 7.1 17) Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. The total revenue that Gladys receives from selling four units of output is: A) $4. B) $6. C) $10. D) $24. Answer: D Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

18) Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. The marginal revenue that Gladys receives from selling the fourth unit of output is: A) $3. B) $6. C) $10. D) $24. Answer: A Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 19) Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. The marginal revenue that Gladys receives from selling the fifth unit of output is: A) $5, because that is the price per unit of output that Gladys receives. B) $5, because that is the quantity that Gladys sells. C) $25, because Gladys sells five unit of output at a price of $5. D) $1, because Gladys earns $1 more in revenue by increasing her output to five units from four units. Answer: D Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 20) Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. Gladys' marginal revenue becomes negative starting with the production of which unit? A) 2 B) 4 C) 6 D) None of the above; marginal revenue is always positive or zero. Answer: C Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

21) Which of the following is NOT a characteristic of a monopoly? A) A monopolist faces a downward-sloping demand curve. B) There are no close substitutes for a monopolist's product. C) After the first unit, the monopolist's marginal revenue is always less than its price. D) A monopolist is a price taker. Answer: D Diff: 1 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 22) Which of the following best characterizes the tradeoff faced by a monopolist when deciding what quantity to produce? A) The firm can increase its output, but needs to lower its price for only the marginal unit of output. B) The firm can increase its output, but to do so it must charge a higher price to all customers. C) The firm gets more revenue from new customers by increasing output, but gets less revenue from existing customers given that it lowered its price. D) The firm gets less revenue from new customers by increasing output, but gets more revenue from existing customers given that it lowered its price. Answer: C Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Figure 7.1 23) Figure 7.1 shows a monopolist's demand curve. If the monopolist increases output from two to three units, what is its marginal revenue? A) $3 B) $5 C) $12 D) $15 Answer: A Diff: 2 Topic: Total Revenue and Marginal Revenue, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 24) Figure 7.1 shows a monopolist's demand curve. If the monopolist increases output from four to five units, what is its marginal revenue? A) $16 B) $15 C) $3 D) -$1 Answer: D Diff: 2 Topic: Total Revenue and Marginal Revenue, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 9 Copyright © 2020 Pearson Education, Inc.

25) Figure 7.1 shows a monopolist's demand curve. If the monopolist were to maximize its total revenue, it would produce ________ units of output and charge a price of ________. A) 3; $5 B) 4; $4 C) 5; $3 D) 6; $2 Answer: B Diff: 2 Topic: Total Revenue and Marginal Revenue, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 26) When a monopolist sells two units of output its total revenues are $100. When the monopolist sells three units of output its total revenues are $120. When the monopolist sells three units of output, the price per unit is: A) $6.67. B) $20. C) $33.33. D) $40. Answer: D Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 27) When a monopolist sells two units of output its total revenues are $100. When the monopolist sells three units of output, its price per unit is $35. The monopolist's marginal revenue from selling the third unit of output is: A) $5. B) $33.33. C) $35. D) $105. Answer: A Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

28) For a monopolist, marginal revenue ________ for all units of output except the first unit. A) is greater than the price of output B) is less than the price of output C) is equal to the price of output D) may be either greater than or less than the price of output Answer: B Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 29) If a monopolist charges the same price for all of the units of the good that it sells, then beyond the first unit sold: A) P = MR because the firm maximizes profit. B) P = MR because the monopolist holds price constant. C) P < MR because the monopolist must decrease price on all units in order to sell another unit. D) P > MR because the monopolist must decrease price on all units in order to sell another unit. Answer: D Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 30) A monopolist will never produce at a quantity where the: A) MR < 0. B) MR > 0. C) P > MR. D) MR= MC. Answer: A Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Figure 7.2 31) Figure 7.2 shows a monopolist's demand curve. The marginal revenue from selling the third unit is: A) $6. B) $8. C) $10. D) $44. Answer: A Diff: 2 Topic: Total Revenue and Marginal Revenue, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 32) Figure 7.2 shows a monopolist's demand curve. The marginal revenue from selling the fourth unit is: A) $8. B) $6. C) $4. D) $2. Answer: D Diff: 2 Topic: Total Revenue and Marginal Revenue, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

33) Figure 7.2 shows a monopolist's demand curve. Suppose that the marginal cost is $6 for all units and the current output level is 4 units. Then what would you recommend to the firm? A) Lower the price to sell more units. B) Raise the price and sell fewer units. C) Maintain the current price and output level. D) There is not sufficient information. Answer: B Diff: 3 Topic: Total Revenue and Marginal Revenue, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 34) Figure 7.2 shows a monopolist's demand curve. Suppose that the marginal cost is $6 for all units and the current output level is 4 units. Then which of the following is true? A) The marginal revenue is less than the marginal cost. B) The price is greater than the average total cost. C) The firm is producing the profit-maximizing level of output. D) All of the above are correct. Answer: A Diff: 2 Topic: Total Revenue and Marginal Revenue, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 35) How do monopoly prices and quantities produced differ from perfectly competitive outcomes, all other things equal? A) Monopoly prices and quantities are both lower than competitive outcomes. B) Monopoly prices and quantities are both higher than competitive outcomes. C) Monopoly prices are lower than competitive prices but monopoly quantities are higher than competitive quantities. D) Monopoly prices are higher than competitive prices but monopoly quantities are lower than competitive quantities. Answer: D Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

36) A monopolist maximizes profits by setting the quantity where: A) marginal revenue is equal to marginal cost. B) marginal revenue is greater than marginal cost. C) marginal revenue is less than marginal cost. D) total revenue is as high as possible. Answer: A Diff: 2 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 37) If a monopolist is maximizing its profits, we know that it has: A) maximized total revenue. B) maximized marginal revenue. C) minimized total cost. D) equated marginal cost and marginal revenue. Answer: D Diff: 2 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 38) At a price of $10, the marginal revenue of a monopolist is $6. If the marginal cost of production is $8, what should the monopolist do in order to maximize profits? A) Increase its price. B) Decrease its price. C) Keep its price at the same level. D) There is not enough information to solve. Answer: A Diff: 2 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

39) At a price of $20, the marginal revenue of a monopolist is $12. If the marginal cost of production is $10, what should the monopolist do in order to maximize profits? A) Increase its price. B) Decrease its price. C) Keep its price at the same level. D) There is not enough information to solve. Answer: B Diff: 2 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Figure 7.3 40) To maximize profits, the firm in Figure 7.3 will produce: A) Q1. B) Q2. C) Q3. D) Q4. Answer: B Diff: 2 Topic: Using the Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

41) If the firm in Figure 7.3 produces at Q3, the firm A) will receive less profits than if it produces at Q2. B) maximizes profits. C) minimizes costs. D) will receive less profits than if it produces at Q4. Answer: A Diff: 2 Topic: Using the Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 42) To maximize profits, the firm in Figure 7.3 will charge: A) P1. B) P2. C) P3. D) P4. Answer: C Diff: 2 Topic: Using the Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 43) At the optimal production point, the firm in Figure 7.3 will: A) make a zero economic profit. B) suffer a loss. C) make a positive economic profit. D) break even. Answer: C Diff: 2 Topic: Using the Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Recall the Application about setting the price of tickets for Major League Baseball games to answer the following question(s). 44) According to the Application, the marginal revenue from ticket sales for a typical Major League Baseball team is: A) positive. B) zero. C) negative. D) infinity. Answer: C Diff: 1 Topic: Application 1, Marginal Revenue from a Baseball Fan Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 45) According to the Application, what is the reason that MLB teams are setting the price of their tickets where the marginal revenue was negative? A) They can get additional revenue from concessions. B) MLB owners only care about popularity. C) TV revenues are way larger than ticket revenues. D) The pricing is set by the Federal Trade Commission. Answer: A Diff: 1 Topic: Application 1, Marginal Revenue from a Baseball Fan Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 46) According to the Application, due to the marginal revenue from ticket sales for a typical Major League Baseball team, the team could increase total revenue from ticket sales by ________ the price of tickets and ________ the quantity of tickets sold. A) increasing; increasing B) increasing; decreasing C) decreasing; increasing D) decreasing; decreasing Answer: B Diff: 1 Topic: Application 1, Marginal Revenue from a Baseball Fan Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

47) A network externality acts as a barrier to entry. Answer: TRUE Diff: 1 Topic: Monopoly and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 48) A monopolist's marginal cost is less than the price it charges. Answer: TRUE Diff: 1 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 49) After the first unit, a monopolist's marginal revenue is less than the price it charges because to sell an additional unit it needs to lower its price. Answer: TRUE Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 50) A monopolist will never produce a level of output where MR < 0. Answer: TRUE Diff: 1 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 51) At a price of $15, a firm sells 80 Blu-ray discs per day. If the slope of the demand curve is 0.10, marginal revenue is $5. Answer: FALSE Diff: 3 Topic: Total Revenue and Marginal Revenue Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 19 Copyright © 2020 Pearson Education, Inc.

52) Monopolist marginal revenue rises with output. Answer: FALSE Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 53) A monopolist picks the quantity of output at which price equals marginal cost. Answer: FALSE Diff: 1 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 54) A monopolist maximizes profit by producing the output at which marginal revenue equals marginal cost. Answer: TRUE Diff: 1 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 55) At a price of $18, the marginal revenue of a movie seller is $12. If the marginal cost of a movie is $9, the firm should increase its price. Answer: FALSE Diff: 2 Topic: Using the Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

56) Why do barriers to entry create market power? Answer: Barriers to entry create market power because it is difficult for firms to enter even if the incumbents are enjoying excessive profits (firms in the market would have the ability to determine price due to lack of competition). In a competitive market with no entry barriers, economic profits would be bid down to zero by entry. Diff: 2 Topic: Monopoly and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 57) Why do some markets have more firms than others? Answer: It depends on a number of factors. One involves the costs of the industry—in some industries, given consumer demand for the product, it makes sense for there to be more firms in some markets than in others. Other factors include barriers to entry—some markets are easier to enter than are others. Diff: 2 Topic: Monopoly and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 58) What is a network externality? Answer: It is when the value of a good to a consumer increases with the number of other consumers using the good. Diff: 2 Topic: Monopoly and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 59) How does a monopolist's marginal revenue change as output increases? Why? Answer: As output increases, a firm must lower its price to sell additional units of the good. So the firm's marginal revenue from selling an additional unit of output decreases with output. Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

60) Why is a monopolist's marginal revenue less than the price? Answer: In order for the monopolist to sell more of a good, it must lower its price on all units sold. Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 61) Will a profit-maximizing monopolist who is not subject to government regulation produce a quantity where the MR < 0? Answer: Never. If the MR < 0, the firm would always be better off decreasing its production to raise prices. Doing so increases revenues and decreases costs, resulting in a higher level of profit. Diff: 2 Topic: Total Revenue and Marginal Revenue Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 62) Should a monopolist charge the highest price for its good that anyone in the market will pay? Answer: No. The monopolist would not sell very many units of its good that way. It should lower price from the highest possible price and thus increase revenue. The monopolist should produce where marginal revenue equals marginal cost. Diff: 2 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

7.2 The Social Cost of Monopoly 1) Which of the following is most accurate? A) In all cases, competitive markets yield more consumer surplus than would be enjoyed in a monopoly market with the same cost structure. B) In all cases, competitive markets yield less consumer surplus than would be enjoyed in a monopoly market with the same cost structure. C) In some cases, competitive markets can yield less consumer surplus than would be enjoyed in a monopoly market with the same cost structure. D) In all cases, competitive markets yield the same consumer surplus that would be enjoyed in a monopoly market with the same cost structure. Answer: A Diff: 1 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 2) In the long run, the main reason that a monopolist can earn positive economic profits while a perfectly competitive firm cannot is: A) monopolists enjoy greater economies of scale. B) there are no barriers to entry in a perfectly competitive market. C) the monopolist faces an inelastic demand for its product. D) perfectly competitive firms face greater opportunity costs. Answer: B Diff: 2 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 3) Which of the following is true in the long run for both monopoly and perfectly competitive industries? A) There are low barriers to entry. B) Firms can earn positive economic profits in the long run. C) Firms produce at levels that are economically efficient. D) Firms will go out of business if they cannot charge a price that is at least equal to average total cost. Answer: D Diff: 2 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 23 Copyright © 2020 Pearson Education, Inc.

4) Will a monopolist produce at a quantity that is higher than the long-run competitive equilibrium output level? A) No, profit maximization for a monopoly always occur at a lower output level than in a competitive market. B) Yes, the monopoly always produces at an output level larger than in a competitive market. C) Yes, but only if it is a monopoly because it holds a patent. D) There is no theory in microeconomics that states that a monopolist produces larger or smaller output than in a perfectly competitive firm in the long-run. Answer: A Diff: 2 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 5) As a monopolist's profit-maximizing quantity moves further away from the competitive industry's profit-maximizing quantity, A) the larger the deadweight loss in the market. B) the larger the profits of the monopoly. C) the smaller the deadweight loss in the market. D) the harder it is for the firm to stay as a monopoly. Answer: A Diff: 2 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 6) Can a monopolist that can charge only one price maximize its profit at a quantity that is equal to the quantity produced if the industry were perfectly competitive? A) No. Never, B) Yes, if the fixed costs are zero. C) Yes, if the marginal costs are zero. D) Yes, if the total costs are zero. Answer: A Diff: 2 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

7) Relative to a competitive market equilibrium, the profit-maximizing quantity chosen by a monopolist will result in a deadweight loss because: A) the monopolist will produce at a quantity lower than the competitive equilibrium. B) the monopolist will produce at a quantity higher than the competitive equilibrium. C) the monopolist will charge a price lower than the competitive equilibrium. D) the monopolist will keep producing at a quantity even though the MR < MC. Answer: A Diff: 2 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Figure 7.4 8) Suppose that Figure 7.4 shows a monopolist's demand curve, marginal revenue, and its costs. The monopolist would maximize its profit by producing a quantity of: A) 30 units. B) 50 units. C) 60 units. D) There is not sufficient information. Answer: A Diff: 2 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

9) Suppose that Figure 7.4 shows a monopolist's demand curve, marginal revenue, and its costs. The monopolist would maximize its profit by charging a price of: A) $35. B) $25. C) $20. D) $16. Answer: A Diff: 2 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 10) Suppose that Figure 7.4 shows a monopolist's demand curve, marginal revenue, and its costs. At the profit-maximizing output level, the monopolist's profit would be: A) $730. B) $570. C) $320. D) $150. Answer: B Diff: 2 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 11) Suppose that Figure 7.4 shows an industry's market demand, its marginal revenue, and the production costs of a representative firm. If the industry was perfectly competitive, it would produce a quantity of: A) 30 units. B) 50 units. C) 60 units. D) There is not sufficient information. Answer: B Diff: 2 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

12) Suppose that Figure 7.4 shows an industry's market demand, its marginal revenue, and the production costs of a representative firm. If the industry was perfectly competitive, a representative firm would charge a price of: A) $35. B) $25. C) $20. D) $16. Answer: B Diff: 2 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 13) Suppose that Figure 7.4 shows an industry's market demand, its marginal revenue, and the production costs of a representative firm. If the industry was perfectly competitive, a representative firm's profit would be: A) $1,250. B) $450. C) $250. D) There is not sufficient information. Answer: D Diff: 2 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 14) Refer to Figure 7.4. If the market was perfectly competitive, the consumer surplus would be: A) $850. B) $625. C) $300. D) $100. Answer: B Diff: 2 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

15) Refer to Figure 7.4. If the market was a monopoly, the consumer surplus would be: A) $625. B) $450. C) $300 D) $225. Answer: D Diff: 3 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 16) Refer to Figure 7.4. The deadweight loss associated with the monopoly would be represented by the area: A) △ abe. B) △ ace. C) △ ade. D) △ efg. Answer: C Diff: 2 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Figure 7.5 17) Suppose that Figure 7.5 shows a monopolist's demand curve, marginal revenue, and its cost. The monopolist would maximize its profit by producing a quantity of ________ and by charging a price of ________. A) 35; $65 B) 50; $50 C) 70; $30 D) There is not sufficient information. Answer: A Diff: 2 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

18) Suppose that Figure 7.5 shows a monopolist's demand curve, marginal revenue, and its cost. At the profit-maximizing output level and price, the consumer surplus would be: A) $2,450. B) $1,225. C) $612.50. D) $262.50. Answer: C Diff: 2 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 19) Suppose that Figure 7.5 shows an industry's market demand, its marginal revenue, and the production costs of a representative firm. If the industry was perfectly competitive, it will produce a quantity of ________ and charge a price of ________. A) 35; $65 B) 50; $50 C) 70; $30 D) There is not sufficient information. Answer: C Diff: 2 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 20) Suppose that Figure 7.5 shows an industry's market demand, its marginal revenue, and the production costs of a representative firm. If the industry was perfectly competitive, the consumer surplus would be: A) $2,450. B) $1,225. C) $612.50. D) $262.50. Answer: A Diff: 2 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

21) Refer to Figure 7.5. The deadweight loss associated with the monopoly would be: A) $787.5. B) $612.5. C) $262.5. D) There is not sufficient information. Answer: B Diff: 3 Topic: Deadweight Loss from Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 22) The term "rent seeking" best describes a situation in which: A) individuals expend effort searching for a good price on an apartment. B) consumers compete for a limited quantity of the good. C) firms use resources to secure or preserve a monopoly in providing a good or service. D) None of the above is a good description of rent-seeking behavior. Answer: C Diff: 2 Topic: Rent Seeking: Using Resources to Get Monopoly Power Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 23) When a pharmaceutical firm spends millions of dollars to lobby and convince Congress to extend the number of years a firm is awarded patent protection, then the pharmaceutical firm is engaging in: A) rent seeking. B) fraud. C) price discrimination. D) marginal cost pricing. Answer: A Diff: 2 Topic: Rent Seeking: Using Resources to Get Monopoly Power Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

24) When a local casino spends millions in TV ads convincing town residents to reject another casino's bid to operate in the area, the casino is: A) rent seeking. B) seeking rent controls. C) acting fraudulently. D) allocating resources efficiently. Answer: A Diff: 2 Topic: Rent Seeking: Using Resources to Get Monopoly Power Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 25) When a local casino spends millions in TV ads convincing town residents to reject another casino's bid to operate in the area, the most that the casino would be willing to spend is: A) the producer surplus gained by being a monopoly. B) the consumer surplus gained by being a monopoly. C) deadweight loss. D) total economic surplus. Answer: A Diff: 2 Topic: Rent Seeking: Using Resources to Get Monopoly Power Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 26) In the case of rent-seeking behavior in a monopolistic market: A) the net loss to society is greater than it would have been in the absence of rent-seeking behavior. B) the net loss to society is less than it would have been in the absence of rent-seeking behavior. C) the net loss to society is the same as it would have been in the absence of rent-seeking behavior. D) monopoly profit is higher than if the monopolist did not engage in rent-seeking behavior, but the net loss to society is lower. Answer: A Diff: 1 Topic: Rent Seeking: Using Resources to Get Monopoly Power Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Recall the Application about the Native American Tribes in Michigan that had a monopoly in casino gambling to answer the following question(s). 27) Recall the Application. How many Native American Tribes made a deal with the state of Michigan in 1993 and were granted a monopoly in casino gambling? A) 2 B) 3 C) 7 D) 10 Answer: C Diff: 1 Topic: Application 2, Rent Seeking for Tribal Casinos Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 28) Recall the Application. The tribes agreed to pay the state a share of their profits in exchange for being granted a monopoly in casino gambling. What economic concept does this illustrate? A) profit maximization B) rent seeking C) irrational behavior D) none of the above Answer: B Diff: 1 Topic: Application 2, Rent Seeking for Tribal Casinos Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 29) Part of the efficiency cost resulting from a switch from perfect competition to monopoly is the loss of consumer surplus caused by the decrease in quantity produced. Answer: TRUE Diff: 2 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

30) Monopolists earn excessive profits by increasing their quantity produced above the competitive market outcome. Answer: FALSE Diff: 1 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 31) If a market switches from being a perfectly competitive market to being a monopoly market, the decrease in consumer surplus is more than offset by an increase in producer profits. Answer: FALSE Diff: 2 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 32) Monopolists reduce producer surplus. Answer: FALSE Diff: 1 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 33) Monopolies reduce market efficiency compared to perfectly competitive markets. Answer: TRUE Diff: 1 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 34) Firms that expend resources for lobbying that could have been used for productive services are engaging in rent-seeking behavior. Answer: TRUE Diff: 1 Topic: Rent Seeking: Using Resources to Get Monopoly Power Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 35 Copyright © 2020 Pearson Education, Inc.

35) Explain why a monopolist must lower its quantity relative to a competitive market to maximize its profits. Answer: Unlike competitive firms, which are price takers with no control over the market, monopolists have a downward-sloping demand curve exclusively for their product. Therefore, if a monopolist wants to increase its quantity produced, it must lower its price for all units sold. The reverse is also true: the monopolist can charge a higher price to everyone by decreasing its production. Therefore, the monopolist's marginal revenue is not the market price (as is the case in a competitive firm) but is rather a decreasing function of the quantity produced that is necessarily less than the price of the output. The monopolist, when lowering output from the competitive level, faces a tradeoff. By lowering its output, it loses the revenue on the output that it is no longer producing. But it gains revenue as it can sell its other output at a higher price. At least at first, when the marginal revenue is less than marginal cost, the monopolist can increase its profits by reducing output from the competitive level. Diff: 2 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 36) What does the deadweight loss of monopoly measure? Answer: It measures the inefficiency associated with monopoly because the level of production is lowered. Since fewer units are produced there is a loss of both consumer and producer surplus for those units; this is known as a loss in market surplus. Diff: 2 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 37) Why does monopoly necessarily reduce consumer surplus compared to perfect competition? Answer: In a monopoly market, consumers consume less of the product and pay a higher price for the product. Since getting to consume less reduces consumer surplus and a higher price reduces consumer surplus, the combination of them necessarily reduces consumer surplus. Diff: 2 Topic: Deadweight Loss from Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

38) What is rent seeking? Answer: Rent seeking is the process of using public policy to gain economic profit. Diff: 2 Topic: Rent Seeking: Using Resources to Get Monopoly Power Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 7.3 Patents and Monopoly Power 1) When governments grant patents: A) producers earn profits that are substantially higher than would occur in a competitive market. B) consumers pay a higher price than they would in a competitive market. C) consumers are likely to pay lower prices than they would in a competitive market. D) both A and B are correct. Answer: D Diff: 1 Topic: Incentives for Innovation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 2) Which of the industries listed below relies the most on patent protection to recoup its investments on research and development? A) the pharmaceutical industry B) the dairy industry C) the restaurant industry D) the citrus industry Answer: A Diff: 1 Topic: Incentives for Innovation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

3) Why do pharmaceutical firms benefit most from patent protection? A) Because research and development of drugs require large expenditures that need to be recouped while the patent is still valid. B) Because pharmaceutical drugs need to be controlled by the government. C) Because pharmaceutical companies pay large taxes to the government. D) Because only physicians can legally prescribe pharmaceutical drugs. Answer: A Diff: 1 Topic: Incentives for Innovation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 4) In which of the following situations can a firm or individual apply for a patent? A) A firm develops a new tool that makes cutting grass much easier. B) An author publishes a new novel. C) Nicki Minaj, a recording artist, releases a new CD in the market. D) All of the above are activities that can be patented. Answer: A Diff: 2 Topic: Incentives for Innovation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 5) Suppose that it would cost a firm $10 million to develop a new drug. In the absence of a patent, other firms will be able to copy and bring to market a generic equivalent of the drug in three years. In each of these three years, the firm would earn monopoly profits of $3 million. A patent will generate monopoly status for the firm for twenty years. If the government knew this information ahead of time, which of the following is most correct? A) The government should not grant a patent to the firm, because the firm would earn monopoly profits for three years even without the patent. B) The government should not grant a patent to the firm, because monopoly leads to efficiency losses relative to the competitive market. C) The government should grant a patent to the firm, because even with a patent the firm will not earn monopoly profits. D) The government should grant a patent to the firm, because the firm would not produce the drug at all without a patent. Answer: D Diff: 2 Topic: Tradeoffs from Patents Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 38 Copyright © 2020 Pearson Education, Inc.

6) Suppose that it would cost a firm $9 million to develop a new drug. In the absence of a patent, other firms will be able to copy and bring to market a generic equivalent of the drug in three years. In each of these three years, the firm would earn monopoly profits of $4 million. A patent will generate monopoly status for the firm for twenty years. If the government knew this information ahead of time, which of the following is most correct? A) The government should grant a patent to the firm, because the firm would not produce the drug at all without a patent. B) The government should grant a patent to the firm, because it does not have the resources to determine on a case-by-case basis exactly which inventions merit award of the patent. C) The government should grant a patent to the firm, because even with a patent the firm will not earn monopoly profits. D) The government should not grant a patent to the firm, because the firm would earn sufficient profits to develop the drug without the patent. Answer: D Diff: 2 Topic: Tradeoffs from Patents Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 7) The merits of a patent system include: A) the patent system gives firms strong incentives to take the risk of substantial research and development costs. B) the patent system may precipitate the development of new products. C) granting monopoly power through a patent may be beneficial from society's perspective. D) all of the above. Answer: D Diff: 2 Topic: Tradeoffs from Patents Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Recall the Application about allegations that the makers of branded drugs made deals with generic drug makers once the patents expired on branded drugs to answer the following question(s). 8) Recall the Application. When a patent ends and generic drugs are introduced, there is: A) downward pressure on the price of the patent version of the drug. B) upward pressure on the price of the patent version of the drug. C) no pressure on the price of the patent version of the drug. D) no demand for the patent version of the drug. Answer: A Diff: 2 Topic: Application 3, Bribing the Makers of Generic Drugs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 9) According to the Application, brand name drugs and generic drugs are ________ each other. A) virtually identical to B) completely different from C) slightly similar to D) perfect complements of Answer: A Diff: 2 Topic: Application 3, Bribing the Makers of Generic Drugs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 10) Recall the Application. When a patent ends and generic drugs are introduced, there is downward pressure on price. Therefore, the makers of the brand name drug will: A) raise their price. B) abandon the product. C) claim the generic is not as good as the patent version of the drug. D) price discriminate. Answer: C Diff: 2 Topic: Application 3, Bribing the Makers of Generic Drugs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

11) A patent is a government granted exclusive right to sell a product for a period of time. Answer: TRUE Diff: 1 Topic: Incentives for Innovation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 12) Patents encourage firms to engage in innovation. Answer: TRUE Diff: 1 Topic: Incentives for Innovation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 13) Since patents lead to lower quantities and higher prices for new products, society is necessarily worse off when patents are awarded. Answer: FALSE Diff: 1 Topic: Tradeoffs from Patents Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 14) All patent protected products would not have been developed without patent protection. Answer: FALSE Diff: 1 Topic: Tradeoffs from Patents Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 15) Society gains from a patent if the product would not otherwise be developed. Answer: TRUE Diff: 1 Topic: Tradeoffs from Patents Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

16) What is a patent? Answer: A right to sell a particular good for a certain period of time. Diff: 1 Topic: Incentives for Innovation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 17) What would happen if the government chooses to increase the number of years that a firm can enjoy patent protection from 20 years to 25 years? Answer: Because the time that a firm can enjoy monopoly rights increases, the firm will receive a larger profit with longer patent protection. This will entice more firms to invest in research and development, in the hopes of creating more patents and more profits. However, while this policy increases the creation of higher cost new products or technology, it will reduce the market efficiency for those products that would have been produced under the old 20 year rule. Those markets will display lower production and higher prices for a longer time. Diff: 2 Topic: Incentives for Innovation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 18) Why does the government grant patents to companies that research new drugs? Answer: Researching new drugs is a very risky and expensive business. If the government did not grant the firm a patent then all other firms would be able copy its innovation as soon as the FDA approved the drug. This competition would make the price of the drug so low that the research firm would not be able to recoup its investment. The result would be that no new drugs would be developed. By allowing firms with new drugs to hold patents the government encourages private research and development. Diff: 2 Topic: Tradeoffs from Patents Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

19) Why does the government grant patents universally rather than just to those products that would not be developed without a patent? Answer: The government has no way to know which products would be developed without a patent. Diff: 1 Topic: Tradeoffs from Patents Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 7.4 Price Discrimination 1) Price discrimination is when a firm charges: A) the same price to all consumers. B) different prices for different goods to different consumers. C) different prices for the same goods to different consumers. D) None of the above is correct. Answer: C Diff: 1 Topic: Price Discrimination Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 2) Is price discrimination always legal in the United States? A) No, while price discrimination is legal throughout the country, it is not allowed if it is used to drive rivals out of business. B) Yes, a firm can price discriminate as long as it benefits them. C) No, price discrimination is discrimination, and its practice is never allowed in the United States. D) No, price discrimination is not legal in some states like California and Nebraska. Answer: A Diff: 1 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

3) When a hotel charges a much higher price for their luxury suites than their deluxe rooms, is this price discrimination? A) No. These are two different goods/services. B) Yes., as long as the price per square foot is the same. C) Yes, as long as they are booked online. D) Yes, as long as they offer both rooms to the same customer. Answer: A Diff: 1 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 4) The government allows firms to engage in price discrimination unless the practice: A) allows the firm to earn positive economic profits. B) reduces consumer surplus. C) drives rival firms out of business. D) increases prices to consumers. Answer: C Diff: 1 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 5) Which of the following situations would be examples of price discrimination? A) United Airlines charges customers who book 14 days ahead a lower price than those who don't. B) Chevron gas stations charges customers 20 cents more per gallon if they choose the premium grade over the regular unleaded. C) The local carwash charges drivers of minivans and large SUVs a $2.00 "large vehicle" surcharge. D) GEICO, an insurance company, charges higher rates to those who received more than one speeding ticket in the last 6 months. Answer: A Diff: 2 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

6) Which conditions must hold if a firm is to successfully engage in price discrimination? A) It must be extremely difficult, if not impossible, for one consumer to resell a product to another. B) Firms must have a sufficiently low amount of market power. C) Consumers must have very similar preferences for the product. D) All of the above are correct. Answer: A Diff: 2 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 7) In order to practice price discrimination, a firm must: A) avoid detection by the government. B) be able to divide consumers into groups with different demands for their product. C) have a homogeneous product. D) advertise their product. Answer: B Diff: 1 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 8) In order to practice price discrimination, a firm must: A) avoid detection by the government. B) have some degree of market power. C) have a homogeneous product. D) advertise their product. Answer: B Diff: 1 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

9) The reason that the local telephone company is able to engage in price discrimination between business and residential customers in providing local phone service is that: A) it is the only provider of local (landline) telephone service. B) it must be extremely difficult, if not impossible, for one consumer to resell phone service to another. C) business and residential customers differ in their willingness to pay for phone service. D) All of the above are correct. Answer: D Diff: 2 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 10) A school bookstore tried to engage in price discrimination by selling novels to students and faculty for different prices. Its strategy was to increase prices to faculty and decrease prices to students. What is the most likely reason that this strategy failed? A) Novels are sold in a competitive market. B) There was nothing to prevent students from purchasing novels and reselling them to faculty. C) Everyone had inelastic demand for novels. D) There was no easy way to distinguish the students from the faculty. Answer: B Diff: 2 Topic: Price Discrimination Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 11) If we observe a firm engaging in price discrimination, it must be true that: A) the firm is enjoying higher total profits than it would have earned if it charged a single price for the product. B) the firm can identify the preferences of every customer it serves. C) the firm earns higher profits per unit than it would have earned if it charged a single price for the product. D) All of the above are correct. Answer: A Diff: 2 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

12) Price discrimination always benefits: A) the firm and may benefit or harm the consumer. B) the consumer and may benefit or harm the firm. C) consumers and firms. D) consumers only. Answer: A Diff: 2 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 13) Which of the following would NOT be considered price discrimination? A) charging business travelers more money than leisure travelers for plane tickets B) charging houses in expensive neighborhoods more money for mowing the same size lawn than in a less expensive neighborhood C) charging a lower price for dry cleaning men's shirts than women's shirts D) charging more money for a large luxury car than a small economy car Answer: D Diff: 2 Topic: Price Discrimination Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 14) Which of the following would NOT be considered price discrimination? A) charging more money for long distance calls during business hours than on weekends B) giving students a discount on ski lift tickets C) charging higher rates for oil delivery to people who live farther from your business D) charging less money to wash a large luxury car than a small economy car Answer: C Diff: 2 Topic: Price Discrimination Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

15) Many hotel chains offer senior citizen discounts to members of AARP. This suggests that the hotels believe that senior citizens have a ________ demand for hotel rooms than non-seniors. A) smaller B) greater C) more elastic D) less elastic Answer: C Diff: 2 Topic: Senior Discounts in Restaurants Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Figure 7.6 16) Figure 7.6 shows prices, demands, and cost data for the only restaurant in a small town. If the restaurant charges the single price of $8 per meal, what is its profit from senior customers? A) $1,200 B) $1,500 C) $2,280 D) $2,560 Answer: A Diff: 2 Topic: Senior Discounts in Restaurants, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

17) Figure 7.6 shows prices, demands, and cost data for the only restaurant in a small town. If the restaurant charges the single price of $8 per meal, what is its profit from non-senior customers? A) $1,200 B) $1,500 C) $2,280 D) $2,560 Answer: C Diff: 2 Topic: Senior Discounts in Restaurants, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 18) Figure 7.6 shows prices, demands, and cost data for the only restaurant in a small town. Which group's demand for meals is more price-elastic? A) the senior customers B) the non-senior customers C) the two groups are equally sensitive to a change in price D) There is not sufficient information. Answer: A Diff: 2 Topic: Senior Discounts in Restaurants, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 19) Figure 7.6 shows prices, demands, and cost data for the only restaurant in a small town. What is its profit from senior customers under the senior discount policy of a $7 senior price and a $10 non-senior price? A) $1,200 B) $1,500 C) $2,280 D) $2,560 Answer: B Diff: 2 Topic: Senior Discounts in Restaurants, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

20) Figure 7.6 shows prices, demands, and cost data for the only restaurant in a small town. What is its profit from non-senior customers under the senior discount policy of a $7 senior price and a $10 non-senior price? A) $1,200 B) $1,500 C) $2,280 D) $2,560 Answer: D Diff: 2 Topic: Senior Discounts in Restaurants, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 21) Figure 7.6 shows prices, demands, and cost data for the only restaurant in a small town. Compared to the profit under the single price policy, how much additional profit does the restaurant earn under the senior discount policy of a $7 senior price and a $10 non-senior price? A) $920 B) $580 C) $300 D) $280 Answer: B Diff: 3 Topic: Senior Discounts in Restaurants, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 22) In order to practice price discrimination, a firm must be in a market such that the consumers in its market: A) all have identical tastes. B) all have identical price elasticities of demand. C) have different price elasticities of demand. D) have the same demand for its product. Answer: C Diff: 1 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

23) Price discrimination is related to elasticity because: A) the firm can increase revenues by charging customers with elastic demands higher prices and charging customers with inelastic demands lower prices. B) the firm can increase revenues by charging customers with elastic demands lower prices and charging customers with inelastic demands higher prices. C) the firm can increase revenues by charging all customers higher prices. D) None of the above; elasticity and price discrimination are unrelated. Answer: B Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 24) Price discrimination is based on differences in ________ among groups of consumers and the differences in ________ that will result. A) cross elasticities of demand; revenues B) price elasticities of demand; profits C) quantities supplied; marginal revenues D) income elasticities of demand; marginal costs Answer: B Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 25) In order to engage in price discrimination, a monopolist has to be able to determine that there are different groups of consumers that have different ________ for the product. A) income elasticities of demand B) price elasticities of demand C) cross elasticities of demand D) All of the above are correct. Answer: B Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

26) Suppose that a price discriminating monopolist is able to divide its market into two groups. If the firm sells its product for $50 to the group whose customers have the most elastic demand, what price are they likely to charge to the group whose customers have the least elastic demand? A) $50 B) more than $50 C) less than $50 D) The answer depends on the marginal revenue for that group. Answer: B Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 27) Suppose that a price discriminating monopolist is able to divide its market into two groups. If the firm sells its product for $25 to the group whose customers have the least elastic demand, what price are they likely to charge to the group whose customers have the most elastic demand? A) $25 B) more than $25 C) less than $25 D) The answer depends on the marginal revenue for that group. Answer: C Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 28) Firms who are attempting to engage in price discrimination will offer customers with a ________ demand a higher price and customers with a(n) ________ demand a lower price. A) lower; higher B) normal; inferior C) less elastic; more elastic D) more elastic; less elastic Answer: C Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

29) A firm switching from a single price to a price discrimination scheme will ________ the price for the group of consumers with a relatively elastic demand and ________ the price for the group of consumers with a relatively inelastic demand. A) decrease; increase B) decrease; decrease C) increase; increase D) increase; decrease Answer: A Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 30) Because demand for air travel from people who are traveling on vacation is ________, the airlines offer leisure travelers lower prices than business travelers. A) larger B) more elastic C) more inelastic D) smaller Answer: B Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 31) What is the most likely reason that snack foods sold in vending machines are so much more expensive than snack foods sold in grocery stores? A) Snack foods sold in vending machines come in smaller packages, so the per-package costs are higher. B) Grocery stores buy in bulk, while vending machine companies tend to buy in smaller quantities. C) People who purchase snack foods from vending machines tend to have less elastic demand for snack foods. D) Owners of vending machine companies are greedier than owners of grocery stores. Answer: C Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

32) What is the most likely reason that milk sold in convenience stores is more expensive than milk sold in grocery stores? A) Convenience stores sell milk in smaller packages, so the per-gallon packaging costs are higher. B) Grocery stores buy in bulk, while convenience stores buy milk in smaller quantities. C) People who buy milk at convenience stores tend to have a less elastic demand for milk. D) Convenience store owners are greedier than grocery store owners. Answer: C Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 33) You currently sell the same product to both students and faculty members, and are able to prevent transfer from one group to the other. Your current prices, quantities sold, and the absolute values of the slopes of the demand curves are as follows:

If your marginal cost is $1 and you are interested in maximizing your revenues, how would you adjust your prices? A) Increase prices for both groups. B) Decrease prices for both groups. C) Increase student price and decrease faculty price. D) Decrease student price and increase faculty price. Answer: D Diff: 3 Topic: Price Discrimination and the Elasticity of Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

34) You currently sell the same product to both professional plumbers and homeowners, and are able to prevent transfer from one group to the other. Your current prices, quantities sold, and the absolute values of the slopes of the demand curves are as follows:

If your marginal cost is $10 and you are interested in maximizing your revenues, how would you adjust your prices? A) Increase plumbers' price and decrease homeowners' price. B) Decrease plumbers' price and increase homeowners' price. C) Increase prices for both groups. D) Decrease prices for both groups. Answer: A Diff: 3 Topic: Price Discrimination and the Elasticity of Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Table 7.2 35) Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its revenue from students under the single price policy? A) $150 B) $180 C) $450 D) $540 Answer: B Diff: 2 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

36) Table 7.2 contains price, demand and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its profit from students under the single price policy? A) $150 B) $180 C) $450 D) $540 Answer: A Diff: 2 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 37) Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its revenue from non-students under the single price policy? A) $300 B) $360 C) $450 D) $540 Answer: B Diff: 2 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 38) Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its profit from non-students under the single price policy? A) $300 B) $360 C) $450 D) $540 Answer: A Diff: 2 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

39) Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its total profit under the single price policy? A) $300 B) $360 C) $450 D) $540 Answer: C Diff: 2 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 40) Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its profit from students under the student discount policy? A) $200 B) $250 C) $325 D) $375 Answer: A Diff: 2 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 41) Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its profit from non-students under the student discount policy? A) $200 B) $250 C) $350 D) $400 Answer: C Diff: 2 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

42) Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its total profit under the student discount policy? A) $450 B) $550 C) $600 D) $650 Answer: B Diff: 2 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 43) Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. Should the firm adopt the single price policy or the student discount policy? A) The single price policy because the firm does not meet the three conditions necessary to engage in price discrimination. B) The single price policy because price discrimination would not be legal for this firm. C) The single price policy because it is more profitable than price discrimination for this firm. D) The student discount policy because it is more profitable than the single price policy. Answer: D Diff: 3 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 44) Movie theaters often offer reduced rates for children under 10. This suggests that demand for adult admission is ________ than demand for children's admission. A) more elastic B) less elastic C) more variable D) lower Answer: B Diff: 2 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

45) The cost of producing a hardback book is only about 20 percent higher than producing a paperback book, yet the hardback price is typically three times the paperback price. This suggests that demand for paperback books is ________ than demand for hardback books. A) more elastic B) less elastic C) more variable D) lower Answer: A Diff: 2 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies Recall the Application about price discrimination using refillable soda bottles to answer the following question(s). 46) According to the Application, allowing stores to give discounts to patrons who use refillable soda bottles benefits: A) both the stores and the consumers. B) the stores only. C) consumers only. D) neither the stores nor the consumers. Answer: A Diff: 2 Topic: Application 4, Refillable Soda Bottles and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 47) According to the Application, who are the customers who have a more elastic demand? A) the consumers who bring refillable bottles to get a discount B) the consumers who buy the disposable bottles C) all consumers D) the consumers who do not buy soda through refillable or disposable bottles Answer: A Diff: 2 Topic: Application 4, Refillable Soda Bottles and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

48) According to the Application, how does the firm earn a larger profit through the refillable soda bottles? A) The consumers who were not likely to buy the soda get a lower price, making them more likely to purchase soda. B) The seller saves money from recycling the disposable bottles. C) The seller earns more revenue from sale of the expensive recyclable bottles. D) The consumers advertise to friends that the seller gives discount through refillable bottles, causing an increase in demand. Answer: A Diff: 2 Topic: Application 4, Refillable Soda Bottles and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 49) Recall the Application. Price discrimination using recyclable soda bottles will work only if: A) some consumers will buy the soda only if given a discount. B) all consumers are willing to buy the soda at the higher price. C) all consumers will not buy the soda at the lower price. D) the seller can only sell the refillable bottles for more than twice the cost of producing it. Answer: A Diff: 2 Topic: Application 4, Refillable Soda Bottles and Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 50) Price discrimination can be profitable if consumers can resell the product. Answer: FALSE Diff: 1 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 51) If a firm wants to engage in price discrimination, it must have some market power. Answer: TRUE Diff: 1 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 60 Copyright © 2020 Pearson Education, Inc.

52) If airlines give passengers under the age of 10 a 25% discount, then this is an example of price discrimination. Answer: TRUE Diff: 1 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 53) When a hair stylist charges men less than women for a haircut because men's hair take less time to cut, the hairstylist is practicing price discrimination. Answer: FALSE Diff: 2 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 54) The reason that Blu-ray movies cost more money immediately after they are released than they do six months later is due to price discrimination. Answer: TRUE Diff: 1 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 55) When a firm engages in price discrimination, it sets marginal revenue equal to marginal cost for each separate set of consumers. Answer: TRUE Diff: 1 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

56) Firms who engage in price discrimination usually make the same amount of money as they would if they charged one price. Answer: FALSE Diff: 1 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 57) All consumers are worse off when firms engage in price discrimination. Answer: FALSE Diff: 1 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 58) If a fast food restaurant gives senior citizens a 10% discount on food every day, this is an example of price discrimination. If they only give the discount on Tuesdays, it is not price discrimination. Answer: FALSE Diff: 2 Topic: Senior Discounts in Restaurants Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 59) Movie theaters would make more money if they offered students the same type of discounts on popcorn that they do on admission. Answer: FALSE Diff: 1 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

60) The difference in price between hardback books and paperbacks is primarily explained by differences in production costs. Answer: FALSE Diff: 1 Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 61) Why is it important that a firm have market power if it wishes to engage in price discrimination? Answer: If a firm does not have market power then it will face price competition from other firms in the industry if it tries to increase the price to one group of consumers. The competitors will charge a lower price to this group of consumers and the first firm will end up serving only the low price consumers. This will make it unprofitable to engage in price discrimination. Diff: 2 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 62) Why is it important that a firm can prevent resale of its product if it wishes to engage in price discrimination? Answer: If the firm cannot prevent resale then consumers who are able to purchase the product at the lower price can do so and resell the product to the consumers to whom the firm will charge the higher price. This will prevent the firm from earning higher profits from price discrimination than from a single pricing strategy, since the single price will be higher than the lowest price charged with a price discrimination strategy. Diff: 2 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

63) When an electronics company advertises on the local newspaper a 10% discount coupon, is this an example of price discrimination? Why or why not? Answer: Yes, it is price discrimination. The price sensitive individual would search for these coupons prior to making a purchase, and will end up paying the lower price. A price insensitive individual will not search for these coupons and will not get the lower price. Diff: 2 Topic: Price Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 64) Why is it important that a firm have different groups of consumers with different demand elasticities if it wishes to engage in price discrimination? Answer: Price discrimination works because a firm charges higher prices to individuals with a relatively more inelastic demand and lower prices to those with a relatively more elastic demand. If all consumers have the same elasticity of demand then charging different prices to different groups of consumers will not yield a higher profit to the firm. Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 65) If you purchased a new model of a digital camera right after it is released you will likely pay more than if you purchase it six months after release. Why is this an example of price discrimination on the part of the firm? Answer: "Early adopters" who purchase the camera right away do so because they have immediate need (thus an inelastic demand) for the camera due to its new features. Other consumers might be willing to purchase the camera but only at a lower price. If price starts out high the consumers with immediate need will purchase the camera because they are unable to wait for price to drop. Once they make their purchases, the firm can drop the price so that other consumers with relatively elastic demands will also purchase cameras. Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

66) Bars often offer specials on appetizers during "happy hour." What does the concept of price discrimination suggest about why this might be profit-maximizing behavior? Answer: People might have more elastic demand for appetizers during times when they could easily go home and eat dinner and less elastic demand for appetizers during the evening hours after dinner. Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 67) Suppose that you own a golf course that is part of a Florida resort. You primarily serve two groups of people: local residents and tourists. Devise a price discrimination strategy that will increase your revenues compared to a single-pricing strategy. Answer: Local residents can be given a free membership in the golf course if they show proof that they are from the area. Prices for these members (who probably have a relatively elastic demand since they can play golf all year) could be set lower than for tourists (who have an inelastic demand for golf since that is probably why they came to Florida in the winter). This would encourage the local residents to play golf all year round. Another possibility is that prices could be set higher during the tourist season than during the off-season. Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 68) You own a local sub shop in a college town. You primarily serve two groups of people: local residents (both students and other local residents) and visitors to your town. Devise a price discrimination strategy that will increase your revenues compared to a single-pricing strategy. Answer: People who live in town know all of the local restaurants well and have kitchens where they could cook their own meals. This means that they will have a relatively more elastic demand for your subs than visitors do. You could engage in price discrimination in a number of ways: by mailing coupons to local residents; by giving out cards so that they can get a meal free if they get enough punches on the card; or by participating in programs through which members of local banks and credit unions get discount cards that are honored in your restaurant. Others may propose student discounts because college students have a higher price elasticity due to university food services and food being a higher percentage of a student's budget compared to people working full time. Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 65 Copyright © 2020 Pearson Education, Inc.

69) As manager of the only video rental store in town, you have noticed that on Thursday through Sunday the demand for movie rentals is much less elastic than it is on Monday through Wednesday. If you are currently charging $3 for a two-night rental, give an example of a pricing policy that might increase your revenues compared to a single-pricing strategy. Answer: Weekend movie rental prices could be increased to $4 per night and the Monday through Wednesday price could be cut to $2 per night. Diff: 2 Topic: Price Discrimination and the Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 8 Market Entry, Monopolistic Competition, and Oligopoly 8.1 The Effects of Market Entry 1) When a second firm enters a monopolist's market: A) market price will drop. B) sales for the first firm will rise. C) the first firm's profits will increase. D) All of the above will occur. Answer: A Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 2) When a second firm enters a monopolist's market, A) the monopolist's demand curve decreases. B) the monopolist's demand curve increases. C) the monopolist's supply curve decreases. D) the monopolist's supply curve increases. Answer: A Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 3) When a second firm enters a monopolist's market, A) the market price will rise. B) the quantity produced by the first firm will decrease. C) the first firm's profits increase. D) All of the above will occur. Answer: B Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

4) When a second firm enters a monopolist's market, A) market price will rise. B) the quantity produced by the first firm will increase. C) the first firm's profits will decrease. D) All of the above will occur. Answer: C Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 5) When a second firm enters a market, the original firm's profits decline because: A) the original firm's price decreases. B) the original firm's ATC increases. C) the original firm's quantity decreases. D) All of the above are correct. Answer: D Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 6) When a second firm enters a monopolist's market, the initial demand curve facing the monopolist will: A) shift to the left. B) shift to the right. C) remain the same. D) none of the above Answer: A Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

7) When a second firm enters a monopolist's market, the monopolist's marginal revenue curve will: A) shift to the left as its initial demand curve shifts to the left. B) shift to the right as its initial demand curve shifts to the right. C) remain the same. D) none of the above Answer: A Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 8) When a second firm enters a monopolist's market: A) the former monopolist's average cost decreases as its output level decreases. B) the demand curve the former monopolist faces shifts to the left. C) the market price rises as the average cost increases. D) none of the above Answer: B Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 9) When a second firm enters a monopolist's market: A) the former monopolist's average cost increases as its output level decreases. B) the demand curve facing the former monopolist shifts to the right. C) the market price rises as the average cost increases. D) none of the above Answer: A Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

10) When a second firm enters a monopolist's market: A) the former monopolist's average cost decreases as its output level decreases. B) the demand curve facing the former monopolist shifts to the right. C) the market price falls. D) none of the above Answer: C Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 11) When the government eliminates artificial barriers to entry: A) more firms will enter the market. B) prices to consumers will likely increase. C) competition in the market will decrease. D) All of the above will occur. Answer: A Diff: 2 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 12) When the government eliminates artificial barriers to entry: A) firm profits will rise. B) prices to consumers will likely decrease. C) competition in the market will decrease. D) all of the above will occur. Answer: B Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

13) Empirical studies indicate that entry: A) increases price and profits. B) decreases price, but increases profits. C) decreases price and profits. D) increases price, but decreases profits. Answer: C Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 14) Empirical studies suggest that when a large number of firms are present in a market, prices are usually ________ and profits are usually ________ than when there are only a few firms in a market. A) lower; higher B) lower; lower C) higher; higher D) higher; lower Answer: B Diff: 2 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 15) Studies of real world markets suggest that prices and the number of firms of comparable size in a market are: A) positively related. B) negatively or inversely related. C) not related. D) sometimes negatively or inversely related, but usually positively related. Answer: B Diff: 2 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

16) After the U.S. government deregulated the trucking industry: A) profits rose. B) freight prices rose. C) freight prices fell. D) the number of trucking companies decreased. Answer: C Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 17) European nations are currently deregulating many markets. They are expecting: A) the price of goods sold in these markets to increase. B) the quality of goods sold in these markets to decrease. C) the price of goods sold in these markets to decrease. D) the profits of firms selling in these markets to increase. Answer: C Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 18) The Motor Carrier Act of 1980 removed the government's restriction on: A) entry into the trucking industry. B) the size of trucks used to transport goods and services. C) entry into the industry that produces delivery trucks. D) entry into parcel delivery. Answer: A Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

19) The Motor Carrier Act of 1980 resulted in: A) lower freight prices. B) more firms entering the trucking industry. C) lower value of a trucking license. D) All of the above are correct. Answer: D Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 20) When the Motor Carrier Act of 1980 was made into law, new firms entered into the trucking industry. This action by new trucking firms confirms that: A) the trucking industry was earning profits in the long run prior to the entry of the new firms. B) the trucking industry was earning losses in the long run prior to the entry of the new firms. C) the trucking industry was earning profits as a result of the entry of the new firms. D) the trucking industry was earning losses before and after the entry of the new firms. Answer: A Diff: 2 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions Recall the Application about the price competition between satellite and cable TV services to answer the following question(s). 21) Recall the Application. In most cases where satellite TV service is introduced in an area with cable TV service, the price of the cable TV service usually: A) increases. B) decreases. C) initially increases, then decreases. D) is unaffected. Answer: B Diff: 1 Topic: Application 1, Satellite versus Cable Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

22) Recall the Application. The introduction of satellite TV service is a form of: A) price gouging. B) profiteering. C) market entry. D) all of the above. Answer: C Diff: 2 Topic: Application 1, Satellite versus Cable Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 23) Recall the Application. In most cases where satellite TV service is introduced in an area with cable TV service, the quality of the cable TV service usually: A) increases. B) decreases. C) initially increases, then decreases. D) is unaffected. Answer: A Diff: 2 Topic: Application 1, Satellite versus Cable Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 24) Recall the Application. In most cases where satellite TV service is introduced in an area with cable TV service, if the price of cable TV decreases, then consumer surplus (in the cable TV market): A) increases. B) decreases. C) drops to zero. D) becomes negative. Answer: A Diff: 2 Topic: Application 1, Satellite versus Cable Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

25) Recall the Application. In most cases where satellite TV service is introduced in an area with cable TV service, if the price of cable TV increases, then consumer surplus (in the cable TV market) usually: A) increases. B) decreases. C) drops to zero. D) becomes negative. Answer: B Diff: 2 Topic: Application 1, Satellite versus Cable Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 26) Recall the Application. In most cases where satellite TV service is introduced in an area with cable TV service, if the quality of cable TV service increases, then consumer surplus (in the cable TV market): A) increases. B) decreases. C) drops to zero. D) becomes negative. Answer: A Diff: 2 Topic: Application 1, Satellite versus Cable Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 27) According to the Application, the reason why the consumer surplus still increases as cable prices rise after satellite TV service is introduced in an area with cable TV service is: A) the quality of services improves and is larger than the increase in the price of cable services. B) the quality of services improves and is smaller than the increase in the price of cable services. C) the tax revenues that the government receives are larger than the price increase. D) the tax revenues that the government receives are smaller than the price increase. Answer: A Diff: 2 Topic: Application 1, Satellite versus Cable Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

28) The entry of an additional firm into a market decreases the profit per unit of output because entry decreases the price. Answer: TRUE Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 29) The entry of an additional firm into a market shifts the demand curve for the original firm to the left. Answer: TRUE Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 30) Entry leads to higher prices and profits in an industry. Answer: FALSE Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 31) Entry leads to reduced firm profits because it leads to a lower price. Answer: TRUE Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 32) Entry of a second firm will result in a downward shift in the ATC curve. Answer: FALSE Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 10 Copyright © 2020 Pearson Education, Inc.

33) Empirical studies show that entry into markets increases both price and quantity of goods supplied. Answer: FALSE Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 34) Why does entry into markets decrease firm profits? Answer: Three reasons: 1) the market price drops; 2) the quantity produced by each firm decreases; and 3) entry may cause average cost per unit to increase. Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 35) What are the effects on a market when there is entry? Answer: Market price usually falls, economic profit is reduced, and if there is a license required to enter the business, its value usually falls. Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 36) What entices a second firm to enter a market that was previously a single price monopoly? Answer: A firm will enter a market when the incumbent monopolist is earning positive profits in the short run and in the long run. This occurs when the price that the firm charges is higher than the ATC at the profit-maximizing quantity. Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

37) Why does the government work to eliminate artificial barriers to entry? Answer: Because if there are economic profits being earned in the industry, eliminating artificial barriers to entry will encourage more firms to enter the industry. The increase in competition is expected to decrease price to consumers and improve service. Diff: 2 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 8.2 Monopolistic Competition 1) Which of the following is NOT a characteristic of a monopolistically competitive market? A) Firms hold patents on their products. B) The products that firms sell are slightly different. C) Firms have some control over price. D) There are no artificial barriers to entry. Answer: A Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 2) Which of the following is NOT a characteristic of a monopolistically competitive market? A) There are many firms. B) Firms sell products that are similar but not identical. C) Firms must take the market price as given. D) There are no artificial barriers to entry. Answer: C Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

3) Which of the following is NOT a characteristic of a monopolistically competitive market? A) There is only one firm selling a product. B) There are many firms selling products that are similar but not identical. C) There are many firms that have some control over price. D) There are no artificial barriers to entry. Answer: A Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 4) Which of the following is NOT a characteristic of a monopolistically competitive market? A) There are many firms. B) Firms sell differentiated products. C) Firms have control over price. D) There are substantial barriers to entry. Answer: D Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 5) A market in which there are many firms each selling differentiated products is most likely a ________ market. A) perfectly competitive B) monopoly C) monopolistically competitive D) natural monopoly Answer: C Diff: 1 Topic: Monopolistic Competition Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

6) Which of the following is the reason why pharmaceutical firms are NOT monopolistically competitive? A) Pharmaceutical firms sell differentiated products. B) There are many buyers in the market. C) There are many sellers in the market. D) There are barriers to entry in the market, like patents. Answer: D Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 7) Which of the following is an example of a monopolistically competitive firm? A) Farmer Smith's corn farm B) Tino's Italian eatery, a local restaurant C) TCI Cablevision, a supplier of cable television services D) Northwest Electricity, a supplier of electricity in the Northwest U.S. Answer: B Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 8) Which of the following is a characteristic of a monopolistically competitive market? I. There are many sellers. II. Firms sell slightly differentiated products. III. Each firm faces a downward-sloping demand curve. A) I only B) I and II only C) II and III only D) I, II, and III Answer: D Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

9) Which of the following is a characteristic of a monopolistically competitive market? I. Each firm is a price-taker. II. Firms sell slightly differentiated products. III. Each firm faces a downward-sloping demand curve. A) I only B) I and II only C) II and III only D) I, II, and III Answer: C Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 10) Which of the following is a characteristic of a monopolistically competitive market? I. There are many sellers. II. Firms sell slightly differentiated products. III. The demand curve facing each individual firm is horizontal. A) I and II only B) I and III only C) II and III only D) I, II, and III Answer: A Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 11) Which of the following is NOT an example of a monopolistically competitive firm? A) Farmer Jones's wheat farm B) the Post Cereal Company C) Procter and Gamble, a large consumer products corporation D) T.J.'s Clothes, a local retail clothing store Answer: A Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

12) Monopolistically competitive firms do NOT differentiate their products by: A) changing the products' physical characteristics. B) selling products at different locations. C) offering different levels of service that come with a product. D) charging different prices to different groups of consumers. Answer: D Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 13) Monopolistically competitive firms differentiate their products by: A) selling products with slightly different physical characteristics. B) selling products at different locations. C) creating a special aura or image for the product with advertising. D) all of the above Answer: D Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 14) Monopolistically competitive firms do NOT differentiate their products by: A) selling products at different locations. B) selling a product with different levels of services accompanying the product. C) convincing consumers that the product is identical to those sold by competitors. D) using advertising to create a special aura or image for the product. Answer: C Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

15) In Eugene, Oregon, there are several Italian restaurants, each offering slightly different items prepared in slightly different ways. It is likely that an Italian restaurant in Eugene, Oregon, operates in a(n): A) perfectly competitive market. B) monopolistically competitive market. C) monopoly market. D) oligopoly market. Answer: B Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 16) In Washington, D.C., there are many coffee shops, each offering nearly identical coffee but each shop is located in a different place around the city. It is likely a coffee shop in Washington, D.C., operates in a(n): A) perfectly competitive market. B) monopolistically competitive market. C) monopoly market. D) oligopoly market. Answer: B Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 17) In Sioux Falls, South Dakota, there are many pizza restaurants, each offering similar types of pizza but each restaurant is located in a different place around the city. It is likely a pizza restaurant in Sioux Falls, South Dakota, operates in a(n): A) perfectly competitive market. B) monopolistically competitive market. C) monopoly market. D) oligopoly market. Answer: B Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

18) Nike has used Michael Jordan to create the impression that Air Jordan basketball shoes are superior to any other basketball shoe. Nike is attempting to: A) differentiate Air Jordan basketball shoes from other types of basketball shoe. B) lower the marginal cost of producing Air Jordan basketball shoes. C) sell fewer Air Jordan basketball shoes so they can raise the price. D) convince consumers that Air Jordan basketball shoes are identical to other basketball shoes. Answer: A Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 19) Pepsi uses advertising to create the impression that Pepsi is superior to any other soft drink. Pepsi is attempting to: A) differentiate Pepsi from other types of soft drinks. B) lower the marginal cost of producing for Pepsi. C) sell less Pepsi so they can raise the price of Pepsi. D) convince consumers that Pepsi is identical to other soft drinks. Answer: A Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 20) When a credit card company offers different services with its card, like travel insurance for air travel tickets purchased with the credit card or product insurance for items purchased with the card, the credit card company is trying to: A) create a barrier to entry for competing firms. B) create a perfectly competitive market in which to sell its credit card. C) differentiate its credit card from those offered by other companies. D) shift the demand curve for competing firms to the right. Answer: C Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

21) In the mid-1990s, Coke introduced a new soda in the soft drink market. Coke then used a new advertising campaign to associate the new soda with youth and strength. Coke was trying to: A) shift the demand curve for competing soft drinks to the left. B) create a perfectly competitive market for soft drinks. C) maximize its per unit costs through advertising. D) lower the market price of soft drinks. Answer: A Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 22) A monopolistically competitive market is one in which: A) only one firm sells a product. B) all firms sell an identical product. C) many firms sell similar yet slightly different products. D) firms have no control over the price they charge for their product. Answer: C Diff: 1 Topic: Monopolistic Competition Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 23) The word "monopolistic" in the label "monopolistic competition" refers to the fact that: A) there is only one firm producing in the market. B) firms have no control over the price they charge. C) each firm produces a slightly different version of the product. D) none of the above Answer: C Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

24) The word "competition" in the label "monopolistic competition" refers to the fact that: A) there are very few firms producing in the market. B) firms have no control over the price they charge. C) firms vie against each other to get customers to buy their version of the product. D) none of the above Answer: C Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 25) In a monopolistically competitive market, there: A) are many firms selling an identical product. B) is only one firm that sells many similar yet slightly different products. C) are many firms that have slight control over the price they charge for their product. D) are substantial barriers to entry. Answer: C Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 26) In a monopolistically competitive market, how do we model the firm's slight control over the price that they charge? A) The demand curve is downward sloping and very elastic. B) The demand curve is downward sloping and very inelastic. C) The ATC is relatively flat. D) The AVC is horizontal. Answer: A Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

27) For a monopolistically competitive firm, the firm's demand curve is: A) downward sloping. B) horizontal. C) upward sloping. D) none of the above Answer: A Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 28) Which of the following is a characteristic of a monopolistically competitive market? I. Firms sell differentiated products. II. Each firm's product is a close substitute for other firms' products. III. Firms freely enter and exit the market. A) I only B) I and III only C) II and III only D) I, II, and III Answer: D Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 29) Which of the following is a characteristic of a monopolistically competitive market? I. Firms sell differentiated products. II. Each firm earns a positive economic profit in the long run. III. Firms freely enter and exit the market. A) II only B) I and II only C) I and III only D) I, II, and III Answer: C Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

30) Which of the following is a characteristic of a monopolistically competitive market? I. Firms sell differentiated products. II. Each firm is earning a zero economic profit in the long run. III. Potential entrants face artificial barriers to entry. A) I only B) I and II only C) II and III only D) I, II, and III Answer: B Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 31) Suppose you operate in a monopolistically competitive market. If you sell your good at a price of $10 and your average cost of production is $8: A) your market is in long-run equilibrium. B) we can expect firms to enter your market and sell a similar good in the long run. C) there will be no incentive for competing firms to enter your market in the long run. D) you cannot be in short-run equilibrium. Answer: B Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 32) Suppose you operate in a monopolistically competitive market. If you sell your good at a price of $20 and your average cost of production is $15: A) your market may be in long-run equilibrium. B) you cannot be in short-run equilibrium. C) you should expect competing firms to enter your market and shift the demand curve for your good to the left. D) you should expect competing firms to enter your market and shift the demand curve for your good to the right. Answer: C Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

33) Under the conditions of monopolistic competition: A) firm profits are higher in the long run than in the short run. B) average costs of production are the same in the short run as they are in the long run. C) economic profit is zero in the long run. D) price equals marginal cost. Answer: C Diff: 1 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 34) Which characteristic of a monopolistically competitive firm causes it to have zero profits in the long run? A) There are no barriers to entry. B) The firm has a slight control of its price. C) The firm sells a differentiated product. D) All of the above cause the monopolistically competitive firm to have zero profits in the long run. Answer: A Diff: 1 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 35) If short-run economic profits are greater than zero for firms in a monopolistically competitive market, in the long run we expect: A) entry barriers to prevent competing firms from entering this market. B) the demand curve for firms in the market to shift to the right. C) competing firms to enter the market and sell similar products. D) profits to increase. Answer: C Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

36) If short-run economic profits are greater than zero for firms in a monopolistically competitive market, in the long run we expect: A) entry barriers to prevent competing firms from entering this market. B) the demand curve for firms in the market to shift to the right. C) the average cost of production to decrease. D) the average cost of production to increase. Answer: D Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 37) Suppose in the city of Smugsburg, Blu-ray disc rental stores operate in a monopolistically competitive market. If the price of Blu-ray disc rentals in Smugsburg is currently equal to $5 per tape and the average cost of renting videos is $1 per Blu-ray disc, in the long run we expect the price of renting Blu-ray discs to: A) increase. B) stay the same. C) decrease, and the average cost of producing Blu-ray disc rentals to increase. D) decrease, and the average cost of producing Blu-ray disc rentals to decrease. Answer: C Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 38) Suppose in the city of Blacksburg, music stores operate in a monopolistically competitive market. If the price of Blu-ray discs in Blacksburg is currently equal to $20 each and the average cost of Blu-ray discs is $15, in the long run we expect the price of Blu-ray discs to: A) increase. B) stay the same. C) decrease, and the average cost of selling Blu-ray discs to increase. D) decrease, and the average cost of selling Blu-ray discs to decrease. Answer: C Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

39) If firms in a monopolistically competitive market are earning economic profits greater than zero in the short run, then in the long run: A) firms will exit this market. B) profits will increase. C) profits will decrease. D) demand will not change. Answer: C Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 40) If a firm is operating in a monopolistically competitive market, then in the long run: A) the firm will earn a zero economic profit. B) the firm will maximize its profit by producing the output level at which the average cost is minimized. C) the firm will maximize its profit by producing the output level at which the marginal revenue is minimized. D) all of the above Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 41) Suppose that a monopolistically competitive market is in its long-run equilibrium. If the market demand curve shifts to the right due to changes in consumer preferences: A) the number of firms in the market will increase in the short run. B) firms will earn positive economic profits in the short run. C) firms' average costs of production will increase as they increase output levels in the short run. D) none of the above Answer: B Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

42) Suppose that a monopolistically competitive market is in its long-run equilibrium. If the market demand curve shifts to the left due to a recession: A) the number of firms in the market decreases in the short run. B) some firms may earn negative profits in the short run. C) firms' average costs of production decreases as they decrease output levels in the short run. D) none of the above Answer: B Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 43) Under the conditions of monopolistic competition: A) prices are always lower in the long run than in the short run. B) firm profits are always higher in the long run than in the short run. C) average costs of production are always higher in the short run than in the long run. D) none of the above is correct. Answer: D Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 44) Under the conditions of monopolistic competition, if a firm is earning economic profits in the short run: A) prices are higher in the long run than in the short run. B) firm profits are higher in the long run than in the short run. C) average costs of production are higher in the long run than in the short run. D) long-run economic profits are positive. Answer: C Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

45) Suppose coffee is sold in a monopolistically competitive market, where coffee is differentiated by coffee shop location. As firms enter in the long run and the price of coffee falls: A) the market quantity of coffee demanded will increase, but the quantity of coffee supplied by any individual coffee shop declines. B) the market quantity of coffee demanded will decrease as does the quantity supplied from any individual coffee shop. C) the average costs of production decline. D) the profits of individual coffee shops increase. Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 46) As firms enter a monopolistically competitive market in the long run: A) price increases, the market quantity demanded increases, and the quantity supplied by an individual firm increases. B) price decreases, the market quantity demanded increases, and the quantity supplied by an individual firm decreases. C) price decreases, but firm profits increase as average costs decrease. D) price increases and firm profits increase. Answer: B Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 47) In a monopolistically competitive market, if price is greater than average cost: A) firms will enter. B) firms will exit. C) there will be no change in the number of firms. D) the market is in long-run equilibrium. Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

48) If price is less than average cost in a monopolistically competitive market: A) there is an incentive for firms to exit the market. B) there is profit incentive for firms to enter the market. C) the market must be in long-run equilibrium. D) there is no incentive for the number of firms in the market to change. Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 49) If profits in a monopolistically competitive market are positive, we can conclude that: A) price is equal to average cost. B) price is greater than average cost C) the market is in long-run equilibrium. D) price is less than average cost. Answer: B Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 50) Suppose Wave detergent is sold in a monopolistically competitive market. If the price of Wave detergent is currently $6, and the average cost of producing Wave is $4, in the long run we can expect: A) firms to enter the detergent market and sell products similar to Wave, shifting the demand curve for Wave to the left. B) firms to enter the detergent market and sell product similar to Wave, shifting the demand curve for Wave to the right. C) the producers of Wave to go out of business. D) the producers of Wave to earn economic profits greater than zero. Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

51) Suppose Toor's beer is sold in a monopolistically competitive market. If the price of Toor's is currently $2 and the average cost of producing Toor's is $1, in the long run we can expect: A) the demand for Toor's beer to increase. B) the price of Toor's beer to decrease, and the average cost of producing Toor's to increase. C) the demand curve for Toor's beer to become horizontal. D) no change in the price or average cost of producing Toor's beer. Answer: B Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 52) Suppose Toor's beer is sold in a monopolistically competitive market. In the long run we expect the price of Toor's beer to: A) equal the average cost of production of Toor's beer. B) exceed the average cost of production of Toor's beer. C) equal the marginal cost of production for Toor's beer. D) equal the minimum possible average cost of producing Toor's beer. Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

Figure 8.1 53) Figure 8.1 depicts demand and costs for a monopolistically competitive firm. At the profitmaximizing output level: A) this firm is earning economic profits equal to zero. B) this firm is earning economic profits equal to Q1(P1 - AC1). C) this firm is earning economic profits equal to P1(Q1 - AC1). D) this firm is in long-run equilibrium. Answer: B Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 54) If Figure 8.1 depicts the current situation for a monopolistically competitive firm, then in the long run we expect: A) the firm's demand curve to shift to the left. B) the firm's demand curve to shift to the right. C) the price of the good to increase. D) the quantity of the good sold by the firm to increase. Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

55) If Figure 8.1 depicts the current situation for a monopolistically competitive firm, then in the long run we expect: A) the firm to charge a price higher than P1. B) the firm to produce and sell more than Q1. C) the average costs of production to decrease below AC1. D) the firm to charge a price lower than P1. Answer: D Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 56) If Figure 8.1 depicts the current situation for a monopolistically competitive firm, then in the long run we expect: A) the firm to charge a price higher than P1. B) the firm to produce and sell more than Q1. C) the firm's average cost of production to rise above AC1. D) the firm to earn higher economic profits. Answer: C Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 57) Profits for the monopolistically competitive firm depicted in Figure 8.1: A) will increase in the long run. B) will not change in the long run. C) will decrease in the long run. D) are impossible to predict in the long run. Answer: C Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

Figure 8.2 58) Figure 8.2 shows demand and costs for a monopolistically competitive firm. At the profitmaximizing output level, the firm's profit is: A) $1,200. B) $1,050. C) $750. D) $375. Answer: B Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 59) Figure 8.2 shows demand and costs for a monopolistically competitive firm. In the long run we expect: A) more firms to enter the market. B) the firm's demand curve to shift to the right. C) the price of the good to increase. D) the average cost of production to decrease. Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 32 Copyright © 2020 Pearson Education, Inc.

60) Figure 8.2 shows demand and costs for a monopolistically competitive firm. At the profitmaximizing output level: A) the firm is earning a positive economic profit and more firms are expected to enter the market. B) the firm is earning a zero economic profit and no firms are expected to enter the market. C) the firm is earning a negative economic profit and more firms are expected to leave the market. D) There is not sufficient information. Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 61) Figure 8.2 shows demand and costs for a monopolistically competitive firm. In the long run we expect: A) the firm to produce more output at a higher price. B) the firm to charge a price which is equal to its average cost of production. C) the firm to experience a decrease in the average cost of production. D) the firm to earn a greater profit. Answer: B Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 62) Figure 8.2 shows demand and costs for a monopolistically competitive firm. In the long run we expect: A) the firm's demand curve to shift to the right. B) the firm's marginal revenue curve to shift to the left. C) the firm's average cost curve to shift upward. D) the firm's marginal cost curve to shift downward. Answer: B Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

Figure 8.3 63) Figure 8.3 shows demands and costs for a monopolistically competitive firm. When the firm's demand curve shifts from to and to : A) the demand for the firm's product is decreasing. B) the firm's average cost of production is increasing. C) the firm's marginal revenue curve also shifts to the left. D) all of the above Answer: D Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 64) Figure 8.3 shows demands and costs for a monopolistically competitive firm. When the firm's demand curve shifts from to and to : A) the firm's economic profit remains the same. B) the firm's marginal revenue at the profit-maximizing output level is decreasing. C) the firm's marginal cost at the profit-maximizing output level is increasing. D) the firm's average cost at the profit-maximizing output level is decreasing. Answer: C Diff: 3 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

65) Figure 8.3 shows demands and costs for a monopolistically competitive firm. When the firm's demand curve shifts from to and to , in the long run we would expect: A) the firm to earn a zero economic profit. B) the firm to charge a price equal to its marginal cost. C) the firm to increase its output level. D) the firm to produce at the lowest average cost. Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

Figure 8.4 66) Figure 8.4 depicts demand and costs for a monopolistically competitive firm. At the profitmaximizing output level: A) the firm is making a positive economic profit. B) the firm is earning a zero economic profit. C) the firm is earning a negative economic profit. D) There is not sufficient information. Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 35 Copyright © 2020 Pearson Education, Inc.

67) Figure 8.4 depicts demand and costs for a monopolistically competitive firm. In the long run we expect: A) more firms to enter the market. B) the firm's demand curve to shift to the left. C) the firm's average cost of production to increase. D) all of the above Answer: D Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 68) Figure 8.4 depicts demand and costs for a monopolistically competitive firm. If the firm's demand curve shifts to the left as more firms enter the market: A) the firm's average cost will be higher at the new profit-maximizing output level. B) the firm's average cost will be lower at the new profit-maximizing output level. C) the firm's average cost will remain the same at the new profit-maximizing output level. D) There is not sufficient information. Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 69) Figure 8.4 depicts demand and costs for a monopolistically competitive firm. If the firm's demand curve shifts to the left as more firms enter the market: A) the firm's average cost will be lower at the new profit-maximizing output level. B) the firm's marginal cost will be higher at the new profit-maximizing output level. C) the firm's marginal revenue will remain the same at the new profit-maximizing output level. D) the firm's marginal cost will remain the same at the new profit-maximizing output level. Answer: D Diff: 3 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

70) Figure 8.4 depicts demand and costs for a monopolistically competitive firm. If the firm's demand curve shifts to the left as more firms enter the market: A) the firm's profit will be smaller at the new profit-maximizing output level. B) the firm's profit will be greater at the new profit-maximizing output level. C) the firm's profit will remain the same at the new profit-maximizing output level. D) There is not sufficient information. Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

Figure 8.5 71) The monopolistically competitive firm in Figure 8.5 will produce where: A) MC = MR. B) MC = D. C) MR = D. D) all of the above Answer: A Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 37 Copyright © 2020 Pearson Education, Inc.

72) Where the monopolistically competitive firm in Figure 8.5 produces, it will: A) make a positive economic profit. B) suffer a loss. C) make zero economic profit. D) make a negative economic profit. Answer: C Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 73) The monopolistic competitive industry in Figure 8.5 will tend to: A) contract. B) remain the same size. C) expand. D) go out of business. Answer: B Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 74) Examples of monopolistically competitive industries in which firms differentiate their products by offering them at more locations include all of the following EXCEPT: A) restaurants. B) video rental stores. C) retail clothing stores. D) wheat farms. Answer: D Diff: 1 Topic: Differentiation by Location Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

75) Restaurants, video rental stores, clothing stores, and music stores are examples of industries in which firms differentiate their products by offering them at more locations. This is an example of a(n) ________ market. A) perfectly competitive B) monopoly C) monopolistically competitive D) oligopoly Answer: C Diff: 1 Topic: Differentiation by Location Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 76) Gasoline stations carrying the same fuel brand (e.g., Chevron) are able to charge different prices in San Francisco because: A) location is a source for product differentiation. B) gasoline stations are perfect price discriminators. C) gasoline station operators form a cartel to act as a monopoly. D) fuel quality varies across stores. Answer: A Diff: 1 Topic: Differentiation by Location Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions Recall the Application about the costs involved in opening a restaurant to answer the following question(s). 77) Recall the Application. Which of the following prevents the restaurant industry from being classified as a monopoly? A) There are many restaurant chains in the industry. B) There is easy entry. All an entrepreneur needs is to pay the franchise fee and the royalties. C) Restaurants are differentiated based on location and price. D) All of the above are reasons why the restaurant industry is not a monopoly. Answer: D Diff: 2 Topic: Application 2, Opening a Restaurant Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

78) Recall the Application. The $45,000 franchise fee that you would pay to Sonic (the owner of the Sonic Drive-In brand) is considered: A) a variable cost. B) part of the marginal cost. C) part of the marginal revenue. D) a fixed cost. Answer: D Diff: 2 Topic: Application 2, Opening a Restaurant Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 79) Recall the Application. The royalty fee of 8.25 percent of revenue that you would pay to Sonic (the owner of the Sonic Drive-In brand) is: A) considered a variable cost. B) considered a sunk cost. C) not considered part of your costs. D) considered a fixed cost. Answer: A Diff: 2 Topic: Application 2, Opening a Restaurant Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 80) Recall the Application. Because the restaurant industry is considered monopolistic competition, it is expected that in the long run, restaurant franchise owners earn A) zero economic profits. B) positive economic profits. C) zero accounting profits. D) negative accounting profits. Answer: A Diff: 2 Topic: Application 2, Opening a Restaurant Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

81) Recall the Application. If you are a franchise owner of a Sonic Drive-In restaurant, and it is in a monopolistically competitive market, you would expect in the long run to earn zero economic profits because: A) you must compete against other restaurants that are similar to you, but not exactly the same. B) barriers to entering the restaurant business are relatively low. C) competition among restaurants is keen. D) All of the above are correct. Answer: D Diff: 2 Topic: Application 2, Opening a Restaurant Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 82) A market is called monopolistically competitive if each firm has the same product but consumers can choose to purchase the product from any firm. Answer: FALSE Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 83) Monopolistically competitive firms sell differentiated products. Answer: TRUE Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 84) In the long run, monopolistically competitive firms become perfectly competitive firms. Answer: FALSE Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

85) Monopolistically competitive industries have only a single firm and there is a barrier to entry. Answer: FALSE Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 86) Some firms in monopolistically competitive markets differentiate their products by their physical characteristics. Answer: TRUE Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 87) The market for laundry detergent is monopolistically competitive because products differ by physical characteristics such as scent, stain fighting ingredients, etc. Answer: TRUE Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 88) Department stores are monopolistically competitive because stores differ in the amount of customer service they provide. Answer: TRUE Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

89) An example of a monopolistically competitive industry is cable television service. Answer: FALSE Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 90) An example of a monopolistically competitive industry is grocery stores. Answer: TRUE Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 91) The price that a monopolistically competitive firm will charge depends on what its competitors charge. Answer: FALSE Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 92) In monopolistically competitive industries, firms find it easy to enter and exit the market in the long run. Answer: TRUE Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 93) In the short run, monopolistically competitive firms find their profit-maximizing quantity by setting price equal to marginal cost. Answer: FALSE Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 43 Copyright © 2020 Pearson Education, Inc.

94) In the long run, monopolistically competitive firms earn zero economic profits. Answer: TRUE Diff: 1 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 95) Some monopolistically competitive firms differentiate their products simply by opening a new store at a different location. Answer: TRUE Diff: 1 Topic: Differentiation by Location Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 96) Describe some of the ways in which firms differentiate their products. Answer: Firms might differentiate their products on the basis of physical characteristics, location, services, or image, among other things. Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 97) Give five examples of industries that are monopolistically competitive. Answer: Answers can vary. Sample answers include: toys, clothing, cleaning products, restaurants, haircuts, coffee shops, gasoline stations, etc. Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

98) What is "monopolistic" about monopolistic competition? Answer: Firms sell goods that are close substitutes for each other, but an individual firm's product is unique. Since each version of the product is only sold by one firm, that firm is a monopolist in selling its version of the product. Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 99) What is "competitive" about a monopolistically competitive market? Answer: A monopolistically competitive market has many sellers and buyers and each monopolistically competitive firm can freely enter or exit the market, which in the long run leads to a zero economic profit for all existing firms in the market. Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 100) If you were thinking of entering the ice cream business, would you make a product that is just like one that is already being produced? Explain. Answer: Yes, if there is a new type of ice cream that is currently earning positive economic profits, then you might. Further, even if the ice cream you produce isn't differentiated, the location of your store or the level of your service could differentiate your product. Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 101) The market for chicken used to be perfectly competitive. Then producers like Frank Perdue started marketing chicken under their name. What did they gain by doing this? Answer: These producers convinced consumers that their chicken was different from and better than all other chicken. This allows the company to charge higher prices for its chicken than "generic" chicken manufacturers. Since this was a successful strategy, other chicken producers now advertise their products. Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 45 Copyright © 2020 Pearson Education, Inc.

102) Suppose that A Cleaner World invents a new type of laundry detergent that has an ingredient that stops stains from setting into clothes. If the laundry detergent market is monopolistically competitive, explain what will happen to the price of its product in the short run. What will happen in the long run? Answer: In the short run consumers will buy its detergent because it is perceived to be better than other detergents and A Cleaner World will earn positive economic profits. In the long run other detergents will put the stain-stopping ingredient into their detergent. This will shift A Cleaner World's demand curve to the left, decrease the quantity they sell, and decrease the price they can charge until economic profits will become zero. Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

Figure 8.6 103) Figure 8.6 depicts a monopolistically competitive firm in the long run. Illustrate on the graph the firm's price and output level in long-run equilibrium. Explain. Answer:

As illustrated on the graph, the firm picks the quantity at which its marginal revenue equals its marginal cost, shown as Q (this is the level of output at which the MR and LRMC curves intersect). It will charge price P for that level of output; P is the price associated with Q on the demand curve facing the firm. Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

104) Referring to Figure 8.6, how much economic profit does the monopolistically competitive firm earn in long-run equilibrium? Answer:

As illustrated on the graph, the firm earns zero economic profit in long-run equilibrium. At the quantity Q the price P is just equal to long-run average cost. The firm earns just enough to stay in business. Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 105) Can a monopolistically competitive firm producing a good with lots of very close substitutes earn large positive profits in the long run? Answer: No, because monopolistically competitive firms are in industries that have no significant barriers to entry, the presence of large profits in the short run will entice other firms to enter into the market. This will cause the price of the good to decrease, and the profits earned by the firms in the industry to be wiped out. Diff: 2 Topic: When Entry Stops: Long-Run Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

8.3 Trade-Offs with Entry and Monopolistic Competition 1) A benefit to consumers of monopolistically competitive markets is that: A) consumers only have to choose from one product. B) consumers have a variety of products from which to choose. C) goods are sold at the lowest possible average cost of production. D) price is equal to marginal cost in equilibrium. Answer: B Diff: 1 Topic: Average Cost and Variety Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 2) Consumers benefit from monopolistically competitive markets because: A) they only have one good from which to choose. B) in this type of market, producers supply goods in a variety of locations or with a variety of characteristics. C) in this type of market, goods are sold at a price equal to the marginal cost of production. D) goods are sold at a price equal to marginal revenue. Answer: B Diff: 1 Topic: Average Cost and Variety Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 3) The "good news" for consumers from monopolistic competition is ________ but the "bad news" for producers is that ________. A) lower prices than monopoly; there are higher production costs B) lower prices than monopoly; there are higher travel costs C) lower prices than monopoly; there is less product variety D) greater product variety; product prices are higher Answer: A Diff: 2 Topic: Average Cost and Variety Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

4) As compared to a perfectly competitive firm, a monopolistically competitive firm will: A) have more control over price. B) have less control over price. C) face more barriers to entry. D) face many more competitors. Answer: A Diff: 2 Topic: Monopolistic Competition versus Perfect Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 5) As compared to a perfectly competitive firm, a monopolistically competitive firm will: A) have less control over price. B) face more barriers to entry. C) face more competitors. D) sell a more differentiated product. Answer: D Diff: 2 Topic: Monopolistic Competition versus Perfect Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 6) Monopolistically competitive markets are like perfectly competitive markets because in both markets, firms: A) have some control over price. B) face substantial barriers to entry. C) face a large number of competitors. D) have no control over price. Answer: C Diff: 2 Topic: Monopolistic Competition versus Perfect Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

7) Monopolistically competitive markets are different from perfectly competitive markets because in monopolistically competitive markets, firms: A) have some control over price, while in perfectly competitive markets firms have no control over price. B) face substantial barriers to entry, while in perfectly competitive markets firms face no significant barriers to entry. C) have no control over price, while in perfectly competitive markets firms have some control over price. D) sell a standardized product, while in perfectly competitive markets firms sell a differentiated product. Answer: A Diff: 2 Topic: Monopolistic Competition versus Perfect Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 8) In which of the following ways is a monopolistically competitive firm like a perfectly competitive firm? A) Short-run economic profits are always positive. B) Short-run economic profits may be positive, negative, or zero. C) Long-run economic profits are negative. D) Long-run economic profits are positive. Answer: B Diff: 2 Topic: Monopolistic Competition versus Perfect Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 9) Which of the following characteristics of the monopolistically competitive and the perfectly competitive market will cause the firm to earn zero profits in the long run? A) no barriers to entry B) many buyers C) price taker D) homogeneous product Answer: A Diff: 2 Topic: Monopolistic Competition versus Perfect Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

10) In which of the following ways is a monopolistically competitive firm like a perfectly competitive firm? A) Short-run economic profits are always positive. B) Long-run economic profits are negative. C) Long-run economic profits are positive. D) Long-run economic profits are equal to zero. Answer: D Diff: 2 Topic: Monopolistic Competition versus Perfect Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 11) The more product differentiation in the market, the ________ the firm specific demand curve. The less product differentiation in the market, the ________ the firm specific demand curve. A) steeper; flatter B) flatter; steeper C) more concave; more convex D) more convex; more concave Answer: A Diff: 2 Topic: Monopolistic Competition versus Perfect Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions Recall the Application about food and drink pricing during "happy hour" at bars and restaurants to answer the following question(s). 12) Recall the Application. Bars and restaurants generally operate in a(n): A) monopoly market. B) monopolistically competitive market. C) perfectly competitive market. D) oligopoly market. Answer: B Diff: 1 Topic: Application 3, Happy Hour Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

13) Recall the Application. During "happy hour," many bars and restaurants face an increase in demand for food and drink, and these establishments often cut prices during these times of increased demand. When this demand increases, the bars and restaurants face a ________ demand curve. A) perfectly elastic B) perfectly inelastic C) more elastic D) more inelastic Answer: C Diff: 1 Topic: Application 3, Happy Hour Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 14) Recall the Application. During "happy hour," many bars and restaurants face an increase in demand for food and drink, and these establishments often cut prices during these times of increased demand. When this demand increases, the demand curve facing these bars and restaurants becomes: A) vertical. B) horizontal. C) steeper. D) flatter. Answer: D Diff: 1 Topic: Application 3, Happy Hour Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 15) Monopolistically competitive firms have no benefits to consumers relative to perfectly competitive firms. Answer: FALSE Diff: 1 Topic: Monopolistic Competition versus Perfect Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

16) Monopolistically competitive firms offer consumers more variety than perfectly competitive firms. Answer: TRUE Diff: 1 Topic: Monopolistic Competition versus Perfect Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions Recall the Application about food and drink pricing during "happy hour" at bars and restaurants to answer the following question(s). 17) Recall the Application. In a market subject to monopolistic competition, a restaurant's rational response to more elastic demand is to increase its price. Answer: FALSE Diff: 1 Topic: Application 3, Happy Hour Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 18) Recall the Application. The happy hour combination of higher demand and lower prices is in accordance with the model of perfect competition. Answer: FALSE Diff: 1 Topic: Application 3, Happy Hour Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 19) What are the benefits and costs associated with monopolistic competition? Answer: The benefits are lower prices than monopoly and more product variety for consumers. The cost is that monopolistically competitive firms do not operate at the minimum of their average cost curves, so their average costs are higher. Diff: 2 Topic: Average Cost and Variety Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions

20) "If the amount of product differentiation in a monopolistically competitive industry is very small, the outcome in that market will not be very different than if it were a perfectly competitive industry." Explain. Answer: If the amount of product differentiation is very small then the good produced by any individual firm is a very close substitute for that produced by any other firm. That means that consumers will pay only a slightly higher price for their favorite good, as opposed to a large increase in price if the goods were very different. This means that all firms' prices will be virtually the same. This is a very similar situation to perfect competition where all firms' prices are exactly the same. Diff: 2 Topic: Monopolistic Competition versus Perfect Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions 8.4 Oligopoly and Pricing 1) When there are just a few firms in the industry, the industry structure is most likely to be: A) a perfectly competitive industry. B) an oligopoly market. C) a monopoly market. D) a natural monopoly market. Answer: B Diff: 1 Topic: Oligopoly and Pricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 2) When a few firms sell similar products in a market, the market structure is most likely to be: A) a perfectly competitive market. B) a monopoly. C) a monopolistically competitive market. D) an oligopoly. Answer: D Diff: 1 Topic: Oligopoly and Pricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

3) The four-firm concentration ratio measures the: A) percentage of total output in a market produced by the four largest firms. B) elasticity of demand of the four largest firms in an industry. C) average cost of the four largest firms in an industry. D) number of firms in an industry. Answer: A Diff: 1 Topic: Oligopoly and Pricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 4) The four-firm concentration ratio for the cigarette market is 93%. This means that: A) the four largest firms in the market produce 93% of the total market output. B) the market is an oligopoly. C) there is a high degree of concentration in the cigarette market. D) all of the above Answer: D Diff: 1 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

Table 8.1 5) The four-firm concentration ratio for the market depicted in Table 8.1 is: A) 10%. B) 40%. C) 82%. D) 92%. Answer: D Diff: 2 Topic: Oligopoly and Pricing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 56 Copyright © 2020 Pearson Education, Inc.

6) The key feature of ________ is that firms act strategically. A) perfect competition B) an oligopoly C) a monopoly D) a natural monopoly Answer: B Diff: 1 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 7) The Herfindahl-Hirschman Index measures: A) the degree of concentration in a market. B) the percentage of market share held by the four largest firms in a market. C) the percentage of market share held by the largest firm in a market. D) the market share held by the largest firm in a market divided by the market share held by all other firms in the market. Answer: A Diff: 1 Topic: Oligopoly and Pricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 8) Oligopoly differs from monopoly and perfect competition in that: A) firms consider each other's actions when choosing price and quantity. B) there are a few firms in the industry. C) firms act strategically. D) all of the above Answer: D Diff: 2 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

9) Suppose that there are five firms in a market, each controlling 20% of the market. The HHI would equal: A) 10. B) 100. C) 1,000. D) 2,000. Answer: D Diff: 2 Topic: Oligopoly and Pricing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 10) Compare two markets. In one market, the HHI is 500, in the other market the HHI is 1,500. What must be true of these two markets? A) The firms in the market in which the HHI is 1,500 have greater market power than do the firms in the market in which the HHI is 500. B) There are more firms in the market in which the HHI is 1,500 than in the market in which the HHI is 500. C) The firms in the market in which the HHI is 1,500 have less market power than do the firms in the market in which the HHI is 500. D) The market in which the HHI is 500 is, by definition, an oligopoly but the market in which the HHI is 1,500 is not an oligopoly. Answer: A Diff: 2 Topic: Oligopoly and Pricing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 11) A high degree of concentration in a market suggests that firms in that market: A) have the power to control prices. B) are perfectly competitive. C) cannot act strategically. D) have formed an illegal cartel. Answer: A Diff: 1 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

12) Market power is the power to: A) control prices. B) gain another firm's customers. C) reduce price below cost to deter entry. D) control output. Answer: A Diff: 1 Topic: Oligopoly and Pricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 13) When economies of scale are present, but are not sufficiently large to generate a natural monopoly, the expected market structure is: A) monopoly. B) monopolistic competition. C) perfect competition. D) oligopoly. Answer: D Diff: 2 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 14) Which one of the following is the best example of an oligopolistic industry? A) cigarettes B) wheat growers C) apple growers D) public utilities Answer: A Diff: 1 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

15) Which one of the following is the best example of an oligopolistic industry? A) long-distance telephone service B) wheat growers C) apple growers D) public utilities Answer: A Diff: 1 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 16) Which one of the following is the best example of an oligopolistic industry? A) wheat growers B) apple growers C) public utilities D) soft drinks Answer: D Diff: 1 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 17) If the government limits the number of firms in a market by issuing a limited number of licenses, the market structure is most likely to be: A) a perfectly competitive market. B) a monopoly. C) a monopolistically competitive market. D) an oligopoly. Answer: D Diff: 1 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

18) If substantial up-front investments in advertising campaigns become essential to a successful market entry, the market is most likely to be: A) a perfectly competitive market. B) a monopoly. C) a monopolistically competitive market. D) an oligopoly. Answer: D Diff: 1 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 19) An oligopoly might occur as a result of: A) economies of scale in production. B) government barriers to entry. C) advertising. D) all of the above Answer: D Diff: 1 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 20) A special case of an oligopoly where there are only two firms is called: A) a monopoly. B) a duopoly. C) perfect competition. D) monopolistic competition. Answer: B Diff: 1 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

21) A duopoly is an industry with: A) one firm. B) two firms. C) many firms that sell slightly differentiated products. D) many firms that sell identical products. Answer: B Diff: 1 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 22) When firms cooperate with each other rather than compete: A) consumers will end up better off. B) the firms will end up better off. C) both consumers and firms end up better off. D) they will agree to set low prices to help each other out. Answer: B Diff: 1 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 23) A group of firms that coordinate their pricing decisions is called: A) a monopoly. B) a duopoly. C) a cartel. D) monopolistic competition. Answer: C Diff: 1 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

24) An arrangement under which a number of firms act as a single firm and coordinate their pricing decisions is: A) a monopoly. B) monopolistic competition. C) price fixing. D) perfect competition. Answer: C Diff: 1 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 25) When firms compete with each other rather than cooperate: A) consumers will end up better off. B) the firms will end up better off. C) prices will be higher. D) output will be lower. Answer: A Diff: 1 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 26) Cartels engage in price fixing in order to: A) drive out competition. B) retain customers. C) increase profits. D) promote entry. Answer: C Diff: 1 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

27) In general, firms in a cartel: A) agree to set price equal to marginal cost. B) do not consider the actions of the other firms in the cartel when making output decisions. C) produce levels of output exceeding the monopoly output level. D) agree to charge the price the monopolist would charge. Answer: D Diff: 1 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 28) Firms in a cartel usually charge: A) the same price. B) different prices to reflect their different costs. C) lower prices than a monopoly would. D) higher prices than a monopoly would. Answer: A Diff: 1 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 29) Price fixing is an arrangement whereby firms agree to: A) set price equal to marginal revenue. B) set price equal to marginal cost. C) set price equal to average total cost. D) coordinate their pricing decisions. Answer: D Diff: 1 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

30) In general, the market price in an oligopoly market is: A) lower than in perfect competition. B) higher than in perfect competition. C) the same as in perfect competition. D) The answer depends on the shape of the average cost curve. Answer: B Diff: 2 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 31) In general, the quantity of output in an oligopoly market is: A) lower than in perfect competition. B) higher than in perfect competition. C) the same as in perfect competition. D) The answer depends on the shape of the average cost curve. Answer: A Diff: 2 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 32) If the price in an oligopoly market is the same as that of a monopoly with identical cost and demand conditions, then: A) the average cost curve must be downward sloping. B) there may be collusion between firms. C) market demand must be unit elastic. D) This could never happen. Answer: B Diff: 3 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

Figure 8.7 33) Figure 8.7 shows the market for a successful price-fixing arrangement (cartel) between two identical firms. When the two firms act like one and charge the same price, the market price will be ________ and each firm will produce and sell a quantity of ________. A) $10; 200 B) $10; 100 C) $5; 500 D) $5; 250 Answer: B Diff: 2 Topic: Cartel Pricing and the Duopolists' Dilemma, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 34) Figure 8.7 shows a successful price-fixing arrangement (cartel) between two identical firms. When the two firms act like one and charge the same price, each firm will earn an economic profit of ________. A) $1,250 B) $1,000 C) $500 D) $0 Answer: C Diff: 2 Topic: Cartel Pricing and the Duopolists' Dilemma, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

35) Figure 8.7 shows a successful price-fixing arrangement (cartel) between two identical firms. If the cartel collapses and the two firms compete against each other, the price will be ________ and the quantity will be ________. A) higher; greater B) higher; smaller C) lower; greater D) lower; smaller Answer: C Diff: 2 Topic: Cartel Pricing and the Duopolists' Dilemma, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 36) Figure 8.7 shows a successful price-fixing arrangement (cartel) between two identical firms. If the cartel collapses and the two firms compete against each other, each firm's profit will be ________ and the quantity will be ________. A) smaller; smaller B) smaller; greater C) greater; smaller D) greater; greater Answer: B Diff: 2 Topic: Cartel Pricing and the Duopolists' Dilemma, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

Figure 8.8 37) Figure 8.8 shows demand, marginal revenue, and costs of an individual duopolist. If the two duopolists have the same costs and split the market equally, each profit-maximizing duopolist will produce and sell a quantity of ________. A) 1,000 units B) 500 units C) 250 units D) 125 units Answer: C Diff: 2 Topic: Cartel Pricing and the Duopolists' Dilemma, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 38) Figure 8.8 shows demand, marginal revenue, and costs of a duopolist. If the two duopolists have the same costs and split the market equally, each profit-maximizing duopolist will earn a profit of ________. A) $30,000 B) $15,000 C) $10,000 D) $0 Answer: C Diff: 2 Topic: Cartel Pricing and the Duopolists' Dilemma, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

39) Figure 8.8 shows demand, marginal revenue, and costs of a duopolist. Suppose that the two duopolists have the same costs. If the two firms form a cartel and charge the profit-maximizing monopoly price, compared to perfect competition, the market price will be ________ and the total output level will be ________. A) higher; greater B) higher; smaller C) lower; greater D) lower; smaller Answer: B Diff: 2 Topic: Cartel Pricing and the Duopolists' Dilemma, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 40) Figure 8.8 shows demand, marginal revenue, and costs of a duopolist. Suppose that the two duopolists have the same costs. If the two firms form a cartel and charge the profit-maximizing monopoly price, then compared to perfect competition, each firm's profit will be ________ and the total output level will be ________. A) greater; greater B) greater; smaller C) smaller; greater D) smaller; smaller Answer: B Diff: 2 Topic: Cartel Pricing and the Duopolists' Dilemma, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 41) A graphical tool that provides a visual representation of the consequences of alternative strategies is a: A) game tree. B) network. C) strategy set. D) decision node. Answer: A Diff: 1 Topic: Price Fixing and the Game Tree Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

Figure 8.9 42) Consider Figure 8.9. Becky's dominant strategy is ________ and David's dominant strategy is ________. A) high; high B) low; low C) high; low D) low; high Answer: B Diff: 2 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 43) Consider Figure 8.9. Which of the following statements is true? A) Both David and Becky have a dominant strategy. B) Neither David nor Becky has a dominant strategy. C) David has a dominant strategy but Becky does not. D) Becky has a dominant strategy but David does not. Answer: A Diff: 2 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

44) Consider Figure 8.9. Choosing a low price is: A) a dominant strategy for David but not for Becky. B) a dominant strategy for Becky but not for David. C) a dominant strategy for both David and Becky. D) not a dominant strategy for either David or Becky. Answer: C Diff: 2 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 45) Consider Figure 8.9. Choosing a high price is: A) a dominant strategy for David but not for Becky. B) a dominant strategy for Becky but not for David. C) a dominant strategy for both David and Becky. D) not a dominant strategy for either David or Becky. Answer: D Diff: 2 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 46) Consider Figure 8.9. David chooses to charge a low price: A) only if Becky chooses a high price. B) only if Becky chooses a low price. C) regardless of whether Becky chooses a high or low price. D) in order to induce Becky to choose a high price. Answer: C Diff: 2 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

47) Consider Figure 8.9. Becky chooses to charge a low price: A) only if David chooses a low price. B) only if David chooses a high price. C) regardless of whether David chooses a high or low price. D) in order to induce David to choose a high price. Answer: C Diff: 2 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 48) Consider Figure 8.9. The outcome of the game will be that: A) both choose a high price. B) both choose a low price. C) Becky chooses a high price and David chooses a low price. D) David chooses a high price and Becky chooses a low price. Answer: B Diff: 2 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 49) Consider Figure 8.9. If Becky's payoff in the top rectangle were 300 instead of 90, the outcome of the game would be that: A) both choose a high price. B) both choose a low price. C) Becky chooses a high price and David chooses a low price. D) David chooses a high price and Becky chooses a low price. Answer: B Diff: 3 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

50) Consider Figure 8.9. If David's payoff in the bottom rectangle were 40 instead of 70, the outcome of the game would be that: A) both choose a high price. B) both choose a low price. C) Becky chooses a high price and David chooses a low price. D) David chooses a high price and Becky chooses a low price. Answer: D Diff: 3 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 51) Consider Figure 8.9. If Becky's payoff in the second rectangle from the top were 80 instead of 60, the outcome of the game would be that: A) both choose a high price. B) both choose a low price. C) Becky chooses a high price and David chooses a low price. D) David chooses a high price and Becky chooses a low price. Answer: C Diff: 3 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 52) The incentive to charge a low price even though it leads to lower profits in Figure 8.9 is an example of: A) the duopolists' dilemma. B) tying products. C) scarcity and choice. D) the economic problem. Answer: A Diff: 1 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

53) Consider Figure 8.9. If Becky and David could coordinate their decisions, then: A) they would each earn profits of 100. B) they would both choose to charge a low price and earn profits of 90 each. C) they would both choose to charge a high price and earn profits of 90 each. D) they would both choose to charge a high price and earn profits of 70 each. Answer: C Diff: 3 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 54) Consider Figure 8.9. Relative to the dominant strategy outcome, guaranteed price fixing would lead to: A) lower prices but higher profits. B) lower prices and lower profits. C) higher prices and higher profits. D) higher prices and lower profits. Answer: C Diff: 2 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 55) Consider Figure 8.9. If the players choose independently, what will be the outcome? A) Becky chooses a low price and David chooses a low price. B) Becky chooses a high price and David chooses a low price. C) Becky chooses a low price and David chooses a high price. D) Becky chooses a high price and David chooses a high price. Answer: A Diff: 3 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

56) Price fixing tends to fail in an oligopoly because: A) firms like to have flexibility in setting prices. B) each firm has an incentive to underprice the other firms. C) it increases the quantity demanded. D) consumers don't like fixed prices. Answer: B Diff: 1 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 57) A dominant strategy is one that: A) maximizes profits. B) is optimal under some conditions. C) never yields a negative payoff. D) is the best choice under all conditions. Answer: D Diff: 1 Topic: Equilibrium of the Price-Fixing Game Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 58) An action that is the best choice under all conditions is known as a: A) profit-maximizing strategy. B) dilemma. C) trigger strategy. D) dominant strategy. Answer: D Diff: 1 Topic: Equilibrium of the Price-Fixing Game Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

59) The duopolists' dilemma refers to the situation in which: A) duopolists would be better off maintaining high prices but face an incentive to choose a low price. B) duopolists can only earn high profits by breaking the law. C) duopolists who are engaged in price fixing have an incentive to report the behavior to the government. D) duopolists do not have a dominant strategy. Answer: A Diff: 2 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 60) A Nash Equilibrium in a game is that outcome in which: A) each player is doing the best he or she can given the other player's action. B) the players' profits are equal. C) the players earn the highest profits possible. D) neither player plays his or her dominant strategy. Answer: A Diff: 1 Topic: Nash Equilibrium Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 61) The concept of Nash Equilibrium: A) has wide applicability. B) is limited in its applicability to economic behavior because firms do not follow their dominant strategies. C) is limited in its applicability to economic behavior because firms generally follow their dominant strategies. D) has been disproven by modern economists. Answer: A Diff: 1 Topic: Nash Equilibrium Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

Recall the Application about the attempt to form a salt cartel in the 19th century to answer the following question(s). 62) According to the Application, what created local salt monopolies in the early 19th century? A) high transportation costs that prevented competition B) government regulation C) local labor unions in salt mines D) high taxes on salt that crossed state borders Answer: A Diff: 1 Topic: Application 4, Failure of the Salt Cartel Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 63) According to the Application, what was the objective of firms when they created salt pools? A) to decrease competition and keep prices uniformly high B) to decrease competition and keep prices uniformly low C) to lobby the state governments to prevent salt from other states to enter D) to give support to financially troubled salt mines Answer: A Diff: 1 Topic: Application 4, Failure of the Salt Cartel Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 64) Recall the Application. One reason cited for the failure of the salt cartel was: A) the demand for salt sharply declined in the late 19th century. B) new firms entering the market and underpricing the cartel. C) foreign competition taking over the salt market. D) the federal government's banning of price fixing in the salt market. Answer: B Diff: 1 Topic: Application 4, Failure of the Salt Cartel Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

65) Recall the Application. One of the primary goals of the salt producers who tried to form a cartel was to: A) establish a uniform price for salt. B) boost the demand for salt. C) establish an export market for salt. D) increase competition in the market for salt. Answer: A Diff: 1 Topic: Application 4, Failure of the Salt Cartel Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 66) An oligopoly is an industry with just one firm. Answer: FALSE Diff: 1 Topic: Oligopoly and Pricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 67) Oligopoly arises with scale economies that are not large enough to cause a natural monopoly. Answer: TRUE Diff: 2 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 68) In oligopoly, the actions of one firm have a perceptible effect on the other firms. Answer: TRUE Diff: 1 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

69) The higher the Herfindahl-Hirschman Index, the more firms there are in a market. Answer: FALSE Diff: 2 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 70) Market power is the power to produce at the lowest cost. Answer: FALSE Diff: 1 Topic: Oligopoly and Pricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 71) Even though in oligopoly the actions of one firm have a perceptible effect on the other firms, oligopoly firms act independently. Answer: FALSE Diff: 2 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 72) Because in oligopoly the actions of one firm have a perceptible effect on the other firms, oligopoly firms act strategically. Answer: TRUE Diff: 2 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 73) A duopoly is an industry with two firms in it. Answer: TRUE Diff: 1 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 79 Copyright © 2020 Pearson Education, Inc.

74) A dominant strategy is one that is best no matter what the other player(s) does (do). Answer: TRUE Diff: 1 Topic: Equilibrium of the Price-Fixing Game Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 75) A dominant strategy is one that always produces the maximum profits for both firms. Answer: FALSE Diff: 1 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 76) Suppose that Jack promises that if Jill chooses the high price, he will too. Jack has an incentive to cheat on the agreement. Answer: TRUE Diff: 1 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 77) Suppose that Jack promises that if Jill chooses the high price, he will too. Jill has no incentive to cheat on the agreement. Answer: FALSE Diff: 1 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 78) In the price fixing game, when both firms choose their dominant strategy, each firm will generally earn more profits than when both firms choose the alternative strategy. Answer: FALSE Diff: 2 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 80 Copyright © 2020 Pearson Education, Inc.

79) The Nash Equilibrium outcome assures the maximum profit for firms. Answer: FALSE Diff: 2 Topic: Nash Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 80) What are the key characteristics of an oligopoly? Answer: An oligopoly is an industry in which there are only a few firms. They can sell differentiated products or identical products. Entry is usually difficult because there can be high advertising costs or cost advantages. A key characteristic of oligopoly is that firms act strategically. Each firm must consider the actions of the other firms in order to determine the best actions for themselves. Because of this, game theory is a useful tool in analyzing the behavior of firms in an oligopoly. Diff: 2 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 81) List four examples of oligopolies in the United States. Answer: 1) Soft drink industry. 2) Automobile industry. 3) Tobacco industry. 4) Long-distance telephone service industry. Diff: 1 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 82) What is a four-firm concentration ratio, and how is it used? Answer: A four firm concentration ratio is the sum of the market shares of the four largest firms in an industry. It is a measure of market power. Diff: 1 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

83) What is meant by strategic behavior? Answer: Strategic behavior is when someone considers how their behavior affects the behavior of others and acts accordingly. Diff: 2 Topic: Oligopoly and Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 84) What is a cartel? Answer: A cartel is a group of firms that cooperate with each other to set prices higher than they would if they competed with each other. Explicit price fixing is illegal in the United States, so cartels are difficult to maintain. They are also difficult to maintain because each firm in the cartel has an incentive to cheat on the arrangements made by the cartel. Diff: 2 Topic: Cartel Pricing and the Duopolists' Dilemma Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 85) Briefly explain why two firms could both be made better off by cooperating, but they fail to cooperate. Answer: This is the duopolists' dilemma. In this situation, while both firms are better off by cooperating, the dominant strategy is to renege on any agreement and end up with a lower outcome. Diff: 2 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

86) Joe and Steve are duopolists who each can follow two strategies: cooperate and jointly act like a monopolist, or don't cooperate (cheat) and act like duopolists. Their profits are as follows: If both cooperate: both receive $1 million If one cooperates: cooperator receives $200,000, cheater receives $1.2 million If both cheat: both receive $500,000 What will they do? Answer: Both will cheat and end up with $500,000. Why? Suppose you're Joe. If Steve cooperates, you're better off cheating, as you will get $1.2 million rather than $1 million. If Steve cheats, you're better off cheating, as you will get $500,000 rather than $200,000. So no matter what Steve does, Joe will cheat. Diff: 3 Topic: Equilibrium of the Price-Fixing Game Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 87) What is meant by a dominant strategy? Answer: A dominant strategy is a strategy that is best for a player no matter what his or her opponents do. A rational player will always play a dominant strategy if he or she has one. Diff: 2 Topic: Equilibrium of the Price-Fixing Game Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 8.5 Overcoming the Duopolists' Dilemma 1) A firm announces that it will refund the difference between its price and any price of a competitor that is lower. This is an example of: A) predatory pricing. B) tying contracting. C) marginal cost pricing. D) a low-price guarantee Answer: D Diff: 1 Topic: Low-Price Guarantees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

2) A firm that faces the duopolists' dilemma can avoid the dilemma by: A) telling customers that it will match any competitor's price. B) undercutting its competitor's price. C) agreeing to join a cartel. D) always choosing its dominant strategy regardless of the other firm's action. Answer: A Diff: 1 Topic: Low-Price Guarantees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 3) If a firm engages in a low-price guarantee, that firm picks a: A) high price but instantly switches to a low price if its competitors choose a low price. B) low price but instantly switches to a high price if its competitors choose a low price. C) high price but instantly switches to a low price if its competitors choose a high price. D) low price no matter what the competition does. Answer: A Diff: 1 Topic: Low-Price Guarantees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 4) In a duopoly, one firm's low-price guarantee: A) eliminates the other firm's incentive to undercut the first firm's price. B) encourages the other firm to cut its prices. C) guarantees that consumers will pay the lowest price possible. D) is ineffective because firms always have an incentive to break their agreements. Answer: A Diff: 2 Topic: Low-Price Guarantees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

5) One method firms can use to solve the duopolists' dilemma is to engage in: A) predatory pricing. B) tying contracting. C) marginal cost pricing. D) low-price guarantees. Answer: D Diff: 1 Topic: Low-Price Guarantees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 6) Suppose Kevin offers to match his competitors' prices in an oligopoly market. This will have the effect of: A) providing consumers with the lowest possible price. B) decreasing his competitors' incentive to reduce price. C) driving out his competition. D) triggering an antitrust investigation. Answer: B Diff: 1 Topic: Low-Price Guarantees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 7) The rational outcome of a low-price guarantee policy is that: A) both firms will sell at the low price. B) one firm will sell at a low price and the competitor will sell at a high price. C) both firms will sell at the high price. D) consumers will be better off. Answer: C Diff: 1 Topic: Low-Price Guarantees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

8) If firms follow a low-price guarantee strategy, the price that will prevail in the market will be closest to: A) the price a monopolist will pick. B) the price that a perfectly competitive firm would pick. C) the duopoly price. D) the price that would yield zero economic profits. Answer: A Diff: 2 Topic: Low-Price Guarantees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 9) Price-fixing by firms in an oligopoly is: A) more likely when the firms play a game repeatedly. B) more likely when firms must commit to a single pricing strategy for the lifetime of the firm. C) more likely when neither firm chooses the low-price guarantee strategy. D) never sustainable because firms have an incentive to underprice each other. Answer: A Diff: 2 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 10) What makes a grim trigger strategy "grim" is: A) if one player overprices, then the other overprices to the point of zero quantity demanded. B) if one player underprices, then the other player notifies the Federal Trade Commission. C) if one player underprices, then the other player is driven out of the market. D) if one player underprices, then the other player drops the price so far that profits for both firms are zero. Answer: D Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

11) Duopoly pricing, grim-trigger strategy, and tit-for-tat all promote cartel pricing by: A) penalizing the underpricer. B) making underpricing impossible. C) increasing the chance of an underpricer being caught by the rest of the cartel. D) making entry impossible. Answer: A Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 12) Which one of the following is NOT a retaliation strategy that firms would apply to one that cheated on a price-fixing scheme by selling at a price below the agreed-upon fixed price? A) All other firms sell at the same low price as the cheating firm. B) All other firms sell at a price that ensures zero economic profit for all firms. C) Each period, all other firms sell at the price picked by the cheater in the previous period. D) All other firms would reduce their output. Answer: D Diff: 2 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 13) Which one of the following statements is NOT true? A) A firm that chooses to cheat on a price-fixing scheme should consider the short-term gain in profits from cheating versus the long-term loss in profits from being punished. B) The duopoly-pricing strategy leads to negative economic profits. C) Cartels may break down because of the incentive to cheat. D) Price leadership arrangements are an implicit price-fixing scheme. Answer: B Diff: 2 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

14) The duopoly price strategy provides ________ incentive to maintain cartel pricing as compared to the grim-trigger strategy. A) a greater B) less of an C) the same D) The answer depends on the firms' average cost curves. Answer: B Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 15) If two firms use a tit-for-tat scheme to maintain cartel pricing, and one firm chooses a low price in the current time period, then: A) that firm will also choose a low price in the next time period. B) that firm will also choose a high price in the next time period. C) the other firm will choose a low price in the next time period. D) the other firm will choose a high price in the next time period. Answer: C Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 16) If two firms use a tit-for-tat scheme to maintain cartel pricing, and one firm chooses a high price in the current time period, then: A) that firm will also choose a low price in the next time period. B) that firm will also choose a high price in the next time period. C) the other firm will choose a low price in the next time period. D) the other firm will choose a high price in the next time period. Answer: D Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

17) When one firm uses the same strategy as the other firm used in the previous time period, this is known as a: A) tit-for-tat strategy. B) grim-trigger strategy. C) dominant strategy. D) predatory strategy. Answer: A Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 18) If Jack underprices Jill this month and Jill employs a tit-for-tat strategy, how can both parties return to the cartel outcome? A) Jack must raise the price and allow Jill to underprice him for one month. B) Jack must retaliate by employing the grim-trigger strategy. C) Jack must cry and beg and plead for Jill to come back to the cartel outcome. D) Jack must report Jill to the Department of Justice. Answer: A Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Analytical AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 19) Consider two people involved in a marriage or relationship. If, when one person is caught cheating on their agreement, the other cheats once as a punishment. In this example, then they are using a: A) tit-for-tat strategy. B) grim-trigger strategy. C) dominant strategy. D) predatory strategy. Answer: A Diff: 2 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

20) Consider two people involved in a marriage or relationship. If, when one person is caught cheating on their agreement, the other divorces or leaves them, then they are using a: A) tit-for-tat strategy. B) grim-trigger strategy. C) dominant strategy. D) predatory strategy. Answer: B Diff: 2 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 21) Which strategy has been shown to be the most effective strategy to promote cooperation? A) tit-for-tat B) grim-trigger strategy C) low-price guarantee D) prisoners' dilemma Answer: A Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 22) The threat of punishment in a repeated game tends to: A) reduce the incentive to break a pricing agreement. B) anger the other firms, resulting in a price war. C) maintain prices at the duopoly price level. D) deter entry. Answer: A Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

23) Explicit price fixing: A) is illegal in the U.S. and in the European Union. B) is illegal only in the United States. C) is illegal only if the firms engage in punishment strategies. D) has not occurred in recent years. Answer: A Diff: 2 Topic: Price Fixing and the Law Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 24) When firms discuss pricing strategies with each other: A) it is a violation of antitrust laws. B) it is not a violation of antitrust laws because laws cannot restrict free speech. C) it is a violation of antitrust laws only if the discussion includes punishment strategies. D) it is a violation of antitrust laws only if some firms in the industry are excluded from the discussion. Answer: A Diff: 2 Topic: Price Fixing and the Law Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 25) Suppose there are two firms maintaining a cartel agreement. If one firm suddenly drops its price, the other firm could interpret this as signaling: A) a change in market conditions. B) limit pricing. C) cartel pricing. D) cooperative pricing. Answer: A Diff: 1 Topic: Price Leadership Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

26) Oligopolists that follow the price leadership model: A) are engaging in implicit, but not explicit, price fixing. B) are violating antitrust laws. C) have chosen to follow the grim-trigger strategy. D) will be unable to overcome the duopolists' dilemma because firms will have an incentive to underprice the firm that is the price leader. Answer: A Diff: 2 Topic: Price Leadership Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 27) Relative to explicit price fixing, with implicit price fixing: A) firms will find it more difficult to figure out why the price leader has set the price that it has. B) the reasons for the price leader's pricing strategy will be more clear and less ambiguous. C) firms face a higher risk of prosecution for antitrust violations. D) consumers will pay higher prices. Answer: A Diff: 2 Topic: Price Leadership Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 28) Suppose there are two firms maintaining a cartel agreement. If one firm suddenly drops its price, the other firm could interpret this as signaling: A) underpricing. B) limit pricing. C) cartel pricing. D) cooperative pricing. Answer: A Diff: 1 Topic: Price Leadership Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

29) If a firm perceived that the other firm in an implicit pricing agreement dropped its price in response to a change in market conditions, then its most likely response would be to: A) match the other firm's price. B) engage in a price war. C) raise price to punish the other firm. D) keep its price the same. Answer: A Diff: 2 Topic: Price Leadership Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 30) If a firm perceived that the other firm in an implicit pricing agreement dropped its price in an attempt to gain market share, then its most likely response would be to: A) merge with the other firm. B) engage in a price war. C) raise price to punish the other firm. D) keep its price the same. Answer: B Diff: 2 Topic: Price Leadership Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies Recall the Application about low-price guarantees and the prices of tires to answer the following question(s). 31) Recall the Application. A study of the retail tire market suggests that prices are ________ in markets where firms offer low-price guarantees. A) generally higher B) generally lower C) always lower D) generally unchanged Answer: A Diff: 1 Topic: Application 5, Low-Price Guarantee Increases Tire Prices Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

32) Recall the Application. From a pricing standpoint, low-price guarantees seem to benefit: A) the buyer. B) the seller. C) both the buyer and the seller. D) neither the buyer nor the seller. Answer: B Diff: 2 Topic: Application 5, Low-Price Guarantee Increases Tire Prices Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 33) In a grim-trigger strategy, a firm responds to underpricing by choosing a price so low that each firm makes zero economic profit. Answer: TRUE Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 34) The duopoly price provides a greater incentive to maintain cartel pricing than does the grimtrigger strategy. Answer: FALSE Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 35) Suppose that Bill and Ted use a tit-for-tat scheme to encourage cartel pricing and Bill chooses the low price for a single month. Bill and Ted will deviate from cartel pricing for two months. Answer: FALSE Diff: 2 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

36) If two firms expect to be in the market together for a long time, the benefit of underpricing will be large relative to the cost. Answer: FALSE Diff: 2 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 37) Studies have shown that the tit-for-tat strategy is ineffective at maintaining a price fixing agreement. Answer: FALSE Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 38) Cartels are unstable and will tend to fall apart due to cheating on the agreement. Answer: TRUE Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 39) It is less likely for oligopolists to maintain high prices in a repeated game than when the firms must choose one strategy to follow for the entire lifetime of the firm. Answer: FALSE Diff: 2 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 40) Price fixing is illegal under the Sherman Act and subsequent legislation. Answer: TRUE Diff: 1 Topic: Price Fixing and the Law Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 95 Copyright © 2020 Pearson Education, Inc.

41) If two firms are engaging in price fixing, and one firm lowers its price, the other firm will always interpret this as underpricing. Answer: FALSE Diff: 1 Topic: Price Leadership Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 42) Implicit cooperation among firms to maintain prices is illegal under antitrust laws. Answer: FALSE Diff: 2 Topic: Price Leadership Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 43) Price leadership is when one firm sets price for the industry and the others follow. Answer: TRUE Diff: 1 Topic: Price Leadership Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 44) Explain what guaranteed price matching means. What are the consequences of such a policy? Answer: Guaranteed price matching occurs when a firm announces that it will match the price of any other firm who offers their product for a lower price. Although this might seem on the surface to benefit consumers by keeping prices low, in actuality it has the opposite effect. By using a guaranteed price matching strategy, a firm actually ensures that its competitors keep their prices high, which benefits the firms and hurts the consumers. Diff: 2 Topic: Low-Price Guarantees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

45) Describe how if a price-fixing game is repeated over and over, the cooperative outcome might be attained. Answer: When a game is repeated, it becomes possible for firms to punish cheaters who deviate from an agreement by lowering their profits in future periods of the game. Examples of this are the tit-for-tat strategy and the grim trigger strategy described in the book. Diff: 2 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 46) Describe a grim trigger strategy. Answer: It is strategy where a firm responds to underpricing by choosing a price so low that each firm makes a zero economic profit. Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 47) Describe a tit-for-tat strategy. Answer: It is a strategy where this period a firm chooses the price that the other firm chose in the last period. Diff: 1 Topic: Repeated Pricing Games with Retaliation for Underpricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 48) How might other firms in an oligopoly interpret your drop in price? Answer: They might view your price drop as underpricing or they might view it as due to a change in market conditions. Diff: 2 Topic: Price Leadership Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

8.6 The Insecure Monopolist and Entry Deterrence 1) A monopoly faced with the possibility that another firm may enter is a(n): A) natural monopoly. B) competitive monopoly. C) insecure monopoly. D) oligopolistic monopoly. Answer: C Diff: 1 Topic: The Insecure Monopolist and Entry Deterrence Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 2) An insecure monopoly is one where: A) a new patent has been granted. B) the possibility of a second firm entering exists. C) no other firms can enter. D) price-fixing is illegal under the Sherman Act. Answer: B Diff: 1 Topic: The Insecure Monopolist and Entry Deterrence Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 3) An insecure monopoly can deter another firm from entering the market by setting its quantity equal to: A) the zero profit quantity. B) the zero profit quantity - the minimum entry quantity. C) the minimum entry quantity. D) the zero profit quantity + the minimum entry quantity. Answer: A Diff: 1 Topic: The Insecure Monopolist and Entry Deterrence Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

4) An insecure monopoly will lose more of its profit preventing other firms from entering when: A) the zero profit quantity is large. B) the minimum entry quantity is small. C) the minimum entry quantity is large. D) the number of potential entrants is large. Answer: A Diff: 1 Topic: The Insecure Monopolist and Entry Deterrence Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 5) When a firm increases output and accepts a lower price to keep new firms from entering, it is engaging in: A) limit pricing. B) cartel behavior. C) collusion. D) price fixing. Answer: A Diff: 1 Topic: Entry Deterrence and Limit Pricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

Figure 8.10 6) In Figure 8.10, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit-maximizing price of $300 per ticket. What is Fly Smart's profit per ticket? A) $200 B) $120 C) $80 D) $0 Answer: A Diff: 1 Topic: Entry Deterrence and Limit Pricing, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

7) In Figure 8.10, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit-maximizing price of $300 per ticket. What is Fly Smart's total profit as a secure monopoly? A) $60,000 B) $40,000 C) $44,400 D) $33,600 Answer: A Diff: 1 Topic: Entry Deterrence and Limit Pricing, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 8) In Figure 8.10, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit-maximizing price of $300 per ticket. Suppose that Fly Smart discovers that a second airline is contemplating entering the market. If Fly Smart accommodates the entry, what will its profit be? A) $44,400 B) $33,600 C) $29,600 D) $16,800 Answer: D Diff: 2 Topic: Entry Deterrence and Limit Pricing, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 9) In Figure 8.10, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit-maximizing price of $300 per ticket. Suppose that Fly Smart discovers that a second airline is contemplating entering the market. If the minimum market entry quantity is 130 passengers per day, Fly Smart's entry-deterring quantity is: A) 500 passengers per day. B) 420 passengers per day. C) 370 passengers per day. D) 300 passengers per day. Answer: C Diff: 2 Topic: Entry Deterrence and Limit Pricing, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 101 Copyright © 2020 Pearson Education, Inc.

10) In Figure 8.10, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit-maximizing price of $300 per ticket. Suppose that Fly Smart discovers that a second airline is contemplating entering the market. If the minimum market entry quantity is 130 passengers per day, what price should Smart Fly charge to secure the entry-deterring quantity? A) $300 B) $220 C) $180 D) $100 Answer: B Diff: 2 Topic: Entry Deterrence and Limit Pricing, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 11) In Figure 8.10, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit-maximizing price of $300 per ticket. Suppose that Fly Smart discovers that a second airline is contemplating entering the market. If the minimum market entry quantity is 130 passengers per day, what is Fly Smart's profit when it commits to the entry-deterring quantity? A) $60,000 B) $44,400 C) $33,600 D) $29,600 Answer: B Diff: 2 Topic: Entry Deterrence and Limit Pricing, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

12) In Figure 8.10, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit-maximizing price of $300 per ticket. Suppose that Fly Smart discovers that a second airline is contemplating entering the market. If the minimum market entry quantity is 130 passengers per day, which is more profitable, entry deterrence or the passive duopoly outcome? A) The entry deterrence outcome B) The passive duopoly outcome C) Fly Smart would earn the same profit. D) There is not sufficient information. Answer: A Diff: 2 Topic: Entry Deterrence and Limit Pricing, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 13) In Figure 8.10, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit-maximizing price of $300 per ticket. Suppose that Fly Smart discovers that a second airline is contemplating entering the market. If the minimum market entry quantity is zero passengers per day, what is Fly Smart's profit when it commits to the entry-deterring quantity? A) $60,000 B) $44,400 C) $33,600 D) $0 Answer: D Diff: 2 Topic: Entry Deterrence and Limit Pricing, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

Figure 8.11 14) The path of the game in Figure 8.11 will be: A) Fred chooses a large quantity and Barney stays out. B) Fred chooses a large quantity and Barney enters. C) Fred chooses a small quantity and Barney stays out. D) Fred chooses a small quantity and Barney enters. Answer: A Diff: 2 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 15) Refer to Figure 8.11. Which of the following statements is true? A) Both Fred and Barney have a dominant strategy. B) Neither Fred nor Barney has a dominant strategy. C) Fred has a dominant strategy but Barney does not. D) Barney has a dominant strategy but Fred does not. Answer: C Diff: 2 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

16) Refer to Figure 8.11. If Fred's profit in the top rectangle were 1,300 instead of 500, then the path of the game would be: A) Fred chooses a small quantity and Barney enters. B) Fred chooses a large quantity and Barney enters. C) Fred chooses a small quantity and Barney stays out. D) Fred chooses a large quantity and Barney stays out. Answer: A Diff: 3 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 17) Refer to Figure 8.11. If Fred's profit in the second rectangle from the top were 1,600 instead of 1,500 then the path of the game would be: A) Fred chooses a small quantity and Barney enters. B) Fred chooses a large quantity and Barney stays out. C) Fred chooses a large quantity and Barney enters. D) Fred chooses a small quantity and Barney stays out. Answer: B Diff: 3 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 18) Refer to Figure 8.11. If Barney got to move first instead of Fred, the path of the game would be: A) Barney stays out and Fred chooses a large quantity. B) Barney enters and Fred chooses a large quantity. C) Barney stays out and Fred chooses a small quantity. D) Barney enters and Fred chooses a small quantity. Answer: D Diff: 3 Topic: Entry Deterrence and Limit Pricing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

19) In general, the entry-deterrence game will generate a market price: A) higher than the monopoly price. B) lower than the monopoly price but higher than the duopoly price. C) the same as the monopoly price. D) the same as the duopoly price. Answer: B Diff: 2 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 20) A firm charges a price so low that it prevents other firms from entering the market. This is an example of: A) a tying contract. B) limit pricing. C) price discrimination. D) predatory pricing. Answer: B Diff: 2 Topic: Entry Deterrence and Limit Pricing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 21) Which of the following is an example of limit pricing? A) In order to buy Microsoft Windows, you must also purchase Internet Explorer. B) Bus rides are cheaper for senior citizens than for other people. C) Prices are set low enough to drive other firms out of a market. D) Prices are set low enough to prevent other firms from entering the market. Answer: D Diff: 2 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

22) Limit pricing occurs when a firm sets price: A) equal to marginal cost. B) equal to average cost. C) at different amounts for different groups of consumers. D) so low that other firms are prevented from entering the market. Answer: D Diff: 2 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 23) In the extreme case of a perfectly contestable market: A) profits will be the same as monopoly profits. B) profits will be the same as cartel profits. C) profits will be the same as duopoly profits. D) profits will be zero. Answer: D Diff: 1 Topic: Entry Deterrence and Contestable Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 24) If there is the legitimate threat of entry into a market, then the market is said to be: A) perfectly competitive. B) contestable. C) secure. D) reactive. Answer: B Diff: 1 Topic: Entry Deterrence and Contestable Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

25) A contestable market is one where: A) there is a threat of entry. B) there are no firms that threaten to enter the market. C) firms already in the market cannot leave the market. D) only one firm at a time can serve the market. Answer: A Diff: 1 Topic: Entry Deterrence and Contestable Markets Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 26) A contestable market is one where: A) there are infinitely many firms. B) entry necessarily occurs. C) there is the legitimate threat of entry. D) firms can maintain the monopoly price. Answer: C Diff: 1 Topic: Entry Deterrence and Contestable Markets Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 27) In a contestable market the costs of entering and leaving the market are very: A) high. B) low. C) low, but firms have no incentive to enter or leave. D) high and firms have no incentive to leave. Answer: B Diff: 1 Topic: Entry Deterrence and Contestable Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

Recall the Application about how cable TV providers respond to the threat of potential competitors to answer the following question(s). 28) Recall the Application. In an effort to deter entry into its markets, cable TV providers engage in: A) limit pricing. B) marginal cost pricing. C) grim-trigger strategies. D) tit-for-tat strategies. Answer: A Diff: 2 Topic: Application 6, Cable TV as an Insecure Monopolist Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 29) Recall the Application. Because cable TV had to fend off potential entrants into their markets, cable TV providers are considered ________ as long as they successfully deterred entry. A) insecure monopolists B) duopolists C) perfect competitors D) monopolistic competitors Answer: A Diff: 2 Topic: Application 6, Cable TV as an Insecure Monopolist Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 30) Recall the Application. Aside from fending off potential entrants into their markets, cable TV decided to lower their prices because: A) they wanted to discourage price regulation by the government. B) they wanted more people to enjoy the benefits of cable TV. C) their marginal costs dropped a lot with the arrival of the internet. D) All of the above are reasons mentioned in the Application. Answer: A Diff: 2 Topic: Application 6, Cable TV as an Insecure Monopolist Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

31) A secure monopolist charges a higher price than an insecure monopolist. Answer: TRUE Diff: 1 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 32) Entry deterrence is always the best strategy for a monopolist. Answer: FALSE Diff: 1 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 33) Deterrence quantity equals zero profit quantity less minimum entry quantity. Answer: TRUE Diff: 2 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 34) Deterrence quantity is always equal to the zero profit quantity. Answer: FALSE Diff: 1 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 35) A contestable market is one where there are few if any barriers to entry. Answer: TRUE Diff: 1 Topic: Entry Deterrence and Contestable Markets Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies

36) Under what circumstances would a monopolist price be as low as the price that would prevail in a perfectly competitive market? Answer: If a market is perfectly contestable, existing firms in the market will earn only zero economic profits, irrespective of the number of firms. Diff: 2 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 37) Does the threat of entry reduce the monopoly problem? Answer: Yes, as an insecure monopolist will produce more than a secure monopolist, getting closer to the competitive outcome. Diff: 2 Topic: Entry Deterrence and Limit Pricing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 38) What is a contestable market? Answer: A contestable market refers to a situation where there are low barriers to entry. Existing firms in the industry must behave as if they are faced with competing firms, even though the competition does not really exist. Simply the threat of competition can force firms to keep their price low. Diff: 1 Topic: Entry Deterrence and Contestable Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies 8.7 Natural Monopoly 1) Which of the following is NOT an example of natural monopoly? A) water systems B) electricity transmission C) local telephone services D) farm products Answer: D Diff: 1 Topic: Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 111 Copyright © 2020 Pearson Education, Inc.

2) Which of the following is an example of natural monopoly? A) a market for cable TV services B) a market for breakfast cereals C) a market for cold medicines D) a market for cigarettes Answer: A Diff: 1 Topic: Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 3) A natural monopoly arises when: A) economies of scale are so great that only one firm can exist in a market. B) a firm acquires a patent. C) two firms merge to become the only firm serving an entire market. D) a single firm controls all of a natural resource. Answer: A Diff: 1 Topic: Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 4) A firm is more likely to have a natural monopoly when: A) the size of the market is small relative to the efficient scale of the firm. B) the size of the market is large relative to the efficient scale of the firm. C) the firms face no or low fixed costs. D) the government grants the firm an exclusive license to operate. Answer: A Diff: 3 Topic: Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

5) The barrier to entry that sustains a natural monopoly is: A) economies of scale. B) implicit price fixing agreements. C) government regulation. D) patent protection. Answer: A Diff: 2 Topic: Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 6) A public utility is a classic example of: A) a natural monopoly. B) perfect competition. C) an oligopoly. D) monopolistic competition. Answer: A Diff: 1 Topic: Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 7) When a firm has decreasing average costs over the entire range of market demand it is: A) a natural monopoly. B) an oligopoly. C) rent seeking. D) in a contestable market. Answer: A Diff: 1 Topic: Picking an Output Level Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

8) To maximize profit, an unregulated natural monopoly will produce at a level where: A) marginal revenue is greater than marginal cost. B) marginal revenue is greater than average revenue. C) marginal revenue is less than marginal cost. D) marginal revenue is equal to marginal cost. Answer: D Diff: 2 Topic: Picking an Output Level Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Figure 8.12 9) Figure 8.12 shows a demand and costs of an unregulated monopoly. At the profit maximization output, the firm earns a profit of: A) $0. B) $10,000. C) $50,000. D) $80,000. Answer: B Diff: 1 Topic: Picking an Output Level, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

10) Figure 8.12 shows a demand and costs of an unregulated monopoly. At the output level of 22,000 units: A) the firm's marginal revenue is smaller than its marginal cost. B) the firm is earning a zero economic profit. C) the firm is producing more than its profit-maximizing level of output. D) all of the above are correct. Answer: D Diff: 2 Topic: Picking an Output Level, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 11) Figure 8.12 shows a demand and costs of an unregulated monopoly. The negatively sloped long-run average cost curve reflects that: A) the firm's total cost of production decreases as its output increases. B) the firm's profit increases as its output increases. C) there exist large economies of scale in production. D) all of the above are correct. Answer: C Diff: 2 Topic: Picking an Output Level, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 12) Figure 8.12 shows a demand and costs of an unregulated monopoly. This firm must: A) be a natural monopoly. B) have an exclusive government license. C) be a monopoly because it has a patent. D) be operating in a contestable market. Answer: A Diff: 2 Topic: Picking an Output Level, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

13) If a severe natural disaster reduced the population of a city, one would expect a natural monopoly to: A) raise prices. B) split into two firms. C) increase sales. D) merge with a competitor. Answer: A Diff: 2 Topic: Picking an Output Level Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 14) If a severe natural disaster reduced the population of a city, one would expect a natural monopoly to: A) lower prices. B) split into two firms. C) merge with a competitor. D) experience an increase in average costs. Answer: D Diff: 2 Topic: Picking an Output Level Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Figure 8.13 15) Consider an unregulated monopoly in Figure 8.13. If we look at the firm's long-run average cost, the firm is exhibiting: A) diseconomies of scale. B) diminishing returns. C) economies of scale. D) increasing returns. Answer: C Diff: 2 Topic: Will a Second Firm Enter? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 16) Consider an unregulated monopoly in Figure 8.13. At the firm's profit-maximizing output level, its total revenue is: A) $1,000,000. B) $200,000. C) $800,000. D) $600,000. Answer: A Diff: 2 Topic: Will a Second Firm Enter? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

17) Consider an unregulated monopoly in Figure 8.13. At the firm's profit-maximizing output level, its total cost is: A) $1,000,000. B) $200,000. C) $800,000. D) $600,000. Answer: C Diff: 2 Topic: Will a Second Firm Enter? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 18) Consider an unregulated monopoly in Figure 8.13. The firm's profit at the profit-maximizing output level is: A) $600,000. B) $400,000. C) $200,000. D) $0. Answer: C Diff: 2 Topic: Will a Second Firm Enter? graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 19) Consider an unregulated monopoly in Figure 8.13. If a second firm enters the market, the demand curve facing the first firm will: A) shift to the right. B) shift to the left. C) remain the same. D) There is insufficient information. Answer: B Diff: 2 Topic: Will a Second Firm Enter? graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

20) Consider an unregulated monopoly in Figure 8.13. Suppose that a second firm enters the market. As a result, if the demand curve facing each firm lies entirely below the long-run average cost curve: A) only one of the two firms can make a positive economic profit. B) both the first and the second firm make positive economic profits. C) neither firm makes a positive economic profit. D) There is not sufficient information. Answer: C Diff: 2 Topic: Will a Second Firm Enter? graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 21) Consider an unregulated monopoly in Figure 8.13. Suppose that a second firm enters the market. As a result, the demand curve facing each firm lies entirely below the long-run average cost curve. Because having two firms in the industry makes both firms unprofitable, then the industry is classified as: A) a natural monopoly. B) a duopoly. C) a monopolistic competitor. D) a pure competitor. Answer: A Diff: 2 Topic: Will a Second Firm Enter? graphing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 22) Consider an unregulated monopoly in Figure 8.13. Suppose that a second firm enters the market and both firms in the industry are profitable. After the second firm's entry, the industry is now classified as: A) a natural monopoly. B) a duopoly. C) a monopolistic competitor. D) a pure competitor. Answer: B Diff: 2 Topic: Will a Second Firm Enter? graphing Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

23) Consider an unregulated monopoly in Figure 8.13. Suppose that a second firm enters the market. As a result, if a natural monopoly is inevitable in this market: A) the demand curve facing each firm lies entirely above the long-run average cost curve. B) the demand curve facing each firm lies entirely below the long-run average cost curve. C) the demand curve facing each firm touches the long-run average cost curve at one point. D) none of the above Answer: B Diff: 2 Topic: Will a Second Firm Enter? graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 24) Consider an unregulated monopoly in Figure 8.13. If that monopoly sets its price equal to its marginal cost, it would: A) earn negative profits. B) earn maximum profits. C) earn zero profits. D) earn small, but greater than zero, profits. Answer: A Diff: 3 Topic: Will a Second Firm Enter? graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 25) When a monopoly is inevitable, the government often: A) forces it to break into smaller firms. B) sets a minimum price for the monopolist. C) sets a maximum price for the monopolist. D) none of the above; monopoly is never inevitable. Answer: C Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

26) Because unregulated natural monopolies earn economic profits greater than zero in the long run, but cannot attract new entrants into the industry: A) government agencies often regulate the number of firms that compete against natural monopolies. B) government agencies often regulate the price natural monopolies can charge. C) natural monopolies often go out of business. D) natural monopolies are outlawed. Answer: B Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 27) Government agencies often regulate the price natural monopolies charge because, if left unregulated, natural monopolies will: A) charge a price greater than average cost. B) charge a price less than average cost. C) charge a price equal to average cost. D) face too many competitors. Answer: A Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 28) Under average-cost pricing, an increase in the monopolist's production cost will: A) decrease its profit because its profit per unit decreases. B) not affect its profit because the government adjusts the regulated price equal to the average cost. C) increase its profit because the monopolist can reduce the average cost at a greater output level. D) none of the above Answer: B Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

29) A regulatory policy under which the government picks the point on the demand curve at which price equals average cost is known as: A) average-cost pricing. B) marginal-cost pricing. C) average-revenue pricing. D) competitive pricing. Answer: A Diff: 1 Topic: Price Controls for a Natural Monopoly Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 30) Consider a cable TV company which is subject to an average-cost pricing regulation. If the number of subscribers decreases: A) the company will have to operate at a smaller profit unless it suffers an economic loss. B) the company will have to charge a relatively low price as the demand curve facing the firm shifts to the left. C) the company will charge more per customer as its average cost increases. D) none of the above Answer: C Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 31) If a regulatory agency mandates that a natural monopoly charge a price equal to its average cost: A) the firm will eventually exit the industry. B) the firm will earn economic profits greater than zero. C) other firms will find it profitable to enter this industry. D) the firm will earn economic profits equal to zero. Answer: D Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

32) Under an average-cost pricing policy: A) a regulatory agency picks a price equal to a natural monopoly's marginal cost. B) a regulatory agency picks a price equal to a natural monopoly's average fixed cost. C) a regulatory agency picks a price at which a natural monopoly's demand curve intersects its average cost curve. D) firms earn economic profits greater than zero. Answer: C Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 33) When compared to the profit-maximizing price and quantity supplied, an average-cost pricing policy for a natural monopoly causes the price the monopolist charges to ________ and the quantity it sells to ________. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase Answer: C Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 34) If a natural monopoly is forced to follow a policy of average-cost pricing, the monopolist will: A) earn economic profits greater than zero. B) charge a higher price than if the monopolist were not regulated. C) charge a lower price than if the monopolist were not regulated. D) decrease output below that in an unregulated pricing policy. Answer: C Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

35) If a natural monopoly is forced to follow a policy of average-cost pricing, the monopolist will: A) earn economic profits less than zero. B) charge a higher price than if not regulated. C) charge the same price as if it were not regulated. D) increase output to an amount greater than what it would have produced if it were not regulated. Answer: D Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 36) Under a policy of average-cost pricing, a monopolist must charge the price at which its ________ cost curve intersects its ________ curve. A) marginal; demand B) average variable; demand C) marginal; marginal revenue D) average; demand Answer: D Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 37) A likely consequence over time of an average-cost pricing policy for a natural monopoly is: A) an increase in the average cost curve. B) an increase in profits. C) no change in price. D) a decrease in the average cost curve. Answer: A Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

38) The quantity produced by a natural monopolist facing an average-cost pricing policy will be: A) less than the quantity produced by a marginal cost pricing policy. B) that quantity at which average costs are at their minimum. C) that quantity at which marginal costs are at their minimum. D) the same as the quantity that would be produced in perfect competition. Answer: A Diff: 3 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 39) Because a monopolist has no incentive to control costs under a policy of average-cost pricing, we can expect: A) price to increase over time as costs rise. B) price to fall over time as costs rise. C) profits to increase over time as costs rise. D) profits to decrease over time as costs rise. Answer: A Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 40) Production costs are likely to rise after an average-cost pricing policy is mandated because the monopolist will: A) increase output. B) decrease output. C) engage in new and inventive production methods. D) have no incentive to control costs. Answer: D Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

41) A policy of average-cost pricing will initially ________ price for a natural monopoly, but as costs increase, price will ________. A) increase; not change B) decrease; increase C) decrease; not change D) increase; decrease Answer: B Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 42) Suppose a monopolist has costs such that when output is 1,000 units per hour, average cost is $5. If the monopolist is regulated by a policy of average-cost pricing, the monopolist will charge a price of: A) $5. B) $5 only if the quantity demanded is 1,000 units per hour at a price of $5. C) $5 only if the quantity demanded is greater than 1,000 units at a price of $5. D) $5 only if the quantity demanded is less than 1,000 units per hour at a price of $5. Answer: B Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 43) Suppose a monopolist has costs such that when output is 500 units per hour, average costs are $3. If the monopolist is regulated by a policy of average-cost pricing, the monopolist will charge a price of: A) $3. B) $3 only if the quantity demanded is 500 units per hour at a price of $3. C) $3 only if the quantity demanded is greater than 500 units at a price of $3. D) $3 only if the quantity demanded is less than 500 units per hour at a price of $3. Answer: B Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Figure 8.14 44) The natural monopoly in Figure 8.14 wants to produce: A) Q1. B) Q2. C) Q3. D) Q4. Answer: B Diff: 2 Topic: Price Controls for a Natural Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 45) The natural monopoly in Figure 8.14 wants to charge a price of: A) P1. B) P2. C) P3. D) P4. Answer: C Diff: 2 Topic: Price Controls for a Natural Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 127 Copyright © 2020 Pearson Education, Inc.

46) Where it wants to produce, the firm in Figure 8.14 would be: A) making a zero economic profit. B) losing money. C) making a positive economic profit. D) breaking even. Answer: C Diff: 2 Topic: Price Controls for a Natural Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 47) With average-cost pricing, the firm in Figure 8.14 would be: A) making a zero economic profit. B) losing money. C) making a positive economic profit. D) shut down. Answer: A Diff: 2 Topic: Price Controls for a Natural Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 48) If price were regulated to be equal to long-run marginal cost, the firm in Figure 8.14 would be: A) making a zero economic profit. B) losing money. C) making a positive economic profit. D) breaking even. Answer: B Diff: 2 Topic: Price Controls for a Natural Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

49) Consider the monopoly depicted in Figure 8.14. Relative to the cost of producing the quantity the monopolist would choose under an average-cost pricing policy, the cost of producing Q4 units is: A) less. B) the same. C) more. D) twice as much. Answer: A Diff: 2 Topic: Price Controls for a Natural Monopoly, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies Recall the Application about the British experience with private water companies in the nineteenth century to answer the following question(s). 50) Recall the Application. The British experience with water privatization showed that the distribution of water is: A) a natural monopoly. B) best left as a deregulated market. C) best set up as a trust. D) a classic example of price fixing. Answer: A Diff: 2 Topic: Application 7, Public versus Private Waterworks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 51) Recall the Application. The British experience with water privatization showed that: A) a single firm providing water will be profitable, but two firms will not. B) two or more firms providing water will be profitable, but a single firm will not. C) it does not matter how many firms provide water, as none will be profitable. D) it does not matter how many firms provide water, as all will be profitable. Answer: A Diff: 2 Topic: Application 7, Public versus Private Waterworks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

52) Recall the Application. Based on the British experience with water distribution, the most efficient way to provide water is through: A) a regulated monopoly. B) a duopoly. C) an unregulated monopoly. D) perfect competition. Answer: A Diff: 2 Topic: Application 7, Public versus Private Waterworks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies Recall the Application about the merger of Sirius Satellite Radio and XM Satellite Radio to answer the following question(s). 53) Recall the Application. One might expect no more firms to enter after the market consolidated into one firm because: A) the fixed cost of setting up a company system and acquiring programing is very high. B) the marginal cost of adding addition subscribers if very high. C) demand is very elastic. D) all of the above Answer: A Diff: 1 Topic: Application 8, Satellite Radio as a Natural Monopoly Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 54) Recall the Application. After the merger of Sirius Satellite Radio and XM Satellite Radio, the new firm, Sirius XM, would be classified as a: A) natural monopoly. B) monopoly, but not a natural monopoly. C) public utility. D) duopoly. Answer: A Diff: 2 Topic: Application 8, Satellite Radio as a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

55) Recall the Application. Sirius and XM proposed the merger because they were: A) losing money because their fixed costs were very high. B) losing money because they faced the advertisers' dilemma. C) earning duopolists' profits that were greater than zero, but knew they could earn more as a single firm. D) losing money because their variable costs were higher than the price they could charge. Answer: A Diff: 1 Topic: Application 8, Satellite Radio as a Natural Monopoly Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 56) In the case of a natural monopoly, two firms can produce at lower average cost than one firm can. Answer: FALSE Diff: 1 Topic: Picking an Output Level Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 57) The conventional way to regulate a natural monopolist is to force it to charge a price equal to marginal cost. Answer: FALSE Diff: 2 Topic: Picking an Output Level Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 58) A natural monopoly is inevitable if the entry of a second firm shifts the demand curve facing each individual firm entirely below the average cost curve. Answer: TRUE Diff: 2 Topic: Will a Second Firm Enter? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

59) Government regulation of a natural monopoly causes its average cost curve to shift downward. Answer: FALSE Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 60) Under the average-cost pricing policy, a regulated monopolist is guaranteed a normal economic profit even if there is a change in its cost of production. Answer: TRUE Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 61) The average-cost pricing policy provides a greater incentive for a regulated monopolist to reduce its production costs. Answer: FALSE Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 62) Compared with average cost at the quantity that an unregulated monopolist would choose, average costs are higher at the quantity chosen by a monopoly facing an average-cost pricing policy. Answer: FALSE Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

63) When demand falls, the price charged by a monopoly under an average-cost pricing policy will fall. Answer: FALSE Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 64) Suppose an unregulated monopoly faces a negatively-sloped and steep average cost curve. If a second firm enters, what will happen to the first firm's demand and average cost of production? Answer: When a second firm enters, the demand curve facing the first firm shifts to the left as it shares the market demand with a second firm. Furthermore, a decrease in each individual firm's output causes the movement upward along the average cost curve. Diff: 2 Topic: Will a Second Firm Enter? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 65) What is the disadvantage of average-cost pricing? Answer: By allowing the firm to charge a price equal to its average cost, the government removes the incentive for the firm to keep costs down. This eventually results in higher prices to consumers than would be charged if the firm was diligent about keeping costs down. Diff: 2 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 66) Why can't the government force a natural monopolist to produce the competitive output? Answer: The competitive solution would be where MC = ATC. At that point the natural monopolist is losing money and would go out of business if forced to produce there. Diff: 3 Topic: Price Controls for a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies

Recall the Application about the merger of Sirius Satellite Radio and XM Satellite Radio to answer the following question(s). 67) Recall the Application. What were the tradeoffs that government regulators had to consider in determining whether to allow Sirius and XM to merge? Answer: They had to weigh the benefits of the cost-savings due to economies of scale against the threat that a single monopolist would raise prices to consumers. Diff: 3 Topic: Application 8, Satellite Radio as a Natural Monopoly Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies 8.8 Antitrust Policy 1) Which of the following is NOT a form of antitrust policy? A) regulation of business practices B) blocking mergers C) breaking up monopolies D) price controls Answer: D Diff: 1 Topic: Antitrust Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 2) The purpose of antitrust policy is to: A) promote competition among firms. B) increase profits to firms. C) protect domestic firms from foreign trade. D) achieve scale economies in production. Answer: A Diff: 1 Topic: Antitrust Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

3) A trust is: A) an agreement among firms to charge the perfectly competitive price. B) a compact between industry and government. C) a creation of the Sherman Act. D) an arrangement between firms whereby decision making is controlled by a board of trustees. Answer: D Diff: 1 Topic: Antitrust Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 4) Firms in a trust: A) act as a single firm. B) act in their own self-interests. C) trust each other. D) do not allow a small number of trustees to make decisions for participating firms. Answer: A Diff: 1 Topic: Antitrust Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 5) An arrangement between firms whereby decision-making is controlled by a board of trustees is known as: A) a trust. B) a compact between industry and government. C) predatory pricing. D) a merger. Answer: A Diff: 1 Topic: Antitrust Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

6) Which of the following companies was NOT broken up by the government? A) Standard Oil B) AT&T C) American Tobacco D) Office Depot Answer: D Diff: 1 Topic: Breaking Up Monopolies Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 7) Which of the following companies was broken up by the government? A) Standard Oil B) Office Depot C) Wonder Bread D) Southwest Airlines Answer: A Diff: 1 Topic: Breaking Up Monopolies Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 8) Which of the following companies was broken up by the government? A) American Tobacco B) Office Depot C) Wonder Bread D) Southwest Airlines Answer: A Diff: 1 Topic: Breaking Up Monopolies Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

9) In which of the following cases did the government break up a monopoly? A) Staples/Office Depot B) Interstate Bakeries and Continental Bakery C) Xidex D) AT&T Answer: D Diff: 1 Topic: Breaking Up Monopolies Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 10) When two firms in an industry become one firm, they are engaged in: A) a trust agreement. B) a merger. C) predatory pricing. D) none of the above. Answer: B Diff: 1 Topic: Blocking Mergers Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 11) The government is likely to block a merger if: A) the firms remaining would all earn economic profit. B) it can be established that the merger would substantially reduce competition. C) the firms remaining would be able to charge a price above marginal cost. D) the firms that are merging are producing different products. Answer: B Diff: 1 Topic: Blocking Mergers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

12) In the Staples/Office Depot Case, the government: A) blocked a merger. B) allowed a merger but regulated the resulting firm. C) allowed a merger and did not regulate the resulting firm. D) prosecuted the two firms for collusion. Answer: A Diff: 2 Topic: Blocking Mergers Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 13) In the Staples/Office Depot Case, the government: A) found that Staples had attempted to drive Office Depot out of the market, and so they prosecuted them under the Clayton Act. B) determined that the anticompetitive effects of a proposed merger between the two firms outweighed the potential savings in production costs, and so they blocked the proposed merger. C) found that Office Depot had illegally attempted to monopolize the market. D) found that Staples had illegally attempted to monopolize the market by using tying contracts. Answer: B Diff: 1 Topic: Blocking Mergers Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 14) A key consideration in the government's decision in the Staples/Office Depot case was that: A) Staples charged lower prices in locations that were close to an Office Depot store. B) Staples charged higher prices in locations that were close to an Office Depot store. C) Staples and Office Depot had engaged in explicit price fixing. D) Staples and Office Depot would be a natural monopoly if they were allowed to merge. Answer: A Diff: 2 Topic: Blocking Mergers Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

15) In which of the following cases did the government successfully block a merger? A) Staples and Office Depot B) Interstate Bakeries and Continental Bakery C) AT&T and Verizon D) Standard Oil and Mobil Answer: A Diff: 1 Topic: Blocking Mergers Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 16) Suppose two firms produce close substitutes such that reducing the price of one product reduces the quantity demanded of the other. If those two firms merge: A) they can earn higher profits by continuing to sell both products if the profit gained from increased sales of one product are greater than the lost profits from reduced sales of the other product. B) they will eliminate the less profitable product and sell only one. C) they will raise prices on both products. D) they will be unable to earn higher profits because the two products will compete against each other. Answer: A Diff: 2 Topic: Blocking Mergers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 17) In the case of Interstate Bakeries and Continental Bakery, the Justice Department concluded that: A) the merger of two firms selling close substitutes may lead to higher prices. B) Interstate Bakeries attempted to drive out Continental by using predatory pricing. C) a merger between the two companies would save money in production costs, and so would be good for consumers. D) Continental attempted to drive out Interstate Bakeries by using predatory pricing. Answer: A Diff: 2 Topic: Merger Remedy for Wonder Bread Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

18) The result of the Interstate Bakeries and Continental Bakery case was that the firms were: A) allowed to merge only if one of the firms sold off some of its divisions. B) blocked from merging because a merger would have created a monopoly in some locations. C) fined substantial amounts for engaging in a trust. D) forced to split up into several smaller firms. Answer: A Diff: 1 Topic: Merger Remedy for Wonder Bread Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 19) A tie-in sale is a business practice where a business A) requires a customer of a product to purchase another product. B) requires another business to purchase its product. C) gives a customer a discount on future purchases of the same product. D) gives a customer a discount on future purchases of a different product. Answer: A Diff: 1 Topic: Regulating Business Practices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 20) Which of the following is an example of a tie-in sale? A) In order to buy Dell Computers, you must also buy Microsoft Windows to get the warranty. B) Bus rides are cheaper for senior citizens than for other people. C) Two companies merge to form one company. D) Prices are set just low enough to prevent other firms from entering the market. Answer: A Diff: 1 Topic: Regulating Business Practices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

21) Which of the following is an example of predatory pricing? A) In order to buy Microsoft Windows, you must also purchase Internet Explorer. B) Bus rides are cheaper for senior citizens than for other people. C) Prices are set low enough to drive other firms out of a market. D) Prices are set just high enough to prevent other firms from entering the market. Answer: C Diff: 2 Topic: Regulating Business Practices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 22) A firm announces that in order to purchase a Blu-ray player, its customers must also purchase 10 Blu-rays. This is an example of: A) a tie-in sale. B) monopoly pricing. C) price discrimination. D) predatory pricing. Answer: A Diff: 2 Topic: Regulating Business Practices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 23) Microsoft requires people who purchase its operating system to also purchase its web browser. This is an example of: A) a tie-in sale. B) competitive pricing. C) price discrimination. D) predatory pricing. Answer: A Diff: 2 Topic: Regulating Business Practices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

24) Suppose that Polaroid instant cameras had a guarantee that would be valid only if the camera was used with Polaroid film. This would then be an example of: A) a tie-in sale. B) monopoly pricing. C) price discrimination. D) predatory pricing. Answer: A Diff: 2 Topic: Regulating Business Practices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 25) A firm charges a price below its average total cost so that it drives out its competition. This is an example of: A) a tie-in sale. B) duopoly pricing. C) price discrimination. D) predatory pricing. Answer: D Diff: 2 Topic: Regulating Business Practices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 26) When a monopolist charges a low price to drive out competition, then charges a high price, the monopolist is engaging in: A) a trust agreement. B) a merger. C) duopoly pricing. D) predatory pricing. Answer: D Diff: 2 Topic: Regulating Business Practices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

27) Predatory pricing occurs when a monopolist charges a: A) price above average total cost. B) price above average variable cost. C) low price to drive out competition, then charges a high price. D) high price to drive out competition, then charges a low price. Answer: C Diff: 2 Topic: Regulating Business Practices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 28) Antitrust laws are enforced by: A) the Department of Commerce. B) the Federal Trade Commission. C) the Federal Reserve. D) the Department of Labor. Answer: B Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 29) Two government organizations that are responsible for initiating actions against possible antitrust cases are: A) the Department of Justice and the Department of Commerce. B) the Department of Commerce and the Federal Reserve. C) the Department of Justice and the Federal Trade Commission. D) the Department of Labor and the Department of Commerce. Answer: C Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

30) The first antitrust legislation was the: A) Sherman Act. B) Clayton Act. C) Federal Trade Commission Act. D) Robinson-Patman Act. Answer: A Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 31) The Sherman Act of 1890: A) made it illegal to engage in practices that resulted in restraint of trade. B) outlawed tying contracts. C) outlawed stock-purchase mergers that would substantially reduce competition. D) prohibited selling products at "unreasonably low prices" with the intent of reducing competition. Answer: A Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 32) The Sherman Act of 1890: A) prohibited selling products at "unreasonably low prices" with the intent of reducing competition. B) outlawed tying contracts. C) outlawed stock-purchase mergers that would substantially reduce competition. D) made it illegal to monopolize a market. Answer: D Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

33) The legislation which made it illegal to monopolize a market was the: A) Sherman Act. B) Clayton Act. C) Robinson-Patman Act. D) Celler-Kefauver Act. Answer: A Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 34) The legislation which made it illegal to engage in practices that resulted in the restraint of trade was the: A) Sherman Act. B) Clayton Act. C) Robinson-Patman Act. D) Celler-Kefauver Act. Answer: A Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 35) The legislation which outlawed tying contracts was the: A) Sherman Act. B) Clayton Act. C) Robinson-Patman Act. D) Celler-Kefauver Act. Answer: B Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

36) The legislation which outlawed price discrimination for the purpose of reducing competition was the: A) Sherman Act. B) Clayton Act. C) Robinson-Patman Act. D) Celler-Kefauver Act. Answer: B Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 37) The legislation which outlawed stock-purchase mergers that would substantially reduce competition was the: A) Sherman Act. B) Clayton Act. C) Robinson-Patman Act. D) Celler-Kefauver Act. Answer: B Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 38) The legislation which prohibited selling products at unreasonably low prices was the: A) Sherman Act. B) Clayton Act. C) Robinson-Patman Act. D) Celler-Kefauver Act. Answer: C Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

39) The legislation which outlawed asset-purchase mergers that would substantially reduce competition was the: A) Sherman Act. B) Clayton Act. C) Robinson-Patman Act. D) Celler-Kefauver Act. Answer: D Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 40) The legislation that extended antitrust legislation to proprietorships and partnerships was the: A) Sherman Act. B) Hart-Scott-Rodino Act. C) Robinson-Patman Act. D) Celler-Kefauver Act. Answer: B Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 41) The Clayton Act of 1914: A) prohibited selling products at "unreasonably low prices" with the intent of reducing competition. B) outlawed tying contracts. C) outlawed asset-purchase contracts that would substantially reduce competition. D) made it illegal to monopolize a market. Answer: B Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

42) The Clayton Act of 1914: A) prohibited selling products at "unreasonably low prices" with the intent of reducing competition. B) made it illegal to monopolize a market. C) repealed the Sherman Act. D) outlawed price discrimination for the purpose of reducing competition. Answer: D Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 43) The Federal Trade Commission Act: A) prohibited selling products at "unreasonably low prices" with the intent of reducing competition. B) was passed to establish a body to enforce antitrust laws. C) outlawed stock purchases that would substantially reduce competition. D) made it illegal to monopolize a market. Answer: B Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 44) The Robinson-Patman Act of 1936: A) prohibited selling products at "unreasonably low prices" with the intent of reducing competition. B) made it illegal to monopolize a market. C) repealed the Sherman Act. D) outlawed price discrimination for the purpose of reducing competition. Answer: A Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

45) The Celler-Kefauver Act of 1950: A) extended antitrust legislation to proprietorships and partnerships. B) made it illegal to monopolize a market. C) outlawed asset-purchase mergers that would substantially reduce competition. D) outlawed price discrimination for the purpose of reducing competition. Answer: C Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 46) The Hart-Scott-Rodino Act of 1980: A) extended antitrust legislation to proprietorships and partnerships. B) made it legal to monopolize a market. C) outlawed asset-purchase mergers that would substantially reduce competition. D) outlawed price discrimination for the purpose of reducing competition. Answer: A Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 47) Tie-in sales: A) are legal under the Clayton Act. B) are the same as predatory pricing. C) were banned under the Hart-Scott-Rodino Act. D) are contracts that prevent purchasing one good without purchasing another. Answer: D Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

48) The Celler-Kefauver Act of 1950: A) established the FTC. B) closed down a loophole in the Clayton Act by outlawing mergers through the purchase of another firm's physical assets. C) closed down a loophole in the Sherman Act by outlawing mergers through the purchase of another firm's physical assets. D) banned tying contracts. Answer: B Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention Recall the Application about the 1998 merger between Pennzoil and Quaker State to answer the following question(s). The merger resulted in a company with a market share of 38 percent: 29 percent from Pennzoil and 9 percent from Quaker State. 49) Recall the Application. A recent study concluded that following the merger between Pennzoil and Quaker State, the new company ________ the price of Pennzoil products and ________ the price of Quaker State products. A) increased; increased B) decreased; increased C) increased; did not change D) did not change; increased Answer: D Diff: 1 Topic: Application 9, Merger of Pennzoil and Quaker State Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

50) Recall the Application. A recent study concluded that following the merger between Pennzoil and Quaker State, the market share of Pennzoil products ________ and the market share of Quaker State products ________. A) increased; increased B) increased; decreased C) increased; did not change D) did not change; increased Answer: B Diff: 1 Topic: Application 9, Merger of Pennzoil and Quaker State Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 51) Recall the Application. A recent study looked at the merger between Pennzoil Motor Oils and Quaker State Motor Oils, plus four other mergers. Their study found that after the mergers, the price of their products only slightly increased. This modest increase surprised: A) those who expected the price to rise by a lot because of increased concentration. B) those who expected to price to decrease because of increased efficiency. C) those who expected the price to decrease because of increased government regulations. D) A and B are correct. Answer: D Diff: 1 Topic: Application 9, Merger of Pennzoil and Quaker State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention Recall the Application about the merger of Office Depot and Office Max to answer the following question(s). 52) Recall the Application. In 2013, the Federal Trade Commission (FTC) ________ the merger of Office Depot and Office Max by concluding that it would not ________ competition in the retail office-supply market. A) approved; decrease B) approved; increase C) denied; decrease D) denied; increase Answer: A Diff: 1 Topic: Application 10, Merger of Office Depot and Office Max Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 151 Copyright © 2020 Pearson Education, Inc.

53) Recall the Application. Which of the following represent increased competition in the office supplies market? A) general superstores like Wal-Mart and Target B) membership warehouse clubs like Costco and Sam's Club C) internet retailers like Amazon D) all of the above Answer: D Diff: 1 Topic: Application 10, Merger of Office Depot and Office Max Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 54) The purpose of antitrust policy is to encourage competition in an industry. Answer: TRUE Diff: 1 Topic: Antitrust Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 55) Producers of close substitutes have little or no incentive to merge. Answer: FALSE Diff: 1 Topic: Blocking Mergers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 56) The Justice Department will not allow firms to merge if the result will be higher prices to consumers. Answer: FALSE Diff: 2 Topic: Blocking Mergers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

57) A merger may cause movement upward along the demand curve. Answer: TRUE Diff: 2 Topic: Blocking Mergers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 58) Mergers can sometimes be good for a market by allowing firms to take advantage of economies of scale. Answer: TRUE Diff: 1 Topic: Blocking Mergers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 59) Analysis of a proposed merger involves examining its effect only on a market's concentration. Answer: FALSE Diff: 1 Topic: Blocking Mergers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 60) The government weighs the potential cost savings resulting from a merger against the potential anticompetitive problems to determine whether or not to allow a merger to take place. Answer: TRUE Diff: 1 Topic: Blocking Mergers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 61) The merger of two firms selling close substitutes may lead to higher prices. Answer: TRUE Diff: 1 Topic: Blocking Mergers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 153 Copyright © 2020 Pearson Education, Inc.

62) It is possible for a merger to result in lower prices for consumers. Answer: TRUE Diff: 1 Topic: Blocking Mergers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 63) The government may intervene when a specific business practice increases concentration in an already concentrated market. Answer: TRUE Diff: 1 Topic: Blocking Mergers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 64) The government allowed the merger between Interstate Bakeries and Continental Bakery. Answer: TRUE Diff: 1 Topic: Merger Remedy for Wonder Bread Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 65) A tie-in sale is when two firms merge together and are essentially tied together. Answer: FALSE Diff: 1 Topic: Regulating Business Practices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 66) The Clayton Act outlawed tying contracts. Answer: TRUE Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

67) Prior to the Hart-Scott-Rodino Act, antitrust laws did not apply to proprietorships. Answer: TRUE Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 68) The Sherman Act outlawed practices that result in the restraint of trade. Answer: TRUE Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 69) The Robinson-Patman Act outlawed predatory pricing. Answer: TRUE Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 70) The Celler-Kefauver Act outlawed predatory pricing. Answer: FALSE Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 71) The government can break up monopolies under federal antitrust legislation. Answer: TRUE Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

72) Discuss three types of antitrust policy. Answer: The three types of antitrust policy used by the government are 1) breaking up monopolies; 2) blocking mergers; and 3) regulating business practices. The government breaks up monopolies to increase competition and increase efficiency. Increased competition leads to lower prices. Mergers can also lead to lower competition and high prices. Sometimes it makes sense to allow the existence of a monopoly or allow a merger because the cost savings from the economies of scale justify it. In these cases, the government can regulate the firms to achieve a more efficient economic state. Diff: 2 Topic: Antitrust Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 73) Explain the new guidelines used by the Department of Justice and the Federal Trade Commission for evaluating proposed mergers. Answer: Companies involved in a merger are allowed to present evidence that the merger will reduce costs and lead to greater economic efficiency. The Department of Justice and the Federal Trade Commission also consider the effect the merger will have on market competition, and then weigh the increase in efficiency against the potential anticompetitive effects of the merger. If the anticompetitive effects of the merger outweigh the potential for greater efficiency, then the government will block the merger. Diff: 2 Topic: Blocking Mergers Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 74) Explain the key issues presented by both sides of the Staples/Office Depot case in 1997. Answer: Staples and Office Depot proposed a merger on the basis that it would allow the companies to save money in production costs and pass the savings along to consumers. The FTC found that the price of office products was significantly higher in regions that had only one of the stores, and so they determined that the anticompetitive effects of the merger outweighed the potential cost savings, and blocked the merger. Diff: 2 Topic: Blocking Mergers Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

75) Explain what is meant by predatory pricing, and the inherent difficulties involved with predatory pricing from a firm's point of view. Answer: Predatory pricing occurs when a firm charges a price below its cost of production in order to drive other firms out of the market. The problem it causes to firms is that in order to maintain a higher market share, the firm must continue this practice to prevent new potential entrants from entering the market, and thus the firm will continue to have losses. Diff: 2 Topic: Regulating Business Practices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 76) What are the main features of the Sherman Act? Answer: The Sherman Act was passed in 1890, and it made it illegal to monopolize a market or engage in practices that result in a restraint of trade. Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 77) What are the main features of the Clayton Act? Answer: The Clayton Act outlawed specific practices that discourage competition, including tying contracts, price discrimination for the purpose of reducing competition, and stock-purchase mergers that would substantially reduce competition. Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 78) What are the main features of the Robinson-Patman Act? Answer: The Robinson-Patman Act prohibited selling products at "unreasonably low prices" with the intent of reducing competition. Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

79) What are the main features of the Celler-Kefauver Act? Answer: The Celler-Kefauver Act outlawed asset-purchase mergers that would substantially reduce competition. It closed a loophole in the Clayton Act. Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 80) What are the main features of the Hart-Scott-Rodino Act? Answer: The Hart-Scott-Rodino Act extended antitrust legislation to partnerships and sole proprietorships. Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 81) When was the Clayton Act passed, and what were the main practices that it outlawed? Answer: The Clayton Act was passed in 1914, and it outlawed tie-in sales, price discrimination for the purpose of reducing competition, and stock-purchase mergers that substantially reduce competition. Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 82) Explain why it was necessary to pass the Clayton Act when the Sherman Act had already addressed the antitrust issue. Answer: The Sherman Act did not specify which business practices were illegal, and thus led to conflicting court rulings. The Clayton Act was passed to resolve the ambiguities of the Sherman Act by enumerating the specific practices that were illegal. Diff: 1 Topic: A Brief History of U.S. Antitrust Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 9 Imperfect Information, External Benefits, and External Costs 9.1 Adverse Selection for Buyers: The Lemons Problem 1) There exists asymmetric information in a market: A) if both sides of the market have the same information about the good. B) only if buyers have better information about the good than sellers. C) only if sellers have better information about the good than buyers. D) if either buyers or sellers have better information than the other group. Answer: D Diff: 1 Topic: Adverse Selection for Buyers: The Lemons Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 2) If the seller knows more about the good than the buyer knows, there exists: A) an externality. B) asymmetric information. C) moral hazard. D) a public goods problem. Answer: B Diff: 1 Topic: Adverse Selection for Buyers: The Lemons Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 3) One assumption of the basic model of supply and demand is that: A) buyers and sellers have enough information to make informed choices. B) buyers and sellers will benefit equally from a voluntary transaction. C) sellers will always have more information than buyers. D) buyers will always have more information than sellers. Answer: A Diff: 1 Topic: Adverse Selection for Buyers: The Lemons Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

4) Relative to a market with perfect information, in a market with imperfect information: A) some goods will be sold in small quantities or not at all. B) more than the equilibrium quantity of goods will be sold. C) the equilibrium quantity will be sold, but at a price higher than the equilibrium price. D) the equilibrium quantity will be sold for the equilibrium price. Answer: A Diff: 2 Topic: Adverse Selection for Buyers: The Lemons Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 5) In markets with imperfect information: A) buyers and sellers will use resources to acquire information before making decisions. B) buyers will use resources to acquire information before making a decision, but sellers do not need to acquire additional information before making a decision. C) sellers will use resources to acquire information before making a decision, but buyers do not need to acquire additional information before making a decision. D) neither buyers nor sellers will be able to acquire information in order to make decisions. Answer: A Diff: 2 Topic: Adverse Selection for Buyers: The Lemons Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 6) If in the market for used bikes where only sellers can distinguish between good quality and bad quality used bikes, then in that market there exists: A) perfect information. B) asymmetric information. C) public information. D) duopoly information. Answer: B Diff: 1 Topic: Adverse Selection for Buyers: The Lemons Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

7) Asymmetric information exists in the market for used cars because: A) sellers have better information concerning the quality of used cars than buyers. B) buyers have better information concerning the quality of used cars than sellers. C) buyers and sellers have equal information concerning the quality of used cars. D) it is impossible for buyers or sellers to determine the quality of used cars. Answer: A Diff: 1 Topic: Adverse Selection for Buyers: The Lemons Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 8) In some markets for used goods: A) the seller has more information than the buyer about the quality of the good. B) the buyer has more information than the seller about the quality of the good. C) low-quality used goods will be underpriced. D) the quality of used goods sold in the market will typically rise over time. Answer: A Diff: 1 Topic: Adverse Selection for Buyers: The Lemons Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 9) Which one of the following is an example of asymmetric information? A) A supermarket repackages packages of stale meat and sells them. B) A homeowner knowingly sells a house that has hidden electrical problems. C) A company hires an employee who has an addiction to sleeping pills. D) All of the above Answer: D Diff: 1 Topic: Adverse Selection for Buyers: The Lemons Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 10) In which of the following is the problem of asymmetric information least likely? A) a patient and an insurance provider B) a job applicant and a prospective employer C) an auto mechanic and a transient customer D) a retailer of used books and prospective customers Answer: D Diff: 2 Topic: Adverse Selection for Buyers: The Lemons Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 3 Copyright © 2020 Pearson Education, Inc.

11) Which of the following is the least likely example of asymmetric information? A) an insurance company and a client who just obtained a driver's license B) a seller of used cars and a prospective customer C) a seller of fresh fruit and a buyer D) a retailer of online music and a buyer Answer: D Diff: 2 Topic: Adverse Selection for Buyers: The Lemons Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 12) A mixed market is one in which: A) consumers can be buyers and sellers and producers can be sellers and buyers. B) there are different qualities of a good being sold in the market and there is imperfect information about the quality of each good. C) a seller of a good requires that the purchase of one good be tied to the purchase of another. D) demand is positively sloped and supply is negatively sloped. Answer: B Diff: 1 Topic: Adverse Selection for Buyers: The Lemons Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 13) Suppose buyers in the used car market are willing to pay $4,000 for a plum (high-quality) used car and $2,000 for a lemon (low-quality) used car. If buyers believe that 50% of the used cars on the market are lemons (low quality), what would they be willing to pay for a used car? A) $2000 B) $3000 C) $3500 D) $4000 Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

14) Suppose buyers in the used car market are willing to pay $8,000 for a plum (high-quality) used car and $3,000 for a lemon (low-quality) used car. If buyers believe that 20% of the used cars on the market are lemons (low quality), what would they be willing to pay for a used car? A) $7,000 B) $6,000 C) $5,000 D) $4,000 Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 15) Suppose buyers in the used car market are willing to pay $5,000 for a plum (high-quality) used car and $2,500 for a lemon (low-quality) used car. If buyers believe that 50% of the used cars on the market are lemons (low quality), what would they be willing to pay for a used car? A) $2500 B) $3000 C) $3750 D) $5000 Answer: C Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 16) Suppose buyers in the used car market are willing to pay $6,000 for a plum (high-quality) used car and $3,000 for a lemon (low-quality) used car. If buyers believe that 75% of the used cars on the market are lemons (low quality), what would they be willing to pay for a used car? A) $4,250 B) $4,000 C) $3,750 D) $3,500 Answer: C Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

17) In equilibrium in a mixed market: A) the percent of low quality goods on the market equals the buyers' estimate of the percent of low-quality goods on the market. B) the percent of low quality goods on the market equals the sellers' estimate of the percent of low-quality goods on the market. C) 50% of the goods on the market are low quality and 50% are high quality. D) all low-quality goods have been driven out of the market. Answer: A Diff: 1 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 18) If buyers believe that the percentage of high-quality goods on the market is greater than the actual percentage of high-quality goods on the market: A) buyers will be willing to pay a price that is higher than the price they would pay with perfect information. B) the most that buyers will be willing to pay is less than the price they would pay with perfect information. C) sellers of low-quality goods will be driven from the market. D) the market will be in a short-run equilibrium. Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Table 9.1 19) Table 9.1 represents 3 markets for used computers. Which of the markets in Table 9.1 are in equilibrium? A) 1 only B) 2 only C) 3 only D) 2 and 3 Answer: D Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 20) Table 9.1 represents 3 markets for used computers. Which of the markets in Table 9.1 are NOT in equilibrium? A) 1 only B) 2 only C) 3 only D) 1 and 3 Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 21) In Table 9.1, Market 1 would be in equilibrium if buyers believed lemons accounted for: A) 60% of the market. B) 55% of the market. C) 45% of the market. D) 40% of the market. Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

22) Refer to Table 9.1. In which market do buyers underestimate the chance of getting a lemon? A) 1 only B) 2 only C) 3 only D) 1 and 3 only Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Figure 9.1 23) Figure 9.1 represents the market for used bikes. Suppose buyers are willing to pay $200 for a plum (high-quality) used bike and $50 for a lemon (low-quality) used bike. If buyers believe that 50% of the used bikes are lemons (low quality), how much will they be willing to pay for a used bike? A) $50 B) $80 C) $125 D) $200 Answer: C Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

24) Figure 9.1 represents the market for used bikes. Suppose buyers are willing to pay $200 for a plum (high-quality) used bike and $50 for a lemon (low-quality) used bike. If buyers believe that 50% of used bikes are lemons (low quality), how many plums (high quality) will be supplied by sellers? A) 8 B) 12 C) 16 D) 22 Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 25) Figure 9.1 represents the market for used bikes. Suppose buyers are willing to pay $200 for a plum (high-quality) used bike and $50 for a lemon (low-quality) used bike. If buyers believe that 50% of used bikes are lemons (low quality), how many lemons (low quality) will be supplied by sellers? A) 8 B) 12 C) 16 D) 22 Answer: D Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 26) Figure 9.1 represents the market for used bikes. Suppose buyers are willing to pay $200 for a plum (high-quality) used bike and $50 for a lemon (low-quality) used bike. If buyers believe that 50% of used bikes in the market are lemons (low quality), what fraction of used bikes sold will actually be lemons (low quality)? A) 8/30 B) 22/30 C) 8/22 D) 30/30 Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

27) Figure 9.1 represents the market for used bikes. Suppose buyers are willing to pay $200 for a plum (high-quality) used bike and $50 for a lemon (low-quality) used bike. If buyers believe that 50% of used bikes in the market are lemons (low quality), what fraction of used bikes sold will actually be plums (high quality)? A) 8/30 B) 22/30 C) 8/22 D) 30/30 Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 28) Figure 9.1 represents the market for used bikes. Suppose buyers are willing to pay $200 for a plum (high-quality) used bike and $50 for a lemon (low-quality) used bike. If buyers have pessimistic expectations about the used bikes in the market, what number of used bikes sold will actually be lemons (low quality)? A) 8 B) 12 C) 16 D) 22 Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 29) Figure 9.1 represents the market for used bikes. Suppose buyers are willing to pay $200 for a plum (high-quality) used bike and $50 for a lemon (low-quality) used bike. If buyers have pessimistic expectations about the used bikes in the market, how many used plums (high-quality used bikes) will be sold? A) 0 B) 8 C) 12 D) 16 Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

30) Figure 9.1 represents the market for used bikes. Suppose buyers are willing to pay $200 for a plum (high-quality) used bike and $50 for a lemon (low-quality) used bike. Initially buyers believe that 50% of used bikes in the market are lemons (low quality). Compared to the outcome with neutral expectations, how many fewer bikes are sold in equilibrium? A) 8 B) 12 C) 18 D) 22 Answer: C Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Figure 9.2 31) Figure 9.2 represents the market for used cameras. Suppose buyers are willing to pay $125 for a plum (high-quality) used camera and $25 for a lemon (low-quality) used camera. If buyers believe that 50% of the used cameras in the market are lemons (low quality), how much will they pay for a used camera? A) $25 B) $50 C) $75 D) $125 Answer: C Diff: 1 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

32) Figure 9.2 represents the market for used cameras. Suppose buyers are willing to pay $125 for a plum (high-quality) used camera and $25 for a lemon (low-quality) used camera. If buyers believe that 50% of used cameras in the market are lemons (low quality), how many plums (high quality) will be supplied by sellers? A) 10 B) 15 C) 20 D) 25 Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 33) Figure 9.2 represents the market for used cameras. Suppose buyers are willing to pay $125 for a plum (high-quality) used camera and $25 for a lemon (low-quality) used camera. If buyers believe that 50% of used cameras in the market are lemons (low quality), how many lemons (low quality) will be supplied by sellers? A) 10 B) 15 C) 20 D) 25 Answer: D Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 34) Figure 9.2 represents the market for used cameras. Suppose buyers are willing to pay $125 for a plum (high-quality) used camera and $25 for a lemon (low-quality) used camera. If buyers believe that 50% of used cameras in the market are lemons (low quality), what fraction of used cameras sold will actually be lemons (low quality)? A) 10/25 B) 10/35 C) 25/35 D) All of the cameras sold will be lemons. Answer: C Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

35) Figure 9.2 represents the market for used cameras. Suppose buyers are willing to pay $125 for a plum (high-quality) used camera and $25 for a lemon (low-quality) used camera. If buyers believe that 50% of used cameras in the market are lemons (low quality), what fraction of used cameras sold will actually be plums (high quality)? A) 10/25 B) 10/35 C) 25/35 D) None of the cameras sold will be plums. Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 36) Figure 9.2 represents the market for used cameras. Suppose buyers are willing to pay $125 for a plum (high-quality) used camera and $25 for a lemon (low-quality) used camera. If buyers believe that all of the used cameras in the market are lemons (low quality), what number of used cameras sold will actually be lemons (low quality)? A) 10 B) 15 C) 20 D) 25 Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 37) Figure 9.2 represents the market for used cameras. Suppose buyers are willing to pay $125 for a plum (high-quality) used camera and $25 for a lemon (low-quality) used camera. Initially buyers believe that 50% of used cameras in the market are lemons (low quality). Compared to the outcome with neutral expectations, how many fewer cameras are sold in equilibrium? A) 10 B) 15 C) 20 D) 25 Answer: C Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Figure 9.3 38) Figure 9.3 represents the market for used refrigerators. Suppose buyers are willing to pay $300 for a plum (high-quality) used refrigerator and $100 for a lemon (low-quality) used refrigerator. If buyers believe that 50% of the used refrigerators in the market are lemons (low quality), how much will they be willing to pay for a used refrigerator? A) $100 B) $200 C) $250 D) $300 Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 39) Figure 9.3 represents the market for used refrigerators. Suppose buyers are willing to pay $300 for a plum (high-quality) used refrigerator and $100 for a lemon (low-quality) used refrigerator. If buyers believe that 50% of used refrigerators in the market are lemons (low quality), how many plums (high quality) will be supplied by sellers? A) 50 B) 125 C) 175 D) 250 Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

40) Figure 9.3 represents the market for used refrigerators. Suppose buyers are willing to pay $300 for a plum (high-quality) used refrigerator and $100 for a lemon (low-quality) used refrigerator. If buyers believe that 50% of used refrigerators in the market are lemons (low quality), how many lemons (low quality) will be supplied by sellers? A) 50 B) 125 C) 175 D) 250 Answer: D Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 41) Figure 9.3 represents the market for used refrigerators. Suppose buyers are willing to pay $300 for a plum (high-quality) used refrigerator and $100 for a lemon (low-quality) used refrigerator. If buyers believe that 50% of used refrigerators in the market are lemons (low quality), what fraction of used refrigerators sold will actually be lemons (low quality)? A) 50/250 B) 50/300 C) 250/300 D) All of the refrigerators sold will be lemons. Answer: C Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 42) Figure 9.3 represents the market for used refrigerators. Suppose buyers are willing to pay $300 for a plum (high-quality) used refrigerator and $100 for a lemon (low-quality) used refrigerator. If buyers believe that 50% of used refrigerators in the market are lemons (low quality), what fraction of used refrigerators sold will actually be plums (high quality)? A) 50/250 B) 50/300 C) 250/300 D) None of the refrigerators sold will be plums. Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

43) Figure 9.3 represents the market for used refrigerators. Suppose buyers are willing to pay $300 for a plum (high-quality) used refrigerator and $100 for a lemon (low-quality) used refrigerator. If buyers believe that all of the used refrigerators in the market are lemons (low quality), what number of used refrigerators sold will actually be lemons (low quality)? A) 50 B) 125 C) 175 D) 250 Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 44) Figure 9.3 represents the market for used refrigerators. Suppose buyers are willing to pay $300 for a plum (high-quality) used refrigerator and $100 for a lemon (low-quality) used refrigerator. Initially buyers believe that 50% of used refrigerators in the market are lemons (low quality). Compared to the outcome with neutral expectations, how many fewer refrigerators are sold in equilibrium? A) 50 B) 125 C) 175 D) 250 Answer: C Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 45) Figure 9.3 represents the market for used refrigerators. Suppose buyers are willing to pay $300 for a plum (high-quality) used refrigerator and $100 for a lemon (low-quality) used refrigerator. Compared to the situation when buyers have neutral expectations, if buyers believed that fewer than 50% of used refrigerators are lemons (low-quality): A) more plums (high-quality) used refrigerators would be on the market. B) fewer plums (high-quality) used refrigerators would be on the market. C) fewer lemons (low-quality) used refrigerators would be on the market. D) the same total number of used refrigerators would be on the market, but more of them would be plums (high-quality) used refrigerators. Answer: A Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 16 Copyright © 2020 Pearson Education, Inc.

Figure 9.4 46) Figure 9.4 represents the market for used 12 megapixel digital cameras. Suppose buyers are willing to pay $400 for a plum (high-quality) used digital camera and $200 for a lemon (lowquality) used digital camera. If buyers believe that 50% of used digital cameras in the market are lemons (low quality), what is consumers' willingness to pay ($W)? A) $100 B) $200 C) $300 D) $400 Answer: C Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 47) Figure 9.4 represents the market for used 12 megapixel digital cameras. Suppose buyers are willing to pay $400 for a plum (high-quality) used digital camera and $200 for a lemon (lowquality) used digital camera. If buyers believe that 50% of used digital cameras in the market are lemons (low quality), how many plums (high quality) will be supplied by sellers? A) 50 B) 60 C) 150 D) 200 Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 17 Copyright © 2020 Pearson Education, Inc.

48) Figure 9.4 represents the market for used 12 megapixel digital cameras. Suppose buyers are willing to pay $400 for a plum (high-quality) used digital camera and $200 for a lemon (lowquality) used digital camera. If buyers believe that 50% of used digital cameras in the market are lemons (low quality), how many lemons will be supplied by sellers? A) 50 B) 60 C) 150 D) 200 Answer: C Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 49) Figure 9.4 represents the market for used 12 megapixel digital cameras. Suppose buyers are willing to pay $400 for a plum (high-quality) used digital camera and $200 for a lemon (lowquality) used digital camera. If buyers believe that 50% of used digital cameras in the market are lemons (low quality), what percent of used digital cameras sold will actually be lemons? A) 25% B) 50% C) 75% D) 100% Answer: C Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 50) Figure 9.4 represents the market for used 12 megapixel digital cameras. Suppose buyers are willing to pay $400 for a plum (high-quality) used digital camera and $200 for a lemon (lowquality) used digital camera. If buyers believe that all of used digital cameras in the market are lemons (low quality), what number of used digital cameras sold will actually be lemons? A) 50 B) 60 C) 110 D) 150 Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

51) Figure 9.4 represents the market for used 12 megapixel digital cameras. Suppose buyers are willing to pay $400 for a plum (high-quality) used digital camera and $200 for a lemon (lowquality) used digital camera. Initially buyers believe that 50% of used digital cameras in the market are lemons (low quality). Compared to the outcome with neutral expectations, how many fewer digital cameras are sold in equilibrium? A) 90 B) 110 C) 140 D) The number of cameras sold in equilibrium is the same as the outcome with neutral expectations. Answer: C Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 52) Figure 9.4 represents the market for used 12 megapixel digital cameras. Suppose buyers are willing to pay $400 for a plum (high-quality) used digital camera and $200 for a lemon (lowquality) used digital camera. At any price between $X and $Z: A) only plums will be supplied. B) only lemons will be supplied. C) both plums and lemons will be supplied. D) neither plums nor lemons will be supplied. Answer: B Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Figure 9.5 53) Figure 9.5 represents the market for used cars. Suppose buyers are willing to pay $5,000 for a plum (high-quality) used car and $3,000 for a lemon (low-quality) used car. If buyers believe that 80% of used cars in the market are lemons (low quality), what is consumers' willingness to pay ($X)? A) $5,000 B) $3,400 C) $3,000 D) $1,700 Answer: B Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 54) Figure 9.5 represents the market for used cars. Suppose buyers are willing to pay $5,000 for a plum (high-quality) used car and $3,000 for a lemon (low-quality) used car. If buyers believe that 80% of used cars in the market are lemons (low quality), how many plums will be supplied in the market? A) 30 B) 40 C) 70 D) 120 Answer: B Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

55) Figure 9.5 represents the market for used cars. Suppose buyers are willing to pay $5,000 for a plum (high-quality) used car and $3,000 for a lemon (low-quality) used car. If buyers believe that 80% of used cars in the market are lemons (low quality), what percent of used cars sold will actually be plums? A) 20% B) 25% C) 33.33% D) 75% Answer: A Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 56) Figure 9.5 represents the market for used cars. Suppose buyers are willing to pay $5,000 for a plum (high-quality) used car and $3,000 for a lemon (low-quality) used car. Initially buyers believe that 80% of used cars in the market are lemons (low quality). Compared to the outcome with these initial expectations, how many fewer cars are sold in equilibrium? A) 50 B) 80 C) 110 D) The number of cars sold in equilibrium is the same as the outcome with neutral expectations. Answer: D Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Table 9.2 57) Table 9.2 represents 3 markets for used guitars. Which of the markets in Table 14.2 are in equilibrium? A) 1 only B) 2 only C) 3 only D) 2 and 3 Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 58) Table 9.2 represents 3 markets for used guitars. Which of the markets in Table 14.2 are NOT in equilibrium? A) 1 only B) 2 only C) 3 only D) 2 and 3 Answer: D Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 59) In Table 9.2, Market 2 would be in equilibrium if buyers believed lemons account for: A) 55% of the market. B) 65% of the market. C) 70% of the market. D) 80% of the market. Answer: C Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

60) In Table 9.2, Market 3 would be in equilibrium if buyers believed plums account for: A) 30% of the market. B) 40% of the market. C) 50% of the market. D) 60% of the market. Answer: C Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 61) Refer to Table 9.2. In which market do buyers underestimate the chance of getting a lemon? A) 1 only B) 2 only C) 1 and 3 only D) 2 and 3 only Answer: D Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Table 9.3 62) Table 9.3 represents 3 markets for used stereos. Which of the markets in Table 14.3 are in equilibrium? A) 1 only B) 2 only C) 3 only D) none of the above Answer: D Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

63) Table 9.3 represents 3 markets for used stereos. Which of the markets in Table 14.3 are NOT in equilibrium? A) 1 only B) 2 only C) 3 only D) 1, 2, and 3 Answer: D Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 64) In Table 9.3, Market 1 would be in equilibrium if buyers believed lemons account for: A) about 83.33% of the market. B) about 71.43% of the market. C) about 66.67%% of the market. D) about 42.86% of the market. Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 65) In Table 9.3, Market 2 would be in equilibrium if buyers believed plums account for: A) about 16.67% of the market. B) about 33.33% of the market. C) about 66.67% of the market. D) about 88.89% of the market. Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

66) In Table 9.3, Market 3 would be in equilibrium if buyers believed lemons account for: A) 45% of the market. B) 50% of the market. C) 55% of the market. D) 60% of the market. Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 67) Refer to Table 9.3. In which market do buyers underestimate the chance of getting a lemon? A) 1 only B) 2 only C) 3 only D) all of the above Answer: D Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Table 9.4 68) Table 9.4 represents 3 markets for used motorcycles. Which of the markets in Table 14.4 are in equilibrium? A) 1 only B) 2 only C) 3 only D) 1 and 3 Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

69) Table 9.4 represents 3 markets for used motorcycles. Which of the markets in Table 14.4 are NOT in equilibrium? A) 1 only B) 2 only C) 3 only D) 1 and 3 Answer: D Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 70) In Table 9.4, Market 1 would be in equilibrium if buyers believed lemons accounted for: A) about 90.91% of the market. B) about 74.5% of the market. C) about 63.25% of the market. D) about 57.65% of the market. Answer: A Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 71) In Table 9.4, Market 3 would be in equilibrium if buyers believed plums accounted for: A) 11.11% of the market. B) 22.22% of the market. C) 33.33% of the market. D) 66.67% of the market. Answer: C Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

72) Refer to Table 9.4. In which market do buyers underestimate the chance of getting a lemon? A) 1 and 2 only B) 1 and 3 only C) 2 and 3 only D) none of the above Answer: B Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 73) You are responsible for purchasing 20 used computers for your company. Red Brand computers cost $1,250 and Green Brand computers cost $1,800. Based on experience, you believe that 60% of Red Brand computers are lemons (low quality) while 20% of Green Brand computers are lemons (low quality). You are willing to pay $1,000 for a known lemon and $2,000 for a known plum. Which brand do you purchase? A) Red Brand B) Green Brand C) You are indifferent between brands. D) You don't buy either brand. Answer: A Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 74) You are responsible for purchasing 25 used cars for your company. Star Brand cars costs $7,500 and Diamond Brand cars cost $6,000. Based on experience, you believe that 20% of Star Brand cars are lemons (low quality) while 40% of Diamond Brand cars are lemons (low quality). You are willing to pay $5,000 for a known lemon and $12,000 for a known plum. Which brand do you purchase? A) Star B) Diamond C) You are indifferent between brands. D) You don't buy either brand. Answer: B Diff: 3 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

75) Suppose buyers in the used car market are willing to pay $3,500 for a plum (high-quality) used car and $1,500 for a lemon (low-quality) used car. If buyers believe that 30% of the used cars on the market are lemons (low quality), what would they be willing to pay for a used car? A) $2,000 B) $2,500 C) $2,900 D) $3,500 Answer: C Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 76) When sellers have more information about the quality of a good than buyers do, a relatively large share of the goods in the market will be low-quality goods. This is the ________ problem. A) free-rider B) law of diminishing returns C) adverse selection D) moral hazard Answer: C Diff: 1 Topic: Equilibrium with All Low-Quality Goods Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 77) Suppose you notice that the market for used bikes is dominated by lemons (low-quality bikes). In such a situation, if you are a buyer of used bikes, you are faced with: A) a positive externality. B) perfect information. C) an adverse selection problem. D) symmetric information. Answer: C Diff: 1 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

78) If the market for used computers has only lemons (low-quality computers) then the market: A) is an example of a thick market. B) suffers from an adverse selection problem. C) is a type of monopoly. D) must be monopolistically competitive. Answer: B Diff: 1 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 79) In a market with an adverse selection problem: A) one side of the market has better information about the goods than the other. B) the uninformed side of the market must choose from an undesirable selection of goods. C) some high-quality goods are sold, but fewer than would be sold in a market with perfect information. D) all of the above Answer: D Diff: 2 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 80) Which of the following is NOT an example of the adverse selection problem? A) Buyers in a market for used cars must choose from an undesirable selection of used cars. B) An insurance company must choose one price for its coverage for both high-cost and low-cost people. C) Commercial banks would rather use credit rationing than raising interest rates in the presence of excess demand for loans. D) An insured motorist drives more recklessly. Answer: D Diff: 2 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

81) Which one of the following is true of a market for used cars? A) A consumer typically overestimates the probability of getting a lemon (low-quality car). B) As buyers become more pessimistic about their chances of buying a high-quality car, the price of used cars (both low-quality and high-quality) decreases. C) There is a public information problem. D) The willingness to pay is less than the willingness to accept. Answer: B Diff: 2 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 82) Which of the following statements about a market for used cars is INCORRECT? A) The presence of low-quality cars decreases consumers' willingness to pay. B) An increase in price increases the quantity of high-quality cars supplied. C) An increase in price decreases the quantity of low-quality cars supplied. D) The decrease in the quantity of high-quality cars lowers consumers' willingness to pay. Answer: C Diff: 2 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 83) One result of adverse selection in the market for used cars is: A) more lemons (low quality) may be offered for sale than plums (high quality). B) more plums (high quality) may be offered for sale than lemons (low quality). C) few lemons (low quality) are sold. D) no used cars are sold. Answer: A Diff: 2 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

84) Buyers in the market for used guitars are getting more pessimistic about the possibility of getting a good guitar. This will cause the price of used guitars to ________ and the percentage of good used guitars to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: D Diff: 2 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 85) The adverse selection problem suggests that: A) the ratio of lemons (low quality) to plums (high quality) is likely to be high. B) the ratio of plums (high quality) to lemons (low quality) is likely to be high. C) the price of lemons (low quality) will be below buyer's willingness to pay. D) plums (high quality) will sell for more than most buyers' willingness to pay. Answer: A Diff: 2 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 86) Employers can find themselves in an adverse selection problem if there are too: A) many applicants for each job. B) few applicants for each job. C) many qualified applicants for each job. D) many underqualified applicants for each job. Answer: D Diff: 2 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

87) Adverse selection in employment is more likely when: A) jobs require specific training. B) everyone is equally qualified for the job. C) people's abilities are easy to measure. D) people's abilities are difficult for potential employers to observe. Answer: D Diff: 2 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 88) In a thin market: A) only high-quality goods are sold. B) some high-quality goods are sold, but fewer than would be sold in a market with perfect information. C) some low-quality goods are sold, but fewer than would be sold in a market with perfect information. D) no high-quality goods are sold. Answer: B Diff: 1 Topic: A Thin Market: Equilibrium with Some High-Quality Goods Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 89) Which one of the following is NOT true of a thin market? A) It is caused by asymmetric information. B) There are relatively few high-quality goods sold. C) There may be some sellers of high-quality goods because people are in a hurry to sell. D) The price of the good sold will be higher than if the market were thicker. Answer: D Diff: 2 Topic: A Thin Market: Equilibrium with Some High-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

90) If only a small percentage of used computers on the market are plums (high-quality), then the asymmetric information concerning the quality of used computers has generated a ________ market. A) thin B) weak C) tight D) competitive Answer: A Diff: 1 Topic: A Thin Market: Equilibrium with Some High-Quality Goods Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 91) The lemons model predicts that: A) if there are low-quality goods in the market, there will be fewer or no high-quality items. B) if there are high-quality goods in the market, there will be fewer or no low-quality items. C) the more low-quality goods there are in the market, the more high-quality goods there will be in the market. D) if buyers are pessimistic about the percentage of low-quality goods on the market, sellers of low-quality goods will be able to charge higher prices than if buyers had neutral beliefs. Answer: A Diff: 2 Topic: Evidence of the Lemons Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 92) In the used pick-up truck market: A) some of the predictions of the lemons model are observed some of the time. B) the lemons model accurately describes the market. C) none of the predictions of the lemons model are observed. D) there is no asymmetric information, and so the lemons model does not apply. Answer: A Diff: 2 Topic: Evidence of the Lemons Problem Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s). 93) Recall the Application. Baseball players who switch teams are more likely to suffer from injuries because the player's ________ team has superior information concerning the health of the player and, if they believe the player will be prone to injury in the future, they ________ be willing to outbid another team. A) new; will not B) old; will not C) new; will D) old; will Answer: B Diff: 1 Topic: Application 1, Are Baseball Pitchers Like Used Cars? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 94) Recall the Application. The market for baseball pitchers suffers from an asymmetric information problem because: A) the pitcher's current team has superior information concerning the health of the pitcher. B) the potential new teams have superior information concerning the health of the pitcher. C) baseball teams never sign injury-prone pitchers. D) a physical exam ensures that both the player's current team and potential new teams have the same information concerning the player's health. Answer: A Diff: 1 Topic: Application 1, Are Baseball Pitchers Like Used Cars? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 95) Recall the Application. The market for baseball players suffers from adverse selection because ________ the used car market, buyers (potential new teams) ________ goods (pitchers) that are lemons (low quality). A) unlike; have difficulty identifying B) like; have difficulty identifying C) unlike; can more easily identify D) like; can more easily identify Answer: B Diff: 2 Topic: Application 1, Are Baseball Pitchers Like Used Cars? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

96) Recall the Application. Pitchers who switch teams ________ pitchers who do not switch teams. A) spend more time on the disabled list, on average, than B) spend less time on the disabled list, on average, than C) spend exactly the same amount of time on the disabled list as D) are less injury-prone than Answer: A Diff: 2 Topic: Application 1, Are Baseball Pitchers Like Used Cars? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 97) There is asymmetric information in the used car market because sellers cannot distinguish between lemons (low-quality) and plums (high-quality), but buyers can. Answer: FALSE Diff: 1 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 98) If a typical consumer is willing to pay $3,000 for a plum and $1,000 for a lemon, and there is a 50% chance of getting a lemon, the typical consumer is willing to pay $2,000 for a used car. Answer: TRUE Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 99) If eight lemons (low quality) and two plums (high quality) are supplied and buyers assume that there is a 40% chance of getting a lemon, there is an equilibrium. Answer: FALSE Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

100) When buyers assume that there is a 70% chance of getting a lemon, and seven lemons (low quality) and three plums (high quality) are supplied, there is an equilibrium. Answer: TRUE Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 101) In the used car market, the adverse selection problem refers to the fact that a buyer must choose a used car from an undesirable selection of cars. Answer: TRUE Diff: 1 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 102) One result of adverse selection in the used car market is that few plums (high-quality) are sold. Answer: TRUE Diff: 1 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 103) In a market for used cars, if the minimum supply price for plums is lower than consumers' willingness to pay for a lemon, only plums will be supplied at the consumers' willingness to pay for a lemon. Answer: FALSE Diff: 1 Topic: A Thin Market: Equilibrium with Some High-Quality Goods Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 104) If the minimum price of plums (high-quality) decreases, the market will become thinner. Answer: FALSE Diff: 1 Topic: A Thin Market: Equilibrium with Some High-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

105) There are profit opportunities in a thin market because the gap between what a buyer is willing to pay for a true plum and the amount a plum owner is willing to accept is large. Answer: TRUE Diff: 1 Topic: A Thin Market: Equilibrium with Some High-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s). 106) Recall the Application. Free-agent baseball pitchers who switch teams spend a relatively long time on the disabled list compared to those who do not switch teams. Answer: TRUE Diff: 1 Topic: Application 1, Are Baseball Pitchers Like Used Cars? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 107) Recall the Application. Baseball teams know more about the health of free-agent pitchers than the pitchers themselves. Answer: FALSE Diff: 1 Topic: Application 1, Are Baseball Pitchers Like Used Cars? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 108) Why do used goods of different qualities often sell for the same price, while used goods of different sizes sell for different prices? Answer: It is easier to determine the size of a good than it is to determine the good's quality. If size is a product attribute then it can easily be incorporated into the price of the good since both buyer and seller can agree on the size. Diff: 2 Topic: Uninformed Buyers and Knowledgeable Sellers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

109) You have just graduated from college and are buying a brand new car. There are two on the lot: a green one and a blue one. Both have the same features for the same price. Is there a potential asymmetric information problem? Answer: No, in this case both you and the seller know the same amount about both cars. While it is possible that one of the cars is a lemon and the other is a plum, they may also both be lemons (low quality) or both plums (high quality). The important thing is that neither one of you knows the true quality of either car, so there is no asymmetric information problem. Diff: 2 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 110) Suppose that buyers assume that there is a 30% chance of getting a plum, and 8 of 10 cars in the used car market are lemons. Is this an equilibrium? Answer: No, buyers are underestimating the probability of getting a lemon by 10%. If buyers pay the amount of money that they are willing to spend in a market with a 30% chance of a plum they will be disappointed with the outcome of their purchases on average. This means that buyers have to reduce their willingness to pay until the outcome is consistent with their expectations. Diff: 3 Topic: Equilibrium with All Low-Quality Goods Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 111) Suppose you own a plum (high-quality) used car that you are thinking about selling. Further, suppose you know that buyers assume that there is a 30% chance of getting a plum, and that 8 of 10 cars currently in the used car market are lemons (low-quality). Would you likely sell your car? Answer: You are more likely to do so than you typically would. Since buyers overestimate the probability of getting a plum, you know that you can get a better price than you normally would by entering the market. Diff: 3 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

112) It has been said that if buyers of used goods are pessimistic it becomes a self-fulfilling prophecy. In other words, buyer pessimism causes the market to have more low-quality goods. Explain why this is true. Answer: The more pessimistic buyers are, the lower the price they will be willing to pay for a used good. The lower the price, the less willing owners of high-quality goods are to sell. Pessimism reduces the price offered in the market for used goods which drives out the highquality goods. Diff: 2 Topic: Equilibrium with All Low-Quality Goods Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk Recall the Application about the free-agent market for professional baseball pitchers to answer the following question(s). 113) Recall the Application. Why is there adverse selection in the baseball pitcher free-agent market? Answer: The pitchers' old team knows more about the pitcher than the new team does. The old team chooses to re-sign the healthier pitchers and let the less healthy ones go to the new team. Diff: 2 Topic: Application 1, Are Baseball Pitchers Like Used Cars? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 9.2 Responding to the Lemons Problem 1) Problems associated with thin markets provide incentives for: A) buyers to seek information about identifying high-quality items. B) sellers to prove that the items they are selling are of high quality. C) buyers and sellers to agree upon a higher price than would hold in equilibrium. D) both A and B. Answer: D Diff: 2 Topic: Responding to the Lemons Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

2) If a seller of a high-quality good cannot prove the quality of that good: A) buyers will not be willing to pay the amount for which they value a high-quality good. B) buyers will only be willing to pay the amount for which they value a low-quality good. C) the good will never be offered for sale. D) the good will trade at its equilibrium price. Answer: A Diff: 2 Topic: Responding to the Lemons Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 3) Reading Consumer Reports before buying a used car: A) helps buyers increase their chances of avoiding a lemon, or low-quality car. B) does not help buyers because magazines only cover new car sales, not used car sales. C) makes warranties on used cars unnecessary. D) is irrational because the cost of the magazine is greater than the benefit of the information. Answer: A Diff: 2 Topic: Buyers Invest in Information Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 4) CARFAX is a company that compiles and sells histories of used cars. Used car dealers offer to give their customers a copy of the CARFAX history of the cars in their inventory to: A) give buyers additional information about used cars for sale. B) give sellers additional information about used cars for sale. C) cause adverse selection. D) avoid having to offer warranties. Answer: A Diff: 2 Topic: Buyers Invest in Information Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 5

) CARFAX is a company that compiles and sells histories of used cars. CARFAX reduces the: A) number of cars exchanged in the used car market. B) information asymmetry in the used car market. C) number of used cars offered for sale in the market. D) cost of used cars in the market. Answer: B Diff: 2 Topic: Buyers Invest in Information Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 6) Quality information for goods that are sold online: A) is available from ratings given by other buyers. B) is of no value because anyone can write anything on the Internet. C) is unavailable because online sellers cannot be identified with certainty. D) is ineffective at reducing asymmetric information problems. Answer: A Diff: 2 Topic: Consumer Satisfaction Scores from ValueStar and eBay Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 7) The problems of thin markets can be addressed by: A) guaranteed price matching. B) increasing the number of sellers in the market. C) imposing price ceilings. D) warranties and repair guarantees. Answer: D Diff: 2 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 8) The problems of markets can be addressed by: A) guaranteed price matching. B) increasing the number of sellers in the market. C) imposing price ceilings. D) money-back guarantees. Answer: D Diff: 2 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 41 Copyright © 2020 Pearson Education, Inc.

9) By which of the following methods could a supplier identify its good as a plum to a skeptical buyer? A) money-back guarantee B) warranties and repair guarantees C) a verbal assurance D) both A and B Answer: D Diff: 1 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 10) In order to identify their used cars as plums (high-quality), many used car dealers: A) raise the minimum price of plums (high-quality). B) advertise their prices. C) offer money-back guarantees. D) raise the minimum price of lemons (low-quality). Answer: C Diff: 1 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 11) Lemon laws that allow consumers to return low-quality used cars are designed to help solve the problem of ________ in used car markets. A) moral hazard B) thick markets C) experience ratings D) adverse selection Answer: D Diff: 1 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

12) Which of the following is NOT an example of the efforts to reduce the adverse selection problem? A) Sellers offer warranties. B) Consumers invest in information. C) Sellers offer money-back guarantees. D) All of the above are examples of efforts to reduce adverse selection. Answer: D Diff: 1 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 13) A seller's verbal assurance that a used car is a plum (high-quality car): A) is not effective at reducing the problems associated with asymmetric information. B) is an effective way for sellers to prove that the good they are selling is of high quality. C) is a more efficient way to prove high quality than a money-back guarantee because it does not cost the seller any money to make the assurance. D) provides the same protection against adverse selection than does a repair guarantee. Answer: A Diff: 2 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 14) A seller who is offering a low-quality used good for sale: A) is less likely to offer a money-back guarantee than is a seller who is selling a high-quality good. B) is more likely to offer a money-back guarantee than is a seller who is selling a high-quality good. C) is just as likely to offer a money-back guarantee than is a seller who is selling a high-quality good. D) is the only kind of seller who would ever offer a money-back guarantee because sellers of high-quality goods do not have to offer guarantees. Answer: A Diff: 2 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

15) Sellers of high-quality used goods are ________ likely to offer money-back guarantees because ________. A) more; buyers will not ask for their money back B) less; buyers will be willing to purchase high-quality goods even without a guarantee C) more; they are wealthier and so can afford to give money back D) less; buyers consider guarantees to be a sign of an inferior good Answer: A Diff: 3 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk Recall the Application about federal quality standards in the market for kiwifruit to answer the following question(s). 16) Recall the Application. California kiwifruit growers had an asymmetric information problem because potential buyers: A) do not know how much kiwifruit they will need. B) could not tell what the price of the kiwifruit will be. C) could not tell if a kiwifruit was sweet or sour before tasting it. D) all of the above Answer: C Diff: 2 Topic: Application 2, Regulation of the California Kiwifruit Market Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 17) Recall the Application. The sweetness of the kiwifruit is based on: A) its maturity at the time of harvest. B) the amount of water on the ground where it is grown. C) the amount of sunshine at the location of the plantation. D) the variety of the tree. Answer: A Diff: 2 Topic: Application 2, Regulation of the California Kiwifruit Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

18) Recall the Application. Prior to the federal marketing order in 1987, why were the California kiwifruit more likely to be sour? A) It was less expensive to harvest the fruit when it was still immature. B) It was more expensive to harvest the fruit when it was still immature. C) The trees were still young and did not bear good fruit. D) The California kiwifruit that were sweet were sold to Canada. Answer: A Diff: 2 Topic: Application 2, Regulation of the California Kiwifruit Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 19) Recall the Application. The federal government marketing order that helped reduce asymmetric information about kiwifruit led to: A) a decrease in the spread between the price of New Zealand and U.S. kiwifruit. B) lower quality kiwifruit sales. C) more kiwifruit imports. D) lower kiwifruit sales. Answer: A Diff: 2 Topic: Application 2, Regulation of the California Kiwifruit Market Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 20) Recall the Application. The asymmetric information about kiwifruit was reduced by: A) reducing the price of U.S. kiwifruit. B) advertising. C) a federal government marketing order. D) all of the above Answer: C Diff: 2 Topic: Application 2, Regulation of the California Kiwifruit Market Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

21) Recall the Application. Prior to enactment of the federal government's order: A) grocers were willing to pay less for any California kiwifruit than for any New Zealand kiwifruit. B) grocers were willing to pay more for any California kiwifruit than for any New Zealand kiwifruit. C) grocers were willing to pay more for California kiwifruit that had been harvested at maturity than for any New Zealand kiwifruit. D) California and New Zealand kiwifruit sold for the same price. Answer: A Diff: 2 Topic: Application 2, Regulation of the California Kiwifruit Market Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 22) Recall the Application. After the federal marketing order in 1987, why were the California kiwifruit more likely to be sweet? A) The federal order required a minimum maturity standard. B) The federal order required that California kiwifruit farmers take lessons from New Zealand farmers. C) The trees were still young in 1987 started to get older and produced better fruit. D) The federal order required that sweet California kiwifruit must be sold only in California. Answer: A Diff: 2 Topic: Application 2, Regulation of the California Kiwifruit Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 23) Consumers can reduce their information disadvantage by investigating consumer satisfaction surveys. Answer: TRUE Diff: 1 Topic: Consumer Satisfaction Scores from ValueStar and eBay Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 24) It is rational for someone who wants to sell a lemon to offer the buyer a money-back guarantee. Answer: FALSE Diff: 1 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 46 Copyright © 2020 Pearson Education, Inc.

25) Warranties reduce information asymmetry. Answer: TRUE Diff: 1 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 26) Repair guarantees are a sign the seller thinks they have a lemon. Answer: FALSE Diff: 1 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk Recall the Application about federal quality standards in the market for kiwifruit to answer the following question(s). 27) Recall the Application. The U.S. kiwifruit information asymmetry was reduced by advertising. Answer: FALSE Diff: 1 Topic: Application 2, Regulation of the California Kiwifruit Market Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 28) People who buy used homes often insist on having a "home inspection" before they finalize the purchase. If the house fails the inspection the buyer has the right to refuse to buy the house unless the seller fixes whatever problems are found. Does this help or hurt the seller? Answer: If the house is in good shape it will help the seller. Since the buyer doesn't have to worry about the risk of buying a house that has problems, he or she will be willing to pay more for the house. If the house is in bad shape it hurts the seller because the home inspection will stop the buyer from purchasing a home with hidden problems. Diff: 2 Topic: Buyers Invest in Information Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

29) For what kinds of goods are buyers most likely to seek additional information about quality? Answer: Buyers will seek information about quality if they cannot assess the quality themselves by inspection. Used goods, complex goods, or goods bought sight unseen (for example over the internet), are all goods for which people have an incentive to acquire additional information. Diff: 2 Topic: Buyers Invest in Information Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 30) Some states have laws that require that used car dealers give buyers a 30-day period during which they can return cars that are discovered to be lemons (low-quality). Who do laws like this help? Who do they hurt? Answer: Buyers are helped because if they find that they have overpaid for a car they can return it. Sellers of plums (high quality) are also helped because consumers will feel confident in buying their cars at high prices. These sellers need not worry about the cars being returned because they are plums (high quality). The only people hurt are the sellers of lemons (low quality) who cannot cajole someone into buying a lemon and then "stick" them with it. Diff: 2 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 31) Who is more likely to offer a money-back guarantee: a seller of a lemon or a seller of a plum? Why? Answer: The seller of a plum is more likely to offer a money-back guarantee, because that seller is unlikely to have to honor the guarantee. A seller of a lemon knows that there is a good chance that the buyer will return the car and ask for his or her money back. Diff: 2 Topic: Guarantees and Lemons Laws Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Recall the Application about federal quality standards in the market for kiwifruit to answer the following question(s). 32) Recall the Application. Why were there so many "lemon" kiwifruit in the U.S. market? Answer: Mature kiwifruit is sweeter but costs more to produce than immature kiwifruit. Consumers cannot tell if a kiwifruit is sweet or sour before they taste it, so they were unwilling to pay a high price for kiwifruit. The relatively low price drove out the more costly to produce, sweeter, kiwifruit from the market. Diff: 2 Topic: Application 2, Regulation of the California Kiwifruit Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 9.3 Adverse Selection for Sellers: Insurance 1) Health insurance companies face an asymmetric information problem because: A) insurance companies have superior information concerning the risk of illness or injury of those insured. B) buyers have superior information concerning their risk of illness or injury. C) the insurance companies and buyers both have equal information concerning the risk of illness or injury of those insured. D) the probability of becoming ill or injured is unrelated to the insured person's occupation. Answer: B Diff: 2 Topic: Health Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 2) Adverse selection occurs in the health insurance market because: A) it is difficult for insurance companies to distinguish between high risk and low risk customers. B) people cannot predict their future health status. C) the least healthy people are the least likely to acquire insurance. D) health care markets are unregulated. Answer: A Diff: 2 Topic: Health Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

3) One consequence of imperfect information in the health insurance market is that: A) less healthy individuals are more likely to buy insurance, driving up the cost of insurance for everyone. B) the most healthy individuals are more likely to buy insurance, leaving the least healthy without access to health care. C) health insurance increases the demand for health care and so increases the price of health care. D) unhealthy individuals are denied health insurance. Answer: A Diff: 2 Topic: Health Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 4) In the used car market, the less-informed party is the ________. In the health care market, the less-informed party is the ________. A) buyer; seller B) seller; buyer C) buyer; government D) seller; government Answer: A Diff: 2 Topic: Health Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 5) If workers have better information about their own ability to work than employers do, which of the following situations is present? A) unemployment B) asymmetric information C) discrimination D) moral hazard Answer: B Diff: 1 Topic: Equilibrium with All High-Cost Consumers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

6) Suppose a health insurance company notes that almost all of its customers are at a high risk of illness or injury. This is an example of: A) public information. B) perfect information. C) a thick market. D) an adverse selection problem. Answer: D Diff: 2 Topic: Equilibrium with All High-Cost Consumers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Figure 9.6 7) Figure 9.6 represents the market for health insurance. Suppose there are two types of consumers, low-cost consumers with $2,000 average medical expenses per year, and high-cost customers with $4,000 average medical expenses per year. The insurance companies estimate that 40% of its customers are high-cost type. The uninformed side(s) of the market is (are): A) customers. B) insurance companies. C) both customers and insurance companies. D) neither customers nor insurance companies. Answer: B Diff: 2 Topic: Equilibrium with All High-Cost Consumers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

8) Figure 9.6 represents the market for health insurance. Suppose there are two types of consumers, low-cost consumers with $2,000 average medical expenses per year, and high-cost customers with $4,000 average medical expenses per year. The insurance companies estimate that 40% of its customers are high-cost type. If the insurance companies set the price equal to their average cost per customer, what is the insurance companies' average cost per customer ($Y)? A) $4,000 B) $3,400 C) $2,800 D) $2,000 Answer: C Diff: 3 Topic: Equilibrium with All High-Cost Consumers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 9) Figure 9.6 represents the market for health insurance. Suppose there are two types of consumers, low-cost consumers with $2,000 average medical expenses per year, and high-cost customers with $4,000 average medical expenses per year. The insurance companies estimate that 40% of its customers are high-cost type. If the insurance companies set the price equal to their average cost per customer, what percent of customers who buy the insurance are actually low-cost customers? A) 20% B) more than 20% but less than 50% C) more than 50% D) less than 20% Answer: D Diff: 3 Topic: Equilibrium with All High-Cost Consumers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

10) Figure 9.6 represents the market for health insurance. Suppose there are two types of consumers, low-cost consumers with $2,000 average medical expenses per year, and high-cost customers with $4,000 average medical expenses per year. The insurance companies estimate that 40% of its customers are high-cost type. If the insurance companies set the price equal to their average cost per customer, what type of customers will dominate the market? A) low-cost customers B) high-cost customers C) Both types equally split the market. D) There is not sufficient information. Answer: B Diff: 3 Topic: Equilibrium with All High-Cost Consumers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 11) Figure 9.6 represents the market for health insurance. Suppose there are two types of consumers, low-cost consumers with $2,000 average medical expenses per year, and high-cost customers with $4,000 average medical expenses per year. Initially the insurance companies estimate that 40% of its customers are high-cost type. Compared to the outcome with pessimistic expectations, how many more customers buy health insurance? A) 500 B) 1,300 C) 1,500 D) 1,600 Answer: C Diff: 3 Topic: Equilibrium with All High-Cost Consumers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 12) Figure 9.6 represents the market for health insurance. Suppose there are two types of consumers, low-cost consumers with $2,000 average medical expenses per year, and high-cost customers with $4,000 average medical expenses per year. If the insurance companies are pessimistic and set their price according to their pessimistic expectations: A) the companies' pessimism is not justified. B) the market will include some low-cost and some high-cost customers. C) the market will include only low-cost customers. D) the market will include only high-cost customers. Answer: D Diff: 3 Topic: Equilibrium with All High-Cost Consumers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 54 Copyright © 2020 Pearson Education, Inc.

13) Figure 9.6 represents the market for health insurance. Suppose there are two types of consumers, low-cost consumers with $2,000 average medical expenses per year, and high-cost customers with $4,000 average medical expenses per year. If $Y is the price the insurance company would charge if it expected 40% of its customers to be high-cost, the price it would charge if it expected 50% of its customers to be high-cost would be: A) greater than $Y. B) less than $Y. C) equal to $Y. D) 50% of $Y. Answer: A Diff: 3 Topic: Equilibrium with All High-Cost Consumers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 14) Suppose an insurance company determines that the average annual malpractice cost is $10,000 for reckless lawyers and $500 for careful lawyers. If 10% of the lawyers insured by the company are reckless, the company will earn zero economic profit if the price of insurance is: A) $500. B) $1,450. C) $5,250. D) $10,000. Answer: B Diff: 3 Topic: Equilibrium with All High-Cost Consumers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 15) Asymmetric information in the health insurance market causes prices to ________ and the mix of insured customers to become ________ healthy on average. A) rise; less B) fall; more C) rise; more D) fall; less Answer: A Diff: 2 Topic: Equilibrium with All High-Cost Consumers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

16) Which practice helps health insurance companies overcome the problem of adverse selection? A) They sell insurance only to unhealthy people. B) They sell insurance only to healthy people. C) They have switched to the experience rating system. D) All of the above. Answer: C Diff: 1 Topic: Responding to Adverse Selection in Insurance: Group Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 17) Insurance policies in which each firm pays a different price for medical insurance depending upon the past medical bills of the firm's employees are based upon a(n): A) experience rating. B) community rating. C) asymmetric information rating. D) adverse selection rating. Answer: A Diff: 1 Topic: Responding to Adverse Selection in Insurance: Group Insurance Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 18) Experience ratings provide firms with an incentive to: A) hire older workers. B) invest in health and safety programs. C) hire disabled workers. D) none of the above Answer: B Diff: 2 Topic: Responding to Adverse Selection in Insurance: Group Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

19) Experience ratings provide firms with an incentive NOT to: A) hire older workers. B) invest in health and safety programs. C) hire disabled workers. D) both A and C Answer: D Diff: 2 Topic: Responding to Adverse Selection in Insurance: Group Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 20) Assume that an insurance company sets a single price for insurance equal to the total medical bills paid by the insurance company divided by the number of its customers. If it pays medical bills of $5,000 for half of its customers and $9,000 for the other half of its customers, the price of insurance will be: A) $5,000. B) $6,000. C) $7,000. D) $9,000. Answer: C Diff: 2 Topic: Responding to Adverse Selection in Insurance: Group Insurance Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 21) Relative to people who are eligible for group health insurance, individuals who are not covered by a group health insurance plan tend to pay: A) more for health insurance regardless of their health condition. B) more for health insurance if they are unhealthy and less for health insurance if they are healthy. C) less for health insurance regardless of their health condition. D) less for health insurance if they are unhealthy and more for health insurance if they are healthy. Answer: A Diff: 2 Topic: The Uninsured Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

22) In the U.S. health care market, the uninsured typically receive health care for: A) emergencies, but not for preventative care. B) preventative care, but not for emergencies. C) both emergencies and preventative care. D) neither emergencies nor preventative care. Answer: A Diff: 2 Topic: The Uninsured Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk Recall the Application about genetic testing and adverse selection to answer the following question(s). 23) According to the Application, what is causing more and more consumers to get a complete genetic profile of themselves? A) The cost of genetic testing is decreasing. B) The government is subsidizing genetic testing through Medicare. C) More employers are requiring genetic testing before workers are hired. D) More people want to know which famous person they are related to. Answer: A Diff: 1 Topic: Application 3, Genetic Testing and Adverse Selection Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 24) According to the Application, why is genetic testing causing adverse selection? A) People who find out through genetic testing that they are more likely to get certain genetic illnesses are more likely to get insurance. B) People who find out through genetic testing that they are more likely to get certain genetic illnesses are less likely to get insurance. C) People who find out through genetic testing that they are more likely to get certain genetic illnesses are more likely to get hired by employers. D) People who find out through genetic testing that they are more likely to get certain genetic illnesses are less likely to get insured by insurance companies. Answer: A Diff: 1 Topic: Application 3, Genetic Testing and Adverse Selection Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

25) According to the Application, what will ultimately happen if genetic testing for certain illnesses like Alzheimer's becomes more common? A) Only the people who are at high risk for those diseases will purchase insurance against those illnesses. B) Only the people who are at low risk for those diseases will purchase insurance against those illnesses. C) The people who are at high risk for those diseases will decline insurance against those illnesses. D) Only the people who are at high risk for those diseases will be fired from their current jobs. Answer: A Diff: 1 Topic: Application 3, Genetic Testing and Adverse Selection Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 26) According to the Application, can health insurance companies decline insurance to those who test positive for APOE4, a mutation of a gene that increases the risk for Alzheimer's? A) Yes, but individuals are not required to divulge to insurance companies the results of APOE4 tests. B) No, it is illegal to use genetic testing results to determine long-term insurance premiums. C) Yes, it is required by law that insurance companies use genetic testing results to determine long-term insurance premiums. D) No, tests for APOE4 is not an exact science, and is used for entertainment purposes only. Answer: A Diff: 1 Topic: Application 3, Genetic Testing and Adverse Selection Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 27) Experience rating systems for pricing insurance are based on past medical bills of a firm's employees. Answer: TRUE Diff: 1 Topic: Responding to Adverse Selection in Insurance: Group Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

28) Experience rating systems for pricing insurance discourage firms from spending money to try to improve their employees' health. Answer: FALSE Diff: 1 Topic: Responding to Adverse Selection in Insurance: Group Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 29) Experience rating systems for pricing insurance encourage firms to discriminate against older and disabled workers in their hiring practices. Answer: TRUE Diff: 1 Topic: Responding to Adverse Selection in Insurance: Group Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 30) Many large companies offer employees time off during the workday to attend seminars on how to improve their health. Some even give bonuses to people who show that they are adopting healthy lifestyles by, for example, weighing in before and after the holidays to show that they are following a sensible diet. Other than showing that they "care" about their employees and trying to minimize the number of days missed from work, why would a company adopt a program like this? Answer: If the company is involved in an insurance program that prices its employees' medical insurance based on the "experience rating" system, the employer's health insurance costs go down if its employees go to the doctor less frequently. A program that results in healthier employees will thus save the company money in insurance premiums. Diff: 2 Topic: Responding to Adverse Selection in Insurance: Group Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 9.4 Insurance and Moral Hazard 1) Which of the following is NOT an example of moral hazard? A) People take poor care of their health because they have health insurance. B) People drive recklessly because they have medical insurance. C) People don't lock their doors because they have theft insurance. D) All of the above are examples of moral hazard. Answer: D Diff: 1 Topic: Insurance and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 60 Copyright © 2020 Pearson Education, Inc.

2) Moral hazard occurs when one side of an economic relationship: A) takes costly actions that the other side of the relationship cannot observe. B) takes actions that is contrary to the religious beliefs of the other side of the economic relationship. C) takes actions that the other side of the relationship enjoys doing. D) takes actions that the other side of the relationship cannot force them to do. Answer: A Diff: 1 Topic: Insurance and Moral Hazard Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 3) Andy does not bother to lock the door to his house because he has theft insurance. This is an example of: A) a positive spillover. B) moral hazard. C) adverse selection. D) irrational behavior. Answer: B Diff: 1 Topic: Insurance and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 4) You do not worry about how your bank is investing your money because your deposits are federally insured. This is an example of: A) a positive spillover. B) moral hazard. C) adverse selection. D) irrational behavior. Answer: B Diff: 1 Topic: Insurance and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

5) Moral hazard is more likely to arise when: A) one side of an economic relationship cannot observe the behavior of those on the other side. B) adverse selection is present. C) insurance policies have high deductibles. D) people are uninsured. Answer: A Diff: 2 Topic: Insurance and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 6) In communities where more people carry property insurance you would expect people to be: A) less careful about securing their possessions. B) more careful about securing their possessions. C) less likely to engage in behaviors that would be classified as moral hazard. D) paying less for property insurance relative to communities where fewer people carry property insurance. Answer: A Diff: 2 Topic: Insurance and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 7) Suppose that Harold buys collision insurance for his car and then drives it recklessly. This is an example of: A) a positive spillover. B) moral hazard. C) adverse selection. D) irrational behavior. Answer: B Diff: 1 Topic: Insurance and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

8) One way that insurance companies can reduce the moral hazard problem is to: A) make insurance customers pay a deductible before the company pays on a claim. B) engage in genetic testing to determine who is more likely to be high risk. C) eliminate copayments on insurance claims. D) insure only customers with good morals. Answer: A Diff: 2 Topic: Insurance Companies and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 9) Suppose that lenders believe that the government will provide assistance if too many of the lenders' borrowers do not pay back their loans. If lenders expect government assistance they will: A) make more loans to borrowers who are less likely to repay them. B) make fewer loans to borrowers who are less likely to repay them. C) increase the interest rates that they charge borrowers who are less likely to repay loans. D) not change their lending policies because this expectation is not reasonable. Answer: A Diff: 2 Topic: Deposit Insurance for Savings and Loans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 10) The existence of the Federal Deposit Insurance Corporation (FDIC): A) increases the risk of moral hazard in the savings and loan industry. B) reduces the risk of moral hazard in the savings and loan industry. C) increases the risk that customers of savings and loans will engage in moral hazard, but reduces the risk that the lenders will engage in moral hazard. D) reduces the risk that customers of savings and loans will engage in moral hazard, but increases the risk that the lenders will engage in moral hazard. Answer: A Diff: 2 Topic: Deposit Insurance for Savings and Loans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

11) People who apply for loans know more about their ability to repay the loan than the lenders do. This is an example of: A) asymmetric information. B) public information. C) a negative externality. D) a community rating. Answer: A Diff: 1 Topic: Deposit Insurance for Savings and Loans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 12) How does Federal Deposit Insurance Corporation (FDIC) cause moral hazard in the banking industry? A) Depositors do not evaluate the health of a bank when they make a deposit because they are assured that they get their money back. B) Money managers of a bank will make more risky loans because they know that if their investments fail, the government will reimburse the depositors. C) The Federal Reserve (our central bank) does not monitor banks because they know the FDIC covers all deposits. D) A and B are both correct. Answer: D Diff: 1 Topic: Deposit Insurance for Savings and Loans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 13) People who are the most willing to pay high interest rates for loans may have bad credit ratings. This is an example of: A) moral hazard. B) an experience rating. C) adverse selection. D) a negative spillover. Answer: C Diff: 2 Topic: Deposit Insurance for Savings and Loans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

14) One result of asymmetric information about people's ability to repay a loan is that: A) loans will only be made to people who don't pay them back. B) a bank could make many loans to people who don't pay them back. C) lenders are better off than with perfect information. D) banks will not make loans. Answer: B Diff: 2 Topic: Deposit Insurance for Savings and Loans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk Recall the Application about how having car insurance affects driving behavior to answer the following question(s). 15) Recall the Application. The idea that an insured driver, who bears less than the full cost of a collision, will drive less carefully than an uninsured driver is an example of: A) asymmetric information. B) adverse selection. C) moral hazard. D) a thin market. Answer: C Diff: 2 Topic: Application 4, Car Insurance and Risky Driving Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 16) Recall the Application. A study of the effect of automobile insurance and traffic fatalities conducted by Alma Cohen and Rajeev Dehejia estimates that a one percentage point decrease in the number of uninsured drivers: A) decreases the number of traffic fatalities by 10 percent. B) decreases the number of traffic fatalities by 0.5 percent. C) has no measurable effect on the number of traffic fatalities. D) increases the number of traffic fatalities by 2 percent. Answer: D Diff: 1 Topic: Application 4, Car Insurance and Risky Driving Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

17) Recall the Application. Based on the results of studies mentioned in the Application, what should we do with mandatory/compulsory insurance? A) We should conduct more studies to compare the benefits of fully insured vehicles to the costs, including the increase in fatalities on more hazardous roads. B) We should ban all insurance because mandatory insurance results in more fatalities. C) We should allow mandatory insurance, but the government should pay for it. D) We should ban driving altogether, to decrease automobile deaths. Answer: A Diff: 1 Topic: Application 4, Car Insurance and Risky Driving Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 18) The tendency for people who have good health insurance to take more risks with their health is called adverse selection. Answer: FALSE Diff: 1 Topic: Insurance and Moral Hazard Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 19) If John drives more recklessly because he has good automobile insurance, it is an example of moral hazard. Answer: TRUE Diff: 1 Topic: Insurance and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 20) Insurance leads to taking less risk. Answer: FALSE Diff: 1 Topic: Insurance and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

21) Adverse selection and moral hazard are two different terms that mean essentially the same thing. Answer: FALSE Diff: 2 Topic: Insurance and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 22) If Tom purchases a comprehensive auto insurance policy because he knows he is a reckless driver, his behavior is an example of moral hazard. Answer: FALSE Diff: 1 Topic: Insurance and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 23) Copayments and deductibles in insurance policies increase moral hazard. Answer: FALSE Diff: 1 Topic: Insurance Companies and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 24) If Tom drives a car more recklessly after he purchases a comprehensive insurance plan, the change in his behavior is an adverse selection problem. Answer: FALSE Diff: 1 Topic: Insurance Companies and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 25) Deposit insurance creates a moral hazard that depositors have less incentive to monitor their bank. Answer: TRUE Diff: 1 Topic: Deposit Insurance for Savings and Loans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Recall the Application about how having car insurance affects driving behavior to answer the following question(s). 26) Recall the Application. The theory of moral hazard suggests that uninsured drivers drive less carefully than insured drivers. Answer: FALSE Diff: 2 Topic: Application 4, Car Insurance and Risky Driving Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 27) Recall the Application. When a state makes car insurance compulsory, decreasing the number of uninsured drivers, roads tend to become less hazardous. Answer: FALSE Diff: 2 Topic: Application 4, Car Insurance and Risky Driving Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 28) What is moral hazard? Answer: When one side of an economic relationship takes undesirable or costly actions the other side cannot observe. Diff: 2 Topic: Insurance and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 29) Health insurance leads to what types of moral hazards? Answer: unhealthy behavior like smoking, unhealthy diet and drinking Diff: 2 Topic: Insurance and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

30) What are the main differences between adverse selection and moral hazard in the insurance market? Answer: Adverse selection describes who is most likely to acquire insurance. It predicts that those who need insurance the most (because they face the most risks) will acquire insurance, driving up insurance rates for everyone, leading the lower-risk customers to drop out of the market. Moral hazard describes how people behave once they have insurance, predicting that people will increase their risk-taking after acquiring insurance. Diff: 3 Topic: Insurance and Moral Hazard Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 31) Why can car insurance companies charge higher auto rates for new customers than for established customers, all else held constant? Answer: The insurance company faces an asymmetric information problem with a new customer—they do not know whether the person is a good driver or whether they are careful about how they take care of their car. After a few years of not getting any "bad news" about the driver the insurance company can afford to reduce its rates and still earn zero economic profits. Diff: 2 Topic: Insurance Companies and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 32) Suppose that everybody pays the same price for auto insurance. What should happen to the price of insurance if the law changes from a system where there is mandatory auto insurance to one where there is voluntary auto insurance? Answer: When auto insurance becomes voluntary, many safe drivers will exit the market because their expected costs are below their premiums when all risk is pooled. Therefore, a higher percentage of reckless drivers will remain. In this case, the price of insurance will rise. Diff: 2 Topic: Insurance Companies and Moral Hazard Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk

Recall the Application about how having car insurance affects driving behavior to answer the following question(s). 33) Recall the Application. Explain the effect of mandatory car insurance laws on the number of traffic accidents and fatalities. Answer: When car insurance is mandatory, the number of insured drivers increases. When drivers are insured, the theory of moral hazard suggests that they will drive less carefully than an uninsured driver, since the insured driver will bear less than the full cost of a collision. When drivers are less careful, the number of traffic accidents and traffic fatalities increases. Diff: 2 Topic: Application 4, Car Insurance and Risky Driving Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-21: Describe methods for countering and avoiding risk 9.5 External Benefits and Public Goods 1) A market in which there are neither external benefits nor external costs is: A) efficient. B) inefficient. C) efficient and equitable. D) impossible. Answer: A Diff: 1 Topic: External Benefits and Public Goods Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 2) A public good is a good that: A) is consumed by a single person or household. B) cannot be used by private citizens. C) is available for everyone to consume, regardless of who pays. D) is provided by the government. Answer: C Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

3) A public good is a good that: A) is excludable. B) is rival. C) is free. D) is available regardless of willingness to pay. Answer: D Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 4) A private good is a good that: A) is consumed by a single person or household. B) cannot be used by private citizens. C) cannot result in external benefits or costs to those who don't consume. D) is available for everyone to consume, regardless of who pays. Answer: A Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 5) If a good is available only to those who pay for it, the good is: A) excludable but not necessarily rival. B) excludable and rival. C) rival but not necessarily excludable. D) nonrival and nonexcludable. Answer: A Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

6) If a local government gives out water filters to low-income families free of charge, the water filters are: A) public goods. B) private goods. C) external goods. D) spillover goods. Answer: B Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 7) A private good is a good that: A) is nonrival. B) is not excludable. C) is provided only by private sectors. D) is consumed by a single person or household. Answer: D Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 8) A good that is available for everyone to consume, regardless of who pays and who doesn't, is called a(n): A) private good. B) external good. C) public good. D) spillover good. Answer: C Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

9) A good that is available for everyone, regardless of who pays and who doesn't, is: A) rival. B) nonrival. C) excludable. D) nonexcludable. Answer: D Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 10) A good that is consumed by a single person or household is: A) rival. B) nonrival. C) excludable. D) nonexcludable. Answer: A Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 11) An example of a public good is: A) national defense. B) a hamburger. C) a laundromat. D) a personal computer. Answer: A Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 12) An example of a private good is: A) national defense. B) a bottle of perfume. C) city streets and highways. D) clean air. Answer: B Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 73 Copyright © 2020 Pearson Education, Inc.

13) If you see a movie at a theater, the movie is: A) an excludable good/service but nonrival in consumption. B) an excludable good/service and rival in consumption. C) a non-excludable good/service but rival in consumption. D) a non-excludable good/service and nonrival. Answer: A Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 14) If you watch a football game on a cable TV, the cable TV is: A) an excludable good/service but nonrival in consumption. B) an excludable good/service and rival in consumption. C) a non-excludable good/service but rival in consumption. D) a non-excludable good/service and nonrival. Answer: A Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 15) If you watch a pay-per-view movie on a cable TV, the movie is: A) an excludable good/service but nonrival in consumption. B) an excludable good/service and rival in consumption. C) a non-excludable good/service but rival in consumption. D) a non-excludable good/service and nonrival. Answer: A Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 16) The breath-taking view of the San Francisco skyline at night is A) a non-excludable good/service and nonrival. B) a non-excludable good/service but rival in consumption. C) an excludable good/service and rival in consumption. D) an excludable good/service but nonrival in consumption. Answer: A Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 74 Copyright © 2020 Pearson Education, Inc.

17) Shows on broadcast TV, like ABC or NBC, are ________ and shows on cable TV, like MTV or HBO, are ________. A) nonexcludable; excludable B) excludable; nonexcludable C) rival; nonrival D) nonrival; nonexcludable Answer: A Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 18) When economists say that a good is nonrival in consumption, they mean that: A) no one wants the good. B) everyone wants the good. C) the good is widely available. D) more than one person can enjoy the good at the same time. Answer: D Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 19) An example of a good that is nonrival in consumption is: A) a campsite at Yellowstone National Park. B) a ticket to an Omnimax movie at the Smithsonian. C) the Lincoln Memorial in Washington, D.C. D) All of the above are nonrival in consumption. Answer: C Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

20) An example of a good that is nonrival in consumption is: A) a music CD. B) a radio broadcast of a song. C) a ticket to a concert. D) a guitar. Answer: B Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 21) An example of a good that is rival in consumption is: A) a radio program. B) a copy of an economics textbook. C) an economics web page. D) a lighthouse. Answer: B Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 22) An example of a good that is rival in consumption is: A) an air show over the whole city. B) a floral display at a large university's graduation ceremony. C) a scientific discovery that allows florists to grow flowers to which no one is allergic. D) a Big Mac. Answer: D Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 23) When economists say that a good is nonexcludable, they mean that: A) everybody wants it. B) there is no practical way to stop a person who does not pay from enjoying the good or service. C) more than one person can consume the good. D) everybody is willing to pay for it. Answer: B Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 76 Copyright © 2020 Pearson Education, Inc.

24) Suppose that a state installs a toll booth on a highway and requires drivers to pay $1.00 before entering the highway. Installation of the toll booth changes: A) a nonexcludable good into an excludable good. B) a nonrival good into a rival good. C) a public good into a private good. D) a nonrival good into a nonexcludable good. Answer: A Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 25) An example of a good that is excludable is: A) a park. B) a river. C) a boat. D) clean air. Answer: C Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 26) An example of a good that is excludable is: A) broadcast television. B) an outdoor sculpture visible from the street. C) an aerial fireworks display. D) a television set. Answer: D Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

27) An example of a good that is nonexcludable is: A) cable TV. B) a computer. C) a published scientific discovery. D) a concert. Answer: C Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 28) An example of a good that is nonexcludable is: A) an art exhibition with an admission fee. B) a piece of Velcro. C) space exploration. D) a bottle of Tang. Answer: C Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 29) A distinguishing feature of a public good is that it: A) is not possible to exclude people who don't pay for the public good. B) is possible to exclude people who pay for the public good. C) may have external costs. D) is provided by the government. Answer: A Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 30) An external benefit is the benefit experienced by people who: A) do not decide how much of the good to produce or consume. B) did not know why they are experiencing the benefit. C) decide how much of the good to produce or consume. D) consume the good. Answer: A Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 78 Copyright © 2020 Pearson Education, Inc.

31) The free-rider problem implies that: A) each person will pay the full cost of the public good. B) nobody wants the public good. C) everybody will pay a portion of the cost of the public good. D) each person will try to benefit from the public good without paying for it. Answer: D Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 32) When people try to benefit from a public good without paying for it, we call it the: A) free-rider problem. B) duopolists' dilemma. C) public goods problem. D) taxation problem. Answer: A Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 33) The free-rider problem occurs for: A) private goods and public goods. B) private goods but not public goods. C) public goods but not private goods. D) neither public nor private goods. Answer: C Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 34) The free-rider problem arises because: A) once provided, a public good is available to all regardless of whether they paid for it. B) poor people cannot afford to contribute to public goods. C) enforcement of tax laws is inadequate. D) people disagree with how the government spends its money. Answer: A Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 79 Copyright © 2020 Pearson Education, Inc.

35) Suppose 100 townspeople value a statue of the local hero at $1 each, and construction of the statue would cost $90. Which of the following is true? A) It would be efficient to build the statue, but it may not be built because some of the townspeople who value the statue will not contribute to its construction. B) It would be efficient to build the statue and it will be built because at least ninety of the townspeople will contribute to its construction. C) The statue will not be built because it is not efficient to build a statue that costs $90 if the townspeople value it at only $1. D) The statue will not be built because the local government does not have the power to tax only those who value it. Answer: A Diff: 3 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 36) When the government provides a public good by taxing citizens and using tax money to provide the good: A) the result is efficient if the total benefits of the public good is greater than the cost of providing it. B) the result is inefficient because the government is an inefficient provider of goods and services. C) the result is inefficient because if it were efficient the good would have been provided in a free market. D) the result is efficient only if voters specifically agreed to provision of that good. Answer: A Diff: 3 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 37) In a voluntary contributions experiment described at the end of the chapter, the chump is the individual who: A) is systematically exploited by others. B) contributes money to fund a public good equal to the benefits they ultimately receive. C) free-rides. D) contributes money to fund a public good much less than the benefits they ultimately receive. Answer: A Diff: 2 Topic: Behavioral Economics and Free Riding Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

38) If the voluntary contributions experiment described at the end of the chapter is played multiple times, we would expect: A) the voluntary contributions will be zero or close to zero. B) the voluntary contributions will exceed the amount required to provide the public good. C) the voluntary contributions will equal the amount required to provide the public good. D) the voluntary contributions will fall short of the amount required to provide the public good, but only by a small amount. Answer: A Diff: 2 Topic: Behavioral Economics and Free Riding Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 39) During pledge week your local public television station asks viewers to contribute to the station. People who watch public television but do NOT contribute are: A) free-riding. B) engaged in moral hazard. C) those who do not value public television. D) causing adverse selection. Answer: A Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 40) Which of the following is likely to overcome the free-rider problem? A) offer people a private gift for contributing B) arrange for matching contributions C) appeal to people's sense of civic or moral responsibility D) all of the above Answer: D Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

41) Which of the following is least likely to overcome the free-rider problem? A) offer people a private gift for contributing B) arrange for matching contributions C) appeal to people's sense of civic or moral responsibility D) maintain anonymity of contributions Answer: D Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 42) An appeal to people's sense of civic or moral responsibility will ________ the free-rider problem and lead to a ________ level of contribution to the public good. A) increase; smaller B) increase; larger C) reduce; smaller D) reduce; larger Answer: D Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 43) Offering contributors private goods such as coffee mugs, books, or magazine subscriptions will ________ the free-rider problem and lead to a ________ level of contribution to the public good. A) reduce; smaller B) reduce; larger C) increase; smaller D) increase; larger Answer: B Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

44) Arranging matching charitable contributions will ________ the free-rider problem and lead to a ________ level of contribution to the public good. A) increase; smaller B) increase; larger C) reduce; smaller D) reduce; larger Answer: D Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 45) A charity that used to make an appeal to people's sense of civic or moral responsibility, but no longer does, is likely to ________ the free-rider problem and lead to a ________ level of contribution to the public good. A) reduce; smaller B) reduce; larger C) increase; smaller D) increase; larger Answer: C Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 46) A charity that used to offer contributors private goods such as coffee mugs, books, or magazine subscriptions, but no longer does, is likely to ________ the free-rider problem and lead to a ________ level of contribution to the public good. A) increase; smaller B) increase; larger C) reduce; smaller D) reduce; larger Answer: A Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

47) A charity that used to arrange matching charitable contributions, but no longer does, is likely to ________ the free-rider problem and lead to a ________ level of contribution to the public good. A) reduce; smaller B) reduce; larger C) increase; smaller D) increase; larger Answer: C Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 48) Public Broadcasting, in its fund drives, often appeals to viewers by saying, "without you, there will be no Big Bird." This is likely to ________ the free-rider problem and lead to a ________ level of contribution to the public good. A) increase; smaller B) increase; larger C) reduce; smaller D) reduce; larger Answer: D Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 49) Public Broadcasting, in its fund drives, often arranges for a corporation to match donations made by its employees. This is likely to ________ the free-rider problem and lead to a ________ level of contribution to the public good. A) reduce; smaller B) reduce; larger C) increase; smaller D) increase; larger Answer: B Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

50) Public Broadcasting reads the names of local contributors on the air. This is likely to ________ the free-rider problem and lead to a ________ level of contribution to the public good. A) increase; smaller B) increase; larger C) reduce; smaller D) reduce; larger Answer: D Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources Recall the Application about space debris in the atmosphere to answer the following question(s). 51) Recall the Application. Which of the following is true? A) Over 20,000 pieces of junk as large as a softball are estimated to be orbiting the earth. B) Modern global positioning satellites (GPS) are at risk of colliding with orbital junk. C) Solving the space junk problem will require international cooperation. D) All of the above Answer: D Diff: 1 Topic: Application 5, Clearing Space Debris Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 52) Recall the Application. The clearing of space debris is a ________ good that ________ subject to the free-rider problem. A) private; is B) public; is C) private; is not D) public; is not Answer: B Diff: 1 Topic: Application 5, Clearing Space Debris Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

Recall the Application about the benefits generated when one country gathers information on global weather to answer the following question(s). 53) Recall the Application. Weather monitoring is: A) a public good. B) a private good. C) impossible because it requires international cooperation. D) efficiently provided by private markets because it is profitable. Answer: A Diff: 2 Topic: Application 6, Global Weather Observation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 54) Recall the Application. When the U.S. acquires and then shares weather data with organizations in other countries: A) both the U.S. economy and the economies of other countries benefit. B) the U.S. does not benefit and other countries free ride. C) the information is excludable and rival. D) the information is incomplete because no country can monitor oceans outside its own borders. Answer: A Diff: 2 Topic: Application 6, Global Weather Observation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 55) A market in which there are neither external benefits nor external costs is inefficient. Answer: FALSE Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 56) Externalities always consist of benefits that are not confined to the person or organization that decides how much of a good to produce or consume. Answer: FALSE Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

57) To be an example of a public good, a good must be both rival in consumption and nonexcludable. Answer: FALSE Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 58) A good is nonrival in consumption if it is not practical to exclude people who don't pay for it from enjoying its benefits. Answer: FALSE Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 59) A good is nonexcludable in consumption if it is not practical to exclude people who don't pay for it from enjoying its benefits. Answer: TRUE Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 60) If you can consume a good without having to pay for it, the good must be a public good. Answer: FALSE Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 61) If you can consume a good at the same time that others consume the same good, the good is nonrival in consumption. Answer: TRUE Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

62) Protecting endangered species is NOT an example of a public good because there are no external benefits associated with it. Answer: FALSE Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 63) Public goods are always provided by the government because private markets do not have an incentive to provide them. Answer: FALSE Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 64) If you can consume a good without having to pay for it, the good must be nonrival in consumption. Answer: FALSE Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 65) Fireworks on the night on July 4th are neither rival nor excludable. Answer: TRUE Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 66) The free-rider problem is larger for private goods than it is for public goods. Answer: FALSE Diff: 1 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources

67) Alissa is studying for her principles of economics exam. She tells her study partner that "Only a very small number of people ever get to become astronauts and go into space. Therefore space exploration is not a public good." Do you agree? Explain. Answer: Space exploration is a public good because it produces all sorts of scientific discoveries that everyone can share (such as Tang and Velcro) and adds to our understanding of the world in which we live. Therefore, it is nonrival in consumption. Since all people share in this benefit, it is also nonexcludable. Therefore, it is a public good. Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 68) Suppose that your local government provides drinking water and charges a 10 cent per gallon fee. Explain whether or not the drinking water is a public good. Answer: A good is defined as a public good when the consumption of the good is both nonrival and nonexcludable. Even if drinking water is provided by a local government, it is a publicly provided private good not only because it is rival in consumption but also because it is excludable (the supply of drinking water will be cut off if you do not pay). Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 69) Provide an intuitive explanation of the free-rider problem. Answer: Since a person's consumption of a public good is independent of how much he/she contributes to the public good, he/she will have the incentive to shirk on his/her contribution to the public good. Hence, people have the incentive to "free ride" off other contributors to the public good. Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 70) Explain intuitively why the market for a nonexcludable good fails to provide an efficient quantity. Answer: It takes resources to produce a good, irrespective of its excludability in consumption. If a good is not excludable, then producers of the good face the free-rider problem. If people have extremely strong incentives to free ride, nonexcludable goods will not be provided by private sectors. Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 89 Copyright © 2020 Pearson Education, Inc.

71) Global warming has become a major international environmental issue. Using the concept of externality, explain why countries around the world seldom reach an agreement to reduce the use of fossil fuels. Answer: External benefits are positive impacts of an individual or a party's action on other people's well-being. If a country does its share to abate pollution, neighboring countries enjoy external benefits without having to pay for it. Furthermore, since such external benefits are nonexcludable, neighboring countries tend to become free-riders. Diff: 2 Topic: Public Goods and the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 72) What are some of the ways a private group can overcome a free rider problem? Answer: Giving a private gift with a contribution, arranging matching contributions, and appealing to civic or moral responsibility by such methods as publicizing contributors names. Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 73) Why is it easier to raise $1 million in voluntary contributions for medical research into a deadly disease like cancer than it is to raise the same amount for space exploration? Answer: Many people will know someone who has died of the disease or will have heard a sad story about someone who died. This will give people a sense of civic or moral responsibility to help cure the disease. Space exploration is not likely to generate the same kind of response. Diff: 2 Topic: Overcoming the Free-Rider Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-23: Discuss the economics of public goods and common resources 9.6 The Efficient Level of Pollution 1) The efficient level of pollution abatement is where: A) the marginal benefit of abatement is greater than its marginal cost. B) the marginal benefit of abatement is less than its marginal cost. C) the marginal benefit of abatement is equal to its marginal cost. D) none of the above Answer: C Diff: 1 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 90 Copyright © 2020 Pearson Education, Inc.

2) The marginal principle ________ to the determination of the efficient level of pollution abatement because ________. A) applies; there are tradeoffs in terms of the costs and benefits of pollution abatement B) applies; pollution abatement causes greater harm than benefits C) does not apply; it is immoral to trade a dirtier environment for material wealth D) does not apply; the costs and benefits of pollution abatement cannot be measured Answer: A Diff: 2 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 3) In which of the following situations should a firm reduce its efforts to abate pollution? A) The marginal benefit of abatement is less than its marginal cost. B) The marginal benefit of abatement is greater than its marginal cost. C) The marginal benefit of abatement is equal to its marginal cost. D) None of the above Answer: A Diff: 1 Topic: Using the Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 4) In which of the following situations should a firm increase its efforts to abate pollution? A) The marginal benefit of abatement is less than its marginal cost. B) The marginal benefit of abatement is greater than its marginal cost. C) The marginal benefit of abatement is equal to its marginal cost. D) None of the above Answer: B Diff: 1 Topic: Using the Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

5) If the marginal benefit of reducing water pollution is constant at $10 per ton, then it is efficient to reduce water pollution: A) to zero. B) until the marginal cost of reducing water pollution equals $10 per ton. C) as long as the marginal cost of reducing water pollution is greater than $10 per ton. D) to whatever level the market determines. Answer: B Diff: 2 Topic: Example: The Efficient Level of Water Pollution Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 6) If the marginal benefit from water pollution abatement increases, then it is efficient to: A) reduce water pollution to zero. B) allow more water pollution. C) let the market determine water pollution D) reduce water pollution further, but maybe not to zero. Answer: D Diff: 2 Topic: Example: The Efficient Level of Water Pollution Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 7) The Coase bargaining solution is named after: A) Ronald Coase. B) John Coase. C) William G. Coase. D) Alexander Coase. Answer: A Diff: 2 Topic: Coase Bargaining Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

8) The Coase bargaining solution applies to a situation when there is a ________ number of affected parties, and the transactions costs of bargaining are relatively ________. A) large; high B) large; low C) small; high D) small; low Answer: D Diff: 2 Topic: Coase Bargaining Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 9) Under a Coase bargaining solution, deal making between the two parties continues until the marginal ________ to the harmed party equals the marginal ________ to the other party. A) benefit; benefit B) benefit; cost C) cost; benefit D) cost; cost Answer: B Diff: 2 Topic: Coase Bargaining Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 10) Suppose a steel mill pollutes the lake and harms a fishing firm. Under a Coase bargaining solution, an efficient solution exists between the two entities if: A) the property rights to the lake is assigned to the fishing firm. B) the property rights to the lake is assigned to the steel firm. C) the property rights to the lake is assigned to the government. D) the property rights to the lake is assigned, regardless to whom it is assigned, the steel mill or the fishing firm. Answer: D Diff: 2 Topic: Coase Bargaining Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

Recall the Application about determining the optimal level of methane abatement to answer the following question(s). 11) Recall the Application. Applying the marginal principle to methane reduction suggests that efforts at reduction should: A) target the sources of methane that are cheapest to abate, or recover, first. B) target the most costly to recover sources of methane first. C) continue until methane is reduced to zero metric tons because the harm from methane is so high. D) not be undertaken because livestock is one of the major sources of methane, and livestock is not an industrial source of pollution. Answer: A Diff: 2 Topic: Application 7, Reducing Methane Emissions Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 12) Recall the Application. The EPA has estimated the cost of methane recovery at different recovery levels. Given those costs, the efficient level of methane recovery: A) depends on the estimate of the marginal benefit of methane recovery. B) is zero because the costs exceed the benefits. C) will increase if scientists determine that methane is not as harmful as it is currently thought to be. D) will include only recovery from landfills and coal mines, but not from natural gas distribution. Answer: A Diff: 2 Topic: Application 7, Reducing Methane Emissions Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 13) It is efficient to reduce pollution to zero. Answer: FALSE Diff: 2 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

14) It is efficient not to alter the amount of pollution produced by the market. Answer: FALSE Diff: 2 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 15) It is efficient to reduce pollution up until the marginal benefit from reducing the pollution equals the marginal cost of abatement. Answer: TRUE Diff: 1 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 16) Pollution imposes costs on people and firms other than those involved in producing or consuming the product that produces pollution. Answer: TRUE Diff: 1 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 17) If the marginal cost of water pollution abatement is increased, then the optimal amount of water pollution increases. Answer: FALSE Diff: 2 Topic: Example: The Efficient Level of Water Pollution Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 18) Coase bargaining works best in a situation with a large number of affected parties and the transactions costs of bargaining are relatively low. Answer: FALSE Diff: 2 Topic: Coase Bargaining Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

19) What is the economic rule for the efficient amount of pollution? Answer: It is efficient to reduce pollution up until the marginal benefit from reducing the pollution equals the marginal cost of abatement. Diff: 1 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 20) Why does it usually NOT make sense to reduce pollution to zero? Answer: The marginal benefits from reducing pollution are likely declining while the marginal costs are usually rising. If pollution is reduced to zero, it will be very costly to reduce the last few increments of pollution with little benefit to society. Diff: 2 Topic: Using the Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 9.7 Taxing Pollution 1) A pollution tax: A) is a method used to internalize external costs. B) will not affect the price of the good being produced. C) does not affect the quantity of a good demanded. D) is a method used to externalize internal costs. Answer: A Diff: 1 Topic: Taxing Pollution Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 2) Producers will take external costs into account when: A) they actually have to pay those costs. B) environmental groups apply sufficient pressure and generate negative press coverage. C) those costs are less than the benefits. D) those costs are less than the private costs. Answer: A Diff: 2 Topic: Taxing Pollution Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

3) The social cost of production is: A) the private cost of production plus the external cost generated by production. B) the external cost generated by production. C) the private cost of production that is greater than the benefit of production. D) the external cost of production that is greater than the benefit of production. Answer: A Diff: 1 Topic: Taxing Pollution Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 4) A pollution tax: A) decreases the price of the good taxed. B) increases the price of the good taxed. C) does not affect the quantity demanded of the good taxed. D) does not affect the price of the good taxed. Answer: B Diff: 1 Topic: Taxing Pollution Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 5) If a pollution tax imposed on a firm is smaller than the external cost: A) the externality is completely internalized. B) the social production cost increases by the amount of the pollution tax. C) the pollution tax transfers the full cost borne by people outside the firm back to the firm itself. D) from society's viewpoint, the firm is producing too much. Answer: D Diff: 2 Topic: A Firm's Response to a Pollution Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 6) If a pollution tax imposed on a firm is greater than its external cost: A) the externality will be fully internalized. B) the social production cost will increase by the amount of the pollution tax. C) the pollution tax will be efficient. D) from a society's point of view, the firm will be producing too little. Answer: D Diff: 2 Topic: A Firm's Response to a Pollution Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 97 Copyright © 2020 Pearson Education, Inc.

7) In order to achieve an efficient result, a pollution tax must: A) be equal to the external cost generated. B) not be passed through to the consumers of the produced good. C) be equal to the social cost of production. D) be shared equally by the producer and the consumer of the produced good. Answer: A Diff: 2 Topic: A Firm's Response to a Pollution Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 8) Because pollution taxes raise the costs of production for firms, firms: A) will lower prices to consumers. B) must receive a higher price at every level of output. C) will increase the quantity produced at every price. D) will quit producing goods that generate pollution. Answer: B Diff: 1 Topic: A Firm's Response to a Pollution Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 9) A pollution tax will: A) always be paid entirely by producers. B) not change the price buyers pay for a good. C) be shared between buyers and sellers. D) always be paid entirely by buyers in the form of a price increase equal to the amount of the tax. Answer: C Diff: 1 Topic: A Firm's Response to a Pollution Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

Figure 9.7 10) A firm that generates pollution is illustrated in Figure 9.7. If the government would like to induce this firm to abate, or reduce, its pollution by A1 tons, it will impose a pollution tax equal to: A) P1. B) P1 minus P3. C) P2. D) P2 minus P3. Answer: A Diff: 1 Topic: A Firm's Response to a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 11) A firm that generates pollution is illustrated in Figure 9.7. If the government imposes a pollution tax equal to P3, the firm's abatement choice will be: A) A1. B) A2. C) A3. D) less than A1. Answer: C Diff: 1 Topic: A Firm's Response to a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 99 Copyright © 2020 Pearson Education, Inc.

12) A firm that generates pollution is illustrated in Figure 9.7. If the government imposes a pollution tax equal to P2, and the firm's abatement level is A3, the firm is: A) abating more than is optimal for the firm. B) abating less than is optimal for the firm. C) choosing an abatement level that is optimal. D) violating the environmental protection laws. Answer: A Diff: 2 Topic: A Firm's Response to a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 13) A firm that generates pollution is illustrated in Figure 9.7. If the government imposes a pollution tax equal to P1, the marginal benefit to the firm of abating A2 is: A) P1. B) P2. C) P1 - P2. D) P2 - P3. Answer: A Diff: 2 Topic: A Firm's Response to a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 14) A firm that generates pollution is illustrated in Figure 9.7. If the government imposes a pollution tax equal to P2 and the firm chooses abatement level A3: A) the marginal cost of abating is greater than the marginal benefit of abating. B) the marginal benefit of abating is greater than the marginal cost of abating. C) the firm is choosing optimally. D) the firm is in violation of environmental protection laws. Answer: A Diff: 2 Topic: A Firm's Response to a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

15) A firm that generates pollution is illustrated in Figure 9.7. The government has chosen to impose a pollution tax equal to P2. From the firm's point of view, the marginal benefit of abatement is: A) avoiding the pollution tax imposed by the government. B) the positive publicity the firm will receive by having a "green" production plant. C) the reciprocal of the marginal cost of abatement. D) zero because abatement benefits the general public, not the firm. Answer: A Diff: 2 Topic: A Firm's Response to a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 16) A firm that generates pollution is illustrated in Figure 9.7. Suppose the government is considering changing the pollution tax from P3 to P2. That new policy would: A) increase the marginal benefit to firms of abating, and thus encourage greater abatement. B) increase the marginal benefit to firms of abating, causing them to generate more pollution. C) reduce the marginal benefit to firms of abating, causing them to generate more pollution. D) reduce the marginal benefit to firms of abating, and thus encourage greater abatement. Answer: C Diff: 3 Topic: A Firm's Response to a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 17) Because pollution taxes raise production costs, the ________ curve ________. A) supply; shifts to the right B) supply; shifts to the left C) supply; does not change D) demand; shifts to the right Answer: B Diff: 2 Topic: The Market Effects of a Pollution Tax Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

18) Suppose Johnson's Rubber Factory belches black smoke into the air over the city of Bellowsville. If the city of Bellowsville attempts to internalize the external costs associated with the production of rubber with a pollution tax, we can expect: A) the price of rubber not to change. B) the price of rubber to increase. C) the quantity of rubber demanded to increase. D) no change in the quantity of rubber demanded. Answer: B Diff: 2 Topic: The Market Effects of a Pollution Tax Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 19) Suppose Johnson's Rubber Factory belches black smoke into the air over the city of Bellowsville. If the city of Bellowsville attempts to internalize the external costs associated with the production of rubber with a pollution tax, then we expect: A) at each price, a smaller quantity of rubber will be supplied by Johnson's Rubber Factory. B) at each price, a larger quantity of rubber will be supplied Johnson's Rubber Factory. C) Johnson's Rubber Factory will not change the amount of rubber supplied at each price. D) Johnson's production costs not to change. Answer: A Diff: 2 Topic: The Market Effects of a Pollution Tax Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 20) Suppose Johnson's Rubber Factory belches black smoke into the air over the city of Bellowsville. If the city of Bellowsville attempts to internalize the external costs associated with the production of rubber with a pollution tax, then we expect: A) a leftward shift of Johnson's supply curve. B) a rightward shift of Johnson's supply curve. C) no change in Johnson's supply curve. D) a leftward shift in the demand curve for Johnson's rubber. Answer: A Diff: 2 Topic: The Market Effects of a Pollution Tax Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

21) Pollution taxes reduce pollution by: A) decreasing the amount of the good sold that causes the pollution. B) causing firms to produce less of the good that generates the pollution. C) encouraging firms to modify their production process to reduce emissions. D) all of the above Answer: D Diff: 2 Topic: The Market Effects of a Pollution Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

Figure 9.8 22) Consider Figure 9.8, which depicts the supply and demand for coal. Assume coal production creates external costs. If PE and QE are the equilibrium price and quantity of coal without government regulation, a pollution tax on the production of coal would ________ the price of coal relative to PE and ________ the quantity of coal relative to QE. A) increase; decrease B) increase; not change C) decrease; not change D) decrease; decrease Answer: A Diff: 2 Topic: The Market Effects of a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

23) Consider Figure 9.8, which depicts the supply and demand for coal. Assume coal production creates external costs. If the government imposes a pollution tax on coal production, the: A) supply curve of coal would shift to the left. B) supply curve of coal would shift to the right. C) demand curve for coal would shift to the left. D) demand and supply curves for coal would shift to the left. Answer: A Diff: 2 Topic: The Market Effects of a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 24) If a firm is taxed for each unit of waste it produces, the firm will decrease the amount of waste produced until: A) there is no waste produced. B) the marginal cost from decreasing waste is zero. C) the marginal cost of decreasing waste is equal to the marginal benefit from decreasing waste. D) the marginal benefit from decreasing waste is equal to zero. Answer: C Diff: 2 Topic: The Market Effects of a Pollution Tax, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

Figure 9.9 25) Figure 9.9 depicts a market for electricity. S1 is the supply curve without the external costs. S2 is the supply curve with the $T tax. Assume electricity production incurs external costs. If the government imposes a pollution tax of $T per mega watt: A) the supply curve will shift to the right. B) the supply curve will shift to the left. C) demand curve will shift to the right. D) demand curve will shift to the left. Answer: B Diff: 2 Topic: The Market Effects of a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 26) Figure 9.9 depicts a market for electricity. S1 is the supply curve without the external costs. S2 is the supply curve with the $T tax. Assume electricity production incurs external costs. If the government imposes a pollution tax of $T per mega watt: A) the equilibrium price of electricity increases but the equilibrium output decreases. B) the equilibrium price of electricity decreases but the equilibrium output increases. C) both the equilibrium price and output increase. D) both the equilibrium price and output decrease. Answer: A Diff: 2 Topic: The Market Effects of a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 105 Copyright © 2020 Pearson Education, Inc.

27) Figure 9.9 depicts a market for electricity. S1 is the supply curve without the external costs. S2 is the supply curve with the $T tax. Assume electricity production incurs external costs. If the government imposes the pollution tax in the amount illustrated, the amount of the pollution tax shifted forward on to consumers is: A) PA - PB. B) PA - PC. C) PB - PC. D) (1/2)∙(PB - PC). Answer: A Diff: 3 Topic: The Market Effects of a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 28) Figure 9.9 depicts a market for electricity. S1 is the supply curve without the external costs. S2 is the supply curve with the $T tax. Assume electricity production incurs external costs. If the government imposes a pollution tax in the amount illustrated, the amount of the pollution tax borne by the electricity producers is: A) PA - PB. B) PA - PC. C) PB - PC. D) (1/2)∙(PA - PB). Answer: C Diff: 3 Topic: The Market Effects of a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 29) Figure 9.9 depicts a market for electricity. S1 is the supply curve without the external costs. S2 is the supply curve with the $T tax. Assume electricity production incurs external costs. If the government imposes a pollution tax, the price of a mega-watt of electricity will increase by: A) PA - PB. B) PA - PC. C) PB - PC. D) 1/2 (PA - PC). Answer: A Diff: 2 Topic: The Market Effects of a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 106 Copyright © 2020 Pearson Education, Inc.

30) Which of the following is NOT an advantage of a pollution tax? A) It allows firms to equate its marginal abatement cost and the marginal benefit (tax savings). B) It allows a low-cost firm to abate more. C) It provides firms an incentive to invest in pollution abatement technologies. D) It allows us to predict the total volume of pollution that will be discharged. Answer: D Diff: 2 Topic: The Market Effects of a Pollution Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

Figure 9.10 31) The pollution tax in Figure 9.10: A) reduces equilibrium output. B) reduces equilibrium price. C) increases supply. D) all of the above Answer: A Diff: 2 Topic: The Market Effects of a Pollution Tax, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

32) The pollution tax in Figure 9.10: A) reduces equilibrium output. B) reduces pollution associated with the production of the good. C) raises equilibrium price. D) all of the above Answer: D Diff: 2 Topic: The Market Effects of a Pollution Tax, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 33) The pollution tax in Figure 9.10: A) increases equilibrium output. B) internalizes the pollution externality. C) increases supply. D) all of the above Answer: B Diff: 2 Topic: The Market Effects of a Pollution Tax, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 34) The pollution tax in Figure 9.10: A) increases equilibrium output. B) decreases equilibrium price. C) gives the firm an incentive to switch to a cleaner production process. D) all of the above Answer: C Diff: 2 Topic: The Market Effects of a Pollution Tax, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 35) The IPCC is an acronym that stands for: A) International Panel on Climate Change. B) International Plant Cultivation Committee. C) Intergenerational Pact on Carbon Conservation. D) International Proponents of Carbon Conservation. Answer: A Diff: 2 Topic: Example: A CO2 Tax Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 108 Copyright © 2020 Pearson Education, Inc.

36) Studies have shown that a $30 tax per ton of carbon translates to an increase in the price of gasoline by: A) $0.27 per gallon. B) $1.00 per gallon. C) $2.00 per gallon. D) $0.01 per gallon. Answer: A Diff: 2 Topic: Example: A CO2 Tax Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 37) If the U.S. were to place a carbon tax on fossil fuels, we can expect: A) the price of fuel oil to decrease. B) the price of fuel oil to increase. C) no change in the price of fuel oil. D) an increase in demand for fuel oil. Answer: B Diff: 2 Topic: Example: A CO2 Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 38) A carbon tax on fossil fuels is likely to cause the price of goods produced by firms that use fossil fuels to: A) decrease. B) not change. C) increase. D) change, but in a way that cannot be determined. Answer: C Diff: 1 Topic: Example: A CO2 Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

39) A carbon tax placed on a fossil fuel: A) is a pollution tax based on the carbon content of the fuel. B) is a form of marketable pollution permit. C) is often used in conjunction with command-and-control carbon policies. D) will not change the price of the fossil fuel taxed. Answer: A Diff: 2 Topic: Example: A CO2 Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 40) A carbon tax placed on coal will ________ the price of coal and ________ the quantity sold of coal. A) raise; decrease B) raise; increase C) lower; decrease D) lower; increase Answer: A Diff: 2 Topic: Example: A CO2 Tax Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 41) A carbon tax placed on coal will: A) shift the supply curve for coal to the right. B) shift the supply curve for coal to the left. C) not affect the supply curve for coal. D) decrease the demand for coal. Answer: B Diff: 2 Topic: Example: A CO2 Tax Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

42) A carbon tax placed on coal would: A) raise the costs of goods produced using coal, raising their price, and thus decreasing the quantity demanded of these goods. B) not affect emissions of greenhouse gases. C) shift the demand curve for coal to the right. D) make coal a more attractive form of energy. Answer: A Diff: 2 Topic: Example: A CO2 Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 43) A carbon tax placed on coal: A) would decrease the price of coal. B) would cause some producers of goods and services, like cars, to switch to other forms of energy. C) is unlikely to affect the demand for alternative forms of energy. D) would increase the quantity of coal demanded at every price. Answer: B Diff: 1 Topic: Example: A CO2 Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 44) A carbon tax could reduce greenhouse emissions by: A) raising the price of gasoline and reducing driving. B) raising the price of electricity, reducing the quantity of electricity demanded, and reducing the fossil fuels burned. C) cause electricity producers to switch to lower carbon fuels. D) all of the above Answer: D Diff: 2 Topic: Example: A CO2 Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

Recall the Application about how to wash carbon out of the air to answer the following question(s). 45) This Application deals with the problem of ________ emissions in the atmosphere. A) fracking B) smog C) carbon D) none of the above Answer: C Diff: 1 Topic: Application 8, Washing Carbon Out of the Air Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 46) Recall the Application. Assume a firm that produces CO2 has a marginal cost of abatement of $90 per ton and faces a carbon tax of $70 per ton. If the cost of carbon washing is $50 per ton, the firm could save ________ per ton and emit ________ carbon into the atmosphere by using a carbon washing machine. A) $40; less B) $40; more C) $20; less D) $20; more Answer: C Diff: 1 Topic: Application 8, Washing Carbon Out of the Air Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 47) Recall the Application. What should change in the future in order for the carbon washing machines to be more widely used? A) The technology must improve enough to drop the cost per ton of carbon washed. B) The government must disseminate the existence of the new technology. C) The carbon tax must decrease enough to make the carbon washing machines more practical. D) The atmosphere must become even more polluted before it makes the technology financially viable. Answer: A Diff: 1 Topic: Application 8, Washing Carbon Out of the Air Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

48) A pollution tax internalizes the costs of pollution a firm is imposing on others. Answer: TRUE Diff: 1 Topic: Taxing Pollution Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 49) A pollution tax allows a firm to externalize some of its internal costs. Answer: FALSE Diff: 1 Topic: Taxing Pollution Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 50) As the volume of waste decreases (holding the amount of paper produced constant), the production cost per ton of paper increases at a decreasing rate because the firm must use increasingly sophisticated abatement equipment to decrease the volume of waste. Answer: FALSE Diff: 1 Topic: A Firm's Response to a Pollution Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 51) Under a system of pollution taxes, we expect firms to cut pollution until the marginal benefit from tax savings equals the marginal increase in production costs due to decreasing pollution. Answer: TRUE Diff: 1 Topic: A Firm's Response to a Pollution Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 52) In a competitive market, a pollution tax increases the equilibrium price of the polluting good, decreases the equilibrium quantity, and decreases the volume of waste. Answer: TRUE Diff: 1 Topic: The Market Effects of a Pollution Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

53) A carbon tax will raise the price of an energy-intensive good such as steel. Answer: TRUE Diff: 1 Topic: Example: A CO2 Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 54) A carbon tax would increase the total volume of greenhouse gases. Answer: FALSE Diff: 1 Topic: Example: A CO2 Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 55) Explain what is meant by "internalizing an externality," and describe three methods by which this can be done. Answer: An externality occurs when the actions of one agent affect other agents. In the case of a negative externality, the action adversely affects other agents, and so the agent taking the action faces artificially low costs. For example, when a firm creates pollution as a by-product of its production process, this adversely affects others. Internalizing the externality involves making the firm face the true cost to society of its production process, including the damages inflicted on other parties. This can be done by levying a pollution tax equal to the value of the damages done to others, or by controlling the output of the firm through either command-and-control methods or by issuing pollution permits. All of these will increase the cost of production to the firm, with the goal of bringing the cost that the firm actually faces closer to the actual cost to all agents (including the firm) in the economy. Diff: 2 Topic: Taxing Pollution Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 56) What is the purpose of a pollution tax? Answer: The purpose of a pollution tax is to make the firm fully realize the costs it imposes on society. That is, to make the firm internalize the external costs imposed on society by its production. Diff: 2 Topic: Taxing Pollution Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

57) How does a pollution tax work? Answer: A pollution tax raises a firm's private costs, decreasing supply, and reducing exchange and consumption of the product, thereby reducing pollution. Avoiding the tax is an incentive for the firm to reduce pollution. Diff: 2 Topic: Taxing Pollution Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 58) Describe the market effects of a carbon tax. Answer: A carbon tax will shift the supply curve of the taxed good to the left, leading to increased price and reduced quantity. Diff: 2 Topic: Example: A CO2 Tax Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 9.8 Traditional Regulation 1) A uniform-abatement policy is: A) inefficient because it does not exploit the differences in abatement costs among firms. B) efficient because an equal amount of pollution is assigned to each firm. C) inefficient because it incurs relatively low compliance costs. D) efficient because it helps firms lower their production costs. Answer: A Diff: 2 Topic: Uniform Abatement with Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 2) Suppose that there are two firms, each generating three tons of SO2. Suppose also that the government has set a target abatement level of two tons. Under a policy of uniform abatement with permits, each firm would receive: A) two non-transferable pollution permits. B) two pollution permits which they could sell to each other. C) one pollution permit with a value equal to that firm's cost of abating one ton of SO2. D) one pollution permit with a value equal to the market price for a pollution permit. Answer: A Diff: 2 Topic: Uniform Abatement with Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 115 Copyright © 2020 Pearson Education, Inc.

3) Suppose that there are two firms, each generating three tons of SO2. Suppose also that the government has set a target abatement level of two tons. Under a policy of uniform abatement with permits, the firm with the lower marginal abatement cost: A) will abate exactly the same amount of SO2 as the firm with the higher marginal abatement cost. B) will abate less SO2 than the firm with the higher marginal abatement cost. C) will abate more SO2 than the firm with the higher marginal abatement cost. D) will sell its pollution permit to the firm with the higher marginal abatement cost. Answer: A Diff: 2 Topic: Uniform Abatement with Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 4) Compared to a pollution tax, a policy of uniform abatement with permits is: A) less efficient. B) more efficient. C) exactly as efficient. D) either more or less efficient depending on the number of firms affected. Answer: A Diff: 1 Topic: Uniform Abatement with Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 5) If the government attempts to control pollution with a command-and-control policy: A) the government will command each firm to produce no more than a certain level of pollution. B) the government will control the firm's entire production process. C) the government will force the firm to use particular pollution-control technologies. D) all of the above Answer: D Diff: 1 Topic: Command and Control Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

6) A command-and-control policy is one in which: A) the government commands each firm to produce no more than a certain level of pollution. B) the government controls the firm's advertising policy. C) the government forces the firm to use particular pollution-control technologies. D) Both A and C are correct answers. Answer: D Diff: 1 Topic: Command and Control Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 7) A command-and-control policy: A) usually does not result in the use of the most efficient pollution abatement technology. B) does not affect the production costs of firms. C) usually finds the most efficient pollution abatement technology. D) increases the incentive for firms to develop efficient abatement technologies. Answer: A Diff: 1 Topic: Command and Control Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 8) A command-and-control policy: A) is unlikely to have any impact on the amount of pollution emitted. B) does not affect the production costs of firms. C) usually finds the most efficient pollution abatement technology. D) decreases the incentive for firms to develop efficient abatement technologies. Answer: D Diff: 1 Topic: Command and Control Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

9) As compared to a pollution tax, a command-and-control policy will increase production costs by a ________ amount and increase equilibrium price by a ________ amount. A) larger; larger B) larger; smaller C) smaller; larger D) smaller; smaller Answer: A Diff: 2 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 10) As compared to a pollution tax, a command-and-control policy will: A) increase production costs by a smaller amount. B) increase price by a smaller amount. C) shift the supply curve to the left by a smaller amount. D) shift the supply curve to the left by a larger amount. Answer: D Diff: 2 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 11) Command-and-control policies usually: A) result in higher costs for firms when compared to pollution taxes. B) don't raise prices as much to consumers as do pollution taxes. C) result in less pollution being produced than when pollution taxes are used. D) result in lower costs for firms when compared to pollution taxes. Answer: A Diff: 2 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

12) Command-and-control policies usually: A) reduce the production of a polluting good more than do pollution taxes. B) reduce the production of a polluting good less than do pollution taxes. C) increase price less than do pollution taxes. D) decrease the quantity demanded by less than do pollution taxes. Answer: B Diff: 2 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 13) Comparing a uniform abatement policy, pollution tax and a command-and-control policy, which one is the most efficient approach in dealing with pollution? A) pollution tax B) uniform abatement C) command-and-control D) All of the above are equally efficient. Answer: A Diff: 2 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 14) Command-and-control policies: A) allow a low-cost firm to abate more pollution. B) encourage firms to develop more efficient abatement technologies. C) usually result in relatively low compliance costs. D) allow us to predict the total amount of pollution that will be discharged. Answer: D Diff: 2 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

15) Firms are likely to prefer a pollution tax to a command-and-control policy because the command-and-control policy will: A) increase the costs of production more than a pollution tax. B) result in the price of the good rising more than under a pollution tax. C) result in consumers buying less of the good than under a pollution tax. D) all of the above Answer: D Diff: 2 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 16) An advantage offered by pollution taxes that is NOT offered by command-and-control policies is that: A) under pollution taxes, pollution is usually reduced to zero. B) a pollution tax decreases the price of the polluting good. C) under pollution taxes, the government receives tax revenues that may be used to clean up pollution. D) pollution taxes decrease the demand for the good generating the pollution. Answer: C Diff: 1 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 17) An advantage of pollution taxes that is NOT offered by command-and-control policies is that: A) with a pollution tax, zero pollution is produced. B) a pollution tax decreases the price of the polluting good. C) with a pollution tax, firms have flexibility in their choice of strategies to use to clean up pollution. D) a pollution tax decreases the demands for goods that cause pollution. Answer: C Diff: 1 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

18) Tax revenues are an advantage of ________, which are not offered by command-and-control policies. A) pollution allowances B) tradeable pollution permits C) pollution taxes D) pollution tax credits Answer: C Diff: 1 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency Recall the Application about reducing pollution generated from international shipping to answer the following question(s). 19) Recall the Application. Of the following CO2 reduction methods for international shipping, which has the lowest marginal abatement cost (MAC)? A) weather-sensitive routing B) switching from diesel to gas-powered engines C) reducing speed and increasing fleet size D) installing fixed sails and wings Answer: A Diff: 1 Topic: Application 9, Options for Reducing CO2 Emissions from International Shipping Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 20) Recall the Application. Of the following CO2 reduction methods for international shipping, which has the highest marginal abatement cost (MAC)? A) weather-sensitive routing B) switching from diesel to gas-powered engines C) reducing speed and increasing fleet size D) installing fixed sails and wings Answer: D Diff: 1 Topic: Application 9, Options for Reducing CO2 Emissions from International Shipping Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

21) Command-and-control policies are undesirable ways of reducing pollution because the means of abatement they mandate may not be efficient for all firms. Answer: TRUE Diff: 1 Topic: Command and Control Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 22) Command-and-control policies are desirable because their tough pollution reduction targets force firms to develop new technologies to survive. Answer: FALSE Diff: 1 Topic: Command and Control Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 23) Command-and-control policies generally reduce pollution more than pollution taxes do. Answer: FALSE Diff: 1 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 24) Command-and-control policies lead to higher prices for consumers than pollution taxes do. Answer: TRUE Diff: 1 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

25) What are the benefits of using a pollution tax rather than a command-and-control system to internalize an externality? Answer: A pollution tax will generate less pollution than a command-and-control policy, since the firm is free to choose either to pay the tax or to come up with a pollution control system that is less costly than the tax. Since firms differ in their production methods, command-and-control policies, which mandate the method of pollution control to the firm, might not be the most efficient method for that firm to use. A pollution tax will also lead to lower prices for the consumers, since the firm can most likely find a cheaper way to control pollution than the method mandated by the government. Finally, a pollution tax generates revenues for the government that might be used to assist with the pollution abatement. Diff: 2 Topic: Market Effects of Pollution Regulations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 9.9 Marketable Pollution Permits 1) Under a system of marketable pollution permits, the government: A) chooses a level of pollution. B) distributes permits to polluting firms. C) allows firms to trade permits. D) all of the above Answer: D Diff: 1 Topic: Marketable Pollution Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 2) Under a system of marketable pollution permits: A) pollution will increase. B) firms may trade the right to pollute a certain amount. C) firms can only buy the right to pollute from the government. D) the government is not involved. Answer: B Diff: 1 Topic: Marketable Pollution Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

3) Another name for a system of marketable permits is: A) cap-and-trade. B) command and control. C) the Environmental Protection Agency. D) the carbon tax. Answer: A Diff: 1 Topic: Marketable Pollution Permits Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 4) Under a system of marketable pollution permits: A) firms with lower costs of reducing emissions are likely to sell permits to those with higher costs of reducing emissions. B) environmentalists can decrease pollution by purchasing permits. C) the government can decrease the amount of pollution to the desired level. D) all of the above are correct. Answer: D Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 5) Under a system of marketable pollution permits: A) firms can trade away their right to pollute. B) the amount of pollution an individual firm can generate is determined by the number of permits issued to it by the government. C) the production costs for firms are not affected. D) the government controls the production process of firms who pollute. Answer: A Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

6) Which of the following is necessary for a system of marketable pollution permits to lead to beneficial trades between polluting companies? A) Companies must have common abatement costs. B) There must be differences in abatement costs between companies. C) Company owners must have a social conscience and must be devoted to pollution abatement. D) The government must direct companies toward beneficial trades. Answer: B Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 7) If two firms have different abatement costs, in a system of marketable pollution permits: A) the firm with lower abatement costs will sell permits to the firm with higher abatement costs. B) the firm with lower abatement costs will purchase permits from the firm with higher abatement costs. C) no voluntary exchange that makes both firms better off is possible. D) voluntary exchange will occur, but it is impossible to determine which firm will be the seller and which will be the purchaser. Answer: A Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 8) What is the highest price that a firm would be willing to pay for one marketable pollution permit? A) an amount equal to the purchasing firm's marginal abatement cost B) an amount equal to the social benefit of pollution reduction C) an amount determined by supply and demand in the market D) an amount equal to the selling firm's marginal abatement cost Answer: A Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

9) Suppose Jones's company and Smith's company both pollute. Under a system of marketable pollution permits, which of the following must be true in order for Smith and Jones to benefit from trading the right to pollute? A) Smith and Jones must be able to reduce pollution at exactly the same cost. B) Smith and Jones must have different abatement costs. C) Smith and Jones must have a social conscience and must be devoted to pollution abatement. D) The government must direct Smith and Jones toward beneficial trades. Answer: B Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 10) Suppose an oil refinery and a paper mill both pollute a river. Under a system of marketable pollution permits, which of the following must be true in order for both companies to benefit from trading the right to pollute? A) They must be able to reduce pollution at exactly the same cost. B) It must cost the firms different amounts to reduce pollution. C) They must have a social conscience and must be devoted to pollution abatement. D) The government must direct them toward beneficial trades. Answer: B Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 11) As long as two firms have different abatement costs, they: A) can benefit under a system of marketable pollution permits by trading the right to pollute. B) will prefer a pollution tax to a system of marketable pollution permits. C) will decrease the price of their product if taxed on the amount of pollution they emit. D) will not be able to benefit from trading the right to pollute under a system of marketable pollution permits. Answer: A Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

Table 9.5 12) Given the data in Table 9.5, if Firm A were to reduce pollution from 1,000 gallons of wastewater per day to 0 gallons per day, production costs: A) would increase by $12. B) would decrease by $12. C) would not change. D) cannot be calculated from the information above. Answer: A Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 13) If each firm depicted in Table 9.5 is currently generating 1,000 gallons of wastewater per day, Firm B would be willing to pay up to ________ to Firm A to be able to generate 2,000 gallons of wastewater per day. A) $15 B) $20 C) $35 D) $120 Answer: A Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 14) If each firm depicted in Table 9.5 is currently generating 1,000 gallons of wastewater per day, Firm A would need to be paid at least ________ from Firm B to reduce wastewater production to 0 gallons per day. A) $20 B) $15 C) $12 D) $3 Answer: C Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 127 Copyright © 2020 Pearson Education, Inc.

15) Both firms depicted in Table 9.5 can benefit if Firm A sells its pollution permit allowing it to generate 1,000 gallons of wastewater to Firm B for: A) a price between $12 and $15. B) a price between $0 and $6. C) a price greater than $20. D) It is not possible for firms to benefit if Firm A sells a permit to Firm B. Answer: A Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

Table 9.6 16) Given the data in Table 9.6, if Firm A were to reduce pollution from 100 gallons of wastewater per day to 0 gallons per day, production costs: A) would increase by $7. B) would decrease by $7. C) would not change. D) cannot be calculated from the information above. Answer: A Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 17) Consider the data in Table 9.6. If each firm is currently generating 100 gallons of wastewater per day, Firm B would be willing to pay up to ________ to Firm A to be able to generate 200 gallons of wastewater per day. A) $10 B) $12 C) $28 D) $200 Answer: B Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 128 Copyright © 2020 Pearson Education, Inc.

18) Consider the data in Table 9.6. If each firm is currently generating 100 gallons of wastewater per day, Firm A would need to be paid at least ________ from Firm B to reduce wastewater production to 0 gallons per day. A) $12 B) $10 C) $7 D) $5 Answer: C Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 19) Consider the data in Table 9.6. Both firms can benefit if Firm A sells its pollution permit allowing it to generate 100 gallons of wastewater to Firm B for: A) a price between $7 and $12. B) a price between $0 and $7. C) a price between $12 and $18. D) Both firms cannot benefit if A sells permits to B. Answer: A Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

Sulfur Dioxide Discharged (Tons) 10 9 8 7 6

Firm A

Firm B

$8,000 10,000 15,000 20,000 28,000

$9,000 12,000 18,000 27,000 37,000

Table 9.7 20) Table 9.7 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm. If Firm B would like to purchase one permit to be able to discharge nine tons of sulfur dioxide, what is Firm B's willingness to pay? A) $2,000 B) $5,000 C) $6,000 D) $9,000 Answer: C Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 21) Table 9.7 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm. If Firm A contemplates selling one permit to Firm B, what is Firm A's willingness to accept? A) $3,000 B) $5,000 C) $6,000 D) $7,000 Answer: B Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

22) Table 9.7 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm. If the two firms agree to swap one permit and split the difference between the willingness to pay and willingness to accept, what is the price of a permit? A) $4,500 B) $5,500 C) $7,250 D) $9,750 Answer: B Diff: 3 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 23) Table 9.7 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm and that Firm A has sold one permit to Firm B. If Firm B wants to purchase a second permit to be able to discharge 10 tons of sulfur dioxide, what is Firm B's willingness to pay? A) $2,000 B) $3,000 C) $5,000 D) $9,000 Answer: B Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 24) Table 9.7 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm. Suppose that Firm A has already sold a permit to Firm B. If Firm A contemplates selling a second permit to Firm B, what is Firm A's willingness to accept? A) $5,000 B) $6,000 C) $7,000 D) $8,000 Answer: D Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

25) Table 9.7 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm. If the two firms were to voluntarily trade pollution permits, how many permits would be swapped? A) 1 B) 2 C) 3 D) 4 Answer: A Diff: 3 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency Sulfur Dioxide Discharged (Tons) 10 9 8 7 6

Firm A

Firm B

$10,000 11,000 13,000 16,000 20,000

$12,000 17,000 22,000 26,000 33,000

Table 9.8 26) Table 9.8 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm. If Firm B would like to purchase one permit to be able to discharge 9 tons of sulfur dioxide, what is Firm B's willingness to pay? A) $2,000 B) $3,000 C) $4,000 D) $5,000 Answer: D Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

27) Table 9.8 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm. If Firm A contemplates selling one permit to Firm B, what is Firm A's willingness to accept? A) $2,000 B) $3,000 C) $4,000 D) $5,000 Answer: B Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 28) Table 9.8 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm. If Firm B wants to purchase a second permit to be able to discharge 10 tons of sulfur dioxide, what is Firm B's willingness to pay? A) $2,000 B) $3,000 C) $4,000 D) $5,000 Answer: D Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 29) Table 9.8 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm. If Firm A contemplates selling a second permit to Firm B, what is Firm A's willingness to accept? A) $2,000 B) $3,000 C) $4,000 D) $5,000 Answer: C Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

30) Table 9.8 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm. If the two firms were to voluntarily trade pollution permits, how many permits would be swapped? A) 0 B) 1 C) 2 D) 3 Answer: C Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 31) Suppose two firms operate under a system of marketable pollution permits. If it costs Firm A $25 to reduce pollution by 1,000 units per day, and Firm B can reduce costs by $35 by increasing pollution by 1,000 units per day: A) the firms cannot gain by trading the right to pollute. B) both firms can benefit if Firm A trades the right to pollute 1,000 units to Firm B for $30. C) both firms can benefit if Firm A trades the right to pollute 1,000 units to Firm B for $40. D) both firms can benefit if Firm B trades the right to pollute 1,000 units to Firm A for $30. Answer: B Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 32) Suppose Smith's oil refinery and Jones's paper mill both pollute a river and both firms operate under a system of marketable pollution permits. If it costs Smith $45 to reduce pollution by 500 gallons per day, and Jones can reduce costs by $65 by increasing pollution by 500 units per day: A) the firms cannot gain by trading the right to pollute. B) both firms can benefit if Smith trades the right to increase pollution by 500 gallons to Jones for $30. C) both firms can benefit if Smith trades the right to increase pollution by 500 gallons to Jones for $50. D) both firms can benefit if Jones trades the right to increase pollution by 500 gallons to Smith for $30. Answer: C Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

33) Suppose two power plants pollute a river and both firms operate under a system of marketable pollution permits. If it costs Firm A $90 to reduce pollution by 800 units per day, and Firm B can reduce costs by $115 by increasing pollution by 800 units per day: A) the firms cannot gain by trading the right to pollute. B) both firms can benefit if Firm A trades the right to increase pollution by 800 units to Firm B for $70. C) both firms can benefit if Firm B trades the right to increase pollution by 800 units to Firm A for $120. D) both firms can benefit if Firm A trades the right to increase pollution by 800 units to Firm B for $100. Answer: D Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 34) If two firms pollute, and the increase in costs to Firm A from decreasing pollution is less than the decrease in costs to Firm B from increasing pollution: A) the firms will not trade the right to pollute. B) the firms can benefit by trading the right to pollute. C) while both firms can benefit from trading, there is no way for them to determine an agreeable price. D) both firms will stop polluting. Answer: B Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 35) If two firms pollute, and the increase in costs to Firm A from decreasing pollution is equal to the decrease in costs to Firm B from increasing pollution: A) the firms cannot benefit from trading the right to pollute. B) the firms can benefit by trading the right to pollute. C) while both firms can benefit from trading, there is no way for them to determine an agreeable price. D) both firms will stop polluting. Answer: A Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

36) We expect firms with ________ to sell marketable pollution permits to firms with ________. A) low abatement costs; high abatement costs B) high abatement costs; low abatement costs C) high price goods; low price goods D) high production capacity; low production capacity Answer: A Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 37) Suppose that a powerplant is given a permit to pollute 10 tons of carbon into the atmosphere. As the powerplant operates, it can generate $200 of profit selling electricity per ton of carbon that it sends into the atmosphere. If the price of the carbon permit is $300 per ton, then: A) the powerplant is better off shutting down and selling its permit. B) the powerplant is better off buying more permits and selling more electricity. C) the powerplant is better off selling electricity and using the permits to pollute 10 tons of carbon. D) the powerplant is better off shutting down and buying more permits. Answer: A Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 38) Suppose that a powerplant is given a permit to pollute 10 tons of carbon into the atmosphere. As the powerplant operates, it can generate $200 of profit selling electricity per ton of carbon that it sends into the atmosphere. If the price of the carbon permit is $100 per ton, then: A) the powerplant is better off shutting down and selling its permit. B) the powerplant is better off buying more permits and selling more electricity. C) the powerplant is better off selling electricity and using the permits to pollute 10 tons of carbon. D) the powerplant is better off shutting down and buying more permits. Answer: B Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

39) Suppose that the government signs a international treaty that cuts the amount of carbon emitted into the atmosphere by 50 %. In the market for pollution permits, the A) supply of permits will increase. B) supply of permits will decrease. C) demand for permits will increase. D) demand for permits will decrease. Answer: B Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 40) While marketable pollution permits may ________ the total amount of pollution, they may ________ pollution in local areas. A) increase; decrease B) decrease; increase C) decrease; not change D) not change; increase Answer: B Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 41) In the market for pollution permits, the total supply of permits is: A) perfectly inelastic. B) perfectly elastic. C) determined by the Chicago Board of Trade. D) always equal to the demand for permits. Answer: A Diff: 1 Topic: Supply, Demand, and the Price of Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

42) In the market for pollution permits, the demand for permits comes from: A) firms that would prefer to use permits rather than incur abatement costs. B) the Chicago Board of Trade. C) firms with low abatement costs. D) the Environmental Protection Agency. Answer: A Diff: 1 Topic: Supply, Demand, and the Price of Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 43) Suppose that next year the government fixes the number of pollution permits at a quantity less than the number sold this year. If nothing else changes, next year the price of a pollution permit will be: A) greater than the price of a permit this year. B) less than the price of a permit this year. C) equal to the price of a permit this year. D) equal to the price set by the government. Answer: A Diff: 2 Topic: Supply, Demand, and the Price of Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 44) If technological advancements reduce the cost of pollution abatement, all else equal: A) the price of a pollution permit will fall. B) the price of a pollution permit will increase. C) the government will be forced to issue more permits. D) the government will be forced to issue fewer permits. Answer: A Diff: 2 Topic: Supply, Demand, and the Price of Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

45) Technological advances in pollution reduction: A) reduce the demand for pollution permits. B) increase the demand for pollution permits. C) reduce the supply of pollution permits. D) increase the supply of pollution permits. Answer: A Diff: 2 Topic: Supply, Demand, and the Price of Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency Recall the Application about how the price of CO2 permits in the European Union is determined to answer the following question(s). 46) Recall the Application. In the European Union, the term they use for pollution permits is: A) allowances. B) caps. C) trades. D) emissions. Answer: A Diff: 1 Topic: Application 10, The Price of CO2 Permits in the European Union Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 47) Recall the Application. Which of the following factors has caused the decline in the price of CO2 allowances in the EU in 2011? A) Industrial output increased. B) The number of renewable energy sources increased. C) The number of energy efficient appliances increased. D) All of the above are correct. Answer: D Diff: 1 Topic: Application 10, The Price of CO2 Permits in the European Union Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

48) Recall the Application. Which of the following factors has caused the increase in the price of CO2 allowances in the EU in 2017? A) Member states agree on reforms that will increase the supply of allowances. B) Member states agree on abolishing the Emissions Trading System (ETS). C) The United States decides to increase its supply of allowances. D) Member states agree on reforms that will decrease the supply of allowances. Answer: D Diff: 1 Topic: Application 10, The Price of CO2 Permits in the European Union Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 49) Under a system of marketable pollution permits, a firm with relatively low abatement costs will buy permits from a firm with relatively high abatement costs. Answer: FALSE Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 50) A switch to marketable pollution permits will decrease abatement costs because high-cost firms do most of the abating. Answer: FALSE Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 51) Marketable pollution permits increase the amount of pollution generated because firms that don't want to reduce pollution can buy the right to pollute. Answer: FALSE Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 52) The price at which marketable pollution permits are sold is set by the government. Answer: FALSE Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 140 Copyright © 2020 Pearson Education, Inc.

53) A nationwide system of marketable pollution permits will reduce pollution overall, but might increase pollution in some high abatement cost areas. Answer: TRUE Diff: 1 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 54) Why should a system of marketable pollution permits lead to less costly pollution abatement than a command-and-control system? Answer: Even if both systems lead to the same pollution abatement, in the case of marketable permits the most expensive polluters can continue to pollute while those for whom cleanup is less costly can choose to clean up. Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency 55) Why might a system of marketable pollution permits lead to a higher concentration of polluted areas than would a command-and-control system? Answer: Under a command-and-control system, each firm (in each city) might be required to reduce pollution by say 20%, while under a system of marketable permits, half the firms might reduce pollution by 40% and the other half might not reduce pollution at all. Pollution will be more prevalent in cities with firms with high abatement costs. Diff: 2 Topic: Voluntary Exchange and Marketable Permits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-22: Explain how externalities affect market efficiency

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 10 The Labor Market and the Distribution of Income 10.1 The Demand for Labor 1) Labor costs account for approximately ________ of total production costs. A) three-fourths B) half C) one-fourth D) one-third Answer: A Diff: 1 Topic: The Labor Market, Income, and Poverty Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 2) The demand for labor is: A) derived from the demand for the products it is used to produce. B) determined by the demand for consumer products. C) determined by the price of consumer products. D) all of the above Answer: D Diff: 1 Topic: The Demand for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 3) The demand for labor is called a "derived demand" because it is: A) derived from the demand for the products it is used to produce. B) affected by the demand for consumer products workers produce. C) affected by the price of consumer products workers produce. D) all of the above Answer: D Diff: 1 Topic: The Demand for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

4) The marginal product of labor is the: A) change in labor necessary to produce an additional unit of output. B) cost of additional labor necessary to produce an additional unit of output. C) change in output resulting from adding an additional unit of labor. D) change in revenue resulting from adding an additional unit of labor. Answer: C Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 5) Other things being equal, as diminishing marginal returns begin to occur, the marginal revenue product of labor: A) decreases as more workers are used. B) increases as more workers are used. C) remains unchanged as more workers are used. D) none of the above Answer: A Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 6) The marginal revenue product of labor is the: A) change in labor necessary to produce an additional unit of output. B) cost of additional labor necessary to produce an additional unit of output. C) change in output resulting from adding an additional unit of labor. D) change in revenue resulting from adding an additional unit of labor. Answer: D Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

7) A curve that shows the relationship between the wage and the quantity of labor demanded in the short run is: A) the marginal revenue product of labor curve. B) the marginal revenue curve. C) the marginal product of labor curve. D) none of the above Answer: A Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 8) When a firm hires a worker for one hour, the marginal benefit to that firm equals the: A) dollar value of the goods produced by that worker in one hour. B) hourly wage of that worker. C) number of items the worker produces in that hour. D) price of each item that the worker produces in that hour. Answer: A Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 9) When a firm hires a worker for one hour, the marginal cost to that firm equals the: A) hourly wage of that worker. B) diminishing marginal productivity of that worker. C) price of each item that the worker produces in that hour. D) average total cost of production at the quantity produced. Answer: A Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

10) Applied to perfectly competitive labor markets, the marginal principle tells firms to hire workers until: A) the marginal revenue product of the last worker hired equals the wage. B) marginal productivity begins to diminish. C) average total costs are minimized. D) the price of the product equals the wage of the worker. Answer: A Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 11) In a perfectly competitive labor market, the firm ________ the price of its product and ________ the wage it pays its workers. A) takes from the market; takes from the market B) can freely set; takes from the market C) takes from the market; can freely set D) can freely set; can freely set Answer: A Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 12) In the short run, the marginal-revenue product curve is ________ because of ________. A) downward sloping; diminishing returns B) upward sloping; increasing returns C) downward sloping; increasing returns D) upward sloping; diminishing returns Answer: A Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

13) If the price of output increases, the marginal revenue product curve will shift ________ and the profit-maximizing quantity of labor demanded will ________. A) up; increase B) up; decrease C) down; increase D) down; decrease Answer: A Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 14) If labor productivity increases, the marginal revenue product curve will shift ________ and the profit-maximizing quantity of labor demanded will ________. A) up; increase B) up; decrease C) down; increase D) down; decrease Answer: A Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

Table 10.1 15) Refer to Table 10.1. The marginal product of the third unit of labor is: A) 30. B) 50. C) 60. D) 160. Answer: C Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 16) Refer to Table 10.1. The marginal product of the fourth unit of labor is: A) 40. B) 50. C) 52.5. D) 210. Answer: B Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

17) Refer to Table 10.1. The marginal product of the fifth unit of labor is: A) 8. B) 40. C) 50. D) 250. Answer: B Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 18) Refer to Table 10.1. If the price of output is $10 per unit, the marginal revenue product of the third unit of labor is: A) $50. B) $60. C) $500. D) $600. Answer: D Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 19) Refer to Table 10.1. If the price of output is $2 per unit, the marginal revenue product of the fourth unit of labor is: A) $50. B) $52.50. C) $100. D) $105. Answer: C Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

20) Refer to Table 10.1. If the price of output is $2 per unit, the marginal revenue product of the eighth unit of labor is: A) $10. B) $20. C) $310. D) $620. Answer: B Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 21) Refer to Table 10.1. If the price of output is $2 per unit and the wage rate is $60, ________ workers should be hired. A) five B) six C) seven D) eight Answer: B Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 22) Refer to Table 10.1. If the price of output is $2 per unit and we observe the firm hiring six workers, if the firm is maximizing profit, the wage rate must be between ________ and ________. A) $20; $40 B) $30; $50 C) $40; $60 D) $500; $600 Answer: C Diff: 3 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

23) Refer to Table 10.1. If the price of output is $2 per unit and we observe the firm hiring four workers, if the firm is maximizing profit, the wage rate must be between ________ and ________. A) $40; $50 B) $50; $90 C) $80; $100 D) $320; $500 Answer: C Diff: 3 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 24) Refer to Table 10.1. Suppose that this year the wage rate is $30 and the price of the good is $1. If the firm is maximizing profit, ________ workers will be hired. Next year the wage rate will increase to $40, but the price of the good will remain at $1. Then ________ workers will be hired. A) 6; 5 B) 6; 6 C) 7; 6 D) 5; 5 Answer: A Diff: 3 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

Table 10.2 25) Refer to Table 10.2. The marginal product of the third unit of labor is: A) 25. B) 50. C) 60. D) 160. Answer: B Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 26) Refer to Table 10.2. The marginal product of the fifth unit of labor is: A) 50. B) 40. C) 30. D) 20. Answer: C Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

27) Refer to Table 10.2. The marginal product of the seventh unit of labor is: A) 50. B) 40. C) 30. D) 10. Answer: D Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 28) Refer to Table 10.2. If the price of output is $10 per unit, the marginal revenue product of the third unit of labor is: A) $50. B) $60. C) $500. D) $600. Answer: C Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 29) Refer to Table 10.2. If the price of output is $10 per unit, the marginal revenue product of the sixth unit of labor is: A) $20. B) $50. C) $200. D) $500. Answer: C Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

30) Refer to Table 10.2. If the price of output is $2 per unit and the wage rate is $40, how many workers should be hired? A) six workers B) five workers C) four workers D) three workers Answer: A Diff: 3 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 31) Refer to Table 10.2. If the price of output is $2 per unit and the wage rate is $50, how many workers should be hired? A) three workers B) four workers C) five workers D) six workers Answer: C Diff: 3 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 32) Refer to Table 10.2. If the price of output is $2 per unit and we observe the firm hiring four workers, if the firm is maximizing profit, the wage rate must be between ________ and ________. A) $25; $45 B) $30; $35 C) $45; $60 D) $60; $80 Answer: D Diff: 3 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

33) Refer to Table 10.2. If the price of output is $1 per unit and we observe the firm hiring four workers, if the firm is maximizing profit, the wage rate must be between ________ and ________. A) $35; $40 B) $30; $35 C) $45; $60 D) $80; $90 Answer: A Diff: 3 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

Figure 10.1 34) Figure 10.1 depicts a firm's marginal revenue product curve. If the firm maximizes its profit and the hourly wage is $15, how many hours of labor will the firm demand? A) smaller than 30 hours B) between 30 hours and 40 hours C) between 40 hours and 50 hours D) greater than 50 hours Answer: B Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 35) Figure 10.1 depicts a firm's marginal revenue product curve. If the firm maximizes its profit and the hourly wage is $12, how many hours of labor will the firm demand? A) smaller than 30 hours B) between 30 hours and 40 hours C) between 40 hours and 50 hours D) greater than 50 hours Answer: C Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 14 Copyright © 2020 Pearson Education, Inc.

36) Figure 10.1 depicts a firm's marginal revenue product curve. If the product price is $2, what is the marginal product of the 30th hour of labor? A) 5 units B) 6 units C) 7 units D) 8 units Answer: D Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 37) Figure 10.1 depicts a firm's marginal revenue product curve. If the product price is $4, what is the marginal product of the 40th hour of labor? A) 4 units B) 3.5 units C) 3 units D) 2.5 units Answer: B Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 38) Figure 10.1 depicts a firm's marginal revenue product curve. The marginal revenue product curve is negatively sloped because ________ decreases as the firm uses more labor. A) the hourly wage B) the marginal product of labor C) the product price D) none of the above Answer: B Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

39) Figure 10.1 depicts a firm's marginal revenue product curve. Why does the marginal revenue product of labor decrease faster as the firm increases its use of labor by 10 hours? A) Because the marginal product of labor decreases at an increasing rate. B) Because the marginal product of labor decreases at a decreasing rate. C) Because the marginal product of labor increases at an increasing rate. D) Because the marginal product of labor increases at a decreasing rate. Answer: A Diff: 3 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 40) Figure 10.1 depicts a firm's marginal revenue product curve. If the product price decreases, the marginal revenue product curve: A) shifts downward. B) shifts upward. C) remains the same. D) none of the above Answer: A Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 41) Figure 10.1 depicts a firm's marginal revenue product curve. If the product price increases, the marginal revenue product curve: A) shifts downward. B) shifts upward. C) remains the same. D) none of the above Answer: B Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

42) Figure 10.1 depicts a firm's marginal revenue product curve. If the prevailing hourly wage increases: A) the marginal revenue product curve shifts upward. B) the marginal revenue product curve shifts downward. C) the marginal revenue product curve does not shift, but there is a movement upward along the curve. D) the marginal revenue product curve does not shift, but there is a movement downward along the curve. Answer: C Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 43) Figure 10.1 depicts a firm's marginal revenue product curve. If the prevailing hourly wage decreases: A) the marginal revenue product curve shifts upward. B) the marginal revenue product curve shifts downward. C) the marginal revenue product curve does not shift, but there is a movement upward along the curve. D) the marginal revenue product curve does not shift, but there is a movement downward along the curve. Answer: D Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

Figure 10.2 44) Figure 10.2 depicts a firm's marginal revenue product curve. If the wage rate is $15, how many workers will the firm demand? A) four workers B) five workers C) six workers D) seven workers Answer: B Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

45) Figure 10.2 depicts a firm's marginal revenue product curve. If the output price is $5, what is the marginal product of the third worker? A) four units of output B) five units of output C) six units of output D) seven units of output Answer: B Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 46) Figure 10.2 depicts a firm's marginal revenue product curve. If the marginal product of the second worker is 10 units of output, what is the price of output? A) $3 B) $4 C) $5 D) $6 Answer: A Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 47) Figure 10.2 depicts a firm's marginal revenue product curve. Suppose that we observe the firm demanding five workers. If the firm is maximizing its profit, the wage rate must be between ________ and ________. A) $5; $10 B) $10; $15 C) $15; $20 D) $25; $30 Answer: B Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

48) Figure 10.2 depicts a firm's marginal revenue product curve. Suppose that we observe the firm demanding three workers. If the firm is maximizing its profit, the wage rate must be between ________ and ________. A) $30; $35 B) $25; $30 C) $20; $25 D) $15; $20 Answer: C Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 49) If the credits for a principles of economics section is three units and an instructor teaches two sections with 100 students in each and tuition and fees at your school are $100 per unit, then the marginal revenue product for your school from hiring that instructor that semester is: A) $100. B) $300. C) $30,000. D) $60,000. Answer: D Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 50) The credits for a principles of economics section is three units, and an instructor teaches two sections with 100 students in each, and tuition and fees at your university are $100 per unit. If the instructor is paid $20,000 to teach both classes, should the university hire the instructor? A) Yes, the MRP of the instructor is higher than the wage. B) Yes, the wage is higher than the instructor's MRP. C) Yes, the wage of the instructor is higher than the MRP. D) No, the wage is higher than the instructor's MRP. Answer: A Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

51) If the credits for a principles of economics section is three units and an instructor teaches two sections with 100 students in each and tuition and fees at your university are $40 per unit. If the instructor is paid $ 30,000 to teach both classes, should the university hire the instructor? A) Yes, the MRP of the instructor is higher than the wage. B) Yes, the wage is higher than the instructor's MRP. C) No, the MRP of the instructor is higher than the wage. D) No, the wage is higher than the instructor's MRP. Answer: D Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 52) If the credits for a principles of economics section is three units and an instructor teaches two sections with 100 students in each and tuition and fees at your school are $500 per credit hour, then the marginal revenue product for your school from hiring that instructor that semester is: A) $500. B) $1500. C) $150,000. D) $300,000. Answer: D Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 53) The market demand curve for labor is the relationship between the wage and the quantity of labor that: A) all workers are willing to provide. B) any given worker is willing to provide. C) all firms are willing to employ. D) any given firm is willing to employ. Answer: C Diff: 1 Topic: Market Demand for Labor in the Short Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

54) The change in the quantity of labor demanded resulting from a change in the quantity produced of the product is known as the ________ effect. A) input-substitution B) price elasticity C) output D) derived demand Answer: C Diff: 1 Topic: Labor Demand in the Long Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 55) The change in the quantity of labor demanded resulting from a change in the relative cost of labor is known as the ________ effect. A) input-substitution B) price elasticity C) output D) derived demand Answer: A Diff: 1 Topic: Labor Demand in the Long Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 56) Which of the following is a long-run impact of an increase in the wage? A) The quantity demanded of labor increases because there are no diminishing returns. B) The quantity demanded of labor increases because the marginal revenue product curve shifts upward due to a higher product price. C) The quantity demanded of labor decreases because firms face a higher degree of diminishing returns. D) The quantity demanded of labor decreases because firms will have an incentive to use more of other inputs instead of labor. Answer: D Diff: 2 Topic: Labor Demand in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

57) The output effect of an increase in the wage comes about because higher wages: A) increase production costs, and final good prices will rise, reducing the quantity demanded of the product. B) increase production costs, and final good prices will rise, increasing the quantity demanded of the product. C) make labor less expensive as an input, leading firms to switch to labor as an input. D) make labor more expensive as an input, leading firms to switch to other inputs. Answer: A Diff: 2 Topic: Labor Demand in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 58) The input-substitution effect of an increase in the wage comes about because higher wages: A) increase production costs, and final good prices will rise, reducing the quantity demanded of the product. B) increase production costs, and final good prices will rise, increasing the quantity demanded of the product. C) make labor less expensive as an input, leading firms to switch to labor as an input. D) make labor more expensive as an input, leading firms to switch to other inputs. Answer: D Diff: 2 Topic: Labor Demand in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 59) In less-developed countries, the ________ effect leads to ________. A) input-substitution; labor intensive production B) input-substitution; mechanized production C) output effect; labor intensive production D) input effect; mechanized production Answer: A Diff: 2 Topic: Labor Demand in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

60) The short-run labor demand curve is: A) more elastic than the long-run labor demand curve. B) less elastic than the long-run labor demand curve. C) either more or less elastic than the long-run labor demand curve. D) perfectly elastic (horizontal). Answer: B Diff: 1 Topic: Short-Run versus Long-Run Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 61) The long-run labor demand curve is: A) more elastic than the short-run labor demand curve. B) less elastic than the short-run labor demand curve. C) either more or less elastic than the short-run labor demand curve. D) perfectly elastic (horizontal). Answer: A Diff: 1 Topic: Short-Run versus Long-Run Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets Recall the Application about the salaries paid in Major League Baseball to answer the following question(s). Some Major League Baseball players are free agents, meaning they are free to negotiate a contract with any team. Other players are journeymen and apprentices, who are restricted to a single team. 62) Recall the Application. On average, free agents in Major League Baseball tend to be paid a salary ________ their marginal revenue product. A) significantly higher than B) significantly lower than C) close to D) unrelated to Answer: C Diff: 2 Topic: Application 1, Marginal Revenue Product in Major League Baseball Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

63) Recall the Application. What was the reason that rookies on the average are paid much less than their MRPs? A) Their negotiations are restricted to only one team. B) Most of their salary goes to health insurance. C) They are terrible at negotiations. D) None of them are good players, so they are paid very little. Answer: A Diff: 2 Topic: Application 1, Marginal Revenue Product in Major League Baseball Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 64) Recall the Application. On average, apprentices in Major League Baseball tend to be paid a salary ________ their marginal revenue product. A) significantly higher than B) significantly lower than C) close to D) unrelated to Answer: B Diff: 2 Topic: Application 1, Marginal Revenue Product in Major League Baseball Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 65) Recall the Application. Which of the following, on the average, are paid the least relative to their MRPs? A) rookies B) arbitration-eligible players C) free-agents D) They all are paid the same relative to their MRPs. Answer: A Diff: 2 Topic: Application 1, Marginal Revenue Product in Major League Baseball Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

66) Marginal revenue product is the additional revenue for the firm when it hires one additional unit of labor. Answer: TRUE Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 67) Marginal revenue product equals marginal revenue times the price of output. Answer: FALSE Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 68) For a perfectly competitive firm, the marginal-revenue product curve is the same as the firm's short-run demand for labor curve. Answer: TRUE Diff: 1 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 69) According to the output effect, a decrease in the wage will decrease production costs, so the price of final goods will decrease and the demand for labor will decrease. Answer: FALSE Diff: 2 Topic: Labor Demand in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

70) The input-substitution effect associated with an increase in the wage implies that as the wage increases, a firm will substitute other inputs for the relatively expensive labor. Answer: TRUE Diff: 2 Topic: Labor Demand in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 71) The output effect is the change in labor supply due to a change in the quantity of output produced. Answer: FALSE Diff: 2 Topic: Labor Demand in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 72) The input-substitution effect associated with an increase in the wage implies that as the wage increases, a firm will substitute other inputs for the relatively expensive labor. Answer: TRUE Diff: 2 Topic: Labor Demand in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 73) Explain why the marginal revenue product of labor curve is the firm's short-run demand curve for labor. Answer: The marginal revenue product curve for labor shows the extra revenue that is generated by an additional unit of labor. A profit-maximizing firm will follow the marginal principle and hire labor up to the point where the marginal cost of labor is equal to the marginal revenue. For a firm that is perfectly competitive in the labor market, the marginal cost of labor is equal to the wage rate, since the firm can hire all of the labor it wants at the market wage rate. Marginal revenue is given by the marginal revenue product curve. So a firm will hire labor up to the point where the wage is equal to the marginal revenue product of labor. This gives the relationship between the wage and the quantity of workers demanded, which is the demand curve for labor. Diff: 2 Topic: Labor Demand by an Individual Firm in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 27 Copyright © 2020 Pearson Education, Inc.

74) Why is the demand for labor downward sloping in the short run? Answer: The demand for labor is its marginal revenue product. The marginal revenue product is marginal product times the price of output. Marginal product of labor and thus marginal revenue product is negatively sloped due to diminishing returns to labor. Diff: 2 Topic: Market Demand for Labor in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 75) What is the output effect? Answer: The change in the quantity of labor demanded resulting from a change in the amount of output produced. Diff: 2 Topic: Labor Demand in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 76) What is the input-substitution effect? Answer: The change in the quantity of labor demanded resulting from a change in the relative price of labor relative to the price of other inputs. Diff: 2 Topic: Labor Demand in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 10.2 The Supply of Labor 1) The relationship between the wage and the quantity of labor that a given worker is willing to provide is called: A) individual labor demand. B) market labor demand. C) individual labor supply. D) market labor supply. Answer: C Diff: 1 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 28 Copyright © 2020 Pearson Education, Inc.

2) The price of an hour of leisure time is: A) the income that could have been earned in that hour. B) zero. C) the minimum wage rate. D) determined by the value of the activity the person engages in during that hour of leisure. Answer: A Diff: 1 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 3) The price of an hour of leisure time for a successful lawyer is ________ the price of an hour of leisure for an unemployed high school drop-out. A) greater than B) the same as C) less than D) impossible to compare to Answer: A Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 4) According to the income effect of labor supply, if leisure is a normal good, then an increase in the wage rate will ________ the quantity of labor ________. A) increase; supplied B) decrease; supplied C) increase; demanded D) decrease; demanded Answer: B Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

5) When wages increase, the income effect of labor supply ________ the quantity of labor supplied because ________. A) reduces; the price of leisure has increased B) reduces; workers acquire more of all normal goods (including leisure) when income increases C) increases; the value of working has increased D) increases; the price of leisure has increased Answer: B Diff: 3 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 6) According to the substitution effect of labor supply, when the wage rate goes up: A) it becomes more costly to consume leisure, so people will work more. B) it becomes less costly to consume leisure, so people will work more. C) the opportunity cost of enjoying leisure goes down. D) firms will hire more workers since people are more willing to work. Answer: A Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 7) When wages increase, the income effect ________ the supply of labor and the substitution effect ________ the supply of labor. A) decreases; increases B) increases; decreases C) increases; increases D) decreases; decreases Answer: A Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

8) If Jerry's demand for leisure increases as the wage increases: A) the income effect dominates the substitution effect. B) the substitution effect dominates the income effect. C) the income effect is completely offset by the substitution effect. D) there is insufficient information. Answer: A Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 9) If Tom's demand for leisure decreases as the wage increases: A) the income effect outweighs the substitution effect. B) the substitution effect outweighs the income effect. C) the income effect is completely offset by the substitution effect. D) there is insufficient information. Answer: B Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 10) If leisure is a normal good, as the price of leisure increases, the quantity of leisure demanded ________ and the demand for leisure ________. A) falls; increases B) falls; is not affected C) remains the same; decreases D) increases; is not affected Answer: A Diff: 3 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

11) The relationship between the wage and the quantity of labor that a given worker is willing to provide is called: A) individual labor demand. B) market labor demand. C) individual labor supply. D) market labor supply. Answer: C Diff: 1 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 12) The individual supply curve for labor is the relationship between the wage and the quantity of labor that: A) all workers are willing to provide. B) any given worker is willing to provide. C) all firms are willing to employ. D) any given firm is willing to employ. Answer: B Diff: 1 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 13) When the wage increases: A) all workers will work more hours. B) all workers will work fewer hours. C) some workers will work more hours and some workers will work fewer hours, but on average, hours worked will increase. D) some workers will work more hours and some workers will work fewer hours, but we don't know whether average hours will increase or decrease. Answer: D Diff: 2 Topic: An Example of Income and Substitution Effects Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

14) When the wage falls: A) all workers will work more hours. B) all workers will work fewer hours. C) some workers will work more hours and some workers will work fewer hours, but on average, hours worked will fall. D) some workers will work more hours and some workers will work fewer hours, but we don't know whether average hours will increase or decrease. Answer: D Diff: 2 Topic: An Example of Income and Substitution Effects Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 15) The relationship between the wage and the quantity of labor that all workers are willing to provide is called: A) individual labor demand. B) market labor demand. C) individual labor supply. D) market labor supply. Answer: D Diff: 1 Topic: The Market Supply Curve for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 16) The market supply curve for labor is the relationship between the wage and the quantity of labor that: A) all workers are willing to provide. B) any given worker is willing to provide. C) all firms are willing to employ. D) any given firm is willing to employ. Answer: A Diff: 1 Topic: The Market Supply Curve for Labor Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

17) Suppose that the wage for musicians increases relative to other occupations. We know that ________ people will work in music, and the total number of hours worked will ________. A) more; increase B) more; decrease C) fewer; increase D) fewer; decrease Answer: A Diff: 2 Topic: The Market Supply Curve for Labor Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 18) Suppose that the wage for musicians decreases relative to other occupations. We know that ________ people will work in music, and the total number of hours worked will ________. A) more; increase B) more; decrease C) fewer; increase D) fewer; decrease Answer: D Diff: 2 Topic: The Market Supply Curve for Labor Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 19) Suppose that the wage for teachers increases relative to other occupations. We know that ________ people will work as teachers, and the total number of hours worked will ________. A) more; increase B) more; decrease C) fewer; increase D) fewer; decrease Answer: A Diff: 2 Topic: The Market Supply Curve for Labor Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

20) Suppose that the wage for teachers decreases relative to other occupations. We know that ________ people will work as teachers, and the total number of hours worked will ________. A) more; increase B) more; decrease C) fewer; increase D) fewer; decrease Answer: D Diff: 2 Topic: The Market Supply Curve for Labor Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 21) The market supply of labor curve is: A) upward sloping. B) upward sloping if the income effect dominates and downward sloping if the substitution effect dominates. C) downward sloping if the income effect dominates and upward sloping if the substitution effect dominates. D) perfectly inelastic. Answer: A Diff: 2 Topic: The Market Supply Curve for Labor Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 22) The effect of higher wages on the individual supply of labor is ________ and the effect of higher wages on the market supply of labor is ________. A) ambiguous; to increase the quantity supplied B) to increase the quantity supplied; ambiguous C) ambiguous; to decrease the quantity supplied. D) to decrease the quantity supplied; ambiguous Answer: A Diff: 2 Topic: The Market Supply Curve for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

Recall the Application about the response of bike messengers in Zurich to a change in wages to answer the following question(s). 23) Recall the Application. A study of bike messengers in Zurich showed that as the messengers' revenue share increased from 40% to 50%, they A) worked more shifts but pedaled slower. B) worked less shifts and pedaled slower. C) worked less shifts but pedaled faster. D) worked more shifts and pedaled faster. Answer: A Diff: 1 Topic: Application 2, Bike Messengers and Revenue Sharing in Zurich Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 24) Recall the Application. A study of bike messengers in Zurich showed that as the messengers' revenue share increased from 40% to 50%, their A) efforts decreased but their incomes still increased. B) efforts increased but their incomes still decreased. C) efforts decreased causing their incomes to decrease. D) efforts increased causing their incomes to increase. Answer: A Diff: 1 Topic: Application 2, Bike Messengers and Revenue Sharing in Zurich Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 25) Recall the Application. A study of bike messengers in Zurich showed that as the messengers' revenue share increased from 40% to 50%, the bike messengers took more shifts but pedaled slower. If the increase in the revenue is similar to a wage increase, then the decrease in the pedaling speed is reflective of: A) the income effect. B) the substitution effect. C) neither the income nor the substitution effect. D) both the income and the substitution effect. Answer: A Diff: 1 Topic: Application 2, Bike Messengers and Revenue Sharing in Zurich Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 36 Copyright © 2020 Pearson Education, Inc.

26) Recall the Application. A study of the messengers in Zurich showed that as the messengers' revenue share increased from 40% to 50%, the bike messengers took more shifts but pedaled slower. If the increase in the revenue is similar to a wage increase, then the increase in the shifts taken is reflective of: A) the income effect. B) the substitution effect. C) neither the income nor the substitution effect. D) both the income and the substitution effect. Answer: B Diff: 1 Topic: Application 2, Bike Messengers and Revenue Sharing in Zurich Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 27) The individual labor supply curve is positively sloped in the short run. Answer: FALSE Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 28) If the substitution effect of wage increases is greater than the income effect, then the individual labor supply curve is positively sloped in the short run. Answer: TRUE Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 29) When the wage rate rises, the demand for leisure falls. Answer: FALSE Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

30) The substitution effect of an increase in the wage rate influences a worker to consuming more leisure. Answer: FALSE Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 31) The income effect and the substitution effect associated with a wage increase influence workers in the same direction. Answer: FALSE Diff: 1 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 32) The market supply curve of labor for an occupation is positively sloped in part because an increase in the wage rate will encourage more people to work in that occupation. Answer: TRUE Diff: 2 Topic: The Market Supply Curve for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 33) Explain why people might work less if the wage increases. Answer: This is known as the income effect of an increase in the wage rate. When the wage rate goes up, so does the real value of income for the person whose wage went up. Since the person now has more income, he or she might choose to increase the amount of leisure time that he or she consumes, if leisure is a normal good. Thus, by increasing the amount of leisure consumed, the person would decrease the amount of hours that he or she works. Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

34) What is the substitution effect for leisure demand? Answer: The change in leisure resulting from a change in the wage rate compared to the price of other goods. When the price of leisure increases (because wages increased) the quantity of leisure demanded will fall relative to the quantity demanded of goods whose prices have not risen. Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 35) What is the income effect for leisure demand? Answer: The change in leisure time resulting from a change in real income caused by a change in the wage rate. A higher wage increases the demand for all normal goods. Diff: 2 Topic: The Individual Labor-Supply Decision: How Many Hours? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 36) Why might the market supply of workers increase when wages increase in a particular occupation or location? Answer: Individual labor supply response to a wage increase is ambiguous, but an increase in wages in a particular industry will attract workers from other industries and from other locations to move to the higher-wage industry and location. Diff: 2 Topic: The Market Supply Curve for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

10.3 Labor Market Equilibrium 1) If the equilibrium wage is below the actual wage: A) the demand for labor will increase. B) the demand for labor will decrease. C) the wage rate will fall. D) the wage rate will rise. Answer: C Diff: 2 Topic: Labor Market Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 2) An equilibrium in the labor market is a situation in which: A) there is no pressure for wages to change. B) there is no unemployment. C) wages exceed minimum wage. D) marginal revenue product equals the wage. Answer: A Diff: 2 Topic: Labor Market Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 3) If the equilibrium wage is above the actual wage: A) the demand for labor will increase. B) the demand for labor will decrease. C) the wage rate will fall. D) the wage rate will rise. Answer: D Diff: 2 Topic: Labor Market Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

4) An increase in the demand for musicians ________ the number of musicians employed, and ________ the wages paid to musicians. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 5) A decrease in the demand for musicians ________ the number of musicians employed, and ________ the wages paid to musicians. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 6) An increase in the supply of musicians ________ the number of musicians employed, and ________ the wages paid to musicians. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

7) A decrease in the supply of musicians ________ the number of musicians employed, and ________ the wages paid to musicians. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 8) If the price of output increases, the labor ________ curve shifts to the ________. A) demand; left B) demand; right C) supply; left D) supply; right Answer: B Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 9) If the price of output increases, the equilibrium wage of workers who produce that output will ________ and ________ workers will be hired. A) increase; more B) increase; fewer C) decrease; more D) decrease; fewer Answer: A Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

10) If the price of output decreases, the labor ________ curve shifts to the ________. A) demand; left B) demand; right C) supply; left D) supply; right Answer: A Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 11) If the price of output decreases, the equilibrium wage of workers who produce that output will ________ and ________ workers will be hired. A) increase; more B) increase; fewer C) decrease; more D) decrease; fewer Answer: D Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 12) If the wage paid to workers increases, the labor demand curve: A) will not shift. B) shifts to the left and fewer workers are hired. C) shifts to the right and more workers are hired. D) shifts to the right and fewer workers are hired. Answer: A Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

13) A government report that makes working in a particular industry more attractive to workers will most likely ________ the number of workers hired in that industry, and ________ the wage paid to those workers. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 14) A government report that makes working in a particular industry less attractive to workers will most likely ________ the number of workers hired in that industry, and ________ the wage paid to those workers. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 15) Suppose the wage rate in a certain industry rises, yet firms hire more workers. The best explanation of this is that labor: A) demand fell. B) demand increased. C) supply fell. D) supply increased. Answer: B Diff: 3 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

16) Suppose the wage rate in a certain industry rises, and firms hire fewer workers. The best explanation of this is that labor: A) demand fell. B) demand increased. C) supply fell. D) supply increased. Answer: C Diff: 3 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 17) Suppose the wage rate in a certain industry falls, yet firms hire fewer workers. The best explanation of this is that labor: A) demand fell. B) demand increased. C) supply fell. D) supply increased. Answer: A Diff: 3 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 18) Suppose the wage rate in a certain industry falls, and firms hire more workers. The best explanation of this is that labor: A) demand fell. B) demand increased. C) supply fell. D) supply increased. Answer: D Diff: 3 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

19) Consider a labor market in equilibrium. If the demand curve shifts to the right while the supply curve shifts to the left, then the wage rate in the market will: A) increase. B) decrease. C) remain unchanged. D) either increase or decrease or remain unchanged. Answer: A Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 20) Consider a labor market in equilibrium. If the demand curve shifts to the left while the supply curve shifts to the left, then the number of workers hired in the market will: A) increase. B) decrease. C) remain unchanged. D) either increase or decrease or remain unchanged. Answer: B Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 21) Consider a labor market in equilibrium. If both demand curve and supply curve of labor shift to the right, then the wage rate in the market will: A) increase. B) decrease. C) remain unchanged. D) either increase or decrease or remain unchanged. Answer: D Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

22) Consider a labor market in equilibrium. If both demand curve and supply curve of labor shift to the right, then the number of workers hired in the market will: A) increase. B) decrease. C) remain unchanged. D) either increase or decrease or remain unchanged. Answer: A Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 23) Suppose that a labor market is initially in equilibrium. If the minimum wage is set above the initial equilibrium wage rate: A) all workers in the labor market will be better off, receiving a higher wage per hour. B) the labor supply curve will shift to the right. C) the quantity demanded of labor will decrease along the given labor demand curve. D) all of the above Answer: C Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

Figure 10.3 24) In Figure 10.3, a decrease in the supply of labor will cause the equilibrium: A) wage and hours of labor used to increase. B) wage and hours of labor used to decrease. C) wage to increase and hours of labor used to decrease. D) wage to decrease and hours of labor used to increase. Answer: C Diff: 2 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 25) In Figure 10.3, an increase in the demand for labor will cause the equilibrium: A) wage and hours of labor used to increase. B) wage and hours of labor used to decrease. C) wage to increase and hours of labor used to decrease. D) wage to decrease and hours of labor used to increase. Answer: A Diff: 2 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

26) In Figure 10.3, a decrease in the demand for labor will cause the equilibrium: A) wage and hours of labor used to increase. B) wage and hours of labor used to decrease. C) wage to increase and hours of labor used to decrease. D) wage to decrease and hours of labor used to increase. Answer: B Diff: 2 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 27) In Figure 10.3, an increase in the supply of labor will cause the equilibrium: A) wage and hours of labor used to increase. B) wage and hours of labor used to decrease. C) wage to increase and hours of labor used to decrease. D) wage to decrease and hours of labor used to increase. Answer: D Diff: 2 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 28) Figure 10.3 describes the labor market for a manufacturing industry. In the short run, an increase in the price of the good made by the workers will: A) cause the equilibrium wage and the hours of labor used to increase. B) not have an effect on this market. C) cause the equilibrium wage to increase but will not change the hours of labor used. D) cause the equilibrium wage and the hours of labor used to decrease. Answer: A Diff: 3 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

29) Figure 10.3 describes the labor market for a manufacturing industry. In the short run, an increase in the productivity of the workers will: A) cause the equilibrium wage and the hours of labor used to increase. B) not have an effect on this market. C) cause the equilibrium wage to increase but will not change the hours of labor used. D) cause the equilibrium wage to increase and the hours of labor used to decrease. Answer: A Diff: 3 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 30) A minimum wage that is less than the prevailing market wage will: A) have no effect on the market. B) increase unemployment. C) increases wages. D) reduce wages. Answer: A Diff: 2 Topic: The Market Effects of the Minimum Wage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 31) Suppose that a minimum wage is set that is higher than wages for retail workers. This is ________ news for shoppers and ________ retail workers. A) bad; good news for some, but not all B) bad; good news for all C) good; good news for some but not all D) good; good news for all Answer: A Diff: 2 Topic: The Market Effects of the Minimum Wage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

32) Suppose that studies show that a ten percent increase in the minimum wage decreases the number of minimum wage jobs by one percent. That would be the case if: A) demand for labor is inelastic. B) demand for labor is elastic. C) supply of labor is inelastic. D) supply of labor is elastic. Answer: A Diff: 3 Topic: The Market Effects of the Minimum Wage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 33) An increase in the minimum wage will have a large effect on the number of workers employed in minimum wage occupations if: A) demand for workers is elastic. B) demand for workers is inelastic. C) supply of workers is elastic. D) supply of workers is inelastic. Answer: A Diff: 3 Topic: The Market Effects of the Minimum Wage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 34) Raising the minimum wage would: A) help some workers while hurting others. B) help all workers and hurt all firms. C) hurt all workers and help some consumers. D) help workers and help consumers. Answer: A Diff: 2 Topic: The Market Effects of the Minimum Wage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

35) The supply of workers in a particular occupation could be relatively small if: A) training costs are high. B) job features are undesirable. C) there are few people with the required skills. D) All of the above are correct. Answer: D Diff: 1 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 36) The supply of workers in a particular occupation could be relatively large if: A) training costs are low. B) job features are undesirable. C) there are few people with the required skills. D) there are artificial barriers to enter that profession. Answer: A Diff: 1 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 37) One reason that professional baseball players earn higher incomes than college professors is that: A) the training costs to enter the baseball profession are low. B) there no barriers to entry in the baseball profession. C) few people have the skill to play professional baseball. D) being a college professor requires less education. Answer: C Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

38) Medical doctors earn higher incomes than PhDs in economics. This is partly because: A) medical doctors are more likely to face malpractice lawsuits. B) the costs of receiving necessary medical education are higher. C) a relatively small number of students are admitted to medical schools. D) all of the above Answer: D Diff: 1 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 39) Given their skills and education, steelworkers earn higher incomes than they would in other occupations. This is partly because: A) steel workers face a higher risk of getting injured or killed. B) it is costly to acquire skills necessary for jobs at steel mills. C) few people have skills and knowledge required for jobs at steel mils. D) all of the above Answer: A Diff: 1 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 40) Given their skills and knowledge, mine workers earn higher incomes than they would in another occupation. This is partly because: A) mine workers have a higher risk of injury or death. B) few people have the skills and knowledge required for mining works. C) the skills required of mine workers can be acquired through costly training. D) all of the above Answer: A Diff: 1 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

41) Given their skills and education, those who work the night shift earn more than those who work in the daytime. This is partly because: A) working the night shift is relatively more desirable. B) a relatively small number of people are willing to work the night shift. C) working the night shift is safer. D) few people have the required skills for the night shift. Answer: B Diff: 1 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 42) Given their skills and education, American workers in hostile regions such as Iraq earn higher incomes than American workers in the homeland. This is partly because: A) American workers in Iraq face a higher risk of getting kidnapped and killed. B) jobs in Iraq in general require more education. C) the U.S. government restricts the number of American workers to work in Iraq. D) only a few people have the skills necessary for jobs in Iraq. Answer: A Diff: 1 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 43) Undesirable job features lead to a ________ labor ________. A) lower; demand B) higher; demand C) lower; supply D) higher; supply Answer: C Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

44) If the number of people with the skills necessary to perform a job decreases, labor ________ shifts to the ________. A) demand; left B) demand; right C) supply; left D) supply; right Answer: C Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 45) If the number of people with the skills necessary to perform a job increases, labor ________ shifts to the ________. A) demand; left B) demand; right C) supply; left D) supply; right Answer: D Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 46) If the costs of the training necessary to perform a job decrease, labor ________ shifts to the ________. A) demand; left B) demand; right C) supply; left D) supply; right Answer: D Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

47) If the worker's costs of the training necessary to perform a job increase, labor ________ shifts to the ________. A) demand; left B) demand; right C) supply; left D) supply; right Answer: C Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 48) Suppose that the steelworkers' association introduces a new steel worker licensing requirement. What do you expect will happen? A) More steelworkers will be employed, at a lower wage. B) More steelworkers will be employed, at a higher wage. C) Fewer steelworkers will be employed, at a lower wage. D) Fewer steelworkers will be employed, at a higher wage. Answer: D Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 49) Which of the following is partially responsible for the male-female wage gap in the United States? A) Women have, on average, less education than their male counterparts. B) Women have, on average, less work experience than their male counterparts. C) Women have been denied access to many occupations, leading to increased supply in a few occupations. D) All of the above are correct. Answer: D Diff: 2 Topic: The Gender Pay Gap and Racial Discrimination Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

50) Which of the following statements about the gender gap in income is INCORRECT? A) Women are underrepresented in more lucrative majors such as computer science and engineering. B) Women in many occupations have less experience, compared to men. C) Women have been denied access to high-paying male-dominated occupations. D) None of the above Answer: D Diff: 2 Topic: The Gender Pay Gap and Racial Discrimination Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 51) Which of the following statements about the gender gap in income is correct? A) The typical woman in the U.S. earns about 75% as much as the typical man. B) In higher education, women are under-represented in more lucrative majors such as physics and chemistry. C) Gender discrimination against women resulted in an excess supply of female workers in female-dominated occupations. D) All of the above Answer: D Diff: 2 Topic: The Gender Pay Gap and Racial Discrimination Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 52) Suppose that a male police officer earns more than a female administrative assistant, but they both have the same amount of education. The difference in wages: A) can be attributable to the increased danger of being a police officer. B) must be due to discrimination against women among police departments. C) will disappear once the labor market has reached equilibrium. D) is a violation of anti-discrimination laws. Answer: A Diff: 2 Topic: The Gender Pay Gap and Racial Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

53) Studies have shown that differences in wages between men and women: A) are explained in part by differences in productivity and in part by discrimination. B) are fully explained by differences in productivity, education, and skill. C) have disappeared in the last five years. D) are fully explained by discrimination. Answer: A Diff: 2 Topic: The Gender Pay Gap and Racial Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 54) Lower wages for women relative to those for men constitute wage discrimination if women earn lower wages: A) but are equally productive. B) and have lower productivity than men. C) in clerical and service occupations. D) due to career interruptions to raise children. Answer: A Diff: 2 Topic: The Gender Pay Gap and Racial Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 55) Which of the following explains the differences in earnings by race? A) differences in productivity B) racial discrimination C) differences in education and work experience D) all of the above Answer: D Diff: 2 Topic: The Gender Pay Gap and Racial Discrimination Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

56) Pay disparity by race: A) is caused by a combination of discrimination and differences in skills. B) is caused solely by discrimination. C) is caused solely by differences in skills. D) has disappeared in the last five years. Answer: A Diff: 2 Topic: The Gender Pay Gap and Racial Discrimination Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 57) Suppose that differences in skills explain part of the difference in wages by race. Wage differences arising from skill differences: A) may result from past discrimination in access to education. B) are not attributable to present or past discrimination. C) will disappear when labor markets are in equilibrium. D) are always classified as racial discrimination. Answer: A Diff: 3 Topic: The Gender Pay Gap and Racial Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 58) One reason that college graduates earn higher wages than non-graduates is because: A) college graduation serves as a signal of the individual's productivity. B) there are no additional skills learned in college that increase productivity. C) college graduates are always less intelligent than non-college graduates. D) college graduates are less equipped to deal with technological change, as their skills are technology-specific. Answer: A Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

59) One reason that college graduates earn higher wages than non-graduates is because college graduates: A) acquire additional skills to allow them to work in more industries than non-graduates. B) always work in more dangerous jobs than non-graduates. C) are always more intelligent than non-graduates. D) are less equipped to deal with technological change, as their skills are technology-specific. Answer: A Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 60) College students who increase their human capital by acquiring the skills required for certain occupations typically earn higher incomes than high school graduates. This is called: A) the learning effect of a college education. B) the signaling effect of a college education. C) the discriminatory effect of a college education. D) none of the above Answer: A Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 61) Compared to the typical high-school graduate, the typical college graduate has greater human capital and thus more options for both low-skill and high-skill jobs. This is called: A) the signaling effect of a college education. B) the learning effect of a college education. C) the discriminatory effect of a college education. D) all of the above Answer: B Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

62) People who complete college provide a signal to employers about their skills and thus face better employment opportunities than equally skilled high school graduates. This is called: A) the learning effect of a college education. B) the signaling effect of a college education. C) the discriminatory effect of a college education. D) none of the above Answer: B Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 63) Given their skills, a college graduate may be perceived as a good manager of time and the better fit for a managerial job than a high school graduate. This is an example of: A) the learning effect of a college education. B) the signaling effect of a college education. C) the discriminatory effect of a college education. D) all of the above Answer: B Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 64) The difference in wages between college graduates and high school graduates: A) has increased in recent years. B) is smaller than in the past. C) is nonexistent when labor markets are in equilibrium. D) has been stable for several decades. Answer: A Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

65) Over the last three decades the "college premium" has ________ because of ________. A) increased; technological advances B) decreased; technological advances C) increased; racial and gender discrimination D) decreased; laws that prohibit discrimination Answer: A Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 66) The unionization rate of private sector workers is about: A) 6.5%. B) 12.5%. C) 35.5%. D) 37.7%. Answer: A Diff: 1 Topic: Labor Unions and Wages Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 67) The unionization rate of public sector workers is about: A) 10.3%. B) 17.1%. C) 24.4%. D) 34.4%. Answer: D Diff: 1 Topic: Labor Unions and Wages Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

68) Which of the following statements is correct? A) For the United States, union workers earn 10 to 20 percent more than nonunion workers doing the same work. B) Most other industrialized countries have a larger union markup. C) The union markup is relatively small for unionized firms in a competitive market. D) None of the above Answer: A Diff: 1 Topic: Labor Unions and Wages Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 69) If a union is successful in increasing wages, it may find that: A) the demand for workers falls. B) the demand for workers increases. C) the price of union-made goods falls. D) the demand for union-made goods rises. Answer: A Diff: 2 Topic: Labor Unions and Wages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 70) Which of the following statements about featherbedding is correct? A) It may or may not increase the demand for labor. B) It may or may not increase wages. C) It forces a firm to hire more workers than it needs. D) All of the above Answer: D Diff: 1 Topic: Labor Unions and Wages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

71) Which of the following statements about featherbedding is correct? A) It could increase production costs, resulting in higher prices for products. B) The quantity of labor demanded by firms could actually decrease. C) It could lead to a lower wage and smaller employment in the long run. D) All of the above Answer: D Diff: 1 Topic: Labor Unions and Wages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 72) The practice of featherbedding is intended to help unions: A) reduce the tradeoff between higher wages and fewer jobs. B) negotiate for higher wages by assuring more efficient labor practices. C) increase membership by guaranteeing job growth. D) defeat "right-to-work" laws. Answer: A Diff: 2 Topic: Labor Unions and Wages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 73) Which of the following is a possible benefit of labor unions? A) It may facilitate a smooth relationship between labor and management. B) It may provide workers an intermediary to discuss job issues with managers. C) It may lead to an increase in productivity. D) All of the above Answer: D Diff: 1 Topic: Labor Unions and Wages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

74) Which of the following is a possible benefit of labor unions? A) They may help firms to retain a more experienced workforce. B) They may help firms reduce training costs of new employees. C) They may facilitate communications between workers and managers. D) All of the above Answer: D Diff: 1 Topic: Labor Unions and Wages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 75) Among all workers in the U.S. with PhDs, ________ percent are foreign born. A) 24 B) 1 C) 5 D) 90 Answer: A Diff: 1 Topic: Immigration and Labor Markets Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 76) Of the dozens of studies that study the effect on wages, most of the studies show that immigration has ________ effect on wages of the native worker as a whole. A) a relatively small B) zero C) a relatively large. D) a very large, almost 100% Answer: A Diff: 1 Topic: Immigration and Labor Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

77) Of the dozens of studies that study the effect on wages, most of the studies show that immigration decreases the wages of A) native workers with low levels of education. B) native PhD holders. C) foreign PhD holders in the U.S. D) college students. Answer: A Diff: 1 Topic: Immigration and Labor Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets Recall the Application about how the effect of a more dangerous job on wages may be used to calculate the value of a statistical life to answer the following question(s). 78) According to the Application, one way to calculate the value of a statistical life is to compare how much more workers are paid with: A) the increase in the probability of dying on the job. B) the average age of death for people who worked in that type of job. C) the number of people how died in that job that year. D) how much the company pays for life insurance for their workers. Answer: A Diff: 1 Topic: Application 3, The Value of a Statistical Life Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 79) According to the Application, if a worker is willing to take a $2,000 pay cut in order to reduce the probability of dying by .001, then the value of a statistical life is: A) $2,000,000. B) $2,000.001. C) $2. D) $20,000,000. Answer: A Diff: 1 Topic: Application 3, The Value of a Statistical Life Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

80) The wage for a particular occupation will be relatively low if supply is small relative to demand. Answer: FALSE Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 81) An increase in the market supply of clerks leads to an increase in the market wage rate for clerks. Answer: FALSE Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 82) A minimum wage above the equilibrium wage leads to an excess quantity supplied of labor. Answer: TRUE Diff: 2 Topic: The Market Effects of the Minimum Wage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 83) Waiters in countries where it's customary to tip waiters will tend to have lower wages than will waiters in countries where tipping is not customary. Answer: TRUE Diff: 2 Topic: The Market Effects of the Minimum Wage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

84) One would expect people who work the night shift to have higher wages than their day-shift counterparts. Answer: TRUE Diff: 1 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 85) If few people have the skill required for a job, it will pay less. Answer: FALSE Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 86) Airline pilots make more than bus drivers in part because the training costs of being an airline pilot are higher. Answer: TRUE Diff: 1 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 87) A construction laborer might make more than a similarly skilled book store clerk because the working conditions in the book store are more desirable. Answer: TRUE Diff: 1 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

88) The signaling effect leads to college graduates earning more because a college degree signals that a person has learned the required job skills. Answer: FALSE Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 89) In the United States, the unionization rate of private-sector workers is much higher than that of public-sector workers. Answer: FALSE Diff: 1 Topic: Labor Unions and Wages Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 90) Labor unions tend to drive wages higher than they would be otherwise. Answer: TRUE Diff: 1 Topic: Labor Unions and Wages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 91) A possible benefit of unions is lower turnover among workers, which in turn leads to lower training costs. Answer: TRUE Diff: 1 Topic: Labor Unions and Wages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

92) Labor unions may increase worker productivity by facilitating smooth relations between labor and management. Answer: TRUE Diff: 1 Topic: Labor Unions and Wages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 93) Almost all of the immigrants into the United States are uneducated. Answer: FALSE Diff: 1 Topic: Immigration and Labor Markets Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 94) Recent studies show that recent immigrants compete for jobs with immigrants who came into the country earlier. Answer: TRUE Diff: 1 Topic: Immigration and Labor Markets Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 95) Explain what will happen to the demand for labor, the equilibrium wage, and the equilibrium quantity of labor if a technological innovation makes workers more productive. Answer: A technological innovation that increases workers' productivity will cause the marginal revenue product curve for labor to shift upward. Since the marginal revenue product curve is the firm's short-run demand curve for labor, this means that the demand for labor has increased, leading to a higher equilibrium wage and a higher equilibrium quantity of labor. Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

96) Name two factors that will increase the demand for labor, and two factors that will increase the supply of labor. Answer: The demand for labor will increase if the productivity of workers increases, or if the price of the output produced by those workers increases. The supply of labor will increase if there is immigration, or if an occupation becomes relatively more attractive due to advertising, social status, or a change in the preferences of workers. Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 97) Evaluate the statement: All minimum wage workers will be better off if the minimum wage rises. Answer: This is probably incorrect. The minimum wage workers who keep their jobs will be better off. But if the labor demand curve is downward sloping (and it most likely is for minimum wage workers), some workers will lose their jobs. Everyone (including the workers) will pay more for the goods and services produced by minimum wage workers. Diff: 2 Topic: The Market Effects of the Minimum Wage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 98) Professional football players earn much higher wages than do accountants. Why? Answer: While being an accountant requires very specialized skills, the effective barriers to entry into the accounting market are lower than those necessary (that is, high athletic skill) to be a successful football player. Other factors, such as desirability of work conditions, may also factor in here. Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

99) Lawyers are required to pass a comprehensive bar exam to be licensed to practice law. What effect should this have on the number of lawyers, the wages they receive, and the price people have to pay to receive legal services? Answer: This is a barrier to entry that will decrease the supply of labor in the legal profession. This will result in higher wages and fewer workers. The prices of legal services will increase as well. Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 100) Explain why women, on average, earn less than men in the United States. Answer: On average, women have less education and less work experience. Especially in education, women have been underrepresented in more lucrative majors while being overrepresented in majors such as general liberal arts. In addition to the differences in skills and productivity, occupational discrimination against women has also contributed to the large gender gap in income. Diff: 2 Topic: The Gender Pay Gap and Racial Discrimination Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 101) Why do college graduates earn higher wages than non-graduates? Answer: There are at least two explanations. First is the "learning effect" of college attendance: people who go to college earn more because they acquired valuable skills in college. In addition, the "signaling effect" suggests that individuals can indicate their high ability levels by going to college, a costly signal for low-ability people. Diff: 2 Topic: Variations in Wages across Occupations and the College Premium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

102) What is featherbedding and why do unions engage in the practice? Answer: Featherbedding is one of the approaches that labor unions use to increase the amount of labor required to produce a given quantity of output. Featherbedding occurs when union rules require more workers than necessary to perform a task. For example, requiring a minimum number of crew members regardless of the difficulty of the job is one type of featherbedding. Diff: 2 Topic: Labor Unions and Wages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 103) Explain why featherbedding may or may not increase the demand for labor. Answer: When firms are forced to use more labor per unit of output, their production costs are likely to increase, resulting in higher prices for their products. If consumers respond to higher prices by purchasing noticeably less output, the total employment may actually decrease. Diff: 2 Topic: Labor Unions and Wages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets 104) Explain the possible benefits of labor unions. Answer: Unions may increase worker productivity by facilitating communication between workers and managers. Unions may also benefit unionized firms by reducing turnover among workers. Diff: 2 Topic: Labor Unions and Wages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets

10.4 The Distribution of Income and Public Policy 1) Suppose that we compare shares of income earned by different U.S. groups by dividing all households into five groups. Which of the following statements about the income distribution in the United States is correct? A) Shares of income remain roughly constant as we move from the lowest quintile to the highest quintile. B) Shares of income decrease as we move from the lowest quintile to the highest quintile. C) Shares of income increase as we move from the lowest quintile to the highest quintile. D) None of the above Answer: C Diff: 1 Topic: Income Distribution in 2013 Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 2) In 2013, the income share of the lowest quintile was A) 3 percent. B) 20 percent C) 90 percent D) 47 percent. Answer: A Diff: 1 Topic: Income Distribution in 2013 Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 3) In 2013, the income share of the highest quintile was A) almost 60 percent. B) 20 percent. C) almost 90 percent. D) 47 percent. Answer: A Diff: 1 Topic: Income Distribution in 2013 Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination

4) Which of the following is a main factor that explains the differences in the incomes of U.S. households? A) inheritances B) luck and misfortune C) discrimination D) all of the above Answer: D Diff: 1 Topic: Income Distribution in 2013 Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 5) Which of the following is the most important reason for growing inequality in the income distribution in the United States? A) an increase in demand for highly educated workers B) inheritances C) discrimination D) a steady increase in tuition and fees for a college education Answer: A Diff: 1 Topic: Changes in the Distribution of Income Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 6) Which of the following explains the impact of technological advances on the wage gap between less skilled workers and highly skilled workers? A) Advances in technology have increased the demand for higher education degrees and widened the wage gap between the two groups. B) Advances in technology have increased the productivity of less skilled workers and thus narrowed the wage gap between the two groups. C) Advances in technology have increased the demand for less skilled workers and highly skilled workers alike, and thus the wage gap between the two groups remains unchanged. D) None of the above Answer: A Diff: 1 Topic: Changes in the Distribution of Income Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination

7) Which of the following explains the impact of the expansion of international trade on the demand for less skilled workers in the United States? A) An increase in international trade has increased the demand for less skilled workers. B) An increase in international trade has decreased the demand for less skilled workers. C) An increase in international trade has had little impact on the demand for less skilled workers. D) The impact of the expansion of international trade on the demand for less skilled workers in the United States varies from year to year. Answer: B Diff: 1 Topic: Changes in the Distribution of Income Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 8) The poverty rate in the United States is highest for: A) married couples. B) childless households. C) female headed households. D) single people. Answer: C Diff: 1 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 9) The poverty rate in the United States is lowest for: A) whites. B) blacks. C) Hispanics. D) Asians. Answer: D Diff: 2 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination

10) Poverty rates among the elderly are: A) much lower than poverty rates among children. B) higher than the poverty rates among children. C) approximately the same as the poverty rates among children. D) rising more rapidly than the poverty rates among children. Answer: A Diff: 1 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 11) A means tested government program is one that: A) is pilot tested to see if it works. B) provides assistance to those below a certain income level. C) is temporary and ends after a short period of time. D) all of the above Answer: B Diff: 2 Topic: Poverty and Public Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 12) Government means tested programs ________ the overall poverty rate. A) substantially decrease B) have not changed C) lead to an increase in D) drop to zero Answer: A Diff: 1 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination

13) The Temporary Aid to Needy Families (TANF) program: A) requires that recipients participate in work activities. B) is associated with a decrease in single mothers working. C) has caused a rise in national welfare caseloads. D) was an important factor in the increase in poverty among children between 1993 and 2002. Answer: A Diff: 2 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 14) Under the Temporary Aid to Needy Families (TANF program), work activities are defined to include: A) vocational training. B) community service. C) on-the-job training. D) all of the above Answer: D Diff: 2 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 15) A relatively high base income in a cash assistance program: A) reduces the incentive to work. B) increases the incentive to work. C) does not affect the incentive to work. D) will reduce the incentive to work through the substitution effect but will increase the incentive to work through the income effect. Answer: A Diff: 2 Topic: Poverty and Public Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination

16) Compared with a low benefit reduction rate, a relatively high benefit reduction rate in a cash assistance program: A) reduces the incentive to work. B) increases the incentive to work. C) does not affect the incentive to work. D) will reduce the incentive to work through the substitution effect but will increase the incentive to work through the income effect. Answer: A Diff: 2 Topic: Poverty and Public Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination Recall the Application about the effects of increasing state level Earned Income Tax Credit (EITC) on child health in the United States to answer the following question(s). 17) Recall the Application. Earned Income Tax Credit improves child health because: A) it increases employment and hence, health benefits. B) it increases income resulting in higher health expenditures. C) it forces children to work so they can get health insurance. D) A and B are both correct. Answer: D Diff: 2 Topic: Application 4, Earned Income Tax Credit and Child Health Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 18) Recall the Application. How does EITC affect government health expenditures? A) EITC raises private insurance coverage, causing a corresponding decrease in public health insurance expenditures in Medicaid and Children's Health Insurance Program (CHIP). B) EITC has no effect on public health insurance expenditures in Medicaid and Children's Health Insurance Program (CHIP). C) EITC raises private insurance coverage and a similar increase in public health insurance expenditures in Medicaid and Children's Health Insurance Program (CHIP). D) EITC lowers private insurance coverage, causing a corresponding increase in public health insurance expenditures in Medicaid and Children's Health Insurance Program (CHIP). Answer: A Diff: 2 Topic: Application 4, Earned Income Tax Credit and Child Health Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination

19) Recall the Application. According to the study cited in the Application, does EITC improve income distribution? A) Yes, aside from increasing income for low-income households, it improves the health levels of the worker and their families. B) Yes, EITC encourages workers to sop working and get an education in the health industry. C) No, only the politicians get rich because of EITC. D) No, the level of spending on EITC is so low it has no measurable effects on incomes of the poor. Answer: A Diff: 2 Topic: Application 4, Earned Income Tax Credit and Child Health Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 20) Recall the Application. According to the study cited in the Application, a $100 increase in the value of the state EITC causes a decrease in the probability that a child is in fair or poor health by ________percentage points. A) 1.2 B) 7.6 C) 9.9 D) 0.5 Answer: A Diff: 2 Topic: Application 4, Earned Income Tax Credit and Child Health Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 21) From 1979-2007, the share of market income for the bottom 99 percent of U.S. households decreased. Answer: TRUE Diff: 1 Topic: Changes in the Distribution of Income Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination

22) From 1979-2007, labor income for U.S. households became more evenly distributed. Answer: FALSE Diff: 1 Topic: Changes in the Distribution of Income Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 23) Between 1992 and 1999, the employment rate for single mothers in the United States: A) increased by 15 percentage points. B) decreased by 19 percentage points. C) remained fairly constant. D) more than doubled. Answer: A Diff: 1 Topic: Earned Income Tax Credit Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 24) From 2002-2004, the earned income tax credit ________ the poverty rate among participants. A) slightly increased B) decreased C) had little to no effect on D) more than doubled Answer: B Diff: 1 Topic: Earned Income Tax Credit Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 25) The poverty rate in the United States has been growing for people over age 65. Answer: FALSE Diff: 1 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination

26) The poverty rate in the United States is lowest for whites. Answer: FALSE Diff: 1 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 27) Black and Hispanics poverty rates in the United States are about twice as high as Asian and white poverty rates. Answer: TRUE Diff: 1 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 28) States can allow exceptions to Temporary Aid to Needy Families' (TANF) 60-month rule for up to 20% of recipients. Answer: TRUE Diff: 1 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 29) Under Temporary Aid to Needy Families (TANF), a recipient loses their cash benefits when they get a job. Answer: FALSE Diff: 1 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 30) The earned income tax credit (EITC) is an earnings subsidy for low-income households. Answer: TRUE Diff: 1 Topic: Earned Income Tax Credit Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination

31) The earned income tax credit (EITC) has been a successful anti-poverty policy by encouraging participation in the workforce. Answer: TRUE Diff: 1 Topic: Earned Income Tax Credit Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 32) List and briefly describe the three key reasons for income inequality in a market-based economy. Answer: 1. Differences in labor skills and effort: some people have better labor skills, work longer hours, and/or work at more demanding jobs, and therefore earn more income. 2. Luck and misfortune: some people are luckier than others at investing their money, starting a business, picking an occupation, and having good health, and these people tend to earn more income. 3. Discrimination: some people are paid lower wages or have limited opportunities for education and work because of their race or gender. Diff: 2 Topic: Income Distribution in 2013 Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 33) What is means testing? Answer: It is providing government assistance to those whose income falls below a certain level. Diff: 2 Topic: Poverty and Public Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination 34) What does Temporary Aid to Needy Families (TANF) require of recipients? Answer: A recipient must participate in work activities defined as employment, on-the-job training, work experience, community service or vocational training. Diff: 2 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination

35) What does Temporary Aid to Needy Families (TANF) provide to recipients? Answer: TANF provides up to 60 months, consecutive or nonconsecutive, of cash assistance. Diff: 2 Topic: Poverty and Public Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 11 Measuring a Nation's Production and Income 11.1 The Flip Sides of Macroeconomic Activity: Production and Income 1) Macroeconomics differs from microeconomics in that: A) macroeconomics is the study of individual markets, while microeconomics deals with the nation's economy as a whole. B) microeconomics is the study of individual markets, while macroeconomics deals with the nation's economy as a whole. C) macroeconomics focuses principally on social and political issues, while microeconomics involves the study of a nation's monetary system. D) microeconomics focuses principally on social and political issues, while macroeconomics involves the study of a nation's monetary system. Answer: B Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 2) Which of the following would be a macroeconomic question? A) How have the retirement benefits in the auto industry changed over time? B) How has inflation increased over time? C) How has the price of gold increased over time? D) How has the number of commercial airline flights decreased over time? Answer: B Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 3) Which of the following is a macroeconomic statement? A) Motorcycle manufacturer productivity decreased by three percent in 2016. B) The price of cell phones decreased by 18 percent last year. C) Real domestic output of seafood increased 12 percent from 2015 to 2016. D) The U.S. inflation rate was two percent in 2016. Answer: D Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns

4) Which of the following is NOT a macroeconomic statement? A) Aggregate worker productivity decreased by three percent in 2016. B) The price of cell phones decreased by 18 percent last year. C) Gross domestic product in Peru increased 4 percent from 2015 to 2016. D) The U.S. inflation rate was two percent in 2016. Answer: B Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 5) Macroeconomics: A) studies the behavior of individual consumers, firms and markets. B) studies the behavior of the economy as a whole. C) involves the interaction between different countries in specific markets. D) studies how computer automation has changed economics. Answer: B Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 6) Fluctuations in economic performance is one of the two basic issues of macroeconomics. The other is: A) tracking unemployment. B) keeping interest rates in check. C) long-run economic growth. D) monitoring inflation rates. Answer: C Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns

7) What are the two critical measures of a nation's economic health? A) income and spending B) sales and taxes C) wages and raises D) production and income Answer: D Diff: 2 Topic: The "Flip" Sides of Macroeconomic Activity: Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 8) The circular flow is used to make the point that: A) rising prices never occur during times of unemployment. B) unemployment only occurs during a recession. C) production generates income. D) households purchase factors of production from firms. Answer: C Diff: 1 Topic: The Circular Flow of Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 9) As depicted in the circular flow diagram, firms: A) demand the goods and services that households supply in product markets. B) supply the goods and services that households demand in product markets. C) demand the resources that households supply in product markets. D) supply the resources that households demand in factor markets. Answer: B Diff: 1 Topic: The Circular Flow of Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income

Recall the Application about using value added to measure the size of Walmart to answer the following question(s). 10) In listing both the amount and cost of Wal-Mart's 2017 sales, this Application is addressing the economic concept of: A) real versus nominal GDP. B) GDP as a measure of welfare. C) chain-weighted indexes. D) value added. Answer: D Diff: 1 Topic: Application 1, Using Value Added to Measure the True Size of Walmart Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 11) According to this Application, why is the value of Walmart's 2017 sales NOT an accurate measurement of its actual sales impact on the U.S. economy? A) The sales figure did not account for chain-weighted inflation measurements. B) The sales figure includes the value of purchases from other firms. C) The sales figure did not take into account the recession of 2008. D) The sales figure was in nominal, not real dollars. Answer: B Diff: 2 Topic: Application 1, Using Value Added to Measure the True Size of Walmart Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 12) According to this Application, by using a value-added approach to measure Wal-Mart's sales in 2017 and its impact on the economy, we are: A) using a chain-weighted index. B) avoiding double-counting. C) including GDP as a measure of welfare. D) excluding the net foreign sector. Answer: B Diff: 1 Topic: Application 1, Using Value Added to Measure the True Size of Walmart Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income

13) According to this Application, what was the approximate value of Walmart's value added in 2017? A) $120 billion B) $286 billion C) $361 billion D) $481 billion Answer: A Diff: 2 Topic: Application 1, Using Value Added to Measure the True Size of Walmart Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 14) Macroeconomics is the study of individual economic markets. Answer: FALSE Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 15) The manner in which a nation's economy reacts when the measured factors are changed affects almost every individual. Answer: TRUE Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 16) In the study of macroeconomics, production leads to income, and income leads to production in a continuing cycle. Answer: TRUE Diff: 1 Topic: The "Flip" Sides of Macroeconomic Activity: Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income

Recall the Application about using value added to measure the size of Walmart to answer the following question(s). 17) When measuring the true contribution of Walmart to the U.S. economy, we must use the value of Walmart's total sales. Answer: FALSE Diff: 1 Topic: Application 1, Using Value Added to Measure the True Size of Walmart Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 18) In the circular flow model, firms sell the services of factors of production to households. Answer: FALSE Diff: 1 Topic: The "Flip" Sides of Macroeconomic Activity: Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 19) If the prices of goods begin to rise rapidly, people may find it difficult to maintain their lifestyles. Explain why. Answer: The prices they pay for goods and services will increase and they will have to make sacrifices in other areas in order to maintain a lifestyle without going deeply into debt. Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 20) Explain the supply and demand of products, factors of production, the payments for the products and factors of production as described in the circular flow diagram. Answer: Households supply the factors of production demanded by firms through the factor market. Firms pay income to the households for these factors. Firms supply the goods and services demanded by households through the product market. Firms collect revenue from the households for the goods being purchased. Diff: 1 Topic: The Circular Flow of Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income

Recall the Application about using value added to measure the size of Walmart to answer the following question(s). 21) Explain why we should use Walmart's value added, not its sales, when analyzing its impact on the U.S. economy. Answer: While Walmart's sales in 2017 was $481 billion, Walmart had to buy goods and services from many other companies. To get the true contribution of Walmart on the economy, we must subtract its cost of sales. By subtracting its cost of sales of $361 billion, Walmart's value added was approximately $120 billion. Diff: 2 Topic: Application 1, Using Value Added to Measure the True Size of Walmart Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 11.2 The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product 1) The value of all final goods and services produced during a given time period measures a nation's: A) gross domestic product. B) net national product. C) consumer price index. D) net exports. Answer: A Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 2) If an economy produced 60 pounds of sushi at $12 per pound and 15 gallons of sake at $30 per gallon, the total value of these goods and services would be: A) $450. B) $720. C) $1,170. D) $2,700. Answer: C Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

3) If an economy produced 220 pounds of jelly beans at $5 per pound and 90 pounds of gum drops at $2 per pound in 2016, its real gross domestic product (GDP) was: A) 310 pounds of candy. B) $180. C) $1,100. D) $1,280. Answer: D Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 4) We measure gross domestic product by multiplying the quantities of goods by their prices because it allows us to: A) express the values of products in a common unit of measurement. B) correct for inflation. C) directly compare the output of one economy to that of another. D) calculate the total number of units of goods produced in an economy. Answer: A Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5) Gross domestic product calculations count only final goods and services because: A) these are the only goods and services that are purchased in an economy. B) counting all goods and services would lead to double-counting of many activities. C) it is difficult to measure the prices of intermediate goods produced. D) one cannot calculate the quantities of intermediate goods produced. Answer: B Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

6) "Final goods and services" are those that are: A) produced outside the United States. B) used in the production of other goods and services. C) double counted in the calculation of GDP. D) sold to ultimate or final purchasers. Answer: D Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 7) A rancher raises sheep. Once a year he shears them and sells the raw wool to a processor who cleans it and spins it into yarn. The yarn is then sold to a knitting mill, which produces and sells sweaters. In calculating GDP we would count: A) the raw wool, the yarn and the sweaters. B) only the yarn and the sweaters. C) only the sweaters. D) only the raw wool and the yarn. Answer: C Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 8) How does real gross domestic product (GDP) differ from nominal GDP? A) Nominal GDP controls for price changes, while real GDP does not. B) Real GDP controls for price changes, while nominal GDP does not. C) Nominal GDP can be used to directly compare the amount of output produced from year to year, while real GDP cannot be used for such comparison. D) There is no difference between nominal GDP and real GDP. Answer: B Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

9) When there are sustained increases in real GDP over time, we say that the economy is undergoing: A) economic stagnation. B) a recession. C) economic growth. D) massive changes in productive capacity. Answer: C Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 10) The data presented in the text shows that in the period from 1947-2013, real GDP in the United States has: A) increased substantially. B) decreased in every year since 1947. C) decreased only in recent years. D) generally remained the same. Answer: A Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11) Which prices are used to measure goods and services in calculating the nominal GDP? A) past years prices B) current prices C) average prices D) projected prices Answer: B Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

12) Which of the following is NOT a component of gross domestic product? A) net exports B) government purchases C) purchases by consumers of used goods D) purchases by consumers of finished goods Answer: C Diff: 1 Topic: The Components of GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 13) How many broad categories are used by economists to define the GDP? A) 3 B) 4 C) 6 D) 8 Answer: B Diff: 1 Topic: The Components of GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 14) The largest component of GDP is: A) government spending. B) consumption expenditures. C) private investment expenditures. D) net exports. Answer: B Diff: 1 Topic: Consumption Expenditures Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 15) Which of the following is NOT an example of a consumption expenditure? A) a digital camera you purchase to take on vacation B) a new county jail C) a motorcycle you purchase to ride on the weekends D) a restaurant meal Answer: B Diff: 1 Topic: Consumption Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11 Copyright © 2020 Pearson Education, Inc.

16) Which of the following is an example of a consumption expenditure? A) the construction of a new public library B) the purchase of a ticket to a New Orleans Saints game C) the purchase of a new fire truck D) the salary paid to the mayor of Denver Answer: B Diff: 2 Topic: Consumption Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 17) For the purpose of GDP accounting, consumption expenditures include: A) only nondurable goods. B) only durable goods. C) both nondurable goods and services. D) durable goods, nondurable goods, and services. Answer: D Diff: 1 Topic: Consumption Expenditures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 18) What is the fastest-growing component of consumption in the United States? A) new home construction B) nondurable goods C) durable goods D) services Answer: D Diff: 1 Topic: Consumption Expenditures Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 19) Which of the following is the largest component of the GDP? A) consumption expenditures B) government purchases C) net exports D) investment Answer: A Diff: 1 Topic: Consumption Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 12 Copyright © 2020 Pearson Education, Inc.

20) Blu-ray disc players, iPhones, and hybrid cars are generally considered to be ________ goods. A) durable B) nondurable C) intermediate D) service Answer: A Diff: 1 Topic: Consumption Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 21) Bananas, chocolate bars, chewing gum, orange juice and yogurt are considered to be ________ goods. A) durable B) nondurable C) essential D) service Answer: B Diff: 1 Topic: Consumption Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 22) Going to the dentist would be counted in GDP as: A) crowns and fillings. B) insurance utilization. C) a service. D) a measure of welfare. Answer: C Diff: 1 Topic: Consumption Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

23) Suppose that a sporting goods store had $800 of golf balls on its shelves at the beginning of 2016 and $1,300 at the end of 2016. The amount of inventory investment included in GDP would be: A) $500. B) $800. C) $1,300. D) $2,100. Answer: A Diff: 1 Topic: Private Investment Expenditures Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 24) Which of the following is NOT a component of private investment, for purposes of GDP accounting? A) newly produced housing B) additions to firms' stock of inventories C) purchases by firms of used machinery D) newly built factories Answer: C Diff: 2 Topic: Private Investment Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 25) Gross investment is: A) what is left over from total new private investment after depreciation. B) the total amount of private investment purchases, whether new or previously existing. C) the total amount of new private investment purchases. D) the wear and tear on private investment. Answer: C Diff: 1 Topic: Private Investment Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

26) Depreciation is: A) what is left over from total new private investment after use for a year. B) the total amount of private investment purchases, whether new or previously existing. C) the total amount of new private investment purchases. D) the wear and tear on private investment. Answer: D Diff: 1 Topic: Private Investment Expenditures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 27) Net investment is: A) what is left over from total new private investment after depreciation. B) the total amount of private investment purchases, whether new or previously existing. C) the total amount of new private investment purchases. D) gross investment plus depreciation. Answer: A Diff: 1 Topic: Private Investment Expenditures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 28) If in the third quarter of 2016 total investment spending was $4,768 billion and depreciation was $3,292 billion, then the amount counted in GDP, which is known as gross investment, would be: A) $1,476 billion. B) $3,292 billion. C) $4,768 billion. D) $8,060 billion. Answer: C Diff: 2 Topic: Private Investment Expenditures Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

29) If in the third quarter of 2016 total investment spending was $4,768 billion and depreciation was $3,292 billion, then net investment was equal to: A) $1,476 billion. B) $3,292 billion. C) $4,768 billion. D) $8,060 billion. Answer: A Diff: 1 Topic: Private Investment Expenditures Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 30) Which of the following is NOT an example of private investment expenditure? A) new plants and equipment added during the year B) new houses built during the year C) using credit cards to purchase durable and nondurable goods D) increases in inventories on goods produced during the year Answer: C Diff: 1 Topic: Private Investment Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 31) The majority of spending in the category of government purchases comes from: A) the federal government. B) state and local governments. C) transfer payments. D) military spending. Answer: B Diff: 1 Topic: Government Purchases Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

32) For the purposes of GDP accounting, government purchases include: A) the purchases of new military equipment. B) Social Security payments. C) direct transfer payments by the government to other individuals. D) welfare payments. Answer: A Diff: 1 Topic: Government Purchases Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 33) For the purposes of GDP accounting, government purchases: A) are considered part of investment. B) are considered part of consumption. C) include transfer payments. D) include wages and benefits paid to government workers. Answer: D Diff: 1 Topic: Government Purchases Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 34) Social Security payments are examples of: A) nondurable goods. B) durable goods. C) services. D) transfer payments. Answer: D Diff: 1 Topic: Government Purchases Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 35) In GDP accounting, Social Security payments are: A) not counted as part of government purchases and GDP. B) are counted in government purchases, but not counted in GDP. C) are not counted in government purchases, but counted in GDP. D) are counted both in government purchases and in the GDP. Answer: A Diff: 1 Topic: Government Purchases Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 17 Copyright © 2020 Pearson Education, Inc.

36) Transfer payments are excluded from government purchases in GDP accounting because: A) they are difficult to measure. B) they are a reward to individuals who have been productive their entire lives. C) they are already included as part of investment. D) nothing is being produced in return for the payment. Answer: D Diff: 1 Topic: Government Purchases Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 37) A nation's net exports consist of: A) its exports plus its imports. B) its exports minus its imports. C) its exports plus all other nation's imports. D) its imports plus all other nation's exports. Answer: B Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 38) Net exports include goods produced: A) domestically that are sold domestically, less goods produced domestically that are sold abroad. B) domestically that are sold abroad, less goods produced domestically that are sold domestically. C) domestically that are sold abroad, less goods that are produced abroad that are sold domestically. D) abroad that are sold domestically, less goods that are produced domestically that are sold abroad. Answer: C Diff: 2 Topic: Net Exports Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

39) Which of the following should be included in U.S. GDP? A) a 3D television manufactured in Thailand and sold in the United States B) a 3D television manufactured in Thailand by a U.S. firm and sold in the United States C) a 3D television manufactured in the United States and sold in Thailand D) a used 3D television manufactured in the United States and sold in Thailand Answer: C Diff: 1 Topic: Net Exports Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 40) A trade surplus occurs when: A) a country purchases more from abroad than other countries purchase from it. B) a country sells more abroad than it purchases from abroad. C) a country's firms open more stores abroad than foreign firms open in the country. D) foreign firms open more stores in a country than the country opens in foreign countries. Answer: B Diff: 1 Topic: Net Exports Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 41) Exports ________ GDP and imports ________ GDP. A) increase; decrease B) decrease; increase C) increase; increase D) decrease; decrease Answer: A Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 42) GDP is supposed to measure the goods ________ the United States. A) purchased in B) produced in C) imported to D) exported to Answer: B Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 19 Copyright © 2020 Pearson Education, Inc.

43) When considering imports and exports, economists include the ________ as a component of the GDP. A) total imports B) total exports C) net exports D) gross exports Answer: C Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 44) A "trade deficit" occurs when: A) we sell more to other countries than we buy from them. B) we buy more from other countries than we sell to them. C) we sell more to one country than another. D) we sell less to one country than another. Answer: B Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 45) The GDP equation is: A) Y = C + I + G + NX. B) Y = C - I - G - NX. C) C + I = G + NX. D) C + I = Y + G + NX. Answer: A Diff: 1 Topic: Putting it all Together: The GDP Equation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

Recall the Application about intellectual property in GDP accounts to answer the following question(s). 46) According to the Application, the government agency tasked with the production of the GDP and other national accounts is: A) the Bureau of Economic Analysis. B) the Central Intelligence Agency. C) the Bureau of Labor Statistics. D) the White House. Answer: A Diff: 1 Topic: Application 2, Intellectual Property in GDP Accounts Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 47) According to the Application, prior to 2013, which of the following was counted as intermediate inputs in our GDP accounts? A) research and development B) software development C) new artistic work D) All of the above are correct. Answer: D Diff: 1 Topic: Application 2, Intellectual Property in GDP Accounts Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 48) According to the Application, prior to 2013, firm expenditures on research and development and new artistic work were treated as ________ in our GDP accounts. A) intermediate inputs B) investment C) net exports D) consumption Answer: A Diff: 1 Topic: Application 2, Intellectual Property in GDP Accounts Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

49) According to the Application, after 2013, firm expenditures on research and development and new artistic work were treated as ________ in our GDP accounts. A) intermediate inputs B) investment C) net exports D) consumption Answer: B Diff: 1 Topic: Application 2, Intellectual Property in GDP Accounts Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 50) According to the Application, what was the effect on GDP of counting research and development and new artistic work as investment instead of intermediate inputs starting 2013? A) It had no effect on GDP. B) It increased GDP. C) It may increase or decrease GDP. D) It decreased GDP. Answer: B Diff: 1 Topic: Application 2, Intellectual Property in GDP Accounts Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 51) Intermediate goods are not counted as part of gross domestic product. Answer: TRUE Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 52) The value of goods produced in a previous year but sold in the current year is added to the GDP for the current year. Answer: FALSE Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

53) Nominal GDP is a measure of GDP that adjusts for price changes. Answer: FALSE Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 54) Nominal GDP uses current year prices to measure GDP. Answer: TRUE Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 55) The four components of GDP are consumption expenditures, private investment expenditures, government purchases, and transfer payments. Answer: FALSE Diff: 1 Topic: The Components of GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 56) As a component of GDP, consumption expenditures refers to purchases by consumers of currently produced goods and services. Answer: TRUE Diff: 1 Topic: Consumption Expenditures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 57) In the GDP accounts, investment includes the purchase of newly issued shares of stock. Answer: FALSE Diff: 1 Topic: Private Investment Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

58) To an economist, "investment" in the GDP accounts means purchases of new final goods and services by firms. Answer: TRUE Diff: 1 Topic: Private Investment Expenditures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 59) Depreciation is the term used when plants, equipment and housing deteriorate and wear out, thus losing their original values. Answer: TRUE Diff: 1 Topic: Private Investment Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 60) The majority of spending in the government purchases category comes from the federal government. Answer: FALSE Diff: 1 Topic: Government Purchases Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 61) In the determination of production of goods or services with respect to GDP, transfer payments are included. Answer: FALSE Diff: 1 Topic: Government Purchases Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 62) Wages paid to teachers, police personnel, and postal workers are not transfer payments because they are payments for services and not simply "transfers" of money. Answer: TRUE Diff: 1 Topic: Government Purchases Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

63) A trade surplus occurs when a country's exports exceed that country's imports. Answer: TRUE Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 64) Net exports are total imports minus total exports. Answer: FALSE Diff: 1 Topic: Net Exports Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 65) We ADD to the GDP when goods produced abroad are sold in the United States. Answer: FALSE Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 66) Define GDP. Answer: The total market value of all final goods and services produced within an economy in a given year. Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

67) Explain why only final goods are included in GDP. Answer: Final goods are those that are sold to ultimate or final purchasers as opposed to intermediate goods, which are goods that are used in the production process. Suppose for example that a farmer grows potatoes and then sells them to a fast food chain that uses them to make fries, which are then sold to the public. If both the potatoes and the fries were counted then the same thing would be counted twice; in other words, the potatoes would be counted when they were potatoes and then again when they were in the form of the fries. In order to avoid this double counting only the final goods are included in GDP. Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 68) List and describe the four components of GDP. Answer: Consumption expenditures are purchases by consumers of currently produced goods and services, either domestic or foreign. Private investment expenditures are purchases by firms. These include spending on new plants and equipment, newly produced housing and increases in inventory. Government purchases are purchases of newly produced goods and services by federal, state and local governments. They include any goods purchased and the wages and benefits of all government employees. Net exports are net purchases by the foreign sector, which is calculated as domestic exports minus domestic imports. Diff: 2 Topic: The Components of GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 69) Define transfer payments and explain why they are not included in the government purchases section of the GDP accounts. Answer: Transfer payments are funds paid to individuals that are not associated with the production of goods and services. They are not included in the government purchases section of the GDP accounts because nothing is being produced in return for the payment. However they do show up in the accounts indirectly when they are spent (and saved) by their recipients; thus they do appear in the consumption (and saving) section of the accounts. Diff: 2 Topic: Government Purchases Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

Recall the Application about intellectual property in GDP accounts to answer the following question(s). 70) From what we learned in the Application, explain how changing the classification of research and development from intermediate inputs to investment will affect the size of the country's GDP. Answer: When research and development is classified as intermediate inputs, they are not included as part of GDP. Once we start counting research and development as part of investment, it is now counted as part of GDP. As a result, the country's GDP will increase after we made this change. Diff: 2 Topic: Application 2, Intellectual Property in GDP Accounts Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11.3 The Income Approach: Measuring a Nation's Macroeconomic Activity Using National Income 1) Income that flows to the private sector for services and production is called: A) net income. B) national income. C) deficit income. D) derived income. Answer: B Diff: 1 Topic: The Income Approach: Measuring a Nation's Macroeconomic Activity Using National Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 2) When gross domestic product (GDP) is adjusted by adding any income earned abroad by U.S. firms or residents and by subtracting any income earned in the United States by non-U.S. corporations or foreign nationals, it is called: A) depreciation. B) subsidized income. C) international GDP. D) gross national product (GNP). Answer: D Diff: 1 Topic: Measuring National Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income

3) Depreciation is subtracted from GNP to determine: A) net income. B) net national product (NNP). C) net GDP. D) net imbalance on exports. Answer: B Diff: 1 Topic: Measuring National Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 4) Which of the following is a category of national income? A) net interest B) corporate profits C) rental income D) all of the above Answer: D Diff: 1 Topic: Measuring National Income Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5) Which of the following is the largest component of national income? A) net interest B) corporate profits C) rental income D) compensation of employees by firms Answer: D Diff: 1 Topic: Measuring National Income Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 6) Which of the following is NOT a component of value added of a firm? A) expenditures on intermediate goods B) profits C) wages D) interest Answer: A Diff: 1 Topic: Measuring National Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 28 Copyright © 2020 Pearson Education, Inc.

7) The amount of income that households keep after paying taxes is: A) national income. B) personal income. C) personal disposable income. D) value added income. Answer: C Diff: 1 Topic: Measuring National Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 8) Personal income and personal disposable income refer to payments ultimately flowing to: A) firms. B) households. C) governments. D) foreigners. Answer: B Diff: 1 Topic: Measuring National Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 9) A firm's value added can be measured as the value of its: A) profits. B) purchases of inputs from other firms. C) total sales. D) total sales, less purchases from other firms. Answer: D Diff: 1 Topic: Measuring National Income through Value Added Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

10) If Cassie's Coffee House purchases 42 cents worth of ingredients and spends 28 cents on wages per cup of coffee to produce an 89 cent cup of coffee, then Cassie's Coffee House's value added per cup of coffee is: A) 19 cents. B) 28 cents. C) 47 cents. D) 61 cents. Answer: C Diff: 2 Topic: Measuring National Income through Value Added Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 11) If Cassie's Coffee House purchases 33 cents worth of ingredients and spends 36 cents on wages per cup of coffee to produce an 89 cent cup of coffee, then Cassie's Coffee House's contribution to GDP is ________ per cup of coffee. A) 20 cents B) 33 cents C) 36 cents D) 56 cents Answer: D Diff: 2 Topic: Measuring National Income through Value Added Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 12) In the expanded circular flow diagram, the government supplies: A) goods and services to the product market. B) factors of production to the factor market. C) goods and services to households. D) factors of production to firms. Answer: A Diff: 2 Topic: An Expanded Circular Flow Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

13) In the expanded circular flow diagram, the rest of the world interacts directly with: A) households. B) firms. C) product markets. D) factor markets. Answer: C Diff: 2 Topic: An Expanded Circular Flow Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures Recall the Application about the link between happiness and GDP to answer the following question(s). Comparing changes in happiness to changes in per capita income over the last 30 years, economists at Dartmouth College and Warwick University have measured levels of happiness in the United States and United Kingdom based on income levels, ethnicity, age, and gender. 14) This Application addresses the economic concept of: A) real versus nominal GDP. B) fluctuations in GDP. C) GDP as a measure of welfare. D) measuring a nation's national income. Answer: C Diff: 1 Topic: Application 3, The Links Between Self-Reported Happiness and GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 15) According to the Application: A) reported levels of happiness in the United States have increased over the past 30 years. B) stable marriages account for no more happiness than marriages ending in divorce. C) retired people report higher levels of happiness than people below the age of 40. D) money does appear to buy happiness, ceteris paribus. Answer: D Diff: 1 Topic: Application 3, The Links Between Self-Reported Happiness and GDP Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

16) According to the Application, large increases in per capita income in the United States over the past 30 years have: A) had the greatest impact on retired people. B) not increased happiness levels. C) led to a higher divorce rate. D) lowered stress levels. Answer: B Diff: 1 Topic: Application 3, The Links Between Self-Reported Happiness and GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 17) National income is the income that individuals and firms earn from their production. Answer: TRUE Diff: 1 Topic: The Income Approach: Measuring a Nation's Macroeconomic Activity Using National Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 18) Personal disposable income is pre-tax income that flows directly to households. Answer: FALSE Diff: 1 Topic: Measuring National Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 19) Compensation of employees is the largest component of national income. Answer: TRUE Diff: 1 Topic: Measuring National Income Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

20) Explain the difference between U.S. GDP and U.S. GNP. Answer: U.S. GDP is the total market value of all final goods and services produced within the United States within a given year. U.S. GNP is calculated by adding to U.S. GDP the net income earned by U.S. firms and residents abroad. Thus, U.S. GNP measures the total income earned by U.S. firms and residents worldwide. Diff: 2 Topic: Measuring National Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures Recall the Application about the link between happiness and GDP to answer the following question(s). Comparing changes in happiness to changes in per capita income over the last 30 years, economists at Dartmouth College and Warwick University have measured levels of happiness in the United States and United Kingdom based on income levels, ethnicity, age, and gender. 21) According to the article, how did the researchers conclude work may hinder happiness, even with higher income. Answer: In their study, Blanchflower and Oswald found that controlling for income, education, and other personal factors, happiness among men and women in the U.S. reaches a minimum at the ages of 49 and 45, respectively. Since these are also the years in which earnings are usually the highest, it does suggest that work takes its toll on happiness. Diff: 2 Topic: Application 3, The Links Between Self-Reported Happiness and GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11.4 A Closer Examination of Nominal and Real GDP 1) If real GDP was 100 in 2015 and 104.4 in 2016, the growth rate of real GDP between 2015 and 2016 was: A) 2.2 percent. B) 4.4 percent. C) 100 percent. D) 102.2 percent. Answer: B Diff: 1 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

2) If the economy grew at 7 percent from 2015 to 2016 and real GDP was 400 in 2015, what was real GDP in 2016? A) 393 B) 400 C) 407 D) 428 Answer: D Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 3) Suppose that nominal GDP in year 1 is 200 and nominal GDP in year 2 is 242. Assume that inflation is ten percent per year. How fast did the economy grow between these two years? A) 10 percent B) 12 percent C) 21 percent D) 42 percent Answer: A Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures Use the following information to answer the next several questions: Scenario 1: Imagine that an economy produces two goods, flashlights and fishing lures. In 2015, the economy produced 70 flashlights and 40 fishing lures, and the prices of flashlights and fishing lures were $5 and $12, respectively. In 2016, the economy produced 85 flashlights and 50 fishing lures, and the prices of flashlights and fishing lures were $7 and $15, respectively. 4) Based on the information in Scenario 1, nominal GDP in 2015 in this economy was: A) $830. B) $1,025. C) $1,090. D) $1,345. Answer: A Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

5) Based on the information in Scenario 1, nominal GDP in 2016 in this economy was: A) $830. B) $1,025. C) $1,090. D) $1,345. Answer: D Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 6) Based on the information in Scenario 1, real GDP in 2016 (in 2015 dollars) in this economy was: A) $830. B) $1,025. C) $1,090. D) $1,345. Answer: B Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 7) Based on the information in Scenario 1, nominal GDP grew by about ________ percent from 2015 to 2016. A) 23 B) 31 C) 62 D) 162 Answer: C Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

8) Based on the information in Scenario 1, real GDP grew by about ________ percent from 2015 to 2016. A) 23 B) 31 C) 62 D) 162 Answer: A Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 9) When GDP is measured in "current prices" it is known as the: A) real GDP. B) nominal GDP. C) real GNP. D) nominal GNP. Answer: B Diff: 1 Topic: Measuring Real versus Nominal GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 10) When the GDP is measured using "adjustments for price changes" it is known as the: A) real GDP. B) nominal GDP. C) real GNP. D) nominal GNP. Answer: A Diff: 1 Topic: Measuring Real versus Nominal GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

11) A chain-weighted index: A) is used to understate the rate of inflation. B) uses neighboring years' data to calculate changes in nominal GDP. C) calculates changes in prices by using an average of base years from neighboring years to obtain a more accurate measure of real GDP growth. D) is a useful tool for determining which fence to purchase. Answer: C Diff: 2 Topic: How to Use the GDP Deflator Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 12) What is the chain-weighted price index for GDP in the base year? A) 0 B) 1 C) 100 D) The answer depends on the price index for the current year. Answer: C Diff: 1 Topic: How to Use the GDP Deflator Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 13) When differences between nominal GDP and real GDP result due to price changes and nothing else is compared, an index is created called the: A) inflation index. B) consumer price index. C) GDP deflator. D) index of leading indicators. Answer: C Diff: 1 Topic: How to Use the GDP Deflator Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 14) Nominal GDP measures the value of goods and services using current-year prices. Answer: TRUE Diff: 1 Topic: Measuring Real versus Nominal GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

15) Nominal GDP is measured by calculating real GDP at constant prices. Answer: FALSE Diff: 1 Topic: Measuring Real versus Nominal GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 16) The GDP deflator measures how prices change over time. Answer: TRUE Diff: 1 Topic: How to Use the GDP Deflator Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 17) Imagine that an economy produces two goods, flashlights and fishing lures. In 2015, the economy produced 100 flashlights and 50 fishing lures, and the prices of flashlights and fishing lures were $5 and $11, respectively. In 2016, the economy produced 120 flashlights and 60 fishing lures, and the prices of flashlights and fishing lures were $7 and $14, respectively. respectively. What happened to nominal GDP from 2015 to 2016? What happened to real GDP? Answer: Nominal GDP in 2015 was (100 × 5) + (50 × 11) = $1,050. In 2016 nominal GDP was (120 × 7) + (60 × 14) = $1,680. For real GDP, we calculate GDP for 2016 in 2015 dollars. 2016 GDP in 2015 dollars would be (120 × 5) + (60 × 11) = $1,260. So while nominal GDP increased by 60 percent, real GDP only increased by 20 percent. Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 18) Prior to 1996 the government measured real GDP using 1987 prices. What would the rapid growth in computers and the fall in computer prices tend to do to the difference between true GDP growth and measured real GDP growth, relative to using a later year? Answer: Using 1987 prices would tend to overstate GDP growth relative to using prices from a later year. Computers were a burgeoning part of national product in the late 1980s and early 1990s, and the incremental contribution to GDP looks bigger when using a bigger price rather than a smaller price. Diff: 3 Topic: Measuring Real versus Nominal GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

19) Suppose someone told you that the chain-weighted price index for GDP in a country was 135. Why does this fact not convey much information to you? Answer: We do not have any price index information from any other years. So while we have a measure of "relative prices," we don't know what this measure is relative to. Diff: 2 Topic: How to Use the GDP Deflator Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 20) Between 2013 and 2016, a country's nominal GDP grew by 18 percent and its inflation rate (based on the chain-weighted price index for GDP) was 11 percent. How fast did real GDP grow over this period? Answer: The growth rate for real GDP would have been 1.18 / 1.11 = 1.06, so real GDP grew by 6 percent over the period. Diff: 3 Topic: How to Use the GDP Deflator Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11.5 Fluctuations in GDP 1) "Recession" refers to a period when real GDP in the economy: A) declines for at least six months. B) suffers due to political instability. C) grows rapidly. D) experiences a rise in living standards. Answer: A Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 2) A period in which real GDP in the economy declines for at least six months is referred to as: A) long term growth. B) a recession. C) a positive fluctuation. D) living standards. Answer: B Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 39 Copyright © 2020 Pearson Education, Inc.

3) Business cycles are: A) movements in stock prices. B) the transfer of executives between firms. C) used to describe fluctuations in GDP. D) a description of the time required to bring a new product to market. Answer: C Diff: 1 Topic: Fluctuations in GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 4) When real GDP falls for two consecutive quarters the economy is in a: A) depression. B) recession. C) peak. D) trough. Answer: B Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5) The date at which a recession starts is called the: A) trough. B) peak. C) plateau. D) depression. Answer: B Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 6) The period of time in which the level of output moves from a trough to a peak is called a: A) recovery or expansion. B) depression. C) contraction or recession. D) plateau. Answer: A Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 40 Copyright © 2020 Pearson Education, Inc.

7) From World War II through 2017, the United States experienced ________ recessions. A) 2 B) 5 C) 11 D) 15 Answer: C Diff: 1 Topic: Fluctuations in GDP Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 8) A depression is: A) a severe recession. B) a sustained economic upturn. C) another word for a bull market. D) the period of time following a peak in the business cycle. Answer: A Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 9) How many quarters (3-month periods) must the real GDP decline to have the economy considered to be in a recession? A) 1 B) 2 C) 3 D) 4 Answer: B Diff: 1 Topic: Fluctuations in GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

10) The "expansion" of an economy occurs after: A) firms produce more goods. B) people spend more money. C) a trough. D) an inflationary period. Answer: C Diff: 1 Topic: Fluctuations in GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11) The common term for a severe recession is a: A) downturn. B) depression. C) bottoming out. D) economic adjustment. Answer: B Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 12) In a business cycle, the date at which a recession starts is called a trough. Answer: FALSE Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 13) In a business cycle, the period following a trough is called an expansion. Answer: TRUE Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 14) From 1948 to 2010, the United States has experienced only 4 recessions. Answer: FALSE Diff: 1 Topic: Fluctuations in GDP Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 42 Copyright © 2020 Pearson Education, Inc.

15) Describe the recession phase of a business cycle, including when it begins and when it ends. Answer: Business cycles describe time periods of economic fluctuations. A recession is a period when real GDP falls for six or more consecutive months. The date at which a recession starts is called a peak. The date at which a recession ends is called a trough. After a trough comes an expansion, or recovery, phase, eventually leading to a new peak, and a new cycle begins. Diff: 2 Topic: Fluctuations in GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 16) What are the four phases of the business cycle. Answer: The four phases of the business cycle are: expansion, peak, recession, trough. Diff: 2 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11.6 GDP as a Measure of Welfare 1) What is the best measure of the value of output of an economy? A) GDP B) GNP C) NNP D) the GDP deflator Answer: A Diff: 1 Topic: GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 2) One of the shortcomings of GDP is that it: A) includes only transactions that take place in formal businesses. B) ignores transactions that do not take place in organized markets. C) includes measures of the underground economy. D) includes measures of changes of quality of life associated with producing output. Answer: B Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

3) GDP understates the value of output produced by an economy because it: A) includes transactions that do not take place in organized markets, such as home-cooked meals. B) excludes value added from the underground economy, such as tips taken "under the table." C) includes environmental degradation caused by increased output production. D) excludes the value of the wages and benefits of government employees. Answer: B Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 4) Suppose that a tire factory produces $825,000 of output and causes $70,000 worth of pollution as a result of production. The tire factory's official contribution to GDP would be ________ and its overall contribution to society would be ________. A) $825,000; $895,000 B) $895,000; $825,000 C) $825,000; $755,000 D) $755,000; $825,000 Answer: C Diff: 2 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5) GDP ignores all of the following EXCEPT: A) household production. B) the value of leisure time. C) products produced in other countries that are sold in the United States. D) changes in the environment that occur in the production of output. Answer: C Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

6) Why is the value of leisure listed as a shortcoming in the measurement of GDP? A) When households take time off for leisure, the activity is not counted in GDP. However, taking time off for leisure makes households better off. B) Because GDP increases when households take more leisure. C) Because leisure increases happiness only when we take a vacation with it. D) Because households really want to work every day, and leisure gets in the way of work. Answer: A Diff: 1 Topic: GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 7) GDP calculations tend to exclude all of the following EXCEPT: A) illegal transactions. B) environmental quality. C) work that people do for themselves in their own homes. D) salaries paid to government employees. Answer: D Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 8) Not including transactions from the underground economy will tend to ________ GDP, and not including environmental changes caused by pollution will tend to ________ GDP. A) overvalue; undervalue B) undervalue; overvalue C) overvalue; overvalue D) undervalue; undervalue Answer: B Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 9) GDP ignores transactions that take place in the underground economy. Answer: TRUE Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

10) If GDP included the value of leisure time, the value of U.S. GDP would most likely increase. Answer: TRUE Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11) GDP measures underestimate the value of output produced by an economy because they include services not transferred through markets. Answer: FALSE Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 12) Why is GDP only an imperfect valid measure of the value of output produced by an economy? Answer: GDP will miss transactions that do not take place in organized markets, does not include leisure time, and ignores the underground economy. In addition, GDP does not value changes in the environment that arise through the production of output. Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 13) Give some examples of transactions in markets which are not regulated or controlled. Answer: services such as cleaning, cooking, free child care, and people who run businesses from their homes, yard sales, and flea markets Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 14) Why is the value of leisure listed as a shortcoming in the measurement of GDP? Answer: When households take time off for leisure, the activity is not counted in GDP. However, taking time off for leisure makes households better off. Diff: 1 Topic: GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

15) List four things considered to be shortcomings in the determination of GDP in relation to the use of GDP as a measure of welfare. Answer: Transactions in unorganized markets, leisure time, the underground economy, and changes in the environment. Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 12 Unemployment and Inflation 12.1 Examining Unemployment 1) During periods of poor economic performance, real GDP: A) declines and unemployment rises. B) declines and unemployment declines. C) declines but unemployment typically does not change. D) is unchanged but unemployment rises sharply. Answer: A Diff: 1 Topic: Examining Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 2) An economic ________ refers to either an upturn or a downturn in the economy. A) stagnation B) model C) fluctuation D) chain index Answer: C Diff: 1 Topic: Examining Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 3) Economists define the unemployed as individuals who are: A) not currently working. B) not currently working but are actively looking for work. C) working but looking for a different job. D) working less than their desired amount of time. Answer: B Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

4) Economists define the labor force to include: A) only people who are working full time. B) people who are working. C) people who are not working but are actively looking for a job, and people who are working. D) all individuals of working age, regardless of whether they are working or looking for a job. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 5) The unemployment rate is the number of unemployed people: A) divided by the number of people who are working. B) divided by the total working-age population. C) divided by the sum of the number of people who are working and the number of people who are looking for work. D) and the number of people working fewer than their desired number of hours, divided by the number of people who are working or looking for work. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 6) If Sam does not have a job and is NOT looking for work, he is considered: A) unemployed and in the labor force. B) unemployed and not in the labor force. C) not in the labor force. D) unemployed. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

7) If Sam does not have a job and is NOT currently looking for work but has looked in the past, he is considered: A) unemployed and in the labor force. B) unemployed and not in the labor force. C) not in the labor force. D) unemployed. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 8) People who are currently not working but are actively looking for work are officially classified as: A) unemployed and in the labor force. B) unemployed and out of the labor force. C) employed and in the labor force. D) employed and out of the labor force. Answer: A Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 9) People who are only working part-time, but want to be working full-time, are classified officially as: A) unemployed and in the labor force. B) unemployed and out of the labor force. C) employed and in the labor force. D) employed and out of the labor force. Answer: C Diff: 2 Topic: How is Unemployment Defined and Measured? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

10) The fraction of the working-age population that is in the labor force is called the: A) employment rate. B) unemployment rate. C) labor force participation rate. D) nonresponse rate. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 11) What is the threshold age for individuals to be considered as being in the "labor force" for statistical purposes? A) 16 B) 18 C) 21 D) Over 21 Answer: A Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 12) Suppose an economy consists of 500,000 individuals 16 years and older, 260,000 are employed, and 21,000 are unemployed but actively seeking work. In this example the labor force is: A) 239,000. B) 260,000. C) 281,000. D) 500,000. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

13) Suppose an economy consists of 500,000 individuals 16 years and older, 260,000 are employed, and 21,000 are unemployed but actively seeking work. In this example the labor force participation rate is approximately: A) 4 percent. B) 48 percent. C) 52 percent. D) 56 percent. Answer: D Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 14) Suppose an economy consists of 500,000 individuals 16 years and older, 260,000 are employed, and 21,000 are unemployed but actively seeking work. In this example the unemployment rate is approximately: A) 4.2 percent. B) 6.1 percent. C) 7.5 percent. D) 8.0 percent. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 15) In June 2012, the U.S. labor force consisted of 142,415,000 employed and 12,749,000 unemployed. The U.S. unemployment rate for June 2012 was about: A) 7.4 percent. B) 8.2 percent. C) 9.0 percent. D) 11.2 percent. Answer: B Diff: 2 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

Employment status of the working age population of Metropolis is approximately: Employed full-time: 4,200 Employed part-time: 700 Not employed and looking for work: 300 Not employed and not looking for work: 200 Table 12.1 16) Given the data in Table 12.1, the labor force participation rate of Metropolis is approximately: A) 96 percent. B) 91 percent. C) 83 percent. D) 78 percent. Answer: A Diff: 2 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 17) Given the data in Table 12.1, the unemployment rate of Metropolis is approximately: A) 6 percent. B) 9 percent. C) 12 percent. D) 22 percent. Answer: A Diff: 2 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

18) Suppose that 50 percent of the part-time workers of Metropolis are looking for full-time jobs. Given the data in Table 12.1, if these workers were counted as not employed and looking for work, the unemployment rate of Metropolis would be approximately: A) 6 percent. B) 13 percent. C) 16 percent. D) 21 percent. Answer: B Diff: 2 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 19) Given the data in Table 12.1, if the workers who are "not employed and not looking for work" were counted as not employed and in the labor force, the unemployment rate of Metropolis would be approximately: A) 4 percent. B) 7 percent. C) 9 percent. D) 10 percent. Answer: C Diff: 3 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes Recall the Application about declining U.S. labor force participation rate since 1999 to answer the following question(s). 20) According to this Application, one explanation for the decline in the U.S. labor force participation rate since 1999 is: A) the decline in the overall population. B) the increasing number of retiring baby boomers. C) the increase in immigration to the United States. D) the increase in outsourcing by U.S. companies. Answer: B Diff: 1 Topic: Application 1, Declining Labor Force Participation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 7 Copyright © 2020 Pearson Education, Inc.

21) According to this Application, one explanation for the decline in the U.S. labor force participation rate since 1999 is: A) higher college enrollment. B) the increase in foreign ownership of U.S.-based companies. C) sluggish economic growth that resulted in more discouraged workers. D) the growing number of workers who have postponed retirement. Answer: C Diff: 1 Topic: Application 1, Declining Labor Force Participation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 22) Since 1997, the labor force participation rate for women in the United States has: A) remained virtually constant. B) increased more than 10 percent. C) decreased more than 20 percent. D) equaled the participation rate for men. Answer: A Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 23) People who want to work but have stopped looking for work because they could not find jobs after actively searching are called: A) employed. B) unemployed. C) discouraged workers. D) empowered. Answer: C Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

24) The existence of discouraged workers will lead to an official unemployment rate that is: A) overstated. B) understated. C) either overstated or understated. D) unbiased. Answer: B Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 25) If a large number of workers are classified as being out of the labor force when they are really looking for work, this will lead to an official unemployment rate that is: A) overstated. B) understated. C) neither overstated or understated. D) unbiased. Answer: B Diff: 2 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 26) Which specific government agency monitors unemployment? A) Commerce Department B) Bureau of Labor Statistics C) Executive Branch D) State Department Answer: B Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

27) For the purpose of statistically reporting the unemployment rate, "discouraged workers" are: A) counted. B) not counted. C) offered other jobs. D) trained to do different work. Answer: B Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 28) Individuals who have stopped looking for work after an active search because of the lack of transportation, lack of affordable child care, etc. are classified as ________ workers. A) non-contributing B) nonfunctional C) marginally attached D) very lazy Answer: C Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 29) The unemployment rate: A) rises during booms and falls during recessions. B) rises during recessions and falls during booms. C) rises during times of rapid economic growth and falls during times of slow economic growth. D) tends to remain the same in booms and recessions. Answer: B Diff: 1 Topic: Who are the Unemployed? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

30) Seasonally adjusted unemployment rates: A) adjust for the predictable summer increase in the unemployment rate for teenagers. B) adjust for the predictable summer decrease in the unemployment rate for teenagers. C) are the same as the unadjusted rates in periods of bad weather. D) are not calculated for the U.S. economy. Answer: A Diff: 1 Topic: Who are the Unemployed? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 31) The unemployment rate is calculated by dividing the number of unemployed and looking for work by the sum of the number employed and the number unemployed and looking for work. Answer: TRUE Diff: 1 Topic: Examining Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 32) Individuals who are not working and are not actively looking for work are counted as unemployed if they have looked for work in the past. Answer: FALSE Diff: 1 Topic: Examining Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 33) The labor force participation rate is the fraction of the population over 16 years of age that is looking for work. Answer: FALSE Diff: 1 Topic: Examining Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

34) A person who is not working and who has looked for work in the past, but is not looking for work now is not considered "unemployed." Answer: TRUE Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 35) If a person without a job is not actively looking for work, that person is classified as not being in the labor force. Answer: TRUE Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 36) If a large number of people are classified as being out of the labor force when they are really looking for work, this will lead to an official unemployment rate that is lower than the true unemployment rate. Answer: TRUE Diff: 2 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 37) People who stopped looking for work because they could not find jobs are called discouraged workers. Answer: TRUE Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

38) Marginally attached workers are discouraged workers who have stopped their job search for reasons other than the lack of jobs. Answer: TRUE Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 39) Explain what is meant by the terms "labor force," "unemployment rate," and "labor force participation rate." Answer: The labor force comprises all workers who are currently employed and unemployed workers who are actively looking for work. The unemployment rate is the percentage of the labor force which is unemployed. The labor force participation rate is the percentage of the population over 16 years of age that is in the labor force. Diff: 1 Topic: Examining Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 40) Name two types of jobs most likely affected by "seasonal unemployment." Answer: Farming, construction work Diff: 1 Topic: Who are the Unemployed? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 41) What is seasonal unemployment? Give an example of unemployment that recur during certain times on the calendar. year Answer: Seasonal unemployment is unemployment that recurs due to calendar effects. For example, farmers usually harvest their crops in September and October; as they require more help in farming, the unemployment rate usually drops. However, the unemployment rate usually increases in November once the harvest is done. Diff: 1 Topic: Who are the Unemployed? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

42) How does the BLS "seasonally adjust" the unemployment rate? Answer: The BLS uses statistical procedures to remove these seasonal factors, so that users of the data can more accurately interpret underlying trends in the economy. For example, they control for the predictable increase in the unemployment rate after agricultural harvests in the fall. Diff: 1 Topic: Who are the Unemployed? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 12.2 Categories of Unemployment 1) Unemployment that naturally occurs during the normal workings of an economy as people change jobs and move across the country is called: A) natural unemployment. B) frictional unemployment. C) structural unemployment. D) cyclical unemployment. Answer: B Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 2) Hector voluntarily left his job to search for a job in accounting, the field in which he has his bachelor's degree. Hector is considered: A) structurally unemployed. B) cyclically unemployed. C) frictionally unemployed. D) not to be unemployed. Answer: C Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

3) Juanita quit her job to move to Santa Fe to be closer to her family. She is actively looking for a new job in Santa Fe. Juanita is considered: A) structurally unemployed. B) cyclically unemployed. C) frictionally unemployed. D) not to be unemployed. Answer: C Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 4) Auto workers laid off from Hot-Rod Autoworks as the result of a recession are considered: A) structurally unemployed. B) cyclically unemployed. C) frictionally unemployed. D) seasonally unemployed. Answer: B Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 5) Steel workers laid off from their jobs as the result of a recession are considered: A) structurally unemployed. B) cyclically unemployed. C) frictionally unemployed. D) seasonally unemployed. Answer: B Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

6) Customer service representatives who have lost their jobs as a result of call centers being outsourced to India are an example of: A) structural unemployment. B) cyclical unemployment. C) frictional unemployment. D) voluntary unemployment. Answer: A Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 7) ________ unemployment is most closely associated with periods of falling GDP. A) Structural B) Cyclical C) Frictional D) Voluntary Answer: B Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 8) ________ unemployment is NOT associated with economic fluctuations. A) Structural B) Cyclical C) Frictional D) both A and C Answer: D Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

9) Cyclical unemployment occurs: A) because the government labels some people who aren't really in the labor force as unemployed. B) with economic fluctuations; it increases during bad times and decreases during good times. C) naturally during the normal workings of an economy, as people change jobs, move across the country, etc. D) because of a mismatch between the jobs that are available in the economy and the skills of workers seeking jobs. Answer: B Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 10) ________ unemployment occurs due to a mismatch between the jobs that are available and the skills of workers seeking jobs. A) Structural B) Cyclical C) Frictional D) Voluntary Answer: A Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 11) When the "real" GDP falls, the rate of unemployment generally: A) increases. B) decreases. C) stays constant. D) equals the natural rate. Answer: A Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

12) When displaced workers require retraining before entering the labor force again, it is the result of ________ unemployment. A) cyclical B) frictional C) structural D) seasonal Answer: C Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 13) At full employment the unemployment rate equals the: A) cyclical unemployment rate. B) structural unemployment rate. C) structural unemployment rate plus the cyclical unemployment rate. D) structural unemployment rate plus the frictional unemployment rate. Answer: D Diff: 1 Topic: The Natural Rate of Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 14) Economists say that the economy is at "full employment" when the: A) structural unemployment rate is zero. B) total unemployment rate is zero. C) frictional unemployment rate is zero. D) cyclical unemployment rate is zero. Answer: D Diff: 1 Topic: The Natural Rate of Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

15) At full employment there is no: A) structural unemployment. B) cyclical unemployment. C) frictional unemployment. D) all of the above Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 16) The economy needs some unemployment to operate efficiently, because without it: A) firms will find it difficult to recruit workers, leading to increased wages and prices. B) firms will find it difficult to recruit workers, leading to reduced wages and prices. C) workers will find it difficult to find a job, leading to increased wages and prices. D) workers will find it difficult to find a job, leading to reduced wages and prices. Answer: A Diff: 2 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 17) In the United States today, economists estimate that the natural rate of unemployment is between ________ and ________ percent. A) 3; 5.5 B) 3; 4 C) 5; 6.5 D) 6.5; 7.5 Answer: C Diff: 1 Topic: The Natural Rate of Unemployment Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

18) The natural rate of unemployment: A) can vary over time and will differ across countries. B) can vary over time but tends to be the same across countries. C) tends to remain constant over time but at different levels for different countries. D) tends to remain constant over time and is the same across countries. Answer: A Diff: 1 Topic: The Natural Rate of Unemployment Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 19) As compared to the estimates of the natural rate of unemployment for the United States, those for Europe are: A) the same. B) higher. C) lower. D) higher and more variable. Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 20) Compared to the natural rate of unemployment, the actual unemployment rate is: A) always higher. B) always lower. C) always the same. D) higher in periods when GDP fails to grow at its normal rate. Answer: D Diff: 2 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

21) In periods when GDP fails to grow at its normal rate, the actual unemployment rate will be ________ than the natural rate of unemployment. A) lower B) higher C) the same D) falling faster Answer: B Diff: 2 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 22) Actual unemployment can exceed the natural rate of unemployment due to: A) structural unemployment. B) cyclical unemployment. C) frictional unemployment. D) all of the above. Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 23) In periods when GDP grows very rapidly for a long period, the actual unemployment rate will be ________ than the natural rate of unemployment. A) lower B) higher C) the same D) more variable Answer: A Diff: 2 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

24) Actual unemployment can fall below the natural rate of unemployment due to: A) structural unemployment. B) negative cyclical unemployment. C) frictional unemployment. D) all of the above. Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 25) The typical relationship between inflation and unemployment is: A) as unemployment falls, inflation falls. B) as unemployment falls, inflation increases. C) as unemployment falls, nothing happens to inflation. D) unemployment changes do not directly lead to changes in inflation, but inflation changes may cause changes in unemployment. Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 26) Economic expansions might lead to inflation because an expansion leads to: A) a decrease in the unemployment rate, which increases wages. B) an increase in the unemployment rate, which increases wages. C) a decrease in the unemployment rate, which decreases wages. D) an increase in the unemployment rate, which decreases wages. Answer: A Diff: 2 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

27) Which one of the following statements is NOT correct? A) The natural rate of unemployment is estimated to be between 5 percent and 6.5 percent in the U.S. B) The term "full employment" means that 100 percent of the labor force is employed. C) The line between frictional and structural unemployment is sometimes hard to draw. D) Unemployment can occur even when an economy is growing. Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 28) Economists consider an economy to be at "full employment" when: A) the unemployment rate equals the natural rate of unemployment. B) there is only a small amount of cyclical unemployment. C) there is no frictional unemployment. D) there is no structural unemployment. Answer: A Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 29) To operate efficiently, an economy generally "needs" ________ unemployment. A) cyclical B) frictional C) structural D) seasonal Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

Recall the Application about the impact of disability insurance benefits on the labor force participation rate to answer the following question(s). 30) From the Application, which of the following federal programs provide income protection to individuals with disabilities? A) Social Security Disability Insurance (SSDI) B) Supplemental Security Income (SSI) C) Medicare D) A and B Answer: D Diff: 1 Topic: Application 2, Disability Insurance and Labor Force Participation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 31) According to the results of the study featured in the Application, Veterans of the Vietnam War, in relation to other veterans, were more likely to enroll in disability programs if they had: A) a heart attack. B) PTSD (Post Traumatic Stress Disorder). C) cancer. D) Type 2 diabetes. Answer: D Diff: 1 Topic: Application 2, Disability Insurance and Labor Force Participation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 32) According to the results of the study featured in the Application, an increase in the disability benefits received by veterans resulted in: A) no change in the labor force participation rate for those qualified to receive the benefits. B) a lower labor force participation rate for those not qualified to receive the benefits. C) a higher labor force participation rate for those qualified to receive the benefits. D) a lower labor force participation rate for those qualified to receive the benefits. Answer: D Diff: 1 Topic: Application 2, Disability Insurance and Labor Force Participation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

33) Unemployment occurs even during periods when the economy is growing. Answer: TRUE Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 34) Cyclical unemployment increases during recessions. Answer: TRUE Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 35) Frictional unemployment is unemployment reflecting a mismatch of skills and jobs. Answer: FALSE Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 36) Structural unemployment exists because workers and employers try to find the right employment matches. Answer: FALSE Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 37) Economists consider the economy to be at "full employment" when there is no cyclical unemployment. Answer: TRUE Diff: 1 Topic: The Natural Rate of Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 25 Copyright © 2020 Pearson Education, Inc.

38) The actual unemployment rate can be greater than or less than the natural rate of unemployment. Answer: TRUE Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 39) Name the three types of unemployment. Answer: cyclical, frictional and structural Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 40) What is cyclical unemployment? Answer: Cyclical unemployment is the unemployment that accompanies fluctuations in real GDP. Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 41) What is frictional unemployment? Answer: Frictional unemployment is unemployment that occurs naturally during the normal workings of the economy, such as workers taking time to to search for suitable jobs and companies taking time to search for qualified employees. Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

42) What is structural unemployment? Answer: Structural unemployment is unemployment that occurs as the economy evolves, and reflects a mismatch of skills and jobs. Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 43) Could the advent of the internet completely eliminate frictional unemployment? Answer: While the internet can improve the exchange of information, that is not enough to reduce frictional unemployment to zero. Some workers, for example, would prefer to continue searching for jobs in their own area rather than moving across the country to seek another job. In fact, improving information flows could even have a negative effect of informing workers of other opportunities in the economy and thereby leading to more of them quitting their current jobs to seek other employment! Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 44) Why is the line between frictional and structural unemployment sometimes hard to draw? Answer: Suppose a highly skilled steel worker is laid off because his company shuts down its plant in his area and moves to a new location overseas. The worker would like to find a comparable job, but only low-wage, unskilled work is available in his town. Jobs are available, but not his kind of job; and the steel company will not come back. There is really no correct answer as to whether this is frictional or structural unemployment. Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 45) In what sense is frictional unemployment "good" for the economy? Answer: Since frictional unemployment is the unemployment that exists so that workers and firms find the right matches, the economy needs some frictional unemployment to operate efficiently. Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 27 Copyright © 2020 Pearson Education, Inc.

46) What is meant by the term "the natural rate of unemployment"? Answer: The natural rate of unemployment is the level of unemployment at which there is no cyclical unemployment. It consists only of frictional and structural unemployment. Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 47) Why does unemployment not go to zero during booms? Answer: While unemployment has a cyclical component—that is, it naturally goes up during recessions as people are laid off and down during booms as people are hired—there are other components of unemployment that do not vary over the business cycle. For instance, some people are going to be transitioning between jobs at all times of the business cycle (this is frictional unemployment). Frictional and structural unemployment rates are nonzero, so "full employment" actually means that some people are unemployed all the time. Diff: 2 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes Recall the Application about the impact of disability insurance benefits on the labor force participation rate to answer the following question(s). 48) According to the article, why were Vietnam War veterans (compared with other veterans) with Type 2 diabetes more likely to enroll in disability programs? Answer: A change i in the benefits paid to veterans in 2001 allowed veterans of the Vietnam War to claim disability benefits if they suffered from Type 2 diabetes. Other veterans who had Type 2 diabetes were not able to receive benefits. Diff: 2 Topic: Application 2, Disability Insurance and Labor Force Participation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

12.3 The Costs of Unemployment 1) ________ is/are the payments that people may receive when they lose their job. A) Unemployment insurance B) Food stamps C) Social security D) Salaries Answer: A Diff: 1 Topic: The Costs of Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 2) The table that summarizes the percent of the unemployed who have been unemployed for different lengths of time is called: A) the duration of unemployment. B) the labor force participation rate. C) structural unemployment D) natural rate of unemployment. Answer: A Diff: 1 Topic: The Costs of Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 3) When the economy experiences sustained economic expansion, the percent of the population who are unemployed 27 weeks of longer: A) decreases. B) increases. C) may increase or decrease. D) does not change. Answer: A Diff: 1 Topic: The Costs of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

4) When the economy experiences a prolonged recession, the percent of the population who are unemployed 27 weeks of longer: A) decreases. B) increases. C) may increase or decrease. D) does not change. Answer: B Diff: 1 Topic: The Costs of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes Recall the Application about the study done about the perceptions and behavior of the unemployed in Great Britain to answer the following question(s). 5) According to this Application, becoming unemployed caused ________ in perceived wellbeing for men if those in their peer group were also unemployed. A) a larger decrease B) a smaller decrease C) no change D) an large increase Answer: B Diff: 1 Topic: Application 3, Social Norms, Unemployment, and Perceived Happiness Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 6) According to this Application, the more unhappy the unemployed individuals were about their situations: A) the more likely they were to remain unemployed. B) the more aggressive they would be to try to find a job. C) the more they congregated around others who were unemployed. D) the longer they collected unemployment benefits. Answer: B Diff: 1 Topic: Application 3, Social Norms, Unemployment, and Perceived Happiness Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

7) According to this Application, if you are unemployed and if your peer group were also unemployed: A) you have a better chance of finding employment. B) you may not be as aggressive in searching for work. C) you will want to find a job quickly to encourage your peer group about employment prospects. D) you have little chance of finding a job. Answer: B Diff: 1 Topic: Application 3, Social Norms, Unemployment, and Perceived Happiness Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 8) Unemployment insurance typically replaces a worker's full earnings. Answer: FALSE Diff: 1 Topic: The Costs of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 9) Unemployment insurance tends to lead to the unemployed worker spending less time unemployed. Answer: FALSE Diff: 1 Topic: The Costs of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 10) The effects of long-term unemployment are purely financial. Answer: FALSE Diff: 1 Topic: The Costs of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes

11) How does prolonged unemployment harm workers when they are applying for a job? Answer: Workers who suffer long-term unemployment may lose job related skills and work habits, and may be less desirable candidates for jobs that the apply for in the future. Diff: 1 Topic: The Costs of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 12.4 The Consumer Price Index and the Cost of Living 1) The value of a dollar: A) is its purchasing power. B) remains constant over time. C) is its face value. D) is set by the government. Answer: A Diff: 1 Topic: The CPI and the Cost of Living Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 2) The real-nominal principle can be stated as: A) production generates income. B) only final goods and services should be counted in GDP. C) what matters to people is the purchasing power of money or income. D) only the manufacture of real goods is production. Answer: C Diff: 1 Topic: The CPI and the Cost of Living Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

3) The index most widely used by the government and the private sector to measure changes in the cost of living is the: A) Producer Price Index. B) Consumer Price Index. C) the GDP deflator. D) the chain-weighted price index. Answer: B Diff: 1 Topic: The CPI and the Cost of Living Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 4) The Consumer Price Index (CPI) relies on the calculation of: A) prices of a fixed basket of goods that does not change often. B) prices of a variable basket of goods that changes frequently. C) the components of GDP that change annually. D) the components of GDP that do not change frequently. Answer: A Diff: 1 Topic: The CPI and the Cost of Living Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 5) Which one of the following statements is TRUE of the Consumer Price Index (CPI)? A) It does not take account of the price of imported goods and services. B) It measures changes in prices of a fixed basket of goods. C) It does not take into account the price of used goods. D) It understates the true rate of inflation. Answer: B Diff: 1 Topic: The CPI and the Cost of Living Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

The following table lists the basket of goods in the Consumer Price Index for the nation of Astro (assume 2014 is the base year).

Sunglasses Toothpaste Ferrets

2014 Quantity 8 15 6

2014 Price $9.00 3.00 12.00

2015 2015 2016 2016 Quantity Price Quantity Price 10 $11.00 7 $10.00 18 4.00 15 4.00 4 15.00 9 18.00

Table 12.2 6) Using the information in Table 12.2, the Astro Consumer Price Index for 2014 is: A) 24. B) 100. C) 124. D) 189. Answer: B Diff: 2 Topic: The CPI and the Cost of Living Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 7) Using the information in Table 12.2, the Astro Consumer Price Index for 2015 is: A) 87. B) 99. C) 126. D) 238. Answer: C Diff: 2 Topic: The CPI and the Cost of Living Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

8) Using the information in Table 12.2, the Astro Consumer Price Index for 2016 is: A) 87. B) 104. C) 131. D) 298. Answer: C Diff: 2 Topic: The CPI and the Cost of Living Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 9) Using the information in Table 12.2, the inflation rate from 2014 to 2015 is about: A) 26 percent. B) 38 percent. C) 42 percent. D) 49 percent. Answer: A Diff: 2 Topic: The CPI and the Cost of Living Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 10) Using the information in Table 12.2, the inflation rate from 2015 to 2016 is about: A) 4 percent. B) 5 percent. C) 17 percent. D) 31 percent. Answer: A Diff: 2 Topic: The CPI and the Cost of Living Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

11) Using the information in Table 12.2, the percent increase in prices over the two year period from 2014 to 2016 is approximately: A) 26 percent. B) 31 percent. C) 38 percent. D) 98 percent. Answer: B Diff: 2 Topic: The CPI and the Cost of Living Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12) What does the Consumer Price Index (CPI) measure? A) prices of durable goods B) prices of nondurable goods C) the cost of living over time D) the cost of replacing lost items Answer: C Diff: 1 Topic: The CPI and the Cost of Living Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 13) The Consumer Price Index (CPI) differs from a chain-weighted price index in that the CPI: A) requires calculation of GDP, while the chain-weighted index does not. B) measures the costs of a typical fixed basket of goods over time, while the chain-weighted index does not. C) allows for the goods consumed in an economy to change over time, while the chain-weighted index does not. D) compares the prices of all goods in one year to the prices of all goods in other years. Answer: B Diff: 2 Topic: The CPI versus the Chain Index for GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

14) The chain-weighted index for GDP and the CPI differ in that the CPI: A) excludes price changes from used and imported goods while the chain-weighted index includes these price changes. B) asks how much a fixed basket of goods costs in the current year as compared to the cost of those same goods in a base year while the chain-weighted index takes an average of price changes using base years from neighboring years. C) is calculated by the Commerce Department while the chain-weighted index is calculated by local newspapers. D) is calculated in nominal terms and the chain-weighted index is calculated in real terms. Answer: B Diff: 3 Topic: The CPI versus the Chain Index for GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 15) Chain-weighted price indices are constructed such that: A) prices in different economies can be directly compared with one another. B) prices in different years can be directly compared with one another. C) all years' levels of GDP are directly related to a base year level of GDP. D) prices of one good can be directly compared with prices of other goods. Answer: B Diff: 2 Topic: The CPI versus the Chain Index for GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 16) Most economists believe that price indices: A) overstate inflation and understate growth in nominal GDP. B) overstate inflation and understate growth in real GDP. C) understate inflation and understate growth in nominal GDP. D) understate inflation and understate growth in real GDP. Answer: B Diff: 2 Topic: Problems in Measuring Changes in Prices Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

17) The principal reason why the chain-weighted index for GDP and the CPI both overstate actual changes in prices is that: A) it is hard to measure quality changes. B) the basket of goods purchased by consumers never changes. C) price data is often inaccurate. D) all of the above Answer: A Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 18) Economists believe that the CPI overstates actual price changes by as much as ________ to ________ percent each year. A) 1; 2 B) 2; 3 C) 0.5; 1 D) 0.5; 1.5 Answer: D Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 19) Cost-of-living adjustments are: A) automatic wage changes based on the CPI which are included in some union contracts. B) changes in the basket of goods used in calculating the CPI. C) averages of neighboring years' base prices used in constructing the CPI. D) quality measurements included in the calculation of the CPI. Answer: A Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

20) When wages or benefits are automatically increased based on the reported inflation rate, it is called the ________ adjustment. A) natural flow of money B) cost-of-living C) change in exports D) change in imports Answer: B Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 21) Social Security payments automatically increase when the Consumer Price Index (CPI) goes up because of the: A) age of the recipient. B) years receiving social security. C) cost-of-living adjustments. D) individual being married or unmarried. Answer: C Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation Recall the Application about the time involved in including cell phones in the calculation of the Consumer Price Index (CPI) to answer the following question(s). 22) According to this Application, cell phones were introduced to the public in 1983, but it took the Bureau of Labor Statistics ________ to include them in calculating the Consumer Price Index (CPI). A) 3 years B) 7 years C) 15 years D) 24 years Answer: C Diff: 1 Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

23) According to this Application, the failure of including cell phones in a timely manner when calculating the Consumer Price Index (CPI) caused the telecommunications component of the price index: A) to be biased downward. B) to be biased upward. C) to actually register no perceptible bias. D) to become negative. Answer: B Diff: 1 Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 24) According to this Application, the bias in the Consumer Price Index (CPI) would be ________ if new goods are ________ incorporated in CPI calculations. A) smaller; quickly B) greater; immediately C) smaller; slowly D) negligible; slowly Answer: A Diff: 1 Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 25) According to the Application, as new products are constantly invented and introduced on the market: A) the bias in the CPI can be large. B) the bias in the CPI tends to become smaller. C) the bias in the CPI will eventually disappear. D) the bias in the CPI will remain virtually unchanged. Answer: A Diff: 2 Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

26) According to the Application, the telecommunications component of the Consumer Price Index (CPI) was biased: A) upward by 0.8 to 1.9 percent. B) upward by 1.8 to 2.9 percent. C) downward by 0.8 to 1.9 percent. D) downward by 1.8 to 2.9 percent. Answer: A Diff: 2 Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 27) According to the Application, if the telecommunications component of the Consumer Price Index (CPI) was biased upward by 1.9 percent, then if increase in telecommunications prices were measured at 1.1 percent, then in reality, telecommunication prices: A) decreased by 0.8 percent. B) increased by 3 percent. C) increased by 0.8 percent. D) decreased by 3 percent. Answer: A Diff: 2 Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 28) The basket of goods measured in computing the Consumer Price Index (CPI) includes goods produced in prior years and imported goods. Answer: TRUE Diff: 1 Topic: The CPI versus the Chain Index for GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

29) Most economists believe that the Consumer Price Index (CPI) overstates the actual changes in prices while the chain index for GDP understates them. Answer: FALSE Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 30) What is the Consumer Price Index (CPI)? Answer: The Consumer Price Index is a measure which tracks the cost of living over time. The CPI measures the cost of a fixed basket of goods chosen to represent the consumption pattern of a typical consumer. Diff: 1 Topic: The CPI and the Cost of Living Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 31) What is a "cost-of-living" adjustment? Answer: Increases in nominal wages or benefits to keep purchasing power constant. Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 32) Why do both the chain-weighted index for GDP and the CPI overstate actual price increases? Answer: Both price indices overstate the actual price inflation experienced by economic agents because quality improvements are difficult to measure. For example, the price of computers may stay the same but one can get more computing power for one's money; thus while the price has remained constant, in some sense it has really fallen, but this is difficult to measure. Diff: 2 Topic: Problems in Measuring Changes in Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

33) How costly are biases in the Consumer Price Index (CPI)? Answer: Each year the federal government increases Social Security payments to the elderly by the rate of increase of prices as measured by the CPI. Economists believe that the CPI overstates actual price increases by between 0.5% and 1.5% a year. If we assume that the figure is 1%, and use the estimates provided by the Congressional Budget Office, reducing Social Security payments by 1% would save 42 billion dollars over a five-year period! Diff: 2 Topic: Problems in Measuring Changes in Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12.5 Inflation 1) The percentage rate of change in the price level is called the: A) chain-weighted price index. B) Consumer Price Index. C) rate of inflation. D) rate of absorption. Answer: C Diff: 1 Topic: Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 2) Suppose that a price index in Paraguay was 131 in 2015 and 152 in 2016. The inflation rate between those two years was approximately: A) 10.5 percent. B) 11.6 percent. C) 16 percent. D) 21 percent. Answer: C Diff: 1 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

3) Suppose that the CPI in Thailand was 345 in 2015 and 388 in 2016. The inflation rate between those two years was approximately: A) 11.2 percent. B) 14.3 percent. C) 12.5 percent. D) 43 percent. Answer: C Diff: 2 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 4) Suppose that the chain-weighted index for GDP in Panama was 180 in 2015 and 188 in 2016. The inflation rate between those two years was approximately: A) 1.1 percent. B) 4.4 percent. C) 8 percent. D) 10.4 percent. Answer: B Diff: 2 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 5) Suppose that a price index in Latvia was 120 in 2015 and 150 in 2016. The inflation rate between those two years was approximately: A) 8 percent. B) 12.5 percent. C) 25 percent. D) 30 percent. Answer: C Diff: 1 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

6) Suppose that the chain-weighted index for GDP in Gambia was 275 in 2015 and 350 in 2016. The inflation rate between those two years was approximately: A) 20.2 percent. B) 27.3 percent. C) 37.5 percent. D) 75 percent. Answer: B Diff: 2 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 7) Suppose that the CPI in Egypt was 111 in 2015 and 122 in 2016. The inflation rate between those two years was approximately: A) 4.8 percent. B) 5.5 percent. C) 9.9 percent. D) 11 percent. Answer: C Diff: 2 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 8) Suppose that in 2015, the chain-weighted price index for GDP in Estonia is 220, and the chain-weighted price index in Lithuania is 160. In 2016, the price index in Estonia is 242, and the price index in Lithuania is 180. You could conclude that: A) Estonia is a more expensive place to live than Lithuania. B) Lithuania is a more expensive place to live than Estonia. C) Estonia's rate of inflation is higher than Lithuania's. D) Lithuania's rate of inflation is higher than Estonia's. Answer: D Diff: 3 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

9) In the United States during the 1950s and 1960s: A) the inflation rate was frequently less than 2 percent a year. B) prices fell. C) prices rose sharply. D) there was zero inflation. Answer: A Diff: 1 Topic: Historical U.S. Inflation Rates Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 10) The biggest problem caused by a deflation is that: A) prices fall. B) wages fall. C) people cannot repay their debts. D) interest rates rise. Answer: C Diff: 1 Topic: The Perils of Deflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 11) Inflation must be high in Moscow because it is very expensive to live there. Answer: FALSE Diff: 1 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12) Since the 1930s, the United States has experienced continuous deflation. Answer: FALSE Diff: 1 Topic: Historical U.S. Inflation Rates Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

13) Critically evaluate the statement "Honolulu is an expensive place to live. Therefore, the inflation rate must be high in Honolulu." Answer: The statement confuses the price level with the inflation rate. Inflation is a flow variable—it measures changes in prices from year to year, while the price level is a stock variable. The statement observes the price level, not the inflation rate. Diff: 2 Topic: Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 14) Explain why deflation could prevent people from being able to repay their debts. Answer: When an economy experiences deflation, or falling price levels, wages can actually decline. If someone has an outstanding loan that needs to be paid off, a decrease in wages will make it harder to pay the loan, since outstanding loan amounts will not decrease with deflation and the decrease in wages. Diff: 2 Topic: The Perils of Deflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12.6 The Costs of Inflation 1) Economists call the physical cost of changing prices: A) the cost of doing business. B) menu costs. C) inflationary suffrage. D) increasing profits. Answer: B Diff: 1 Topic: Anticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

2) On what kind of income is our tax system based? A) real B) nominal C) adjusted D) inflationary Answer: B Diff: 1 Topic: Anticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 3) The costs associated with recalculating prices and printing new price lists when there is inflation are known as: A) shoe leather costs. B) menu costs. C) chain-index costs. D) diminishing costs. Answer: B Diff: 1 Topic: Anticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 4) The costs of inflation that arise from trying to reduce cash holdings are known as: A) shoe leather costs. B) menu costs. C) chain-index costs. D) diminishing costs. Answer: A Diff: 1 Topic: Anticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

5) What happens to your purchasing power if inflation is less than you anticipated? A) It decreases. B) It increases. C) It devalues your net worth. D) It won't change much. Answer: B Diff: 1 Topic: Unanticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 6) If you negotiated a salary based on an anticipated inflation rate of 4 percent, and the actual inflation rate turned out to be 6 percent: A) the purchasing power of your real wages would be more than you anticipated. B) your employer would have gained at your expense. C) your real wage will increase, but your nominal wage will decrease. D) the purchasing power of your wages will not change, since purchasing power is based on your nominal wage. Answer: B Diff: 2 Topic: Unanticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 7) If you take out a bank loan prior to unanticipated inflation: A) it will be harder for you to repay the loan because of the inflated dollar. B) you will gain at the expense of your bank. C) your bank will gain at your expense. D) neither you nor your bank will be affected, because the loan was made prior to the inflation. Answer: B Diff: 2 Topic: Unanticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

8) One cost of unanticipated inflation is: A) both lenders and borrowers lose. B) arbitrary redistributions of income. C) nominal income falls below real income. D) people cannot repay their debts. Answer: B Diff: 1 Topic: Unanticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 9) When inflation increases by more than what people expect: A) lenders lose while debtors gain. B) both lenders and debtors lose. C) debtors lose and lenders gain. D) both lenders and debtors gain. Answer: A Diff: 2 Topic: Unanticipated Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 10) In September 2008, the MONTHLY rate of inflation in Zimbabwe approached 489 BILLION percent. An inflation rate such as this would: A) seriously disrupt normal commerce. B) decrease the natural rate of unemployment. C) be too high to calculate using the CPI. D) all of the above Answer: A Diff: 1 Topic: Unanticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

11) An inflation rate that exceeds 50 percent per month is referred to as: A) anticipated inflation. B) destructive deflation. C) hyperinflation. D) superflation. Answer: C Diff: 1 Topic: Unanticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12) Hyperinflation is defined as an inflation rate: A) that doubles each year. B) that exceeds 50 percent per month. C) that increases rapidly in one year and decreases rapidly the next year. D) that is moderately high but anticipated. Answer: B Diff: 2 Topic: Unanticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 13) If a can of soda costs $1.00 today, how much would it cost next month if the prices go up by 50 percent in one month? A) $1.50 B) $0.50 C) $150.00 D) $2.50 Answer: A Diff: 2 Topic: Unanticipated Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

14) If a can of soda costs $1.00 today, how much would it cost in two months if the prices go up by 50 percent per month? A) $2.25 B) $1.50 C) $2.00 D) $2.50 Answer: A Diff: 2 Topic: Unanticipated Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 15) If a can of soda costs $1.00 today, how much would it cost in 12 months (1 year) if the prices go up by 50 percent per month? A) about $130.00 B) about $7.00 C) about $6.00 D) about $24.00 Answer: A Diff: 3 Topic: Unanticipated Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 16) Anticipated inflation is associated with cost increases which are fully expected. Answer: TRUE Diff: 1 Topic: The Costs of Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 17) Unanticipated inflation is associated with cost increases which are not expected. Answer: TRUE Diff: 1 Topic: The Costs of Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

18) Inflation distorts the operation of our tax and financial system. Answer: TRUE Diff: 1 Topic: Anticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 19) Hyperinflation refers to an inflation rate which exceeds 5 percent per month. Answer: FALSE Diff: 1 Topic: Unanticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 20) Unemployment and recessions are sometimes necessary to curb high inflation. Answer: TRUE Diff: 1 Topic: Unanticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 21) Explain menu costs and shoe leather costs as they relate to inflation. Answer: When there is inflation, menu costs refer to the actual physical costs of changing prices, as would be necessary for printed material such as catalogs, price tags and restaurant menus. Shoe leather costs refer to the costs involved with holding less cash. When there is inflation, people will tend to want to hold less cash, since the value of cash being held will decrease. If less cash is held, more frequent trips to banks or ATMs will be necessary when people need cash. Diff: 2 Topic: Anticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

22) What is hyperinflation? Answer: Hyperinflation refers to an inflation rate which exceeds 50 percent per month. Diff: 1 Topic: Unanticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 13 Why Do Economies Grow? 13.1 Economic Growth Rates 1) According to the text, ________ is perhaps the most critical aspect of a country's economic performance. A) growth in GDP B) the inflation rate C) the unemployment rate D) the living standard Answer: A Diff: 1 Topic: Why Do Economies Grow? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 2) An increase in a country's capital stock relative to its work force is known as: A) capital deepening. B) capital growth. C) capital improvement. D) capital augmentation. Answer: A Diff: 1 Topic: Why Do Economies Grow? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 3) Technological progress occurs when the economy gets more output: A) without any more capital or labor. B) by using more capital per worker. C) by using more capital but not more workers. D) by using more labor but not more capital. Answer: A Diff: 1 Topic: Why Do Economies Grow? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

4) GDP per capita means GDP: A) in real terms. B) adjusted for inflation. C) per person. D) divided by the capital stock. Answer: C Diff: 1 Topic: Measuring Economic Growth Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5) Suppose real GDP was 120 in year 1 and 156 in year 2. The growth rate of real GDP is: A) 5.6 percent. B) 18 percent. C) 30 percent. D) 36 percent. Answer: C Diff: 1 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 6) Suppose real GDP was 100 in year 1 and 105 in year 2. The growth rate of real GDP is: A) 0.5 percent. B) 1.5 percent. C) 2.5 percent. D) 5 percent. Answer: D Diff: 1 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

7) If the growth rate for GDP was 9 percent and GDP in year 1 was 100, then GDP in year 2 would be: A) 90. B) 109. C) 190. D) 199. Answer: B Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 8) If the growth rate for GDP was 5 percent and GDP in year 1 was 140, then GDP in year 2 would be: A) 133.3. B) 135. C) 145. D) 147. Answer: D Diff: 1 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 9) Suppose that real GDP starts at 100 and grows at a rate of 10 percent per year for two years. In the third year real GDP would be: A) 110. B) 110.1. C) 120. D) 121. Answer: D Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

10) Suppose that real GDP starts at 200 and grows at a rate of 9 percent per year for two years. In the third year real GDP would be: A) 183.49. B) 236. C) 237.62. D) 239.24. Answer: C Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11) Using the rule of 70, if the GDP per capita growth rate in the United States is 3.5 percent, real GDP per capita doubles every: A) 20 years. B) 24.5 years. C) 35 years. D) 70 years. Answer: A Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 12) Using the rule of 70, if the GDP per capita growth rate in the United States is 4.4 percent, real GDP per capita doubles every: A) 6.72 years. B) 15.91 years. C) 44 years. D) 65.6 years. Answer: B Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

13) Suppose the annual growth rate of GDP in Nepal is 5 percent. In 35 years, GDP in Nepal will double: A) 1.75 times. B) 2.5 times. C) 7 times. D) 24.5 times. Answer: B Diff: 3 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 14) Suppose the annual growth rate of GDP in Belize is 3.5 percent. In 20 years, GDP in Belize will double: A) 1 time. B) 1.5 times. C) 3.5 times. D) 7 times. Answer: A Diff: 3 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 15) When comparing the measure of goods and services of one country to that of another, economists generally compare: A) the real GDP. B) the real GDP per capita. C) the real GDP and net exports. D) the real GDP and the labor force. Answer: B Diff: 1 Topic: Measuring Economic Growth Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

16) Over time, a country's real GDP per capita typically: A) shrinks B) grows. C) remains stable. D) increases and decreases randomly. Answer: B Diff: 1 Topic: Measuring Economic Growth Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures Recall the Application about the effect of global warming on economic growth to answer the following question(s). 17) According to this Application, the economic effects of increases in temperature seem to: A) be confined to poorer countries. B) be confined to richer countries. C) be equal across all countries. D) be nonexistent in most countries. Answer: A Diff: 2 Topic: Application 1, Global Warming, Rich Countries, and Poor Countries Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 18) According to this Application, a study of municipalities in Latin and South America found that a one degree Celsius rise in temperature was associated with: A) no measurable change in per capita income. B) a small decline in real income and a small increase in per capita real income. C) a slight increase in municipal per capita income. D) a decline in municipal per capita income. Answer: D Diff: 1 Topic: Application 1, Global Warming, Rich Countries, and Poor Countries Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

19) According to this Application, over time, as economies adapt to higher temperatures: A) approximately half the decline in per capita income disappears. B) approximately half the increase in per capita income disappears. C) per capita income does not seem to change. D) real income begins to increase and per capita income begins to decrease. Answer: A Diff: 1 Topic: Application 1, Global Warming, Rich Countries, and Poor Countries Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 20) According to this Application, a one degree Celsius rise in temperature: A) increases poor countries' exports. B) decreases poor countries' exports. C) increases rich countries' exports. D) decreases all countries' exports. Answer: B Diff: 1 Topic: Application 1, Global Warming, Rich Countries, and Poor Countries Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 21) Which of the following creates difficulties in making comparisons of real GDP across nations? A) Each nation has a different population. B) Nations produce different goods and services. C) Relative prices differ sharply across countries. D) Nations often have different languages. Answer: C Diff: 1 Topic: Comparing the Growth Rates of Various Countries Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

22) In making accurate comparisons of GDP across countries, it is important to take differences in ________ into account. A) population size B) the average age of the population C) family size D) all of the above Answer: A Diff: 1 Topic: Comparing the Growth Rates of Various Countries Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 23) Convergence refers to closing the gap in ________ between poorer countries and richer countries. A) real GDP B) real GDP per capita C) the growth rate in real GDP D) the growth rate in real GDP per capita Answer: B Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 24) A comparison of the average growth rates across time for developed nations indicates that: A) nations with lower levels of income grow more slowly than those with higher levels of income. B) nations with lower levels of income will never be as rich as nations with high levels of income. C) nations with high levels of income experience a continuously increasing growth rate. D) nations with lower levels of income grow more quickly than those with higher levels of income. Answer: D Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

25) Nations with low levels of GDP per capita may converge to richer nations if: A) nations with high levels of income experience a continuously increasing growth rate. B) nations with lower levels of income grow more quickly than those with higher levels of income. C) nations with lower levels of income spend less on investment. D) nations with lower levels of income grow more slowly than those with higher levels of income. Answer: B Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 26) If a nation with a low level of GDP per capita converges to a richer nation, the poor nation: A) experiences low growth rates. B) enters into a free trade agreement with the richer nation. C) experiences a rate of high growth such that its GDP per capita increases to that of the richer nation. D) experiences a rate of low growth such that its GDP per capita increases to that of the richer nation. Answer: C Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 27) Most economists believe that convergence of GDP per capita ________ between developed nations and ________ between developing and developed nations. A) has occurred; has occurred B) has not occurred; has occurred C) has occurred; has not occurred D) has not occurred; has not occurred Answer: C Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

28) Technological progress is one of the mechanisms by which economies can grow. Answer: TRUE Diff: 1 Topic: Why Do Economies Grow? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 29) Capital deepening is the only mechanism by which economies can grow. Answer: FALSE Diff: 1 Topic: Why Do Economies Grow? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 30) The real GDP per capita allows economic comparison between countries. Answer: TRUE Diff: 1 Topic: Measuring Economic Growth Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 31) At a 3.5 percent annual growth rate it would take 20 years for GDP per capita to double. Answer: TRUE Diff: 1 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 32) Economists who have studied economic growth find strong evidence of convergence. Answer: FALSE Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

33) Explain the two basic mechanisms that increase GDP per capita over the long term. Answer: The two basic mechanisms are capital deepening, meaning increases in an economy's stock of capital relative to its work force, and technological progress, which results in an economy operating more efficiently. Diff: 1 Topic: Why Do Economies Grow? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 34) Suppose that one country has a GDP that is ten percent of its richer neighbor, but the poorer country is growing at a rate of eight percent per year while the richer country is growing at a rate of two percent per year. Which country will be richer in 60 years? Answer: Using the rule of 70, it can be shown that the poor country will be richer in 60 years. The poor country's GDP will have doubled more than six times over this period, while the rich country's GDP will not have even doubled twice. So while the poor country might have started slowly, it is much richer than the rich country by 60 years later! Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 35) If real GDP is 100 in year 1, and grows at a rate of 3 percent per year for 9 years, what will real GDP be in 9 years? Answer: GDP [9 years later] = (1 + .03)9(100) = 130.48 Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 36) If an economy grows at 6 percent per year, how many years would it take for real GDP to double? Answer: Using the rule of 70, it would take 70/6 = 11.67 years for real GDP to double. Diff: 1 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures

37) Why is it difficult to make accurate and valid comparisons of real GDP or GNP for different countries, and how do the World Bank and the IMF deal with these difficulties? Answer: Difficulties arise for several reasons. Countries have their own currencies, patterns of consumption and prices differ between countries. In some countries, consumption patterns vary based on the availability of certain goods and services. For example, in nations where land is scarce, housing prices can be higher than in nations where land is abundant. Developing nations can have much different price structures on non-traded goods than developed nations have. Services like housekeeping or yard maintenance are usually much less expensive in developing nations than in developed nations. The World Bank and the IMF make adjustments for consumption patterns and relative prices when they gather price data for comparable goods to use in measuring real GDP across nations. Diff: 2 Topic: Comparing the Growth Rates of Various Countries Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 38) Explain the economic concept of convergence. Answer: Convergence is the process by which poorer countries close the gap between their level of GDP per capita and the GDP per capita of richer countries. To converge, poorer countries must grow at a faster rate than richer countries. Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 13.2 Capital Deepening 1) If a firm increases its capital stock per person while holding constant the number of workers employed, the firm is said to experience: A) capital augmentation. B) investment deepening. C) labor intensity. D) capital deepening. Answer: D Diff: 1 Topic: Capital Deepening Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

2) Decreases in the stock of capital will lead to: A) increases in wages and total GDP. B) decreases in wages and increases in GDP. C) increases in wages and decreases in GDP. D) decreases in wages and GDP. Answer: D Diff: 1 Topic: Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 3) An increase in the capital stock will: A) shift the production function downward. B) shift the production function upward. C) flatten the production function. D) steepen the production function. Answer: B Diff: 1 Topic: Capital Deepening Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 4) Capital deepening causes ________ in the demand for labor. A) an increase B) a decrease C) no change D) either an increase or decrease Answer: A Diff: 1 Topic: Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

Recall the Application about incentives to immunize children in developing countries to answer the following question(s). 5) This Application emphasizes the importance of: A) wealth distribution. B) economic incentives. C) literacy rates. D) none of the above. Answer: B Diff: 1 Topic: Application 2, Behavioral Incentives in Development Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 6) According to this Application, the incentives described were ________ because they ________ the rate of immunizations. A) effective; increased B) effective; decreased C) not effective; increased D) not effective; decreased Answer: A Diff: 1 Topic: Application 2, Behavioral Incentives in Development Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 7) According to this Application, why did parents not complete the sequence of vaccines for their children? A) because the costs of completing vaccine sequences were high in the short run B) because the costs of completing vaccine sequences were high in the long run C) because the benefits of completing vaccine sequences were low in the long run D) because the pain to the children of completing vaccine sequences were high Answer: A Diff: 1 Topic: Application 2, Behavioral Incentives in Development Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

8) According to this Application, which of the following were given to parents who immunized their children? A) dal (a common Indian food) B) a set of cooking pans C) rupees D) both A and B Answer: D Diff: 1 Topic: Application 2, Behavioral Incentives in Development Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 9) In a simple economy without government or foreign trade, any income not consumed is called: A) investment. B) net investment. C) saving. D) depreciation. Answer: C Diff: 1 Topic: Saving and Investment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 10) In a simple economy without government or foreign trade,and output can be purchased only by consumers or by firms, saving must equal: A) investment. B) depreciation. C) consumption. D) income. Answer: A Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

11) Increases in the stock of capital are the result of decreases in: A) gross investment. B) depreciation. C) net investment. D) all of the above. Answer: B Diff: 2 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 12) Gross investment minus depreciation is equal to: A) gross domestic product. B) net investment. C) personal investment. D) nominal investment. Answer: B Diff: 1 Topic: Saving and Investment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 13) Gross investment minus net investment is equal to: A) depreciation. B) nominal investment. C) real investment. D) consumption. Answer: A Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 14) Net investment plus depreciation is equal to: A) gross depreciation. B) gross domestic product. C) gross exports. D) gross investment. Answer: D Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 16 Copyright © 2020 Pearson Education, Inc.

15) The stock of capital ________ with any gross investment and ________ with any depreciation. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Diff: 2 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 16) To determine the change in the capital stock, the level of new investment must be adjusted for depreciation because some new investment: A) is not used immediately. B) merely replaces existing, but worn out, capital. C) replaces existing workers. D) is more efficient than existing capital. Answer: B Diff: 2 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 17) As the stock of capital grows, there will typically be ________ depreciation. A) less B) more C) the same amount of D) no Answer: B Diff: 2 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

18) Increases in net investment generally result in: A) lower levels of capital stock and lower levels of depreciation. B) lower levels of capital stock and higher levels of depreciation. C) higher levels of capital stock and higher levels of depreciation. D) higher levels of capital stock and lower levels of depreciation. Answer: C Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 19) In the short run, if the stock of capital ________ there will be more depreciation. A) grows B) declines C) remains stable D) grows, declines, or remains stable Answer: A Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 20) The factor that ultimately determines the change in the stock of capital, the level of real wages, and the output of an economy is: A) the labor force. B) net investment. C) the unemployment level. D) GDP. Answer: B Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

21) Suppose that for a given firm, the increase in output resulting from the last worker hired is less than the increase in output of the previous worker hired. This is an example of: A) diminishing returns. B) constant returns. C) increasing return. D) capital deepening. Answer: A Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 22) If the stock of capital of a nation is ________ while the population ________, the nation can produce more output, but output per worker falls. A) fixed; decreases B) declining; decreases C) fixed; increases D) fixed; remains stable Answer: C Diff: 2 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 23) Which of the following uses of tax revenues collected by the government leads to increased capital deepening? A) building roads B) increased foreign aid C) Medicare payments D) Social Security payments Answer: A Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

24) Which of the following uses of tax revenues collected by the government leads to increased capital deepening in the United States? A) providing food to a nation suffering from a famine B) foreign aid given to Mexico to build new schools C) higher salaries for members of Congress D) subsidizing airport construction in Seattle Answer: D Diff: 2 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 25) If the government ________ taxes to pay for spending on infrastructure, the result will most likely be a(n) ________ in capital deepening. A) increases; increase B) decreases; increase C) increases; decrease D) eliminates; elimination Answer: A Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 26) Suppose consumers save 3 percent of their incomes. If the government collects 1 dollar in taxes from each taxpayer, private saving will ________ per taxpayer. A) decrease by 3 cents B) decrease by 97 cents C) increase by $1 D) increase by 97 cents Answer: A Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

27) Suppose consumers save 5 percent of their incomes. If the government collects 100 dollars in taxes from each taxpayer, private saving will ________ per taxpayer. A) increase by $105 B) decrease by $95 C) decrease by $5 D) decrease by 95 cents Answer: C Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 28) Suppose consumers save 17 percent of their incomes. If the government collects 10 dollar in taxes from each taxpayer and invested it in infrastructure, total social investment will ________ per taxpayer. A) increase by $10.17 B) increase by $8.30 C) decrease by $1.70 D) decrease by $8.30 Answer: B Diff: 2 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 29) Suppose consumers save 8 percent of their incomes. If the government collects 4 dollar in taxes from each taxpayer and invested it in infrastructure, total social investment will ________ per taxpayer. A) increase by $ 4.32 B) increase by $3.68 C) increase by 32 cents D) decrease by 64 cents Answer: B Diff: 2 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

30) Nations that borrow from abroad to support current investment will: A) always be better off in the future. B) always sacrifice future consumption. C) be better off in the future if the investments are profitable. D) sacrifice future consumption only if the investments are profitable. Answer: C Diff: 2 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 31) Nations that borrow from abroad to support current consumption: A) will always be better off in the future. B) will always sacrifice future consumption. C) may sacrifice future consumption. D) will always sacrifice current consumption. Answer: B Diff: 2 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 32) Trade deficits always lead to future decreases in consumption if the trade deficits: A) support current investment. B) support current consumption. C) support either current investment or current consumption. D) require borrowing from abroad. Answer: B Diff: 3 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 33) An economy is better off with an increase in the stock of capital. Answer: TRUE Diff: 1 Topic: Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

34) In a simple economy without government or the foreign sector, saving must equal investment because output is divided into consumption and investment, and income is either consumed or saved. Answer: TRUE Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 35) Assuming full employment, if the private sector saves 8 percent of its income and the government raises taxes by $500 to finance public investments, total investment will increase by $460. Answer: TRUE Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 36) If a country runs a trade deficit to finance increased current consumption, it will have to increase consumption in the future to pay back its borrowings. Answer: FALSE Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 37) A larger labor force will allow the economy to produce more total output. Answer: FALSE Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 38) The point of diminishing returns means that output will decrease at an increasing rate. Answer: FALSE Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

39) Explain the impact of capital deepening on workers. Answer: Capital deepening is an increase in the amount of capital per worker. In a fullemployment economy under the assumption that the supply of labor is fixed, an increase in capital shifts the production function upwards because more output can be produced with the same amount of labor. Firms will therefore increase their demand for labor because the marginal benefit from hiring labor will increase. The real wage also rises. Thus, workers will enjoy higher wages, and total GDP in the economy will increase. Diff: 2 Topic: Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 40) Draw a graph showing the effect of an increase in the saving rate on the production function. Answer:

An increase in the saving rate causes the production function to shift upwards. Diff: 1 Topic: Capital Deepening, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 41) Why does depreciation decrease the stock of capital? Answer: As capital stock items such as buildings and machinery become older, they wear out and become less productive. New investment is needed to replace these buildings and machinery that have depreciated or become obsolete. Diff: 1 Topic: Saving and Investment Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 24 Copyright © 2020 Pearson Education, Inc.

42) Will increased imports of supercomputers for industry promote economic growth? Answer: Yes—doing so will lead to an increase in the economy's stock of capital. Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 43) Explain the effect of trade deficits on economic growth. Answer: The foreign sector can affect capital deepening. An economy can run a trade deficit and import investment goods to aid capital deepening. Even though it borrows from abroad, the resulting increase in GDP and wealth will enable it to repay those borrowings. However, an economy can also run a trade deficit because it wants to buy more consumer goods. In this case the economy is borrowing from abroad but there would be no capital deepening, just additional consumer spending. As a result, there would be no increase in GDP and when it comes time to repay the borrowing, society will be poorer. Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 13.3 The Key Role of Technological Progress 1) An event that allows the economy to operate more efficiently by producing more outputs without using any more inputs is referred to as: A) absolute progress. B) efficiency progress. C) capital investment. D) technological progress. Answer: D Diff: 1 Topic: The Key Role of Technological Progress Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

2) Which of the following is NOT an example of technological progress? A) an increase in the labor supply as the result of population growth B) the development of laser eye surgery C) the invention of the microwave oven D) the development of smart phones Answer: A Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 3) Which of the following is NOT an example of technological progress? A) builders constructing a new office building that uses less energy B) an increase in Florida's orange crop resulting from a mild winter C) the invention of wireless internet access D) the development of bluetooth headsets Answer: B Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 4) Which of the following is an example of technological progress? A) an increase in corn output resulting from genetic engineering B) the invention of the air conditioner C) the invention of LCD televisions D) all of the above Answer: D Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 5) According to Robert Solow, the production function should be written as: A) Y = F(K, L). B) Y = F(K, L, A). C) Y = F(K, A). D) Y = F(A, L). Answer: B Diff: 1 Topic: How Do We Measure Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 26 Copyright © 2020 Pearson Education, Inc.

6) Growth accounting refers to the method used to: A) identify the contribution of economic growth from increased capital, labor, and technological progress. B) identify the costs of promises made by the government today but paid for by future generations. C) measure the growth in the labor force. D) measure growth in the capital stock. Answer: A Diff: 1 Topic: How Do We Measure Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 7) According to the method of growth accounting, which of the following contribute to economic growth? A) capital growth B) labor growth C) technological progress D) all of the above Answer: D Diff: 1 Topic: How Do We Measure Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 8) Suppose the growth rate of GDP in the United States is 4.2 percent. If 2.9 percent and 1.3 percent of GDP growth are due, respectively, to capital and labor growth, the amount resulting from technological progress is: A) 0 percent. B) 1.3 percent. C) 2.9 percent. D) 4.2 percent. Answer: A Diff: 2 Topic: How Do We Measure Technological Progress? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

9) Suppose the growth rate of GDP in the United States is 4.2 percent. If 1.1 percent and 1.4 percent of GDP growth are due, respectively, to capital and labor growth, the amount resulting from technological progress is: A) 0.3 percent. B) 1.1 percent. C) 1.4 percent. D) 1.7 percent. Answer: D Diff: 2 Topic: How Do We Measure Technological Progress? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Recall the Application about growth in China and India to answer the following question(s). From 1978 to 2004, China grew at a rate of 9.3 percent per year and India grew at a rate of 5.4 percent per year. 10) According to this Application, based on the analysis of the sources of growth in China and India, and assuming that nothing changes, it can be concluded that: A) India's long-term growth prospects are not as strong those for China. B) the growth rate in China should significantly slow down in the near future, but the growth rate in India will continue to rapidly increase in the near and distant future. C) there is convergence between the nations in Asia. D) China's reliance on technology for economic growth makes it less likely to keep pace with the growth rate in India. Answer: A Diff: 2 Topic: Application 3, Sources of Growth in China and India Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 11) According to this Application, China's growth rate was faster than India's during this 26 year period because: A) China received more contributions from human capital than India received. B) China invested more in physical capital than India invested. C) China's growth was based more on human capital and India's growth was based more on physical capital. D) China's growth was based more on human capital and India's growth was based more on technological progress. Answer: B Diff: 1 Topic: Application 3, Sources of Growth in China and India Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 28 Copyright © 2020 Pearson Education, Inc.

12) According to this Application, China's GNP per capita and India's GDP per capita are ________ U.S. GNP per capita. A) now greater than B) still significantly less than C) now equal to D) within 5 percentage points of Answer: B Diff: 2 Topic: Application 3, Sources of Growth in China and India Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Recall the Application about the productivity of large infrastructure investments to answer the following question(s). 13) According to the Application, which of the following techniques do economists use to measure the productive effects of investments? A) growth accounting B) opportunity costs. C) supply and demand analysis D) production possibility curves Answer: A Diff: 1 Topic: Application 4, How Important is Infrastructure? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 14) According to the Application, what is the massive investment project did China recently embark on? A) bullet trains B) irrigation C) stem cell research D) reforestation Answer: A Diff: 1 Topic: Application 4, How Important is Infrastructure? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

15) According to the Application, which infrastructure investment in the U.S. contributed to the increased the productivity of agricultural lands between 1870-1890? A) railroads B) the internet C) the highway systems. D) dams. Answer: A Diff: 1 Topic: Application 4, How Important is Infrastructure? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 16) According to the Application, Donaldson and Hornbeck's (2010) study estimated that without railroads, agricultural productivity would have been ________ less. A) 60 percent B) 100 percent C) 30 percent D) 37.8 percent Answer: A Diff: 1 Topic: Application 4, How Important is Infrastructure? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 17) Labor productivity is defined as: A) total output per worker. B) output per hour of work. C) output divided by the average hourly wage. D) price of output divided by cost of output. Answer: B Diff: 1 Topic: Using Growth Accounting Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 18) Technological progress means that we produce more output with the same amount of inputs. Answer: TRUE Diff: 1 Topic: The Key Role of Technological Progress Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

19) Technological innovations are not necessarily major scientific breakthroughs. Answer: TRUE Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 20) Technological progress can be another mechanism which affects economic growth. Answer: TRUE Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 21) In terms of technological progress, economists interpret this as meaning an economy operates more efficiently by producing more output without using any more inputs. Answer: TRUE Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 22) The contribution to output growth of technological progress is estimated by how much of the output growth can be explained by the growth in inputs. Answer: FALSE Diff: 1 Topic: How Do We Measure Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 23) Do inventions have to be major technological breakthroughs to affect the efficiency of producing goods? Explain. Answer: No. Small changes in methodology can increase productivity or improvement to an existing machine can make it more productive. Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

24) Growth accounting is a method which measures the contributions to economic growth from what three factors? Answer: Increased capital; labor; technological progress Diff: 1 Topic: How Do We Measure Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 13.4 What Causes Technological Progress? 1) All of the following can cause technological progress EXCEPT: A) research and development. B) education. C) free trade. D) population decreases. Answer: D Diff: 1 Topic: What Causes Technological Progress? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 2) It is possible for an economy to become more productive and per-capita output to increase if: A) new ideas are generated. B) inventions are developed. C) technology is improved. D) all of the above Answer: D Diff: 1 Topic: What Causes Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 3) The process by which monopoly profits lead to technological progress in known as: A) imperfect competition. B) destructive creation. C) creative destruction. D) economies of scale. Answer: C Diff: 1 Topic: Monopolies That Spur Innovation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 32 Copyright © 2020 Pearson Education, Inc.

4) Monopoly profits lead to technological process by: A) carefully investing deadweight loss. B) encouraging the development of innovations by firms attempting to break a monopoly. C) firms lobbying Congress for protection of their monopolies. D) increasing the amount of human capital in the economy. Answer: B Diff: 1 Topic: Monopolies That Spur Innovation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 5) When one company is the sole seller of certain products in a market, it is called a: A) government exclusive. B) monopoly. C) manipulation of the market. D) conglomerate. Answer: B Diff: 1 Topic: Monopolies That Spur Innovation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 6) All of the following encourage increases in technological progress EXCEPT: A) larger markets through free trade. B) the possibility of monopoly profits. C) the ability to patent a new invention. D) closed economies. Answer: D Diff: 1 Topic: The Scale of the Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

7) To reduce labor costs, companies often invent machines and methods to produce products and reduce the amount of labor required. This is called: A) downsizing. B) induced innovation. C) failed labor utilization. D) anti-union. Answer: B Diff: 1 Topic: Induced Innovations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 8) The returns to education are: A) lowest in developing nations. B) highest in developed nations. C) highest in developing nations. D) never reflected in the wages of workers. Answer: C Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 9) According to human capital theory, all of the following help make workers more productive EXCEPT: A) education. B) health and fitness. C) skills. D) increased unemployment benefits. Answer: D Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

10) In developing countries, the highest returns are from investing in: A) transportation systems. B) sanitation systems. C) education. D) defense. Answer: C Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 11) Developing countries send their best students to get an education in developed countries to help develop: A) more education people. B) a channel of communications. C) a skilled work force. D) better political skills. Answer: C Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 12) Knowledge and skills are part of ________ in an economy. A) educational functions B) human capital C) market growth D) innovation Answer: B Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

13) In developing countries, economists have found ________ correlation between a person's height and the wages he can earn in the farming sector. A) a weak B) a strong C) an inverse D) no Answer: B Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Recall the Application about the role of megacities in economic growth to answer the following question(s). 14) According to the Application, what is the term economists use to refer to the extra productivity that occur in larger cities? A) agglomeration economies B) aggregation economies C) economies of scale D) comparative advantage Answer: A Diff: 1 Topic: Application 5, The Role of Megacities in Economic Growth Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 15) According to the Application, who recognized that specialization of labor can generate higher productivity? A) Adam Smith B) Karl Marx C) David Ricardo D) John Maynard Keynes Answer: A Diff: 1 Topic: Application 5, The Role of Megacities in Economic Growth Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

16) According to the Application, why would more face-to-face interactions in densely populated cities lead to more economic growth? A) More face-to-face interactions can lead to less need for social media. B) More face-to-face interactions can raise the cost of sharing of new ideas. C) More face-to-face interactions can lead to the production and sharing of new ideas. D) More face-to-face interactions can lead to more social unrest. Answer: C Diff: 1 Topic: Application 5, The Role of Megacities in Economic Growth Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 17) According to the Application, which country has more cities with a population greater than 5 million? A) South Korea B) The United States C) China D) Japan Answer: C Diff: 1 Topic: Application 5, The Role of Megacities in Economic Growth Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Recall the Application about cultural factors in England and their relevance to the Industrial Revolution to answer the following question(s). 18) According to the Application, the cultural habits of the rich filtered down through English society. These habits included all of the following virtues EXCEPT: A) thrift. B) prudence. C) hard work. D) impulsive behavior. Answer: D Diff: 1 Topic: Application 6, Culture, Evolution, and Economic Growth Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

19) According to the Application, the cultural changes in England allowed individuals to take advantage of: A) new developments in science and technology. B) the increase in agrarian lifestyles. C) the decrease in population caused by the number of citizens who were leaving for the New World. D) the elimination of trade barriers resulting from the formation of the European Union. Answer: A Diff: 1 Topic: Application 6, Culture, Evolution, and Economic Growth Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 20) According to the Application, the differential survival of the wealthy created an environment: A) which allowed for economic growth. B) which caused increased class warfare. C) where lower-class people could no longer afford to live in the country. D) that directly led to the demise of the British monarchy. Answer: A Diff: 1 Topic: Application 6, Culture, Evolution, and Economic Growth Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 21) The Application cites a study by Galor and Moav (2002) that found that families with fewer children gained a comparative advantage in the evolutionary cycle because: A) they invested more human capital on their offspring than the families with more children. B) having more children led to more chaos. C) having more children meant more workers in the farms. D) they lived in cities while families with more children lived in the countryside. Answer: A Diff: 1 Topic: Application 6, Culture, Evolution, and Economic Growth Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

22) An example of a topic studied in the field of new growth is how incentives for ________ interact with the accumulation of physical capital. A) research and development B) new product development C) international trade D) all of the above Answer: D Diff: 1 Topic: New Growth Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 23) The idea that investment in comprehensive education in developing countries leads to permanent increases in the rate of technological progress is an example of: A) increasing economic inequality. B) capital deepening. C) new growth theory. D) a trade-off between human capital and technology. Answer: C Diff: 1 Topic: New Growth Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 24) A defining feature of new growth theory is that it involves economic models of growth which account for: A) population increases. B) technological progress. C) political changes. D) capital flight. Answer: B Diff: 1 Topic: New Growth Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

25) Models of growth that account for technological progress are part of: A) creative destruction theory. B) new growth theory. C) growth accounting. D) all of the above. Answer: B Diff: 1 Topic: New Growth Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 26) Innovation and incentives to come up with new products and production methods are stifled in larger markets. Answer: FALSE Diff: 1 Topic: The Scale of the Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 27) In larger markets, the quest for profit by firms motivates them to be innovative and produce new and more appealing products. Answer: TRUE Diff: 1 Topic: The Scale of the Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 28) Human capital includes investments in education and skills. Answer: TRUE Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 29) Education is an integral part of economic growth. Answer: TRUE Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

30) Human capital is equally, if not more, important than physical capital. Answer: TRUE Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 31) All growth theory today is "new growth theory" because it considers a broad framework that includes technological progress. Answer: TRUE Diff: 1 Topic: New Growth Theory Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 32) Suppose you were interested in increasing technological progress in your country. Suggest some ways to do it. Answer: The text offers a number of possibilities. Increasing research and development in fundamental science, allowing a limited number of monopolies that spur innovation, investing in education and the accumulation of knowledge are all policy prescriptions that may be expected to increase technological progress. Diff: 1 Topic: What Causes Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 33) What are the trade-offs involved in shortening the length of a patent for pharmaceuticals? Answer: On the one hand, shortening the length of a patent will lead to reduced profits by drug companies and increased competition, meaning lower prices for consumers. On the other hand, reducing this legal monopoly period will reduce the incentive to invest in research and development, and fewer pharmaceuticals may be invented. Diff: 1 Topic: Monopolies That Spur Innovation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

34) In what two ways can education contribute to economic growth? Answer: Increased knowledge and skills of people complement current investments in physical capital. Education enables a workforce to use its skills to develop new ideas or copy ideas or import them from other nations. Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Recall the Application about cultural factors in England and their relevance to the Industrial Revolution to answer the following question(s). 35) In the Application, what was Galor and Moav's (2002) explanation for why families with fewer children gain a comparative advantage in the evolutionary cycle? Answer: They argue that at some point during the human evolutionary process, families that had fewer children but invested more in them gained a competitive advantage in the evolutionary cycle. The offspring of these families had more human capital and more easily adapted to technological progress and the other changes that were taking place in societies. Diff: 1 Topic: Application 6, Culture, Evolution, and Economic Growth Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 13.5 A Key Governmental Role: Providing the Correct Incentives and Property Rights 1) Economic growth is severely impeded in economies: A) with a lack of clear property rights. B) with a strong market system. C) with high rates of convergence. D) which encourage induced innovation. Answer: A Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

2) The absence of clear property rights: A) is caused by capital deepening. B) is common in many developing nations. C) encourages creative destruction. D) all of the above Answer: B Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 3) According to economists, the lack of clear property rights will: A) remove the proper incentives to invest in the future. B) encourage more incentives to invest in the future. C) lower the costs of investing in the future. D) All of the above are correct. Answer: A Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 4) Which of the following is the best example of a person NOT having clear property rights? A) a city parks worker who inherits his uncle's town house B) a dairy farmer who pays off the mortgage on his farm C) a medical student who lives on campus for his first year of studies D) a retired college professor who builds a bungalow on her oceanfront property Answer: C Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

5) According to William Easterly, a former World Bank Economist, the World Bank's role in development is to: A) increase the cost of education in a country. B) hold governments responsible for creating the proper economic environment C) help governments increase inflation rates in a country. D) allow countries to tax their exports. Answer: B Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 6) Which of the following government actions can hinder the economic development of a country? A) It inhibits the growth of the financial and banking sector. B) It implements policies that increase inflation rates in a country. C) It adopts policies that effectively tax exports. D) All of the above are correct. Answer: D Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Recall the Application about the lack of property rights in Peru, and why clear property rights are important for economic growth in developing countries, to answer the following question(s). 7) According to this Application, clear property rights: A) are important for economic growth in developed nations, but not in developing nations. B) hinder economic growth in developing nations. C) have no impact on the economic growth of developed nations. D) are important for economic growth in developing and developed nations. Answer: D Diff: 1 Topic: Application 7, Lack of Property Rights Hinders Growth in Peru Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

8) According to this Application, clear property rights are important for economic growth, because without a clear title to property: A) the property cannot be used as collateral for loans. B) people will not reside on the property. C) no utilities will be available for the property. D) the property has no value. Answer: A Diff: 1 Topic: Application 7, Lack of Property Rights Hinders Growth in Peru Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 9) According to this Application, in Peru, producing palm oil is very profitable but is a timeconsuming process. Producing coca paste, an ingredient in cocaine, is not as costly or as time consuming as the production of palm oil. To switch Peruvian farmers from producing an ingredient used for cocaine to producing the profitable and safe palm oil would require: A) informal ownership of property. B) cocaine being declared illegal in Peru. C) improvements in finance and the ability to borrow funds. D) governmental approval. Answer: C Diff: 1 Topic: Application 7, Lack of Property Rights Hinders Growth in Peru Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 10) The absence of clear property rights inhibits investment and economic growth. Answer: TRUE Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 11) The substantial increase in clear property rights has severely impeded growth in many developing countries. Answer: FALSE Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

12) Explain the connection between property rights and economic growth. Answer: Clear property rights provide property owners the incentives to invest in the future. With clear property rights, the property owner can reap the economic benefits from investing in the property. Without clear property rights, someone else could enjoy the benefits from this investment, and this possibility could significantly decrease the incentive to invest. Diff: 2 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 13) What is former World Bank economist William Easterly's explanation for why developing countries fail to grow even with the aid of international agencies like the World Bank? Answer: According to Easterly, governments in developing countries have failed to provide the proper economic environment that would motivate individuals and firms to take actions that promote economic development. The World Bank and other international agencies should not try to find a magic bullet for development, but should instead hold governments responsible for creating the proper economic environment. Diff: 2 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 13.6 Appendix: A Model of Capital Deepening 1) Increasing the stock of capital while holding the labor force constant will ________ output at a(n) ________ rate. A) increase; increasing B) increase; decreasing C) decrease; increasing D) decrease; decreasing Answer: B Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

2) Capital stock will increase as long as: A) capital deepening decreases. B) depreciation exceeds real GDP. C) gross investment exceeds depreciation. D) net investment equals zero. Answer: C Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 3) In the Solow model, if total saving exceeds depreciation: A) capital deepening stops. B) gross investment is negative. C) real wages decrease. D) capital stock increases. Answer: D Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 4) As capital deepening occurs, there will be: A) economic growth and decreases in depreciation. B) increased real wages and economic growth. C) decreased real wages and decreases in saving. D) decreases in depreciation and decreases in saving. Answer: B Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

Figure 13A.1 5) Refer to Figure 13A.1. When the economy reaches K, total saving is represented by point ________ and depreciation is represented by point ________. A) e; Y B) e; e C) Y; e D) Y; Y Answer: B Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 6) Refer to Figure 13A.1. The stock of capital no longer increases once the economy reaches point: A) a. B) b. C) c. D) e. Answer: D Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

7) Refer to Figure 13A.1. Suppose that the economy starts with a capital stock of K0. Then total saving is given by point ________ and depreciation by point ________. A) a; b B) b; a C) c; d D) d; c Answer: A Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 8) Refer to Figure 13A.1. Moving from K0 to K1: A) economic growth stops. B) saving becomes negative. C) capital stock continues to increase. D) depreciation starts to decline. Answer: C Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 9) Refer to Figure 13A.1. When the economy reaches K: A) depreciation equals saving. B) depreciation is zero. C) capital stock increases. D) economic growth through capital deepening continues to increase. Answer: A Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

10) Refer to Figure 13A.1. Capital deepening occurs as long as: A) total saving exceeds depreciation. B) depreciation exceeds total saving. C) total saving and depreciation are equal. D) the level of Y is increasing. Answer: A Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

Figure 13A.2 11) Refer to Figure 13A.2. Compared to curve s1Y, curve s2Y represents: A) a decrease in capital deepening. B) a higher saving rate. C) a decrease in depreciation. D) a decrease in original capital stock. Answer: B Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

12) Refer to Figure 13A.2. If the economy were saving at the rate s1: A) saving would equal depreciation at e1. B) capital stock would increase until the economy reached K2. C) the economy would grow until it reached e2. D) all of the above. Answer: A Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 13) Refer to Figure 13A.2. If the economy were originally saving at the rate s1 but changed to the rate s2: A) depreciation will not catch up to total saving. B) capital deepening will continue past K2. C) saving exceeds depreciation at K1. D) the economy stops growing at e1. Answer: C Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 14) Refer to Figure 13A.2. An increase in the saving rate is represented by: A) shifting from s2Y to dK. B) shifting from s1Y to s2Y. C) a movement from K1 to e1. D) a movement from e2 to e1. Answer: B Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 15) Capital deepening will occur as long as total saving is greater than depreciation. Answer: TRUE Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 51 Copyright © 2020 Pearson Education, Inc.

16) Eventually the process of capital deepening comes to a halt as depreciation catches up with total saving. Answer: TRUE Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 17) A higher saving rate will promote capital deepening. Answer: TRUE Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 18) Technological progress directly raises output, but also slows capital deepening. Answer: FALSE Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 19) As capital deepening occurs, there will be increased real wages and economic growth. Answer: TRUE Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 20) The capital deepening model developed by Robert Solow shows the links among which three items? Answer: saving, depreciation, capital deepening Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

21) In to the Solow model, what is capital deepening? How can a country achieve capital deepening? Answer: Capital deepening occurs when the amount of capital per worker increases. A country can do this by increasing its saving and investment in capital. Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 22) According to the Solow model, technological progress will cause output to increase for two reasons. What are these two reasons? Answer: The increased efficiency which comes with technological progress will directly raise per capita output and technological progress leads to additional capital deepening. Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 23) According to the Solow model, can a country have capital deepening without any limit? Answer: No. Capital deepening will halt when depreciation catches up with total saving. Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

24) Draw a graph showing the Solow model. Illustrate and explain the point at which capital deepening ceases. Answer:

Capital deepening occurs as long as total saving exceeds depreciation. This occurs as long as the saving function sY is above the depreciation line dK in the graph. At the point where the two cross, shown as the capital level k*, capital deepening will cease. Diff: 2 Topic: Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 14 Aggregate Demand and Aggregate Supply 14.1 Sticky Prices and Their Macroeconomic Consequences 1) Recessions occur because of: A) real adverse shocks to the economy. B) shocks to technology. C) difficulties in coordinating economic affairs. D) all of the above. Answer: D Diff: 2 Topic: Sticky Prices and Their Macroeconomic Consequences Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 2) Real business cycle theory emphasizes the role of: A) demand shocks as a cause of economic fluctuations. B) technology shocks as a cause of economic fluctuations. C) shocks to the money supply as a cause of economic fluctuations. D) government spending as a cause of economic fluctuations. Answer: B Diff: 1 Topic: Sticky Prices and Their Macroeconomic Consequences Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 3) The economic theory that emphasizes the role of difficulties in coordinating economic affairs as a cause of economic fluctuations is known as: A) Keynesian economics. B) investment cycle theory. C) real business cycle theory. D) technology shock theory. Answer: A Diff: 1 Topic: Sticky Prices and Their Macroeconomic Consequences Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

4) The mechanism that normally coordinates what goes on in an economy is the: A) government. B) price system. C) stock market. D) Federal Reserve. Answer: B Diff: 1 Topic: Sticky Prices and Their Macroeconomic Consequences Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 5) In modern economies: A) all prices are very flexible. B) some prices are very flexible while others are not. C) no prices are very flexible. D) prices become less flexible as they increase. Answer: B Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 6) Which of the following is a problem with the price system that can lead to a breakdown in the coordination of economic activity? A) The price system works silently in the background. B) Prices can be slow to adjust. C) Prices may be flexible. D) all of the above Answer: B Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

7) Which of the following is a problem with the price system that can lead to fluctuations in output? A) The price system works silently in the background. B) Prices can be slow to adjust. C) Prices may be flexible. D) all of the above Answer: B Diff: 2 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 8) Prices that adjust nearly on a daily basis are: A) custom prices. B) auction prices. C) sticky prices. D) heavy prices. Answer: B Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 9) Prices that adjust slowly are: A) custom prices. B) auction prices. C) flexible prices. D) heavy prices. Answer: A Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

10) Prices for fresh fruit, vegetables and other food products are examples of: A) custom prices. B) auction prices. C) sticky prices. D) temporary prices. Answer: B Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 11) Prices for industrial commodities such as steel rods or machine tools are: A) heavy prices. B) sticky prices. C) auction prices. D) custom prices. Answer: D Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 12) Because wages of sports stars can change frequently, their wages are considered: A) auction prices. B) custom prices. C) sticky prices. D) irrational prices. Answer: A Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 13) Because laundromat prices can change infrequently, the prices are considered: A) auction prices. B) custom prices. C) flexible prices. D) irrational prices. Answer: B Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 4 Copyright © 2020 Pearson Education, Inc.

14) If prices are sticky: A) economic activity will be coordinated efficiently. B) economic activity will not be coordinated efficiently. C) prices will quickly adjust to changes in demand. D) quantity supplied will always equal quantity demand. Answer: B Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 15) Workers often have ________ contracts and so their wages are ________. A) long-term; flexible B) long-term; sticky C) short-term; sticky D) short-term; flexible Answer: B Diff: 2 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 16) Stickiness of wages: A) is unrelated to stickiness of prices. B) lessens the stickiness of prices. C) reinforces stickiness of prices. D) may or may not reinforce stickiness of prices. Answer: C Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 17) The economy's ability to coordinate economic activity is hindered by: A) sticky wages causing sticky prices. B) auction prices. C) workers whose wages change quickly. D) all of the above. Answer: A Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 5 Copyright © 2020 Pearson Education, Inc.

18) Workers whose wages tend to adjust slowly include all of the following EXCEPT: A) union workers. B) unskilled, low wage workers. C) those with long-term contracts. D) movie stars, professional athletes, and rock stars. Answer: D Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 19) Which of the following types of workers might have wages that change quickly? A) unskilled, low-wage workers B) union workers C) employees of state and local governments D) movie stars and rock stars Answer: D Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 20) In which market would the price be least likely to be "sticky"? A) refrigerators B) steel rods C) fresh fruit D) trucks Answer: C Diff: 2 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

21) Suppose the demand for hot dogs decreases. In the short run, firms that produce hot dogs will experience a fall in prices, which will induce them to: A) increase production and increase the number of workers. B) decrease production and increase the number of workers. C) decrease production and reduce the number of workers. D) increase production and reduce the number of workers. Answer: C Diff: 2 Topic: How Demand Determines Output in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 22) Suppose the demand for hamburgers increases. In the short run, firms that produce hamburgers will experience a rise in prices, which will induce them to: A) decrease production and decrease the number of workers. B) increase production and increase the number of workers. C) decrease production and increase the number of workers. D) increase production and decrease the number of workers. Answer: B Diff: 2 Topic: How Demand Determines Output in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 23) Suppose consumer tastes and preferences shift from pizza to tacos. In the short run, these changing tastes will result in pizza restaurants ________ pizza prices and taco restaurants ________ taco prices. A) increasing; decreasing B) decreasing; increasing C) decreasing; decreasing D) increasing; increasing Answer: B Diff: 2 Topic: How Demand Determines Output in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

24) Suppose consumer tastes and preferences shift from tacos to pizzas. In the short run, these changing tastes will result in pizza restaurants ________ pizza prices and taco restaurants ________ taco prices. A) increasing; decreasing B) decreasing; increasing C) decreasing; decreasing D) increasing; increasing Answer: A Diff: 2 Topic: How Demand Determines Output in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 25) The short run in macroeconomics is the period in which: A) prices change significantly. B) no contracts or agreements exist to fix prices. C) demand determines output. D) the demand curve is vertical. Answer: C Diff: 1 Topic: How Demand Determines Output in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model Recall the Application about the behavior of prices in retail catalogs to answer the following question(s). 26) This Application examines the concept of: A) the wealth effect. B) sticky prices. C) consumer spending habits. D) stagflation. Answer: B Diff: 1 Topic: Application 1, Measuring Price Stickiness in Consumer Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

27) In the Application, findings by Anil Kasyap showed that even though the catalogs listed in the Application were reissued every six months, the prices which were tracked in these retail catalogs: A) were typically fixed for a year or more. B) changed every month. C) tended to fall during periods of high inflation. D) were not listed due to low rates of inflation. Answer: A Diff: 1 Topic: Application 1, Measuring Price Stickiness in Consumer Markets Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 28) In the Application, Anil Kasyap found that in periods of high inflation: A) prices tended to change more frequently. B) prices tended to change less frequently. C) prices do not change at all. D) prices change equally as often as during periods of low inflation. Answer: A Diff: 1 Topic: Application 1, Measuring Price Stickiness in Consumer Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 29) According to this Application, the prices which were tracked in the retail catalogs exemplified the macroeconomic concept of the short run, a period of time in which: A) price changes are significant because the aggregate supply curve is vertical. B) prices never change because the aggregate demand curve is vertical. C) prices change frequently because of changes in aggregate supply. D) prices don't change very much, implying that the aggregate supply curve is relatively flat. Answer: D Diff: 1 Topic: Application 1, Measuring Price Stickiness in Consumer Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

30) In the Application, Mark Bils and Peter Klenow's findings were: A) different from Anil Kashyap's findings. They found prices changing more frequently. B) different from Anil Kashyap's findings. They found prices changing less frequently. C) similar to Anil Kashyap's findings. They found prices changing very frequently. D) similar to Anil Kashyap's findings. They found prices changing very infrequently. Answer: A Diff: 1 Topic: Application 1, Measuring Price Stickiness in Consumer Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 31) The price system always works instantaneously. Answer: FALSE Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 32) Prices of industrial products and wages tend to be the most "flexible." Answer: FALSE Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 33) For most firms, the biggest cost of doing business is wages. Answer: TRUE Diff: 1 Topic: Flexible and Sticky Prices Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 34) The price system works in an economy on a day-to-day basis to match the desires of consumers with the output from producers. Answer: TRUE Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

35) Changes in demand will often be met with changes in output rather than changes in prices because of formal and informal contracts. Answer: TRUE Diff: 1 Topic: How Demand Determines Output in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 36) What are some reasons why coordination of economic affairs through the price system may not work perfectly? Answer: There are a number of correct answers here, but three principal reasons are that there may be too few prices (that is, more markets than prices), prices may not contain sufficient information, and prices may be "sticky." Diff: 2 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 37) What are the two types of prices in an economy? Answer: auction, custom Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 38) Suppose that demand for a product falls, but prices are sticky. What is likely to happen to prices and output in that market, in the short run? Answer: If prices are not flexible, they may not immediately adjust downward in response to the decrease in demand. So in the short run, prices may stay constant, and output might fall by more than would have happened if prices were flexible. Diff: 2 Topic: How Demand Determines Output in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

14.2 Understanding Aggregate Demand 1) The relationship between the level of prices and the total demand for all goods and services is known as: A) aggregate supply. B) market supply. C) aggregate demand. D) market demand. Answer: C Diff: 1 Topic: What is the Aggregate Demand Curve? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 2) Aggregate demand refers to the relationship between: A) prices and the quantity of a good supplied. B) the price level and the quantity of real GDP supplied. C) prices and the quantity of a good demanded. D) the price level and the quantity of real GDP demanded. Answer: D Diff: 1 Topic: What is the Aggregate Demand Curve? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 3) What is the total demand for goods and services in an entire economy called? A) supply and demand B) aggregate demand C) consumer demand D) GDP demand Answer: B Diff: 1 Topic: What is the Aggregate Demand Curve? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

4) The aggregate demand curve is: A) downward sloping. B) upward sloping. C) a vertical line at potential output. D) a horizontal line at the current price level. Answer: A Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 5) As the price level ________, the purchasing power of money ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; stays the same Answer: B Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 6) The increase in spending that occurs because the real value of money increases when the price level falls is known as the: A) interest rate effect. B) international trade effect. C) price effect. D) wealth effect. Answer: D Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

7) One reason the aggregate demand curve is downward sloping is because of the: A) interest rate effect. B) welfare effect. C) price effect. D) tariff effect. Answer: A Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 8) The increase in spending that occurs because the demand for investment goods increases when the price level falls is known as the: A) interest rate effect. B) international trade effect. C) price effect. D) wealth effect. Answer: A Diff: 2 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 9) The increase in spending that occurs because domestic goods become cheaper relative to foreign goods when the price level falls is known as the: A) interest rate effect. B) international trade effect. C) price effect. D) wealth effect. Answer: B Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

10) The purchasing power of money increases as the: A) demand increases. B) unemployment decreases. C) price level falls. D) production increases. Answer: C Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 11) The purchasing power of money decreases as the: A) production decreases. B) price level increases. C) employment increases. D) demand increases. Answer: B Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 12) The real value of money ________ as the price level falls. A) remains the same B) decreases C) increases D) none of the above Answer: C Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

13) When interest rates are lower, consumers and companies are able to borrow money more cheaply in order to make major purchases. As a result, the demand for goods in an economy will generally: A) decrease. B) increase. C) remain the same. D) be minimally affected. Answer: B Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 14) When the price level is low, resulting in domestic goods being cheaper than imported foreign goods: A) consumers hold more money. B) consumers spend less money. C) the demand for domestic goods will increase. D) there will be a reduction in import tariffs. Answer: C Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 15) When the price level is low and the demand for domestic goods increases, how does it affect international trade? A) Net exports will decrease. B) Net exports will increase. C) Prices of all international goods will decrease. D) Prices of all international goods will increase. Answer: B Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

16) If home prices are falling, consumers purchasing a home will find their purchasing power of money has increased. This benefit to consumers is called the: A) inflation effect. B) wealth effect. C) home equity effect. D) multiplier effect. Answer: B Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 17) Which of the following does NOT shift the U.S. aggregate demand curve? A) an increase in the supply of money B) an increase in GDP in Japan C) a decrease in taxes D) a decrease in the price level Answer: D Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 18) Which of the following does NOT decrease aggregate demand in the United States? A) a decrease in the price of oil B) a decrease in GDP in Germany C) a decrease in government spending D) a decrease in the supply of money Answer: A Diff: 2 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

19) Which of the following would cause an increase in aggregate demand in the short run? A) an increase in the supply of money B) a decrease in the price level C) an increase in taxes D) a crop failure Answer: A Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 20) Which of the following would cause a decrease in aggregate demand? A) a rise in wages B) an increase in the price level C) an increase in the money supply D) a fall in investor confidence Answer: D Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 21) Which of the following causes a movement upward along the aggregate demand curve? A) a fall in wages B) an increase in the price level C) an increase in government spending D) an increase in the money supply Answer: B Diff: 2 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 22) Which of the following causes a movement downward along the aggregate demand curve? A) a decrease in the price level B) an increase in the price level C) an increase in the money supply D) a decrease in government spending Answer: A Diff: 2 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 18 Copyright © 2020 Pearson Education, Inc.

23) Which one of the following would shift the aggregate demand curve to the left? A) an increase in the money supply B) an increase in government spending C) an increase in exports D) an increase in taxes Answer: D Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

Figure 14.1 24) Figure 14.1 shows three aggregate demand curves. A shift from curve AD1 to curve AD0 could be caused by a(n): A) increase in the money supply. B) decrease in taxes. C) increase in the price level. D) decrease in government spending. Answer: D Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

25) Figure 14.1 shows three aggregate demand curves. A shift from curve AD1 to curve AD2 could be caused by a(n): A) decrease in the money supply. B) increase in taxes. C) decrease in the price level. D) increase in government spending. Answer: D Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 26) Figure 14.1 shows three aggregate demand curves. A shift from curve AD1 to curve AD2 could be caused by a(n): A) increase in the money supply. B) increase in taxes. C) increase in the price level. D) decrease in government spending. Answer: A Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 27) Figure 14.1 shows three aggregate demand curves. A shift from curve AD1 to curve AD0 could be caused by a(n): A) decrease in the money supply. B) decrease in taxes. C) increase in the price level. D) increase in government spending. Answer: A Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

28) Figure 14.1 shows three aggregate demand curves. A shift rom curve AD0 to curve AD1 could be caused by a(n): A) decrease in the money supply. B) decrease in taxes. C) decrease in the price level. D) decrease in government spending. Answer: B Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 29) Figure 14.1 shows three aggregate demand curves. A shift from curve AD2 to curve AD1 could be caused by a(n): A) increase in the money supply. B) increase in taxes. C) increase in the price level. D) increase in government spending. Answer: B Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 30) Figure 14.1 shows three aggregate demand curves. A movement from point b to point a could be caused by a(n): A) decrease in the money supply. B) increase in taxes. C) increase in the price level. D) increase in government spending. Answer: C Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

31) Figure 14.1 shows three aggregate demand curves. A movement from point b to point c could be caused by a(n): A) increase in the money supply. B) decrease in taxes. C) decrease in the price level. D) decrease in government spending. Answer: C Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 32) Suppose that we are currently at point b in Figure 14.1. An increase in government spending will result in a: A) shift in the AD curve from AD1 to AD2. B) shift in the AD curve from AD1 to AD0. C) movement from point b to point a. D) movement from point b to point c. Answer: A Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 33) Suppose that we are currently at point c in Figure 14.1. An increase in income taxes will result in a: A) shift in the AD curve from AD1 to AD2. B) shift in the AD curve from AD1 to AD0. C) movement from point b to point a. D) movement from point a to point c. Answer: B Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

34) Suppose that we are currently at point b in Figure 14.1. An increase in the price level will result in a: A) shift in the AD curve from AD1 to AD2. B) shift in the AD curve from AD1 to AD0. C) movement from point b to point a. D) movement from point b to point c. Answer: C Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 35) Suppose that we are currently at point b in Figure 14.1. A decrease in the price level will result in a: A) shift in the AD curve from AD1 to AD2. B) shift in the AD curve from AD1 to AD0. C) movement from point b to point a. D) movement from point a to point b. Answer: D Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 36) Assuming the price level has not changed, how would an increase in the aggregate demand affect real GDP? A) It decreases. B) It increases. C) It only changes with changes in imports. D) It only changes with changes in exports. Answer: B Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

37) A decrease in spending on new homes will, other things being equal: A) increase aggregate demand. B) decrease aggregate demand. C) increase aggregate supply. D) decrease aggregate supply. Answer: B Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 38) Any change in spending from ________ will also change aggregate demand. A) households B) firms C) the foreign sector D) all of the above Answer: D Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 39) The relationship between consumer spending and income is known as the: A) rate of income. B) consumption function. C) inflation rate. D) rate of individual wealth. Answer: B Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 40) When consumers spend and buy things regardless of their level of income, this is known as: A) bad financial management. B) living the good life. C) autonomous consumption spending. D) using credit to its maximum. Answer: C Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 24 Copyright © 2020 Pearson Education, Inc.

41) When consumers realize additional income in a household and spend the additional money, the portion of the additional income that is spent is measured by the: A) credit increase theory. B) marginal propensity to consume. C) aggregate demand factor. D) measure of individual wealth. Answer: B Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 42) The multiplier represents the ratio of the total shift in aggregate demand to the: A) total shift in short-run aggregate supply. B) initial shift in short-run aggregate supply. C) initial shift in aggregate demand. D) total shift in long-run aggregate supply. Answer: C Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 43) The marginal propensity to save (MPS) is the: A) amount of saving that is later consumed. B) fraction of additional income that is saved. C) part of consumption spending that does not depend on income. D) total amount of income that is saved. Answer: B Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

44) If the government increases its purchases of goods and services by $3,000 and the MPC is 0.8, GDP and income will eventually increase by: A) $2,400. B) $6,000. C) $15,000. D) $24,000. Answer: C Diff: 2 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 45) If the government decreases its purchases of goods and services by $12,000 and the MPS is 0.5, GDP and income will eventually decrease by: A) $2,400. B) $6,000. C) $24,000. D) $60,000. Answer: C Diff: 2 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 46) If the government increased its purchases of goods and services by $12,000, and this resulted in an eventual increase in GDP and income of $60,000, the MPS would be equal to: A) 0.2. B) 0.4. C) 0.8. D) 2. Answer: A Diff: 2 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

47) If the government decreased its purchases of goods and services by $4,000, and this resulted in an eventual decrease in GDP and income of $10,000, the MPC would be equal to: A) 2.5. B) 1.5. C) 0.6. D) 0.4. Answer: C Diff: 2 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 48) If the MPC = 0.9, the multiplier would be: A) 0.1. B) 2. C) 9. D) 10. Answer: D Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 49) If the MPS = 0.1, the multiplier would be: A) 10. B) 1 C) 9 D) 0.9 Answer: A Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

50) If the MPS = 0.1, the MPC would be: A) 10. B) 1 C) 9 D) 0.9 Answer: D Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 51) If the multiplier is 10, then the MPS is ________ while the MPC would be ________. A) 1; 9 B) 0.9; 0.1 C) 9; 10 D) 0.1; 0.9 Answer: D Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 52) If the MPS = 0.2, the multiplier would be: A) 0.5. B) 1. C) 2. D) 5. Answer: D Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 53) If the multiplier = 2.5, the MPC would be: A) 0.25. B) 0.4. C) 0.6. D) 0.75. Answer: C Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 28 Copyright © 2020 Pearson Education, Inc.

54) If the multiplier = 2.5, the MPS would be: A) 0.25. B) 0.4. C) 0.6. D) 0.75. Answer: B Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 55) Aggregate demand is the total demand for intermediate goods and services in an entire economy. Answer: FALSE Diff: 1 Topic: What is the Aggregate Demand Curve? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 56) Higher prices lead to higher levels of real wealth. Answer: FALSE Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 57) Aggregate demand will be affected by the purchasing power of money. Answer: TRUE Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 58) The purchasing power of money decreases as the price level increases. Answer: TRUE Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

59) When considering the aggregate demand curve, the wealth effect, interest rate effect and international trade effect reinforce each other. Answer: TRUE Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 60) Decreases in taxes shift the aggregate demand curve to the right. Answer: TRUE Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 61) An increase in the money supply will increase aggregate demand. Answer: TRUE Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 62) An increase in government spending will shift the aggregate demand curve to the left. Answer: FALSE Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 63) The ratio of the total shift in aggregate demand to the initial shift in aggregate demand is known as the multiplier. Answer: TRUE Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

64) The relationship between the level of income and investment spending is known as the consumption function. Answer: FALSE Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 65) What are the four components of aggregate demand? Answer: consumption spending, investment spending, government purchases, net exports Diff: 1 Topic: The Components of Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 66) What three effects can alter the aggregate demand curve? Answer: wealth effect, interest rate effect, international trade effect Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 67) Explain how the wealth effect can affect aggregate demand. Answer: As price levels change, the purchasing power of money changes. If price levels decrease, people holding money find they are better off, and will spend more on additional goods and services. The increase in consumer spending increases aggregate demand. If price levels decrease, people's wealth is reduced and the total demand for goods and services decreases. Diff: 2 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 68) Explain how the interest rate effect can increase aggregate demand. Answer: In an economy with a fixed supply of money, price level changes lead to interest rate changes. If price levels drop, interest rates fall. When interest rates fall, both consumers and businesses will find it cheaper to borrow money to make purchases. The increases in consumer and business spending increase aggregate demand. Diff: 2 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 31 Copyright © 2020 Pearson Education, Inc.

69) Identify three key factors that can cause a shift in the aggregate demand curve. Answer: the supply of money, changes in taxes, changes in government spending Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 70) Define the "consumption function." Answer: The consumption function represents the relationship between consumer spending and income. Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 71) Define "autonomous consumption spending." Answer: Autonomous spending is consumer spending that does not depend on the level of income. Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 72) Define the marginal propensity to consume (MPC) and the marginal propensity to save (MPS), and explain why MPC + MPS always equals 1. Answer: MPC is the fraction of additional income that is spent. MPS is the fraction of additional income that is saved. The MPC + MPS must equal 1 because additional income is either spent or saved, so the two fractions must add up to 1. Diff: 2 Topic: How the Multiplier Makes the Shift Bigger Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

14.3 Understanding Aggregate Supply 1) The relationship between the level of prices and the quantity of real GDP supplied is known as: A) aggregate supply. B) market supply. C) aggregate demand. D) market demand. Answer: A Diff: 1 Topic: Understanding Aggregate Supply Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 2) The relationship between the level of prices and total quantity of goods and services producers are willing to supply is represented by the: A) aggregate demand curve. B) aggregate supply curve. C) sticky price curve. D) GDP multiplier. Answer: B Diff: 1 Topic: Understanding Aggregate Supply Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 3) To determine the equilibrium price level and equilibrium level of real GDP, the aggregate demand and aggregate supply must: A) be considered separately. B) intersect. C) be disregarded. D) be considered as a multiplier. Answer: B Diff: 1 Topic: Understanding Aggregate Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

4) The long-run aggregate supply curve is: A) downward sloping. B) upward sloping. C) a vertical line at potential output. D) a horizontal line at the current price level. Answer: C Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 5) Assuming a long-run aggregate supply curve, an increase in the money supply results in ________ in output and ________ in price level. A) a decrease; a decrease B) an increase; no change C) a decrease; no change D) no change; an increase Answer: D Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 6) Assuming a long-run aggregate supply curve, a decrease in government spending results in ________ in output and ________ in price level. A) no change; an increase B) no change; a decrease C) a decrease; a decrease D) an increase; no change Answer: B Diff: 2 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

7) Assuming a long-run aggregate supply curve, a decrease in taxes results in ________ in output and ________ in price level. A) a decrease; a decrease B) no change; an increase C) no change; a decrease D) an increase; no change Answer: B Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 8) Assuming a long-run aggregate supply curve, a decrease in consumer confidence results in ________ in output and ________ in price level. A) a decrease; no change B) no change; a decrease C) a decrease; a decrease D) an increase; no change Answer: B Diff: 3 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 9) Which of the following curves reflects the idea that in the long run, output is determined only by the factors of production and given technology? A) the aggregate demand curve B) the market supply curve C) the long-run aggregate supply curve D) the Keynesian aggregate supply curve Answer: C Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

10) An implication of the long-run aggregate supply curve is that continuous increases in the money supply will result in continuous: A) increases in price level. B) decreases in output and price level. C) decreases in output. D) increases in output and price level. Answer: A Diff: 3 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 11) Which of the following factors influence the position of the long-run aggregate supply curve? A) the supply of money B) government spending C) taxes D) the level of full-employment output Answer: D Diff: 2 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 12) In the long run: A) price and output levels are mutually dependent. B) the level of output depends on the price level. C) the level of output is independent of the price level. D) the price level depends on the level of output. Answer: C Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

13) Output in the long run is determined by which of the two following factors when an economy operates at full employment? A) capital and supply B) imports and exports C) capital and labor D) the "real" GDP and purchases Answer: C Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 14) The level of output determined by the intersection of the short-run aggregate supply curve and the aggregate demand curve: A) is always below full-employment output. B) is always above full-employment output. C) always corresponds to full-employment output. D) may be above, below, or equal to full-employment output. Answer: D Diff: 2 Topic: The Short-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 15) Output in the short run is determined by which of the following factors when an economy operates at full employment? A) demand B) supply C) the price level D) the labor force Answer: A Diff: 1 Topic: The Short-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

Figure 14.2 16) Refer to Figure 14.2. A movement from point a to point c could be caused by a(n): A) increase in government spending. B) decrease in the price of oil. C) increase in taxes. D) increase in short-run aggregate supply. Answer: A Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 17) Refer to Figure 14.2. A movement from point c to point a could be caused by a(n): A) decrease in government spending. B) increase in the price of oil. C) decrease in taxes. D) decrease in short-run aggregate supply. Answer: A Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 18) Refer to Figure 14.2. A movement from point d to point b could be caused by a(n): A) increase in government spending. B) increase in the price of oil. C) increase in taxes. D) decrease in short-run aggregate supply. Answer: C Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 38 Copyright © 2020 Pearson Education, Inc.

19) Refer to Figure 14.2. A movement from point b to point d could be caused by a(n): A) decrease in government spending. B) increase in the price of oil. C) decrease in taxes. D) increase in short-run aggregate supply. Answer: C Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 20) Refer to Figure 14.2. A movement from point d to point c could be caused by an: A) increase in government spending. B) increase in the price of oil. C) increase in taxes. D) increase in short-run aggregate supply. Answer: B Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 21) Refer to Figure 14.2. A movement from point a to point b could be caused by a(n): A) increase in government spending. B) decrease in the price of oil. C) decrease in taxes. D) decrease in short-run aggregate supply. Answer: B Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 22) Refer to Figure 14.2. A movement from point b to point a could be caused by a(n): A) increase in government spending. B) decrease in the price of oil. C) increase in taxes. D) a massive crop failure. Answer: D Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 39 Copyright © 2020 Pearson Education, Inc.

Recall the Application about the factors involved in causing recessions, and the causes of recessions in the United States from 1893 to 1990 to answer the following question(s). 23) Recall the Application. Recessions can occur either when there is a(n) ________ in aggregate demand or a(n) ________ in aggregate supply. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Diff: 1 Topic: Application 2, Two Approaches to Determining the Causes of Recessions Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 24) According to this Application, the recession of 1929 was primarily due to: A) a decrease in aggregate demand caused by the private sector. B) a decrease in aggregate demand resulting from decreases in government spending. C) a decrease in aggregate supply due to rising gold prices. D) an increase in aggregate supply resulting from European bank collapses. Answer: A Diff: 1 Topic: Application 2, Two Approaches to Determining the Causes of Recessions Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 25) According to this Application, the recessions in 1973 and 1979 were caused by: A) supply shocks. B) deflation. C) foreign monetary developments. D) arbitrage losses in the foreign exchange market. Answer: A Diff: 1 Topic: Application 2, Two Approaches to Determining the Causes of Recessions Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

26) According to this Application, the recession in 1981 was caused by: A) increasing oil prices which resulted in a decrease in aggregate supply. B) the government cutting back on aggregate demand to reduce inflation. C) a decrease in aggregate supply resulting from U.S. bank collapses. D) massive immigration from Europe to the United States. Answer: B Diff: 1 Topic: Application 2, Two Approaches to Determining the Causes of Recessions Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

Figure 14.2 27) Refer to Figure 14.2. A movement from point a to point d could be caused by a simultaneous ________ and ________. A) increase in government spending; decrease in the price of oil B) increase in taxes; increase in the price of oil C) decrease in taxes; massive crop failure D) decrease in the money supply; decrease in government spending Answer: A Diff: 3 Topic: Supply Shocks, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

28) Refer to Figure 14.2. A movement from point c to point b could be caused by a simultaneous ________ and ________. A) decrease in government spending; decrease in the price of oil B) decrease in taxes; increase in the price of oil C) increase in taxes; decrease in government spending D) increase in government spending; increase in the money supply Answer: A Diff: 3 Topic: Supply Shocks, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 29) Refer to Figure 14.2. A movement from point d to point a could be caused by a simultaneous ________ and ________. A) decrease in the money supply; increase in the price of oil B) increase in the money supply; massive crop failure C) decrease in taxes; decrease in the money supply D) decrease in government spending; decrease in the price of oil Answer: A Diff: 3 Topic: Supply Shocks, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 30) Refer to Figure 14.2. A movement from point b to point c could be caused by a simultaneous ________ and ________. A) increase in the money supply; increase in the price of oil B) decrease in taxes; decrease in the price of oil C) increase in taxes; decrease in government spending D) increase in the price of oil; massive crop failure Answer: A Diff: 3 Topic: Supply Shocks, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

31) Which of the following is an example of a supply shock? A) a surprise increase of the money supply B) an increase in government spending C) a sharp increase in the price of oil D) an increase in the price level Answer: C Diff: 2 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 32) Which one of the following statements is TRUE? A) In the short run, the level of output is determined by demand. B) In the long run, the level of output is determined by demand. C) In the long run, the aggregate supply curve is horizontal. D) Where aggregate demand and aggregate supply intersect is always the full-employment level of output. Answer: A Diff: 1 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 33) When there is a shift the aggregate supply curve caused by factors external to a nation's economy, it is called: A) a trade imbalance. B) government control. C) a supply shock. D) an economic anomaly. Answer: C Diff: 1 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

34) A supply shock is an ________ event that shifts the aggregate ________ curve. A) internal; supply B) external; supply C) internal; demand D) external; demand Answer: B Diff: 1 Topic: Supply Shocks Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 35) When there is a recession (a fall in output) and prices are increasing, and this situation is caused by adverse supply shocks, the term economists use to describe it is: A) aggregate shifts. B) stagnation. C) inflation. D) stagflation. Answer: D Diff: 1 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model Recall the Application about rising oil prices and their effect on the U.S. economy to answer the following question(s). 36) According to the Application, the U.S. imports about ________ of the petroleum products it consumes. A) 25% B) 50% C) 75% D) 38% Answer: A Diff: 1 Topic: Application 3, Oil Price Increases and the Changing U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

37) According to the Application, the U.S. imports ________ than it exports of petroleum products. A) less B) more C) the same D) All of the above are correct. Answer: A Diff: 1 Topic: Application 3, Oil Price Increases and the Changing U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 38) According to the Application, which of the following explains why the U.S. imports for oil has substantially decreased since 2005? A) increased production through new technologies B) more alternative energy sources C) better fuel consumption in automobiles D) All of the above are correct. Answer: D Diff: 1 Topic: Application 3, Oil Price Increases and the Changing U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 39) According to the Application, why is the U.S. less vulnerable to oil supply shocks today as opposed to the 1970s? A) The U.S. is now a net exporter of oil products. B) The. U.S. is less dependent on oil as an energy source. C) The U.S. determines the price of oil in world markets. D) Only A and B are correct. Answer: D Diff: 1 Topic: Application 3, Oil Price Increases and the Changing U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 40) The long-run aggregate supply curve is horizontal. Answer: FALSE Diff: 1 Topic: Understanding Aggregate Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 45 Copyright © 2020 Pearson Education, Inc.

41) Aggregate demand determines output in the short run if prices are flexible. Answer: FALSE Diff: 1 Topic: Understanding Aggregate Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 42) If the supply of money increases, the long-run aggregate supply curve suggests that output will not change but the price level will. Answer: TRUE Diff: 1 Topic: Understanding Aggregate Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 43) Aggregate demand and aggregate supply must be combined to determine the price level and the "real" GDP. Answer: TRUE Diff: 1 Topic: Understanding Aggregate Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 44) In the long run, output is determined solely by the supply of capital and the supply of labor, not the price level. Answer: TRUE Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 45) In the long run, the level of output depends on the price level. Answer: FALSE Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

46) In the short run, the price level is determined primarily by the supply of goods. Answer: FALSE Diff: 1 Topic: The Short-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 47) Adverse supply shocks can cause a recession with increasing price level. Answer: TRUE Diff: 1 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 48) The term "stagflation" is used to define an economic situation where there are adverse supply shocks which cause a fall in output but with increasing price level. Answer: TRUE Diff: 1 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 49) Explain why the long-run aggregate supply curve is vertical. Answer: In the long run, the economy operates at full employment, and changes in the price level do not affect employment. Because the level of full-employment output does not depend on the price level, long-run aggregate supply is unaffected by the price level, and so is vertical. Diff: 2 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 50) Explain why the short-run aggregate supply curve is a relatively flat, horizontal line. Answer: In the short run, prices are sticky and output is determined primarily by demand. Firms will adjust production to meet demand. Since firms will supply all the output to meet demand with only small changes in price, the short-run aggregate supply curve is relatively flat. Diff: 2 Topic: The Short-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

51) What are supply shocks? Explain what effect adverse and favorable supply shocks have on the supply curve. Answer: Supply shocks are external events that shift the aggregate supply curve. Adverse supply shocks would cause aggregate supply to decrease, shifting the AS curve to the left. Favorable supply shocks would cause aggregate supply to increase, shifting the AS curve to the right. Diff: 2 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 52) Name a supply shock that has affected the U.S. economy on more than one occasion. Answer: increase or decrease in the price of oil Diff: 1 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model Recall the Application about rising oil prices and their effect on the U.S. economy to answer the following question(s). 53) What does "the U.S. is a net exporter of petroleum products" mean? How can we be a net exporter when we still import oil from other countries? Answer: The U.S. being a net exporter means that the value of our exports for petroleum products is larger than the value of our imports. This is because the U.S. is an exporter of refined petroleum products to many countries, and the value of these exports are greater than our imports. Diff: 1 Topic: Application 3, Oil Price Increases and the Changing U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model

14.4 From the Short Run to the Long Run 1) During an economic boom: A) actual output exceeds potential output. B) potential output exceeds quantity demanded. C) potential output exceeds actual output. D) aggregate demand exceeds aggregate supply. Answer: A Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 2) During an economic boom: A) the level of unemployment tends to be high. B) it is difficult for firms to recruit and retain workers. C) firms have an easier time purchasing raw materials. D) prices tend to decrease over time. Answer: B Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 3) Adjustments in ________ take the economy from the short-run equilibrium to the long-run equilibrium. A) imports and exports B) interest rates C) wages and prices D) the multiplier Answer: C Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation

4) If actual output exceeds potential output, ________ shifts upward over time. A) the short-run AS curve B) the short-run AD curve C) the long-run AS curve D) the long-run AD curve Answer: A Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 5) If actual output equals potential output, ________ shifts upward over time. A) neither the short-run AS curve nor the short-run AD curve B) the short-run AD curve C) the short-run AS curve D) the long-run AD curve Answer: A Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 6) If ________, the short-run AS curve shifts upward over time. A) actual output exceeds potential output B) actual output is zero C) actual output equals potential output D) actual output is less than potential output Answer: A Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation

7) If potential output exceeds actual output, ________ shifts downward over time. A) the short-run AS curve B) the short-run AD curve C) the long-run AS curve D) the long-run AD curve Answer: A Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 8) During an economic boom, actual output exceeds potential output. Answer: TRUE Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 9) If potential output exceeds actual output, the aggregate demand curve shifts downward over time. Answer: FALSE Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 10) If actual output exceeds potential output, the short-run aggregate supply curve shifts downward over time. Answer: FALSE Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation

11) Describe how adjustments in wages and prices take the economy from the short-run equilibrium to the long-run equilibrium. Answer: For example, if the level of output exceeds the level of potential output (a boom economy), the unemployment level will be low. As firms compete for workers and for raw materials, wages and prices will increase. This will cause the short-run aggregate supply curve to shift upwards, a process that will continue as long as the economy produces at a level of output that exceeds potential output. At some point the short-run aggregate supply curve will reach the long-run equilibrium, which is where the aggregate demand curve intersects the long-run aggregate supply curve. Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 12) Draw an aggregate supply and aggregate demand graph which shows the economy producing an output which exceeds potential output in the short run, and the adjustment that will occur as the economy adjusts to long-run equilibrium. Answer: In the short run, the economy is at the intersection of AD and AS0, with an output of y0. In the long run, aggregate supply will decrease, shifting up from AS0 to AS1, and the equilibrium output will fall from y0 to yp, at the intersection of AD, AS1, and Long-run AS.

Diff: 2 Topic: From the Short Run to the Long Run, graphing Skill: Analytical AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 15 Fiscal Policy 15.1 The Role of Fiscal Policy 1) What are the two tools of fiscal policy that governments can use to stabilize an economy? A) government spending and technology improvements B) government spending and taxation C) taxation and controlling imports D) taxation and controlling exports Answer: B Diff: 1 Topic: Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 2) Contractionary policies are policies designed to: A) increase the level of real GDP. B) reduce the level of real GDP. C) increase government spending. D) increase the federal deficit. Answer: B Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 3) Expansionary policies are policies designed to: A) increase the level of real GDP. B) reduce the level of real GDP. C) decrease government spending. D) reduce the federal deficit. Answer: A Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

4) What are the two tools of fiscal policy that governments can use to affect the level of aggregate demand? A) government spending and taxation B) government spending and technology improvements C) taxation and controlling imports D) taxation and controlling exports Answer: A Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 5) In order to ________, a government must increase spending and decrease taxation. A) increase aggregate demand B) decrease aggregate demand C) increase aggregate supply D) decrease aggregate supply Answer: A Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 6) In order to ________, a government must decrease spending and increase taxation. A) increase aggregate demand B) decrease aggregate demand C) increase aggregate supply D) decrease aggregate supply Answer: B Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

7) As a result of an increase in the personal income tax rate, consumers are likely to: A) spend less. B) spend more. C) save more. D) earn more money. Answer: A Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 8) A decrease in the personal income tax rate ________ disposable income, which ________ consumption. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases Answer: A Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 9) Tax cuts aimed at businesses can stimulate: A) social spending. B) private consumption. C) investment spending. D) net exports. Answer: C Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

10) Expansionary policies are government policies that: A) increase aggregate supply. B) decrease aggregate supply. C) decrease aggregate demand. D) increase aggregate demand. Answer: D Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 11) Contractionary policies are government policies that: A) increase aggregate supply. B) decrease aggregate supply. C) decrease aggregate demand. D) increase aggregate demand. Answer: C Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 12) When the government develops policies to stabilize the economy: A) these policies are unaffected by the multiplier effect. B) only expansionary fiscal policy is impacted by the multiplier effect. C) it needs to consider the multiplier effect for all fiscal policies. D) only contractionary fiscal policy is impacted by the multiplier effect. Answer: C Diff: 1 Topic: The Fiscal Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

13) Due to the ________ effect, the final shift in aggregate demand is larger than the initial shift in aggregate demand. A) income B) multiplier C) substitution D) crowding-out Answer: B Diff: 1 Topic: The Fiscal Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 14) The idea that a $1 increase in infrastructure spending will generate more than $1 in economic growth is a representation of: A) the multiplier effect. B) an outside lag. C) an inside lag. D) an automatic stabilizer. Answer: A Diff: 1 Topic: The Fiscal Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 15) Policies taken to move the economy closer to potential output: A) must be expansionary policies. B) must be contractionary policies. C) are called stabilization policies. D) are lagging policies or automatic policies. Answer: C Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

16) Stabilization policies are policies designed to: A) keep output constant. B) keep prices constant. C) move the economy closer to potential output. D) increase trade. Answer: C Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 17) What is the reason that stabilization policies do NOT have an immediate effect on an economy? A) Consumers are slow to catch up on spending. B) There is a time lag for policies to take effect. C) Imports come into the country too fast. D) Exports often are not shipped fast enough. Answer: B Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 18) The time it takes to formulate a policy is known as: A) fiscal policy. B) crowding out. C) inside lags. D) outside lags. Answer: C Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

19) The time it takes for a policy to actually work is known as: A) fiscal policy. B) crowding out. C) inside lags. D) outside lags. Answer: D Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 20) The fact that it takes time for government to identify and recognize a problem is one reason for the occurrence of: A) inside lags. B) outside lags. C) implementation lags. D) structural lags. Answer: A Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 21) The fact that it takes time for government to take action, even after a problem has been diagnosed, is one reason for the occurrence of: A) inside lags. B) outside lags. C) crowding out. D) the multiplier effect. Answer: A Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

22) President Obama needed to get Congressional approval to enact measures to boost the economy. The time involved to formulate and get approval for these policies are called: A) inside lags. B) outside lags. C) automatic stabilization. D) crowding in. Answer: A Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 23) Even when the Obama administration succeeded with its effort to gain Congressional approval for its stimulus proposals, it still took time for these policies to actually work. The time it took for these policies to work is known as: A) inside lags. B) outside lags. C) automatic stabilization. D) crowding out. Answer: B Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 24) Taxation and government spending are examples of fiscal policy tools used to stabilize an economy. Answer: TRUE Diff: 1 Topic: Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 25) Economic advisers who fear that the economy is growing too rapidly would recommend that the government decrease spending and/or increase taxes. Answer: TRUE Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

26) Changes in government purchases affect aggregate demand only indirectly through consumption spending. Answer: FALSE Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 27) Stabilization policies are actions taken to bring the economy closer to full employment. Answer: TRUE Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 28) An outside lag is the time period it takes economists to formulate a stabilization policy. Answer: FALSE Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 29) An inside lag is the time period it takes for the stabilization policies to take effect after they have been implemented. Answer: FALSE Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 30) Briefly explain how a change in the personal income tax rate affects aggregate demand. Answer: Changes in the personal income tax rate affect aggregate demand through consumption. Consumption is a major component of aggregate demand. For example, a decrease in the personal income tax rate increases disposable income, which in turn increases consumption. Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

31) Name two actions that a government could take if it wants to implement an expansionary fiscal policy. Answer: increase government spending, decrease taxes. Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 32) Name two actions a government could take if it wants to implement a contractionary fiscal policy. Answer: decrease government spending, increase taxes. Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 33) What is meant by the term "inside lags"? Answer: Inside lags refers to the time it takes policy makers to formulate a corrective or stabilization policy. Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 34) What is meant by the term "outside lags"? Answer: Outside lags refers to the time it takes for a stabilization policy to have an effect on an economy. Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 35) What are the two basic reasons inside lags occur? Answer: Inside lags occur because it takes time for policy makers to identify and recognize a problem in the economy, and once the problem has been recognized it takes more time for policy makers to take corrective actions. Diff: 2 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

36) Why is it difficult to implement fiscal policies? Answer: One reason why fiscal policies are difficult to implement is the presence of lags, which arise due to the time involved in recognizing and responding to economic changes and the time needed for the policies to operate. A second reason is economists have incomplete information about all aspects of an economy, which limits their abilities to accurately predict economic responses to fiscal policies. Diff: 2 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 15.2 The Federal Budget 1) Which component of federal spending is included in GDP? A) net exports B) transfer payments C) government purchases D) capital supply Answer: C Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 2) Why are transfer payments not included in GDP? A) The amount is too low to have any effect. B) Unemployment varies and can't be tracked. C) They do not represent payments to those who contributed resources to currently produced goods or services. D) Money companies receive from the government isn't reported. Answer: C Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

3) Spending on programs that Congress authorizes ________ is known as discretionary spending. A) by prior law B) on an annual basis C) on an off-budget emergency basis D) after approval from the Federal Reserve Answer: B Diff: 1 Topic: Federal Spending Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 4) Spending on programs that Congress authorizes on an annual basis is known as: A) discretionary spending. B) wasteful spending. C) mandatory spending. D) defense spending. Answer: A Diff: 1 Topic: Federal Spending Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 5) When the government conducts activist fiscal policy, what type of spending does it usually use? A) entitlement and mandatory spending B) net interest spending C) discretionary spending D) strategic spending Answer: C Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

6) Which of the following is an example of government discretionary spending? A) Social Security retirement payments B) Medicare benefits for the elderly C) defense spending D) net interest paid on government debt held by the public Answer: C Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 7) Spending on programs that ________, such as Social Security and Medicare, is classified as entitlement and mandatory spending. A) is authorized by Congress on an annual basis B) has been authorized by prior law C) is authorized only in times of budget surpluses D) is authorized only in times of budget deficits Answer: B Diff: 1 Topic: Federal Spending Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 8) Does the term "mandatory spending" mean that spending must go on forever? A) Yes, once appropriated, spending is indefinite. B) No, once appropriated, spending is for the life of the program only or until it changes. C) Yes, the laws which authorized this spending cannot be changed. D) Yes, Congress has no right to change these spending programs. Answer: B Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

9) Who sets the rules for entitlements when spending is authorized under this category? A) the President B) the agency involved C) the Congress when it appropriates the spending D) each individual state Answer: C Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 10) What is the largest component of the federal budget? A) discretionary spending B) entitlements and mandatory spending C) net interest D) defense spending Answer: B Diff: 1 Topic: Federal Spending Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 11) Entitlements and net interest are the ________ the U.S. federal budget. A) only two declining components of B) two fastest-growing components of C) two slowest-growing components of D) only two components with negative values in Answer: B Diff: 1 Topic: Federal Spending Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

12) A White House proposal to increase infrastructure spending on roads, rail lines and runways is an example of: A) expansionary fiscal policy. B) contractionary fiscal policy. C) automatic stabilization. D) insourcing policies. Answer: A Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy Recall the Application about how society will cope with increased demands for entitlement programs to answer the following question(s). This Application addresses the impact of increasing life expectancy and aging populations on the costs of government entitlement programs such as Social Security, Medicare and Medicaid, and examines several possible solutions to the potential problem. 13) According to this Application, current spending on federal retirement and health programs accounts for 10 percent of GDP. Experts estimate that this spending component's share of GDP ________ by the year 2075. A) is likely to shrink B) will more than double C) will remain constant D) will grow moderately initially then taper off Answer: B Diff: 1 Topic: Application 1, Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 14) According to this Application, in the year 2075, the portion of GDP devoted to spending on Social Security, Medicare and Medicaid is expected to be: A) significantly less than the share of GDP devoted to these programs today. B) roughly equal to the total amount of GDP today. C) larger than total federal spending's share of GDP today. D) greater than the consumption spending component's share of GDP in 2075. Answer: C Diff: 1 Topic: Application 1, Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 15 Copyright © 2020 Pearson Education, Inc.

15) According to this Application, how will an increase in government spending on entitlement programs affect the macroeconomy? A) It will increase aggregate demand. B) It will decrease aggregate demand. C) It will increase aggregate supply. D) It will decrease aggregate supply. Answer: A Diff: 1 Topic: Application 1, Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 16) According to this Application, one solution proposed to deal with the rising expenses of government entitlement programs is to raise taxes. An increase in taxes to help cover the rising expenses of entitlement programs would: A) increase aggregate demand, shifting the AD curve to the right. B) increase aggregate demand, shifting the AD curve to the left. C) decrease aggregate demand, shifting the AD curve to the right. D) decrease aggregate demand, shifting the AD curve to the left. Answer: D Diff: 1 Topic: Application 1, Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 17) According to this Application, one strategy proposed to deal with the rising expenses of government entitlement programs is for the government to save and invest now so as to reduce the burden on future generations. This strategy would: A) increase GDP, and entitlement programs would increase along with GDP. B) increase GDP and entitlement programs would decrease. C) increase GDP and eliminate entitlement programs. D) not change GDP, but shrink entitlement programs. Answer: A Diff: 2 Topic: Application 1, Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

18) According to this Application, which of the following is NOT a strategy that the government can pursue to address the rising cost of federal retirement and health care programs? A) reform the health care system to encourage more competition to reduce health care expenditures B) increase the age at which retirement benefits begin to be paid C) borrow from the public to finance the programs D) promote government saving and investment to increase real GDP over time Answer: C Diff: 2 Topic: Application 1, Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 19) A White House proposal to lower business taxes by increasing tax deductions is an example of: A) expansionary fiscal policy. B) contractionary fiscal policy. C) automatic stabilization. D) progressive taxation. Answer: A Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 20) Which of the following sources of revenue is used to fund government spending? A) interest B) taxation C) corporate contributions D) political party contributions Answer: B Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

21) Individual income tax is the ________ single component of federal revenue. A) largest B) second largest C) smallest D) least important Answer: A Diff: 1 Topic: Federal Revenues Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 22) The share of corporate tax in total federal revenues: A) is larger than the other components of federal revenue. B) is the smallest of all the components of federal tax revenue. C) has declined over the past few decades to a relatively low level. D) has grown significantly in each of the past 10 years. Answer: C Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 23) Special taxes levied on earnings for Social Security and Medicare are called: A) a withholding tax on wages. B) a social insurance tax. C) an unfair tax on low-income families. D) an exception tax for corporations. Answer: B Diff: 1 Topic: Federal Revenues Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 24) Proponents of the estate and gift tax argue that the tax is necessary because: A) it generates a large portion of total federal revenue. B) it prevents "unfair" accumulation of wealth across generations. C) it is only applied to items that have not previously been taxed. D) it is the primary source of funding for Medicare and Medicaid. Answer: B Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 18 Copyright © 2020 Pearson Education, Inc.

25) One school of thought that emphasizes the role that taxes play in an economy's supply of output is known as: A) demand-pull economics. B) classical economics. C) tax-and-spend economics. D) supply-side economics. Answer: D Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 26) According to supply-side economics, a(n) ________ in the tax rate tends to increase the labor supply and ________ aggregate output. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase Answer: A Diff: 2 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 27) The relationship between tax rates and tax revenues is shown on the: A) IRS curve. B) Laffer curve. C) production possibilities frontier. D) Discretionary Spending curve. Answer: B Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

28) The Laffer curve illustrates that: A) high tax rates could lead to lower tax revenues if economic activity is severely discouraged. B) lowering tax rates will always increase tax revenues. C) high tax rates would increase tax revenue and increase the labor supply as people work harder to maintain their standard of living. D) lowering tax rates will always decrease tax revenues. Answer: A Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 29) The curve that illustrates that higher tax rates could lead to lower tax revenues if economic activity is severely discouraged is called: A) the Laffer Curve. B) the Phillips Curve. C) the aggregate demand curve. D) the production possibility curve. Answer: A Diff: 1 Topic: Federal Revenues Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 30) An increased federal budget deficit resulting from a recession can actually help stabilize an economy through transfer payments because an increased budget deficit will ________ transfer payments and thereby ________ the income of some households. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A Diff: 2 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

31) An increased federal budget deficit resulting from a recession can actually help stabilize an economy, because corporate profits tend to fall in a recession which, in turn, results in ________ corporate taxes and ________. A) higher; more tax revenue for the government B) higher; larger profits for businesses C) lower; fewer spending cuts for businesses D) lower; increases in the price level Answer: C Diff: 2 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 32) A federal budget ________ occurs when the federal government spends more than it collects in taxes. A) surplus B) deficit C) equilibrium D) ceiling Answer: B Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 33) A federal budget ________ occurs when the government spends less than it collects in taxes. A) surplus B) deficit C) equilibrium D) floor Answer: A Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

34) Suppose the government runs a budget surplus in a given year. It can reduce its overall federal debt by: A) not buying anything on credit. B) buying back bonds it sold to the public. C) forcing a change in net exports. D) increasing taxes on luxury items. Answer: B Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy Recall the Application the Joint Committee on Taxation and how Congress accounts for the dynamic effects of its policies to answer the following questions. 35) Recall the Application. The Joint Committee of Taxation (JCT) only started to consider the macroeconomic effects of tax cuts starting: A) 2015. B) 2014. C) 2016. D) 2013. Answer: A Diff: 1 Topic: Application 2, Dynamic Scoring Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 36) According to the Application, the Trump Tax cuts would have increased the deficit by ________ billion, without taking into account the dynamic effects. A) $1456 B) $1591 C) $286 D) $641 Answer: A Diff: 1 Topic: Application 2, Dynamic Scoring Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

37) According to the Application, the Trump Tax cuts would have increased the deficit by ________ billion after taking into account the dynamic effects. A) $451 B) $159 C) $1456 D) $641 Answer: A Diff: 1 Topic: Application 2, Dynamic Scoring Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 38) The results highlighted in this Application shows that President Trump's tax cuts resulted in: A) a decrease in tax revenue. B) an increase in tax revenue. C) no change in tax revenue. D) an increase in tax revenues early on, before tax revenues decreased in the long run. Answer: A Diff: 1 Topic: Application 2, Dynamic Scoring Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 39) When the economy slows down and national income falls, the government will have ________ tax revenue to fund programs. A) more B) less C) about the same D) a rapid increase in Answer: B Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

40) The government strives to operate at neither a deficit nor surplus budget in order to keep the federal budget: A) balanced. B) equal to inflation. C) in line with the stock market. D) equal to that of other countries. Answer: A Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 41) During a recession, tax revenues ________ while government transfer payments ________, thereby mitigating part of the adverse effects of a recession and stabilizing the economy. A) fall; increase B) fall; decrease C) rise; increase D) rise; decrease Answer: A Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 42) Suppose initially the federal budget is balanced. The economy then enters a period of expansion. What is likely to happen to the federal budget? A) It will show a surplus. B) It will show a deficit. C) It will remain balanced. D) It will automatically stabilize. Answer: A Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

43) Automatic stabilizers: A) require explicit actions by policy makers to become active. B) work without the need for decisions from Congress or the White House. C) magnify fluctuations in the economy. D) increase taxes during recessions. Answer: B Diff: 1 Topic: Automatic Stabilizers Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 44) Automatic stabilizers: A) minimize fluctuations in the economy. B) must be authorized by the President. C) decrease taxes during expansions. D) increase welfare payments during expansions. Answer: A Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 45) Which of the following is an example of an automatic stabilizer? A) Congress authorizes spending increases during a recession. B) Congress increases the tax rate during an expansion. C) More unemployment benefits are paid during a recession. D) Welfare payments decrease during a recession. Answer: C Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

46) Suppose an economy has a balanced federal budget, and a large increase in oil prices plunges the economy into a recession. Tax revenues will ________ and expenditures on transfer payments will ________, resulting in a budget ________. A) fall; increase; deficit B) increase; increase; surplus C) fall; fall; deficit D) increase; fall; surplus Answer: A Diff: 2 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 47) Suppose an economy has a balanced federal budget, and a favorable supply shock hits the economy. Tax revenues will ________ and expenditures on transfer payments will ________, resulting in a budget ________. A) fall; increase; deficit B) increase; increase; surplus C) fall; fall; deficit D) increase; fall; surplus Answer: D Diff: 2 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 48) When the economy is producing its potential output, an increase in government spending must necessarily reduce some component of private spending. This phenomenon is called: A) fiscal policy. B) crowding out. C) the multiplier effect. D) entitlement spending. Answer: B Diff: 1 Topic: Are Deficits Bad? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

49) Suppose the economy is operating below potential output. If policy makers try to avoid a budget deficit by raising taxes or reducing government spending, these actions would: A) increase inflation. B) help pull an economy out of a depression. C) make a recession worse. D) negate the multiplier effect. Answer: C Diff: 1 Topic: Are Deficits Bad? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 50) Using expansionary policies to combat a recession would: A) increase a budget deficit. B) increase a budget surplus. C) decrease discretionary spending. D) increase federal revenue. Answer: A Diff: 1 Topic: Are Deficits Bad? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 51) Transfer payments are excluded from GDP. Answer: TRUE Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 52) Discretionary funds are typically used by the Executive Branch and Congress for activist fiscal policies. Answer: TRUE Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

53) Net interest payments made by the government depend on the total federal debt held and on the level of interest rates. Answer: TRUE Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 54) Taxes are the only mechanism by which the federal government earns money. Answer: FALSE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 55) The federal income tax on wages is the largest source of revenue for the federal government. Answer: TRUE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 56) Income taxes are taxes paid on wages and investment income. Answer: TRUE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 57) A higher tax rate on income will always result in higher tax revenue for the government. Answer: FALSE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

58) Social insurance taxes are paid by corporations based on their profits. Answer: FALSE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 59) Social insurance taxes are paid on wages and investment income. Answer: FALSE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 60) Unlike social insurance taxes, income taxes are paid on wages only. Answer: FALSE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 61) Estate and gift taxes account for a very small portion of total tax revenues collected by the federal government because taxes are levied only on large estates. Answer: TRUE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 62) Corporate profits are taxed by state and local governments, but not by the federal government. Answer: FALSE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

63) Because the government has so much money, and can print more, it does not need to borrow and therefore rarely pays net interest on debt. Answer: FALSE Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 64) When federal government spending exceeds tax revenues, the federal government runs a budget surplus. Answer: FALSE Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 65) When federal government spending amounts to less than tax revenues, the federal government runs a budget deficit. Answer: FALSE Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 66) Taxes and transfer payments automatically reduce fluctuations in real GDP and thereby stabilize the economy without any need for decisions from Congress or the White House. Answer: TRUE Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 67) Fiscal actions to eliminate a recession are likely to decrease the federal budget deficit. Answer: FALSE Diff: 1 Topic: Are Deficits Bad? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

68) What are the two components of federal spending? Answer: government purchases and transfer payments. Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 69) The federal budget has three components. Name them. Answer: discretionary spending, entitlements and mandatory spending, net interest Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 70) Describe the three broad categories of the U.S. budget. Answer: Discretionary spending constitutes spending on all the programs that Congress authorizes on an annual basis that are not automatically funded by prior laws. Discretionary spending includes defense spending and all nondefense domestic spending. Entitlement and mandatory spending constitutes all spending that Congress has authorized by prior law. Entitlement and mandatory spending includes Social Security, Medicare and Medicaid payments. Net interest is the interest that the government pays the public on public-held government debt. Net interest payments include the payments made on U.S. Treasury bonds, bills and U.S. savings bonds. Diff: 2 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 71) What is the federal government's largest source of revenue? Answer: individual income taxes Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

72) Explain how a change in tax rates influences aggregate demand and aggregate supply. Answer: A change in tax rates will influence consumer spending and business investment spending, both of which are components of aggregate demand. For example, if tax rates decrease, consumers and businesses will have more income to spend, and the spending increases will increase aggregate demand. If tax rates decrease, labor supply and output will tend to increase because businesses will pay less in taxes and therefore have more to spend on labor and capital, and these changes will increase aggregate supply. Diff: 2 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 73) Explain how an increased federal budget deficit resulting from a recession can actually help stabilize an economy. Answer: Help in stabilizing the economy can come through three different channels: transfer payments, household incomes, and corporate taxes. Transfer payments increase during a recession, and these transfer payments increase the income of their recipients. In doing so, they partly offset the fall in household income which results from recessions and slows the decline in consumer spending. Households whose incomes are falling due to a recession pay less in taxes, which partly offsets the income decline and slows the decline in consumer spending. The corporate tax depends on corporate profits, and since profits fall in a recession, corporate taxes also fall. Lower corporate taxes enable businesses to reduce the spending cuts they would otherwise face during a recession. Diff: 3 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 74) Describe the relationship illustrated by the Laffer curve. Answer: The Laffer curve illustrates the relationship between tax rates and tax revenues. The Laffer curve shows that high tax rates could lead to lower tax revenues if economic activity is severely discouraged, and lower tax rates could actually lead to higher tax revenues. Diff: 2 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

75) Why do most economists believe that the Laffer argument does NOT apply to broad-based taxes? Answer: Most economists believe that the supply of labor is not as sensitive to changes in tax rates as Laffer believed, so for broad-based taxes like income taxes and payroll taxes, cutting rates would simply reduce the revenues that the government collects. Diff: 2 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 76) Explain the differences between a federal budget deficit, a federal budget surplus, and a balanced federal budget. Answer: A federal budget deficit occurs when the federal government spends more than it receives in tax revenues in a given year. A federal budget surplus occurs when the federal government receives more in tax revenues than it spends in a given year. A balanced federal budget occurs when the federal government spends the same amount that it receives in tax revenues in a given year. Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 77) Explain how automatic stabilizers work. Answer: Taxes and transfer payments are automatic stabilizers for the economy. When income is high, the government collects more taxes and pays out less transfer payments, thus reducing consumer spending, which in turn reduces output. When output is low, such as during a recession, the government collects less in taxes and pays out more in transfer payments, increasing consumer spending and therefore increasing output. Note that this occurs without any decisions from Congress or the White House. Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

15.3 Fiscal Policy in U.S. History 1) In the United States during the 1930s, politicians: A) relied on government spending and taxation to pull the economy out of the depression. B) did not believe in using government spending and taxation because they feared the consequences of budget deficits. C) knew that the depression would eventually subside because of automatic stabilizers. D) deliberately relied on government spending and taxation even though they knew the depression would continue. Answer: B Diff: 1 Topic: The Depression Era Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 2) In the United States during the 1930s: A) government spending and taxes both increased, resulting in zero net fiscal expansion. B) government spending and taxes both decreased, resulting in a net fiscal contraction. C) government spending increased and taxes decreased, resulting in a fiscal expansion. D) government spending decreased and taxes increased, resulting in a fiscal contraction. Answer: A Diff: 1 Topic: The Depression Era Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 3) In the United States, the use of fiscal policy tools to stabilize the economy gained prominence during: A) the depression era. B) the Kennedy administration. C) the Reagan administration. D) the Clinton administration. Answer: B Diff: 1 Topic: The Kennedy Administration Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

4) During the Kennedy administration, what did economist Walter Heller propose to bring the economy back to full employment? A) a large government works program B) insourcing C) tax cuts D) tariffs on imported goods Answer: C Diff: 1 Topic: The Kennedy Administration Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 5) An estimate of a household's long-run average income is called: A) permanent income. B) disposable income. C) per capita income. D) transitory income. Answer: A Diff: 1 Topic: The Vietnam War Era Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 6) The 10% tax surcharge in 1968 did not have much effect on people's consumption because: A) people knew the tax was temporary. B) people thought the tax was small. C) people knew the tax was permanent D) people thought the tax was for a good cause. Answer: A Diff: 1 Topic: The Vietnam War Era Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

7) The 10% tax surcharge in 1968 was only for 1 year, and people deemed the tax was temporary. As a result, the tax: A) did not have much effect on people's consumption. B) resulted in a large drop in people's consumption. C) resulted in a large increase in people's consumption. D) caused people's consumption to become zero. Answer: A Diff: 1 Topic: The Vietnam War Era Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 8) In the United States during the Vietnam War era, as military spending increased: A) unemployment dropped to very low levels. B) both frictional and cyclical unemployment increased. C) frictional unemployment dropped, but cyclical unemployment increased. D) overall unemployment rates did not change. Answer: A Diff: 1 Topic: The Vietnam War Era Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 9) Huge increases in government spending and record low levels of unemployment during the Vietnam War era in the late 1960s led policy makers to fear that: A) the economy was growing too fast, which would increase unemployment. B) the economy was growing too fast, which would increase inflation. C) the economy was slipping into a recession, which would increase unemployment. D) the economy was slipping into a recession, which would increase inflation. Answer: B Diff: 2 Topic: The Vietnam War Era Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

10) In the United States, the temporary tax surcharge of 1968: A) had no impact on consumer spending. B) decreased consumer spending by less than was originally estimated. C) decreased consumer spending by more than was originally estimated. D) actually increased consumer spending. Answer: B Diff: 1 Topic: The Vietnam War Era Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 11) Fearing that the economy was overheating, policymakers instituted a temporary tax surcharge in 1968. This temporary surtax: A) successfully reduced consumption sufficiently to cool down the economy. B) reduced savings but had little effect on consumption. C) drastically reduced both savings and consumption. D) increased savings and reduced consumption. Answer: B Diff: 1 Topic: The Vietnam War Era Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 12) The supply-side motivated tax cuts of 1981 during the Reagan administration were aimed at: A) increasing aggregate demand. B) increasing aggregate supply. C) decreasing aggregate supply. D) balancing the federal budget. Answer: B Diff: 1 Topic: The Reagan Administration Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

13) Taxes can have an important effect on: A) the labor supply. B) saving. C) economic growth. D) all of the above Answer: D Diff: 1 Topic: The Reagan Administration Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 14) The Clinton administration inherited a budget deficit from its predecessor. President Clinton instituted major tax increases that: A) increased the budget deficit during his entire term. B) brought the budget into balance and eventually into a surplus. C) reduced the budget deficit but increased the federal debt. D) reduced the size of the deficit but could not eliminate it. Answer: B Diff: 1 Topic: The Clinton and George W. Bush Administrations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 15) President George W. Bush used part of the budget surplus inherited from the Clinton administration to: A) fund tax cuts. B) stimulate the economy that was slowing down following the end of the high-tech investment boom. C) increase government entitlement spending. D) both A and B. Answer: D Diff: 1 Topic: The Clinton and George W. Bush Administrations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

16) In 2003, the Bush administration revised the tax bill to include provisions to: A) delay tax increases from the 2001 bill. B) decrease the child tax credit. C) lower taxes on dividends. D) increase taxes on capital gains. Answer: C Diff: 1 Topic: The Clinton and George W. Bush Administrations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 17) The prospect of future deficits: A) encourages government to conduct expansionary fiscal policy. B) would prompt government to vastly expand discretionary spending. C) requires a government to eliminate all entitlement spending. D) limits the ability of government to conduct fiscal policy in the near future. Answer: D Diff: 2 Topic: The Clinton and George W. Bush Administrations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 18) The federal deficit ________ in 2006 and 2007, and ________ in 2008. A) increased; decreased B) increased, increased further C) decreased; increased D) decreased; decreased further Answer: C Diff: 2 Topic: The Clinton and George W. Bush Administrations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

19) The largest fiscal stimulus package enacted in U.S. history was done during whose administration? A) President Barack Obama B) President Bill Clinton C) President George W. Bush D) President Donald Trump Answer: A Diff: 2 Topic: The Obama and Trump Administrations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 20) In 2017, President Trump signed a major tax cut into law when the economy was: A) near full employment. B) experiencing hyperinflation. C) was in a recession. D) experiencing zero unemployment. Answer: A Diff: 2 Topic: The Obama and Trump Administrations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 21) In 2017, President Trump's major tax cut included a cut in the corporate tax rate from: A) 35 to 22 percent. B) 29 to 24 percent. C) 48 to 23 percent. D) 50 percent to zero. Answer: A Diff: 2 Topic: The Obama and Trump Administrations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

22) Because President Trump's tax cut in 2017 occurred when the economy was near full employment, economists were worried that the tax cut would potentially cause: A) higher inflation. B) lower unemployment. C) higher unemployment. D) lower inflation. Answer: A Diff: 2 Topic: The Obama and Trump Administrations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy Recall the Application about the success of the 2009 stimulus package to answer the following question(s). 23) According to the Application, economist John B. Taylor found that the temporary tax cuts which were a part of the 2009 stimulus package: A) were very successful in stimulating consumption spending. B) did very little to stimulate consumption spending. C) were split very evenly between consumption spending and household saving. D) were primarily used to pay off home mortgage balances. Answer: B Diff: 1 Topic: Application 3, How Effective was the 2009 Stimulus? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 24) According to the Application, economist John B. Taylor found that the aid to state and local governments which were a part of the 2009 stimulus package were used primarily to: A) increase spending on goods and services. B) increase spending on transfer programs, but spending on goods and services declined. C) increase spending on transfer programs, goods, and services. D) increase spending on infrastructure, but spending on transfer programs declined. Answer: B Diff: 1 Topic: Application 3, How Effective was the 2009 Stimulus? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

25) The Obama stimulus package was implemented to assist the economy in its recovery from recession. This package was designed to shift: A) aggregate demand to the right. B) aggregate demand to the left. C) aggregate supply to the left. D) aggregate demand and aggregate supply to the left. Answer: A Diff: 1 Topic: Application 3, How Effective was the 2009 Stimulus? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 26) The Obama stimulus package included fiscal policy actions designed to assist the economy in its recovery from recession. These fiscal policy actions would include ________ government spending and ________ taxes. A) increasing; decreasing B) decreasing; increasing C) increasing; Increasing D) decreasing; decreasing Answer: A Diff: 1 Topic: Application 3, How Effective was the 2009 Stimulus? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 27) At the beginning of the Vietnam War, increased military spending in the United States decreased unemployment. Answer: TRUE Diff: 1 Topic: The Vietnam War Era Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 28) An estimate of a household's long-run average income is called permanent income. Answer: TRUE Diff: 1 Topic: The Vietnam War Era Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

29) Consumers often base their spending on their estimated permanent income. Answer: TRUE Diff: 1 Topic: The Vietnam War Era Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 30) Temporary tax cuts tend to stimulate consumer spending at the same rate as permanent tax cuts. Answer: FALSE Diff: 1 Topic: The Clinton and George W. Bush Administrations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 31) The tax cuts of 2008 were valued at approximately one percent of GDP. Answer: TRUE Diff: 1 Topic: The Clinton and George W. Bush Administrations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 32) Why were economists concerned about the timing of President Trump's major tax cut law that was enacted in December 2017? Answer: Economists were concerned because the major tax cut law was signed during the time when the U.S. economy was near full employment. Since the tax cut would shift the aggregate demand to the right at the time when the economy was already near its full employment level of output, the tax cut could potentially cause an increase in inflation in the economy. Diff: 1 Topic: The Obama and Trump Administrations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 16 Money and the Banking System 16.1 What Is Money? 1) The supply of money in the U.S. economy is determined primarily by: A) decisions made by the Federal Reserve and the U.S. Treasury. B) the actions of the Federal Reserve and the banking system. C) consumers and the banking system. D) the demand for money in the economy. Answer: B Diff: 1 Topic: Money and the Banking System Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 2) In the ________ increases in the supply of money will ________. A) short run; raise total demand and output B) long run; raise total demand and output C) long run; lead to lower prices D) short run; decrease total demand and output Answer: A Diff: 2 Topic: Money and the Banking System Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 3) Money is: A) anything that is regularly used and generally accepted in economic transactions or exchanges. B) necessary to conduct economic transactions. C) facilitates specialization in production. D) anything the government declares to have value. Answer: A Diff: 1 Topic: What is Money? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

4) Which of the following can be used as money? A) checks B) cigarettes C) precious stones D) all of the above Answer: D Diff: 1 Topic: What is Money? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 5) When money is accepted as payment for a good or service, it is being used as a: A) medium of exchange. B) store of value. C) unit of account. D) mechanism for transforming current purchases into future purchases. Answer: A Diff: 1 Topic: Three Properties of Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 6) Money solves the dilemma of a double coincidence of wants by serving as a: A) medium of exchange. B) store of value. C) symbol of value. D) unit of account. Answer: A Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

7) When money is used to express the value of goods and services, it is functioning as a: A) medium of exchange. B) store of value. C) unit of account. D) store of purchasing power. Answer: C Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 8) If the prices of goods and services were expressed in terms of carved wooden beads, then the carved wooden beads would be serving as a: A) medium of exchange. B) store of value. C) unit of account. D) mechanism for transforming present purchases into future purchases. Answer: C Diff: 2 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 9) If money is used as a mechanism to hold purchasing power for a period of time it is functioning as a: A) standard of value. B) store of value. C) medium of exchange. D) unit of account. Answer: B Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

10) As inflation rates increase, money becomes less useful as a: A) unit of account. B) store of value. C) medium of exchange. D) double coincidence of wants. Answer: B Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 11) Suppose after the semester ends, you take a trip to a tropical island. Upon arriving at the island, you make a stop at one of the markets and notice that everyone is carrying around jars full of little turtles. You also notice the person in line in front of you just paid for a bottle of rum with 6 turtles. Someone else just bought a straw hat for 2 turtles. Thinking back to your economics class, you would conclude that: A) this is a barter economy. B) those little turtles are being used as money. C) turtles are valueless. D) turtle soup is a delicacy. Answer: B Diff: 1 Topic: Three Properties of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 12) Which of the following is/are example(s) of "mediums of exchange"? A) money used to buy goods B) goods used to obtain other goods C) pigs used to obtain chickens D) all of the above Answer: D Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

13) In order for a barter transaction to be successful, there must be a: A) market for the goods. B) high demand for a certain item. C) double coincidence of wants. D) federal tax law in effect. Answer: C Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 14) The stored value of money over time should not change significantly as long as the level of inflation is: A) high. B) low. C) adjusted by the government. D) less than your pay increases. Answer: B Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 15) According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. Undetected counterfeit currency which is spent and circulated in the marketplace is an example of the counterfeit currency being used as a: A) medium of exchange. B) commodity money. C) store of value. D) bank reserve. Answer: A Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

16) According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. As long as counterfeit U.S. currency remains undetected and in circulation, an increase in the U.S. inflation rate would essentially: A) decrease the real value of the counterfeit currency. B) increase the real value of the counterfeit currency. C) decrease the nominal value of the counterfeit currency. D) increase the nominal value of the counterfeit currency. Answer: A Diff: 2 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 17) According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. The U.S. government is continually adding security features to its paper currency to help make counterfeit money easier to detect. If counterfeit currency remained undetected, a vast increase in the supply of counterfeit U.S. currency would: A) decrease aggregate demand in the short run. B) lead to inflation. C) reduce the amount of M1. D) lower the nominal income of the average U.S. worker. Answer: B Diff: 2 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 18) Money that has no intrinsic value and is created by a government decree is called: A) barter money. B) commodity money. C) fiat money. D) asset money. Answer: C Diff: 1 Topic: Different Types of Monetary Systems Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

19) What gives money value under a fiat system? A) Fiat money is backed by gold. B) The supply of fiat money is controlled by the government. C) Fiat money is also a commodity. D) Fiat money is the same as Treasury bonds. Answer: B Diff: 1 Topic: Different Types of Monetary Systems Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 20) M1: A) is the sum of currency plus traveler's checks. B) is the narrowest definition of the money supply. C) includes small time deposits. D) includes credit cards. Answer: B Diff: 2 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 21) Checking account balances are included in: A) M1 only. B) M2 only. C) both M1 and M2. D) neither M1 nor M2. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

22) Currency is included in: A) M1 only. B) M2 only. C) neither M1 nor M2. D) both M1 and M2. Answer: D Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 23) Which of the following are also known as demand deposits? A) checking deposits B) savings deposits C) time deposits D) money market mutual fund accounts Answer: A Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 24) Traveler's checks are included in: A) M1 only. B) M2 only. C) both M1 and M2. D) neither M1 nor M2. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

25) Which of the following is NOT included in M1? A) savings accounts B) deposits in checking accounts C) deposits in checking accounts that pay interest D) traveler's checks Answer: A Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 26) About 42 percent of M1 is composed of: A) demand deposits. B) savings deposits. C) money market mutual funds. D) currency held by the public. Answer: D Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 27) The smallest single component of M1 is: A) demand deposits. B) savings account balances. C) other checkable deposits. D) traveler's checks. Answer: D Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

28) The largest single component of M2 is: A) demand deposits. B) savings deposits. C) money market mutual funds. D) currency held by the public. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 29) In the 1980s, a new category called ________ was added to M1. A) traveler's checks B) demand deposits C) other checkable deposits D) money market mutual fund deposits Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 30) Checking accounts that pay interest are included in the: A) "demand deposits" part of M1. B) "other checkable deposits" part of M1. C) "savings deposits" part of M2. D) "money market mutual funds deposits" part of M2. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

31) Deposits in savings accounts are included in: A) M1. B) M2. C) both M1 and M2. D) neither M1 nor M2. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 32) Money market mutual funds are included in: A) M1. B) M2. C) both M1 and M2. D) neither M1 nor M2. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 33) Which of the following is NOT included in M1 or M2? A) checking account balances B) currency in circulation outside of commercial banks C) traveler's checks D) credit card balances Answer: D Diff: 2 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

34) Which of the following is included in M2? A) commercial paper B) U.S. Treasury bonds C) savings accounts D) stocks Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 35) Which of the following appears in M2 but NOT M1? A) currency B) checking account balances C) money market mutual funds D) traveler's checks Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 36) Suppose Bob withdraws money from his checking account and deposits it into his savings account. What happens to M1? A) It decreases. B) It increases. C) It stays the same. D) The effect is unknown. Answer: A Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

37) Suppose Bob withdraws money from his checking account and deposits it into his savings account. What happens to M2? A) It decreases. B) It increases. C) It stays the same. D) The effect is unknown. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 38) Suppose Bob withdraws money from his savings account and deposits it into his checking account. What happens to M2? A) It decreases. B) It increases. C) It stays the same. D) The effect is unknown. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 39) Suppose Bob withdraws money from his savings account and deposits it into his checking account. What happens to M1? A) It decreases. B) It increases. C) It stays the same. D) The effect is unknown. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

Currency held by the public Demand deposits Other checkable deposits Traveler's checks Savings deposits Small time deposits Money market mutual funds

$450 billion 220 billion 170 billion 2 billion 800 billion 50 billion 170 billion

Table 16.1 40) According to the information in Table 16.1, M1 is equal to: A) $620 billion. B) $672 billion. C) $842 billion. D) $1,012 billion. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 41) According to the information in Table 16.1, M2 is equal to: A) $840 billion. B) $1,062 billion. C) $1,692 billion. D) $1,862 billion. Answer: D Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

42) Economists use different definitions of money because: A) there are differences in the frequency with which depositors use their accounts. B) deposits can be domestic or international. C) deposits may be held at banks or savings and loans. D) it is not always clear which assets are used primarily as money. Answer: D Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 43) A reason that economists keep an eye on both M2 and M1 is because: A) M2 is more accurate than M1. B) both fluctuate widely and frequently in total dollar value. C) money market accounts are sometimes used like checking accounts and sometimes used like savings accounts. D) during a recession, M1 is meaningless. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 44) In the United States economy, what is the basic measure of money? A) wealth B) M1 C) disposable income D) commodities Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

45) Along with currency not in banks and deposits in checking accounts, what is another component of the M1 measure of money? A) credit cards B) debit cards C) traveler's checks D) prepaid accounts Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 46) Financial monetary assets which often cannot be readily used in commercial exchanges are included in: A) M1. B) M2. C) credit cards. D) prepaid accounts. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 47) Small time deposits of $100,000 or less are classified as: A) part of M1. B) part of M2. C) FDIC insured. D) highly liquid. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

48) Before they can be used in regular exchanges, the assets that make up M2 must often: A) have their interest computed. B) be converted to M1 assets. C) be paid off if they are credit cards. D) have reached term if they are insurance policies. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 49) An example of money is: A) a dollar bill. B) a checking account balance. C) a traveler's check. D) all of the above. Answer: D Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 50) According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. Undetected counterfeit U.S. currency being held by the public both at home and abroad will impact the level of: A) the reserve ratio. B) the money multiplier. C) M1. D) commodity money. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

Recall the Application about how Greek citizens began to hold large amounts of cash in 2015 to answer the following question(s). 51) According to this Application, which of the following is a reason for holding cash? A) for convenience B) to make a purchase when you cannot use a debit or credit card C) fear of financial catastrophe D) all of the above Answer: D Diff: 1 Topic: Application 1, Cash as a Sign of Trust Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 52) According to this Application, residents of Greece in 2015 ________ withdrawals of funds from their banks in order to hold ________ cash. A) increased; less B) increased; more C) decreased; less D) decreased; more Answer: B Diff: 1 Topic: Application 1, Cash as a Sign of Trust Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 53) According to this Application, the main concern of Greek residents was that: A) hyperinflation could occur in the economy. B) banks would convert their accounts to drachmas and they would suffer financial losses. C) the country would switch to a gold standard. D) the Prime Minister of Greece would be impeached. Answer: B Diff: 1 Topic: Application 1, Cash as a Sign of Trust Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

54) Money is the standard of exchange by which any type of goods can be purchased. Answer: TRUE Diff: 1 Topic: What is Money? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 55) In order for money to be an effective medium of exchange, it is important to have it serve as a unit of account. Answer: TRUE Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 56) Money solves the problem of double coincidence of wants that would regularly occur under a system of credit. Answer: FALSE Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 57) Inflation makes money an imperfect store of value. Answer: TRUE Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 58) Fiat money refers to a monetary system in which gold backs up paper money. Answer: FALSE Diff: 1 Topic: Different Types of Monetary Systems Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 19 Copyright © 2020 Pearson Education, Inc.

59) In the United States today, the government will exchange gold or silver for paper money. Answer: FALSE Diff: 1 Topic: Different Types of Monetary Systems Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 60) Credit cards are regularly used in economic exchanges, so credit card balances are included in the definition of money. Answer: FALSE Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 61) Economists use M2 to measure the amount of money that is regularly used in transactions. Answer: FALSE Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 62) M1 is larger than M2. Answer: FALSE Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 63) Checking deposits are also known as demand deposits. Answer: TRUE Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

64) Money market mutual funds are hard to classify because they are used both for making transactions and for savings. Answer: TRUE Diff: 2 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 65) Credit cards are NOT a part of the M1 or M2 money supply. Answer: TRUE Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 66) Define "money." Answer: Money is anything that is used in economic transactions or exchanges. Diff: 1 Topic: What is Money? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 67) What are the three properties of money? Answer: Money serves as a medium of exchange that avoids the problem of double coincidence of wants; it is a unit of account that makes it easier to conduct economic transactions; and it is a store of value that is preserved between transactions. Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

68) What is a commodity money system? Answer: A commodity money system is a monetary system in which the actual money is a commodity, such as gold or silver. Diff: 1 Topic: Different Types of Monetary Systems Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 69) What is a gold standard? Answer: A gold standard is a monetary system in which gold backs up paper money. In a traditional gold standard, a person can present paper money to the government and receive its stated value in gold. Diff: 1 Topic: Different Types of Monetary Systems Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 70) Distinguish M1 from M2. Answer: M2 is a broader definition of money that includes assets that are less likely to be used in economic exchanges. M2 includes all the assets in M1 but also includes savings deposits, money market mutual funds and time deposits. Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 71) What are the four components of M1? Answer: currency held by the public; demand deposits; other checkable deposits; traveler's checks Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

72) What are the components of M2? Answer: money market mutual funds; deposits in savings accounts; small time deposits; M1 Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 16.2 How Banks Create Money 1) One of the essential functions that a bank performs is: A) purchasing government bonds. B) creating deposits by lending required reserves. C) transferring money from savers to lenders. D) owning assets like real estate. Answer: C Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 2) Loans are examples of a bank's: A) assets. B) liabilities. C) net worth. D) balance sheet. Answer: A Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

3) Deposits are examples of a bank's: A) assets. B) liabilities. C) net worth. D) balance sheet. Answer: B Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 4) Which of the following is a bank liability? A) reserve deposits held at the Fed B) loans made to customers C) required reserves D) demand deposit balances Answer: D Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 5) Which of the following is a bank asset? A) demand deposits B) savings account deposits C) certificates of deposit held by the public D) loans made to customers Answer: D Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

6) Which one of the following statements is TRUE? A) Demand deposits are assets of a bank. B) A bank's assets plus its liabilities must equal zero. C) A bank's reserves can only be kept as cash in its vault. D) Assets generate income for a bank. Answer: D Diff: 2 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 7) The fraction of deposits that banks are required by law to hold and not lend out are called its: A) reserves. B) excess reserves. C) required reserves. D) net worth. Answer: C Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 8) A bank's reserves: A) are the sum of its excess and required reserves. B) can be held as cash in its vault. C) can be held as deposits with the Federal Reserve. D) all of the above Answer: D Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

9) Given the following information about AAA bank: Bank Deposits $200,000 Loans 100,000 Required Reserves 40,000 Excess Reserves 60,000 What is the reserve ratio? A) 50 percent B) 40 percent C) 20 percent D) 10 percent Answer: C Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 10) Given the following information about AAA bank: Bank Deposits $50,000 Loans 25,000 Required Reserves 15,000 Excess Reserves 10,000 What is the reserve ratio? A) 50 percent B) 30 percent C) 20 percent D) 15 percent Answer: B Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

11) By law, banks are required to: A) hold 100 percent of customer deposits as reserves. B) hold a fraction of their reserves at the Federal Reserve bank. C) hold a fraction of demand deposits as reserves. D) lend out no more than the amount of their required reserves. Answer: C Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 12) Suppose that while vacationing in Switzerland, you won 9,375 Swiss francs, which is the equivalent of $8,000. When you return to the United States, you deposit the $8,000 into your checking account. If the required reserve ratio is 15 percent, this would increase your bank's: A) liabilities by $8,000. B) excess reserves by $8,000. C) required reserves by $8,000. D) assets by $1,200. Answer: A Diff: 2 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 13) Logan finds $10 in his jacket pocket and deposits it into a bank. As a result of this single transaction, M1 has: A) increased by $10. B) increased by more than $10. C) increased by less than $10. D) not changed. Answer: D Diff: 1 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

14) Given the following information about Gotham Bank: Bank Deposits $50,000 Loans 34,000 Reserves 12,000 Reserve Requirement 20 percent Gotham Bank is holding ________ in excess reserves. A) $22,000 B) $12,000 C) $2,000 D) -$2,000 Answer: C Diff: 1 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 15) Given the following information about Metropolis Bank: Bank Deposits $50,000 Loans 17,500 Required Reserves 30,000 Excess Reserves 2,500 The required reserve ratio must be: A) 75 percent. B) 60 percent. C) 30 percent. D) 15 percent. Answer: B Diff: 1 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

16) Suppose a bank has $200,000 in deposits and a reserve ratio of 15 percent. Its required reserves are: A) $350. B) $1,500. C) $3,000. D) $30,000. Answer: D Diff: 1 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 17) Suppose a bank has $8 million in deposits and a reserve ratio of 20 percent. Its required reserves are: A) $40,000. B) $400,000. C) $1,600,000. D) $16,000,000. Answer: C Diff: 1 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 18) Suppose a bank has $200,000 in deposits, a reserve ratio of 10 percent, and reserves of $45,000. This bank has excess reserves of: A) $155,000. B) $25,000. C) $10,000. D) $5,000. Answer: B Diff: 1 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

19) Suppose a bank has $1 million in deposits, a reserve ratio of 25 percent, and reserves of $250,000. This bank has excess reserves of: A) $250,000. B) $125,000. C) $62,500. D) $0. Answer: D Diff: 1 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 20) Suppose a bank has $600,000 in deposits, a reserve ratio of 20 percent, and bank reserves of $240,000. This bank can make new loans in the amount of: A) $840,000. B) $360,000. C) $120,000. D) $12,000. Answer: C Diff: 2 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 21) Suppose a bank has $300,000 in deposits, a reserve ratio of 5 percent, and bank reserves of $45,000. This bank can make new loans in the amount of: A) $345,000. B) $45,000. C) $30,000. D) $15,000. Answer: C Diff: 2 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

22) Suppose Diego deposits $4,000 in his bank. If the reserve ratio is 10 percent, this will lead to a maximum increase of ________ in checking account balances throughout all banks. A) $0 B) $4,000 C) $10,000 D) $40,000 Answer: D Diff: 2 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 23) Suppose Ariana deposits $75,000 in her bank. If the reserve ratio is 20 percent, this will lead to a maximum increase of ________ in checking account balances throughout all banks. A) $15,000 B) $375,000 C) $750,000 D) $1,500,000 Answer: B Diff: 2 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 24) Suppose Darrell has $4,000 in currency which he deposits in his bank. If the reserve ratio is 25 percent, this will lead to a maximum increase of ________ in M1 throughout all banks. A) $0 B) $4,000 C) $6,000 D) $12,000 Answer: D Diff: 2 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

25) Suppose Jennifer has $42,000 in currency which she deposits in her bank. If the reserve ratio is 50 percent, this will lead to a maximum increase of ________ in M1 throughout all banks. A) $0 B) $21,000 C) $42,000 D) $84,000 Answer: C Diff: 2 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 26) If the banking system has a required reserve ratio of 40 percent, then the money multiplier is: A) 2. B) 2.5. C) 4. D) 8. Answer: B Diff: 1 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 27) If the banking system has a required reserve ratio of 25 percent, then the money multiplier is: A) 2. B) 4. C) 5. D) 10. Answer: B Diff: 1 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

28) The money multiplier is equal to: A) the government spending multiplier. B) the marginal propensity to consume. C) the reserve ratio. D) 1/(reserve ratio). Answer: D Diff: 1 Topic: How the Money Multiplier Works Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 29) A bank may make loans until its: A) required reserves are exhausted. B) excess reserves are exhausted. C) total assets are exhausted. D) total liabilities are exhausted. Answer: B Diff: 2 Topic: How the Money Multiplier Works Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 30) The money multiplier tends to be greater when: A) individuals hold less cash. B) individuals hold more cash. C) banks hold more excess reserves. D) the reserve ratio increases. Answer: A Diff: 1 Topic: How the Money Multiplier Works Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

31) The money multiplier will be smaller when: A) bank customers prefer to hold a bigger amount of their money as cash (instead of in their checking account). B) banks prefer to lend out 9 percent of their excess reserves instead of 90 percent. C) when the marginal propensity to save declines. D) when the reserve ratio decreases. Answer: A Diff: 2 Topic: How the Money Multiplier Works Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 32) If people never withdrew money, how much money could the banking system create given a new amount of deposits, assuming that excess reserves were zero? A) zero B) as much as the new deposits C) the amount of new deposits multiplied by the reserve ratio D) the amount of new deposits multiplied by the money multiplier Answer: D Diff: 2 Topic: How the Money Multiplier Works Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system Recall the Application about Bitcoin and other cryptocurrencies to answer the following question(s). 33) According to the Application, Bitcoin is a currency: A) that is not backed by any government. B) that can be used anonymously. C) that can be used to transfer money without the use of traditional banks. D) All of the above are correct. Answer: D Diff: 1 Topic: Application 2, Bitcoin and Cryptocurrencies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

34) According to the Application, Bitcoin and other cryptocurrencies: A) require a special method to encode or encrypt transactions. B) are cleared using systems of the Federal Reserve. C) are backed by gold or silver only. D) All of the above are correct. Answer: A Diff: 1 Topic: Application 2, Bitcoin and Cryptocurrencies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 35) According to the Application, which of the following functions of money does Bitcoin perform? A) medium of exchange only B) store of value only C) unit of account only D) Bitcoin performs all functions of money. Answer: A Diff: 1 Topic: Application 2, Bitcoin and Cryptocurrencies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 36) According to the Application, the disadvantage to using Bitcoin is: A) that is not backed by any government. B) that it can be used anonymously. C) that it can be used to transfer money without the use of traditional banks. D) the value of Bitcoin has varied sharply over time. Answer: D Diff: 1 Topic: Application 2, Bitcoin and Cryptocurrencies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

37) Suppose Kaylee withdraws $4,000 from her bank. If the reserve ratio is 25 percent, then this will lead to a decrease in M1 of: A) $1,000. B) $4,000. C) $8,000. D) $12,000. Answer: D Diff: 2 Topic: How the Money Multiplier Works in Reverse Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 38) Suppose George withdraws $60,000 from his bank. If the reserve ratio is 25 percent, then this transaction will lead to a decrease of ________ in checking account balances. A) $15,000 B) $45,000 C) $90,000 D) $180,000 Answer: D Diff: 1 Topic: How the Money Multiplier Works in Reverse Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 39) Isabel receives a check for $7,000 from Kermit and deposits it in her bank. Suppose that the reserve ratio is 10 percent. As a result of this transaction the money supply will: A) increase by $70,000. B) decrease by $63,000 and then increase by $70,000. C) decrease by $70,000 and then increase by $63,000. D) not change. Answer: D Diff: 2 Topic: How the Money Multiplier Works in Reverse Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

40) Mr. Garrison has recently obtained a bank card from South Park National Bank. Excited about the concept of using a little plastic card to get money from a machine, he quickly runs down to the nearest ATM and withdraws $500. This action has: A) increased the money supply by $500. B) reduced the money supply by $500. C) reduced the bank's required reserves by $25 assuming the reserve ratio is 5 percent. D) not changed the money supply. Answer: C Diff: 1 Topic: How the Money Multiplier Works in Reverse Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 41) Which one of the following would lead to an eventual change in the total money supply? A) a customer's cash withdrawal from an ATM B) a customer moves funds from her checking account to her savings account C) using a credit card to purchase a new television D) depositing a paycheck in a bank Answer: A Diff: 2 Topic: How the Money Multiplier Works in Reverse Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 42) Banks prefer to make loans than keep reserves because they earn interest on loans and must pay interest on reserves. Answer: FALSE Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 43) A bank's required reserves are the fraction of deposits they are required by law to hold as reserves. Answer: TRUE Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 37 Copyright © 2020 Pearson Education, Inc.

44) A bank's excess reserves are the fraction of a bank's deposits held at the Federal Reserve. Answer: FALSE Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 45) If cash is deposited into a checking account, the supply of money increases. Answer: FALSE Diff: 1 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 46) U.S. banks are required by law to keep most of their assets as reserves. Answer: FALSE Diff: 1 Topic: How the Money Multiplier Works Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 47) If the reserve ratio is 0.3 and a deposit of $1,000 is made to the bank, the bank can lend out $700. Answer: TRUE Diff: 1 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 48) Banks will never hold any additional reserves beyond what is required. Answer: FALSE Diff: 1 Topic: How the Money Multiplier Works Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

49) If the reserve ratio is 0.9, the money multiplier will be 10. Answer: FALSE Diff: 1 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 50) When one individual writes a check to another individual the money supply will not be changed. Answer: TRUE Diff: 1 Topic: How the Money Multiplier Works in Reverse Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 51) Explain liabilities and assets as they relate to a bank's balance sheet. Answer: Liabilities are the source of funds for a bank. Included in a bank's liabilities are deposits in the bank and owner's equity. Assets are the uses of the funds of a bank. Assets generate income for a bank. A bank's assets include its loans and reserves. Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 52) Explain why depositing cash into a checking account does NOT change the money supply. Answer: The deposited cash reduces the currency being held by the public by the same amount as the increase in the checking account. Since currency held by the public and checking accounts are both included in the supply of money, the total money supply does not change—only the location of the money has changed. Diff: 2 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

53) Suppose that someone deposits $10,000 into a bank. Assuming a reserve requirement ratio of 20 percent, what will be the eventual increase in checking account balances? Answer: The short way to figure this out is to multiply the initial cash deposit amount by the reciprocal of the reserve ratio (the money multiplier). Therefore, the eventual increase in account balances will be $50,000. Diff: 1 Topic: How the Money Multiplier Works Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 54) Why is the money multiplier in the United States smaller than the inverse of the required reserve ratio? Answer: The formula for the money multiplier assumes that all loans make their way directly into checking accounts. In reality, people hold part of their loans as cash, and that cash is therefore not available for the banking system to lend out. Also, banks hold excess reserves rather than lending all of them out. For both of these reasons the multiplier is smaller in reality than in the illustrations in this chapter. Diff: 2 Topic: How the Money Multiplier Works Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 55) Explain why the money supply does NOT change when one individual writes a check to another. Answer: When one individual writes a check to another there is an offsetting increase and decrease to the money supply. The bank into which the check is deposited begins to expand the money supply but the bank that has lost a deposit begins to contract it. The net result is no change. Diff: 1 Topic: How the Money Multiplier Works in Reverse Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

16.3 A Banker's Bank: The Federal Reserve 1) The Federal Reserve was created in: A) 1893. B) 1913. C) 1921. D) 1933. Answer: B Diff: 1 Topic: A Banker's Bank: The Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 2) Which of the following serves as the central bank for the United States? A) the Federal Reserve System B) the Department of Treasury C) the Federal Deposit Insurance Corporation D) the Congress Answer: A Diff: 1 Topic: A Banker's Bank: The Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 3) The Federal Reserve System was created by the: A) U.S. Treasury. B) President. C) Congress. D) Supreme Court. Answer: C Diff: 1 Topic: A Banker's Bank: The Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

4) When checks are exchanged between banks, the Fed oversees the banks to ensure the appropriate funds have been transferred. This is known as: A) check kiting. B) check clearing. C) check floating. D) check balancing. Answer: B Diff: 1 Topic: Functions of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 5) Which of the following is NOT a subgroup of the Federal Reserve System? A) the Federal Reserve Banks B) the Federal Funds Market C) the Board of Governors D) the Federal Open Market Committee Answer: B Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 6) There are ________ Federal Reserve Banks located in different parts of the United States. A) 10 B) 12 C) 15 D) 50 Answer: B Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

7) Members of the Federal Reserve Board of Governors: A) are appointed to 4-year terms. B) are confirmed by the House of Representatives. C) frequently need to deal with political pressures. D) are members of the Federal Open Market Committee. Answer: D Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 8) The chairperson of the Federal Reserve Board of Governors: A) sits on the Federal Open Market Committee. B) is appointed by the President and confirmed by the Treasury. C) serves a fourteen-year term as chairman. D) is always the president of the Federal Reserve Bank of New York. Answer: A Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 9) Which of the following serves as the chairperson of the Federal Open Market Committee? A) The chairperson of the Board of Governors B) The President of the Federal Reserve Bank of New York C) The U.S. Secretary of Treasury D) The Vice President of the United States Answer: A Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

10) Members of the Board of Governors are: A) appointed by the President of the United States and confirmed by the Senate. B) appointed by the President of the United States and confirmed by the House of Representatives. C) appointed by the U.S. Secretary of Treasury and confirmed by the President of the United States. D) appointed by member-banks and confirmed by the House of Representatives. Answer: A Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 11) The chairperson of the Board of Governors serves ________ years as the main spokesperson for monetary policy in the United States. A) 4 B) 7 C) 12 D) 14 Answer: A Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 12) Each member of the Board of Governors is appointed for a nonrenewable ________ term. A) 14-year B) 7-year C) 12-year D) 4-year Answer: A Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

13) The group responsible for making decisions regarding monetary policy is the: A) Federal Open Market Committee. B) Board of Governors only. C) Federal Advisory Council. D) group of 12 Federal Reserve Bank presidents only. Answer: A Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 14) The voting members of the Federal Open Market Committee are: A) all of the members of the Board of Governors and all of the presidents of the 12 Federal Reserve banks. B) all of the members of the Board of Governors and five of the presidents of the 12 Federal Reserve banks. C) the presidents of the 12 Federal Reserve banks and three members of the Board of Governors. D) only the members of the Board of Governors. Answer: B Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 15) The president of the Federal Reserve Bank of ________ is always a member of the FOMC. A) Minneapolis B) Boston C) Washington, D.C. D) New York Answer: D Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

16) There are ________ members of the FOMC. A) 5 B) 7 C) 12 D) 19 Answer: C Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 17) The purpose of having the members of the Board of Governors of the Federal Reserve serve fourteen-year terms is to: A) ensure that the governors become well-experienced at policymaking. B) insulate the governors' policy decisions from the influence of presidential elections and politics. C) promote unity of opinion from shared time together. D) establish long-standing ties with high-level officials of other nations' central banks. Answer: B Diff: 1 Topic: The Structure of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 18) The Federal Reserve is ________ the U.S. Treasury. A) independent of B) a part of C) a creation of D) under the control of Answer: A Diff: 1 Topic: The Independence of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

19) Studies by economists have tended to show that countries with more independent central banks have: A) more inflation. B) less inflation. C) higher unemployment. D) lower unemployment. Answer: B Diff: 1 Topic: The Independence of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 20) The Federal Reserve System is the central bank of the United States. Answer: TRUE Diff: 1 Topic: A Banker's Bank: The Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 21) Monetary policy refers to the actions taken by the Treasury Department to set the level of the money supply. Answer: FALSE Diff: 1 Topic: A Banker's Bank: The Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 22) In practice, the Board of Governors and the chairperson of the Federal Reserve have the real control over monetary policy. Answer: TRUE Diff: 1 Topic: The Structure of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

23) Every country in the world has an independent central bank. Answer: FALSE Diff: 2 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 24) Headquartered in Washington, D.C., the Board of Governors of the Federal Reserve determines monetary policies and strategies based on the state of the economy. Answer: TRUE Diff: 1 Topic: The Structure of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 25) The Federal Reserve is a branch of the Treasury Department, and is therefore subject to significant government control. Answer: FALSE Diff: 1 Topic: The Independence of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 26) List four of the Federal Reserve's key functions. Answer: The Fed supplies currency to the economy. The Fed provides a system of check collecting and clearing. The Fed holds reserves from banks and regulates banks. The Fed conducts monetary policy. Diff: 1 Topic: A Banker's Bank: The Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

27) List and explain the three subgroups of the Federal Reserve System. Answer: The 12 Federal Reserve banks are the regional banks from each of the 12 Federal Reserve districts. The Board of Governors of the Federal Reserve is the seven-person governing body of the Federal Reserve System. The Federal Open Market Committee decides on monetary policy, and consists of the seven members of the Board of Governors plus 5 of the 12 regional bank presidents. Diff: 1 Topic: The Structure of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 28) Describe the relationship between the Federal Reserve and the legislative and executive branches of the U.S. government. Answer: Although the Fed operates with independence from the U.S. Treasury, it is a creation of Congress and the chairperson of the Board of Governors is required to report to Congress on a regular basis. In practice, the Fed takes its actions first and later reports those actions to Congress. The chairperson of the Fed often will meet with members of the executive branch to discuss economic affairs. Presidents and members of Congress can bring political pressures on the Board of Governors of the Fed but 14-year terms provide some insulation from external pressures. Diff: 2 Topic: The Independence of the Federal Reserve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

16.4 What the Federal Reserve Does During a Financial Crisis Recall the Application about how policymakers use stress tests to protect the financial system to answer the following question(s). 1) According to this Application, after the financial crisis of 2008, former Treasury Secretary Timothy Geithner and his staff made a proposal that major banks and financial institutions be subjected to: A) yearly audits. B) stress tests. C) regulation by Congress. D) none of the above. Answer: B Diff: 1 Topic: Application 3, Stress Tests for the Financial System Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 2) According to this Application, a bank will be required to develop an analytical model to determine what would happen if there was a ________ change in economic conditions, such as a large ________ in unemployment. A) positive; increase B) positive; decrease C) negative; increase D) negative; decrease Answer: C Diff: 1 Topic: Application 3, Stress Tests for the Financial System Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 3) According to this Application, if a bank does NOT pass the test, the Fed can: A) prevent the bank from paying out dividends to its shareholders. B) make the bank raise additional capital from the financial markets. C) force the bank to close. D) Both A and B are correct. Answer: D Diff: 1 Topic: Application 3, Stress Tests for the Financial System Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 50 Copyright © 2020 Pearson Education, Inc.

Recall the Application about the Fed's response to the collapse of the investment house Bear Stearns as well as its handling of the 2008 financial crisis with respect to other financial institutions to answer the following question(s). 4) According to this Application, the Fed increased its lending by hundreds of billions of dollars to financial institutions as a response to the ongoing financial crisis. This increase in loans to financial institutions increased the supply of money in the economy. When the supply of money increases, the money supply curve will: A) shift to the right, increasing the interest rate. B) shift to the right, decreasing the interest rate. C) shift to the left, increasing the interest rate. D) shift to the left, decreasing the interest rate. Answer: B Diff: 1 Topic: Application 4, Coping with the Financial Chaos Caused by the Mortgage Crisis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 5) According to the Application, in response to the financial crisis, the Fed implemented a new policy in which it began to pay interest on deposits held at the Fed. This move would ________ deposits held at the Fed and ________ the Fed's ability to make loans. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase Answer: D Diff: 2 Topic: Application 4, Coping with the Financial Chaos Caused by the Mortgage Crisis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

6) According to this Application, the Fed responded to the financial crisis by continuing to develop new programs. One example of this was its announcement that it would now purchase commercial paper, which is the short-term debt of corporations. This is an example of the Fed acting as a: A) medium of exchange. B) lender of last resort. C) store of value. D) unit of account. Answer: B Diff: 1 Topic: Application 4, Coping with the Financial Chaos Caused by the Mortgage Crisis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 16.5 Appendix: Formula for Deposit Creation 1) Assuming that banks have loaned all excess reserves, then an increase in checking account balances brought about by an increase in deposits is equal to: A) (the initial deposit) × (the reserve ratio). B) (the initial deposit) × (1 / reserve ratio). C) (total reserves) × (1 / reserve ratio). D) (total reserves) × ( the reserve ratio). Answer: B Diff: 1 Topic: Formula for Deposit Creation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 2) The formula for an infinite sum is: A) 1 + b + b2 + b3 + b4 + ... = 1 / b. B) 1 + b + b2 + b3 + b4 + ... = 1 / (1 + b). C) 1 + b + b2 + b3 + b4 + ... = 1 / (1 - b). D) 1 + b + b2 + b3 + b4 + ... = b / (1 - b). Answer: C Diff: 2 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

3) If the reserve ratio is designated by "r," how much of a deposit can banks lend out? A) 1 / r B) (1 - r) C) 1 / (1 - r) D) r / (1 - r) Answer: B Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 4) Using the formula for an infinite sum, if "r" designates the reserve ratio, the 1 / reserve ratio would equal: A) (1 - r). B) 1 / (1 - r). C) 1 / [1 - (1 - r)]. D) r / (1 - r). Answer: C Diff: 2 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 5) Assuming all excess reserves are loaned out, currency holdings by the public are zero, and a reserve ratio of 20 percent, an initial deposit of $850 will lead to total deposits of: A) $425. B) $850. C) $4,250. D) $42,500. Answer: C Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

6) Assuming all excess reserves are loaned out, if the reserve ratio is 40 percent, the money multiplier will be equal to: A) 2. B) 2.5. C) 4. D) 6. Answer: B Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 7) Assuming all excess reserves are loaned out, currency holdings by the public are zero, and a reserve ratio of 5 percent, an initial deposit of $10,000 will lead to a total increase in deposits of: A) $500. B) $10,000. C) $50,000. D) $200,000. Answer: D Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 8) Assuming all excess reserves are loaned out, if the reserve ratio is 3.33 percent, the money multiplier will be equal to: A) 0.67. B) 3.33. C) 6.67. D) 30. Answer: D Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

9) Assuming all excess reserves are loaned out, currency holdings by the public are zero, and a reserve ratio of 25 percent, an initial deposit of $3,000 will lead to a total increase in deposits of: A) $750. B) $2,250. C) $12,000. D) $36,000. Answer: C Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 10) Assuming all excess reserves are loaned out, if the reserve ratio is 25 percent, the money multiplier will be equal to: A) 0.5. B) 2.5. C) 4. D) 5. Answer: C Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 11) Assuming all excess reserves are loaned out, currency holdings by the public are zero, and a reserve ratio of 2 percent, an initial deposit of $500 will lead to a total increase in deposits of: A) $250. B) $5,000. C) $25,000. D) $50,000. Answer: C Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

12) Assuming all excess reserves are loaned out, if the reserve ratio is 1 percent, the money multiplier will be equal to: A) 1. B) 10. C) 11. D) 100. Answer: D Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 13) Assuming all excess reserves are loaned out, currency holdings by the public are zero, and a reserve ratio of 20 percent, an initial deposit of $6,000 will lead to a total increase in deposits of: A) $12,000. B) $24,000. C) $30,000. D) $36,000. Answer: C Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 14) Assuming all excess reserves are loaned out, if the reserve ratio is 8 percent, the money multiplier will be equal to: A) 2. B) 8. C) 12.5. D) 16.67. Answer: C Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

15) An increase in checking account balances equals the initial deposit multiplied by total reserves. Answer: FALSE Diff: 1 Topic: Formula for Deposit Creation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 16) The formula for an infinite sum is 1 / (1 - b), where b = (1 - reserve ratio). Answer: TRUE Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 17) If the reserve ratio is designated by "r," the amount of deposits a bank can lend out is equal to [D × (1 - r)]. Answer: TRUE Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 18) If the reserve ratio is designated by "r," the amount of deposits a bank can hold as excess reserves is equal to 1 / (1 - r). Answer: FALSE Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 19) If the reserve ratio is 4 percent, the money multiplier is equal to 25. Answer: TRUE Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 57 Copyright © 2020 Pearson Education, Inc.

20) If the reserve ratio is 10 percent, the money multiplier is equal to 10. Answer: TRUE Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 17 Monetary Policy and Inflation 17.1 The Money Market 1) In the short run, when prices don't have enough time to change, the Federal Reserve: A) can influence the level of interest rates in the economy. B) cannot influence the level of interest rates in the economy. C) can influence the level of interest rates in the economy but generally will not because it would be destabilizing. D) can only affect the amount of money in the economy. Answer: A Diff: 1 Topic: The Federal Reserve and Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 2) Generally, when the Federal Reserve lowers interest rates, investment spending ________ and GDP ________. A) increases; decreases B) increases; increases C) decreases; decreases D) decreases; increases Answer: B Diff: 1 Topic: The Federal Reserve and Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 3) When the Federal Reserve increases interest rates, investment spending ________ and GDP ________. A) increases; decreases B) increases; increases C) decreases; decreases D) decreases; increases Answer: C Diff: 1 Topic: The Federal Reserve and Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 1 Copyright © 2020 Pearson Education, Inc.

4) The nominal interest rate is determined in the: A) stock market. B) money market. C) exchange market. D) bond market. Answer: B Diff: 1 Topic: The Money Market Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 5) The transaction demand for money comes mostly from the fact that: A) money is a store of value. B) money is a medium of exchange. C) money is a unit of account. D) money has low opportunity cost. Answer: B Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 6) The opportunity cost of holding money is: A) heavy and awkward. B) the probability of theft or loss. C) the ease of conducting everyday business. D) the return that could have been earned from holding wealth in other assets. Answer: D Diff: 1 Topic: The Demand for Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

7) Suppose that the interest rate available to you on a long-term bond is 4 percent. If you hold $1,000 of your wealth in currency instead of in the form of a bond, the annual opportunity cost is: A) $0.04. B) $4. C) $40. D) $400. Answer: C Diff: 1 Topic: The Demand for Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 8) At higher interest rates, the: A) money supply is higher. B) money supply is indeterminate. C) quantity of money demanded is higher. D) quantity of money demanded is lower. Answer: D Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 9) At lower interest rates, the: A) money supply is indeterminate. B) money supply is lower. C) quantity of money demanded is higher. D) quantity of money demanded is lower. Answer: C Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

10) An increase in the price level in the economy leads to: A) a leftward shift in the demand for money curve. B) a rightward shift in the demand for money curve. C) a leftward movement along the demand for money curve. D) a rightward movement along the demand for money curve. Answer: B Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 11) A decrease in the price level in the economy leads to: A) a leftward shift in the demand for money curve. B) a rightward shift in the demand for money curve. C) a leftward movement along the demand for money curve. D) a rightward movement along the demand for money curve. Answer: A Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 12) An increase in the level of real GDP in the economy leads to: A) a leftward shift in the demand for money curve. B) a rightward shift in the demand for money curve. C) a leftward movement along the demand for money curve. D) a rightward movement along the demand for money curve. Answer: B Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

13) A decrease in the level of real GDP in the economy leads to: A) a leftward shift in the demand for money curve. B) a rightward shift in the demand for money curve. C) a leftward movement along the demand for money curve. D) a rightward movement along the demand for money curve. Answer: A Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 14) Which of the following factors does NOT shift the demand curve for money? A) changes in the interest rate B) changes in the price level in the economy C) changes in real income D) changes in real GDP Answer: A Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 15) The demand for money that arises so that individuals or firms can make purchases on quick notice is called the: A) real demand for money. B) transaction demand for money. C) liquidity demand for money. D) speculative demand for money. Answer: C Diff: 1 Topic: The Demand for Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

16) The demand for money that arises because holding money over short periods of time is less risky than holding stocks or bonds is called the: A) transactions demand for money. B) liquidity demand for money. C) opportunity cost demand for money. D) speculative demand for money. Answer: D Diff: 1 Topic: The Demand for Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 17) If your wealth is held as currency, in checking accounts or other assets that you can convert to money on short notice, your assets are considered to be: A) abundant. B) fast moving. C) interest bearing. D) liquid. Answer: D Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 18) What is the motivation for individuals to hold money? A) to reduce risk B) to have liquidity C) to facilitate transactions D) all of the above Answer: D Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced

Recall the Application about the Fed's policy of quantitative easing to answer the following question(s). 19) This Application refers to quantitative easing, a policy that occurs when the Fed: A) changes the reserve requirement. B) sells mortgage-backed securities. C) purchases long-term securities. D) raises the discount rate. Answer: C Diff: 1 Topic: Application 1, Quantitative Easing and the Fed's Balance Sheet Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 20) Recall the Application. By the end of the last phase of quantitative easing in late 2014, that value of the Fed's assets was: A) $1 trillion. B) $2 trillion. C) $3 trillion. D) $4.5 trillion. Answer: D Diff: 1 Topic: Application 1, Quantitative Easing and the Fed's Balance Sheet Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 21) Recall the Application. The Fed's goal of this policy was to ________ the prices of government bonds and mortgage securities and ________ the interest rates on both bonds and mortgages. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 1 Topic: Application 1, Quantitative Easing and the Fed's Balance Sheet Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

22) The Fed has immense power and there are no limits to the extent to which it can effectively control the economy. Answer: FALSE Diff: 1 Topic: The Federal Reserve and Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 23) We use interest rates to measure the opportunity cost of holding money. Answer: TRUE Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 24) The quantity of money demanded will increase as interest rates increase. Answer: FALSE Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 25) Both increases in the price level and increases in real GDP will decrease the demand for money. Answer: FALSE Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 26) If your assets are highly liquid, this means you can make transactions on short notice. Answer: TRUE Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 8 Copyright © 2020 Pearson Education, Inc.

27) What three factors affect the demand for money? Answer: the interest rate, the price level, and the level of real GDP Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 28) Explain the three different types of money demand. Answer: Transaction demand refers to the demand for money based on the desire to facilitate transactions, because money makes it easier to conduct everyday transactions. Liquidity demand refers to the desire to hold money to make transactions on quick notice without incurring excessive costs. Speculative demand refers to holding money during periods of economic volatility when money is believed to be a safer asset than stocks or bonds. Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 17.2 How the Federal Reserve Can Change the Money Supply 1) The one organization that has the power to change the total amount of reserves in the banking system is the: A) Congress. B) Executive Branch of the Federal Government. C) U.S. Treasury. D) Federal Reserve System. Answer: D Diff: 1 Topic: How the Federal Reserve Can Change the Money Supply Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

2) Increased investment spending in the economy would be a possible result of: A) an increase in interest rates. B) an open market purchase of bonds by the Fed. C) an open market sale of bonds by the Fed. D) a decrease in the money supply. Answer: B Diff: 2 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 3) Decreased investment spending in the economy would be a possible result of: A) a decrease in interest rates. B) an open market purchase of bonds by the Fed. C) an open market sale of bonds by the Fed. D) an increase in the money supply. Answer: C Diff: 2 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 4) From time to time, the Federal Reserve buys back government bonds from the private sector through a process called: A) bond recall procedures. B) open market purchases. C) backflip bond investments. D) voluntary redemption procedures. Answer: B Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

5) From time to time, the Federal Reserve sells various quantities of government bonds to the private sector through a process called: A) bond recall procedures. B) backflip bond investments. C) open market sales. D) voluntary redemption procedures. Answer: C Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 6) Selling government bonds through open market operations allows the Federal Reserve to: A) decrease money in the Treasury. B) decrease the money supply in the private sector. C) receive discounts on future sales. D) receive a high rate of interest on the bonds. Answer: B Diff: 2 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 7) How can the Federal Reserve actually increase the money supply? A) by delaying transfer of money among banks B) by raising the discount rate C) by doubling the reserve requirement D) by purchasing more government bonds in the open market Answer: D Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

8) What would be a way for the Federal Reserve to stimulate a sluggish economy? A) print more money B) buy government bonds on the open market C) sell more government bonds D) encourage the stock market Answer: B Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 9) What would be a way for the Federal Reserve to slow down the economy when it is growing too quickly or is inflationary? A) print more money B) buy back government bonds on the open market C) sell more government bonds D) encourage the stock market Answer: C Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 10) An open market purchase by the Fed: A) increases the total amount of reserves in the banking system. B) decreases the total amount of reserves in the banking system. C) does not change the total amount of reserves in the banking system. D) causes the reserve requirement to fall. Answer: A Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

11) The most commonly used tool in monetary policy is: A) changes in required reserve ratios. B) changes in the discount rate. C) open market operations. D) express lending transactions. Answer: C Diff: 2 Topic: Open Market Operations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 12) To increase the money supply using the reserve requirements, what would the Fed typically do? A) increase the reserve requirement for banks B) reduce the reserve requirement for banks C) make each bank set its own reserve levels D) let each bank get more currency from the Treasury Answer: B Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 13) To decrease the money supply using the reserve requirements, what would the Fed typically do? A) raise the reserve requirement for banks B) reduce the reserve requirement for banks C) make each bank voluntarily set its own reserve levels D) let each bank get less currency from the Treasury Answer: A Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

14) If the Federal Reserve wanted to change the money supply in the economy, it would be least likely to: A) buy bonds on the open market. B) sell bonds on the open market. C) change the level of reserves required to be held by banks. D) change the federal funds rate. Answer: C Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 15) By raising the discount rate, the Federal Reserve ________ banks from borrowing more reserves. A) encourages B) discourages C) prohibits D) short-changes Answer: B Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 16) A change in the reserve requirement is used infrequently by the Fed because it: A) is disruptive to the banking system. B) does not influence the money supply. C) does not affect bank reserves. D) does not affect the money multiplier. Answer: A Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

17) The rate of interest charged to commercial banks by the Fed for loans is called the ________ rate. A) federal funds B) discount C) prime D) commercial paper Answer: B Diff: 1 Topic: Other Tools of the Fed Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 18) The federal funds rate is the interest rate that: A) the Fed charges to banks that borrow from it. B) banks charge the Fed for using their reserves. C) the Fed pays on bank reserves. D) banks charge each other for borrowed money. Answer: D Diff: 1 Topic: Other Tools of the Fed Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 19) An increase in the discount rate: A) reduces the cost of reserves borrowed from the Fed. B) signals the Fed's desire to increase the money supply. C) signals the Fed's desire to lend increased reserves to banks. D) increases the cost of reserves borrowed from the Fed. Answer: D Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

20) A decrease in the discount rate: A) reduces the cost of borrowing from the Fed. B) signals the Fed's desire to decrease the money supply. C) signals the Fed's desire to reduce lending to commercial banks. D) increases the cost of reserves borrowed from the Fed. Answer: A Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 21) An increase in the discount rate will: A) decrease the money supply. B) not affect the money supply. C) increase the money supply. D) have an unclear effect on the money supply. Answer: A Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 22) A decrease in the discount rate will: A) decrease the money supply. B) not affect the money supply. C) increase the money supply. D) have an unclear effect on the money supply. Answer: C Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

23) Which action could the Fed use to decrease the money supply? A) an open market purchase B) an increase in the required reserve ratio C) a tax increase D) a decrease in the discount rate Answer: B Diff: 2 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 24) In addition to lowering the discount rate to increase the money supply, the Fed could also: A) purchase bonds on the open market and raise reserve requirements. B) sell bonds on the open market and raise reserve requirements. C) purchase bonds on the open market and lower reserve requirements. D) sell bonds on the open market and lower reserve requirements. Answer: C Diff: 2 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 25) In practice, the Federal Reserve keeps the discount rate close to the ________ rate in order to avoid large swings in borrowed reserves by banks. A) inflation B) six-month Treasury bill C) federal funds D) prime Answer: C Diff: 1 Topic: Other Tools of the Fed Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

26) What impact does the Fed's raising the interest rate have on the money supply and on the price level? A) An increase in interest rates raises the money supply and eventually reduces prices. B) An increase in interest rates reduces the money demand which will slow the growth in prices. C) An increase in interest rates lowers the money supply and raises the money demand, which will neutralize price increases. D) An increase in interest rates will increase investment spending and GDP, which will lower prices. Answer: B Diff: 3 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 27) What impact would the Fed's raising the interest rate have on any inflationary pressure in the economy? A) An increase in interest rates decreases the money demand, which could slow increases in the price level. B) An increase in interest rates increases the money supply, which could cause the price level to increase. C) An increase in interest rates decreases the exchange rate, which causes net exports to rise, generating inflation. D) An increase in interest rates increases real GDP, which creates inflation in an economy. Answer: A Diff: 2 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 28) The Fed can change the money supply by buying or selling long-term Treasury bonds. Purchasing long-term securities is commonly called: A) open market operations. B) discount operations. C) federal funds speculation. D) quantitative easing. Answer: D Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 18 Copyright © 2020 Pearson Education, Inc.

29) When the Fed makes higher interest payments on bank reserves, banks will hold ________ reserves which will ________ the money supply. A) more; increase B) more; decrease C) less; increase D) less; decrease Answer: B Diff: 2 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 30) When the Federal Reserve buys bonds on the open market, it decreases the money supply. Answer: FALSE Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 31) An open market sale of bonds by the Federal Reserve will lead to an increase of reserves in banks. Answer: FALSE Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 32) When the Federal Reserve decreases the money supply, it generally does so by purchasing bonds. Answer: FALSE Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

33) Banks can obtain funds to make loans by borrowing reserves from other banks through the federal funds market. Answer: TRUE Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 34) If the Federal Reserve raises the discount rate, banks will be inclined to borrow additional reserves and the money supply will increase. Answer: FALSE Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 35) The prime rate is the interest rate at which banks can borrow from the Fed. Answer: FALSE Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 36) The Fed has recently paid interest on the required and excess reserves that banks hold. Answer: TRUE Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

37) If the Federal Reserve is interested in conducting contractionary policy, what types of policies should it consider? Answer: Examples of contractionary monetary policy include open market sales, increasing the reserve requirements for banks and increasing the discount rate. In all three instances, the money supply decreases. Diff: 1 Topic: How the Federal Reserve Can Change the Money Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 38) How would the Fed's sale of government bonds on the open market affect the money supply? Answer: The Fed, by selling bonds, is decreasing the supply of money, because it is taking money out of the hands of people who would otherwise deposit it in a bank, which would in turn loan it out. Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 39) How would the Fed's reduction of the reserve ratio requirement affect the money supply? Answer: Since banks would rather loan out deposits than hold them as reserves, banks would respond to this policy change by loaning more, thereby increasing the money supply. Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 40) How would the Fed's changing the discount rate affect the money supply? Answer: When the Fed changes the discount rate, it changes the amount banks must pay to borrow money from the Fed. If the Fed raises the discount rate, it charges banks more to borrow money, making banks less likely to borrow and therefore, giving banks less money to loan out, which would reduce the money supply. Conversely, if the Fed lowers the discount rate, banks would borrow and loan out more money, which would increase the money supply. Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system

17.3 How Interest Rates Are Determined: Combining the Demand and Supply of Money 1) The Federal Reserve influences the level of interest rates in the short run by changing the: A) demand for money through open market operations. B) demand for money through changes in reserve requirements. C) supply of money through open market operations. D) supply of money through changes in stock market operations. Answer: C Diff: 2 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 2) The ________ determines the supply of money. A) Congress B) President C) Federal Reserve D) banking system Answer: C Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 3) Equilibrium in the money market occurs when: A) the quantity of money demanded equals the quantity of money supplied. B) the quantity of money demanded is less than the quantity of money supplied. C) the quantity of money demanded is more than the quantity of money supplied. D) the interest rate equals the money supply. Answer: A Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

4) If the quantity of money demanded exceeds the quantity of money supplied, then the: A) equilibrium interest rate stays the same. B) equilibrium interest rate will increase. C) equilibrium interest rate will decrease. D) effect on the equilibrium interest rate is indeterminate. Answer: B Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 5) If the quantity of money demanded is less than the quantity of money supplied, then the: A) interest rate stays the same. B) interest rate will increase. C) interest rate will decrease. D) effect on the interest rate is indeterminate. Answer: C Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 6) If the Federal Reserve conducts an open market purchase, the: A) interest rate will not change. B) interest rate will increase. C) interest rate will decrease. D) money supply is decreased. Answer: C Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

7) If the Federal Reserve conducts an open market sale, the: A) interest rate will not change. B) interest rate will increase. C) interest rate will decrease. D) money supply is increased. Answer: B Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 8) Based on the model of the money market, if prices in the economy decrease, the equilibrium interest rate should: A) stay the same. B) increase. C) decrease. D) increase to the same extent that the supply of money increases. Answer: C Diff: 3 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 9) Based on the model of the money market, when real GDP increases, the equilibrium interest rate should: A) stay the same. B) increase. C) decrease. D) increase to the same extent that the supply of money increases. Answer: B Diff: 3 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

10) Based on the model of the money market, when real income decreases, the equilibrium interest rate should: A) stay the same. B) increase. C) decrease. D) increase to the same extent that the supply of money increases. Answer: C Diff: 3 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 11) Based on the model of the money market, if the Federal Reserve increases the reserve requirement, the equilibrium interest rate should: A) stay the same. B) increase. C) decrease. D) increase to the same extent that the demand for money increases. Answer: B Diff: 3 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation Recall the Application about the possible link between interest rates and commodity prices worldwide to answer the following question(s). 12) According to this Application, some economists noticed that commodity prices such as oil increased since the summer of 2010. They suggested that the increase in the commodity prices was caused by: A) expansionary monetary policy used by the U.S. and other major economies. B) expansionary fiscal policy used by the U.S. and other major economies. C) contractionary monetary policy used by the U.S. and other major economies. D) contractionary fiscal policy used by the U.S. and other major economies. Answer: A Diff: 2 Topic: Application 2, Commodity Prices and Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

13) According to this Application, which is a theoretical explanation for why commodity prices rise with expansionary monetary policy? A) Lower interest rates lower the cost of holding commodities in inventories, resulting in an increase in the commodity demand. B) Lower interest rates raise the cost of holding commodities in inventories, resulting in an increase in the commodity demand. C) Higher interest rates lower the cost of holding commodities in inventories, resulting in an increase in the commodity demand. D) Lower interest rates lower the cost of holding commodities in inventories, resulting in a decrease in the commodity demand. Answer: A Diff: 2 Topic: Application 2, Commodity Prices and Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 14) According to this Application, which is a theoretical explanation for why commodity prices rise with expansionary monetary policy? A) Lower interest rates raise bond prices, so investors invest less in bonds and more in commodities. B) Higher interest rates raise bond prices, so investors invest less in bonds and more in commodities. C) Lower interest rates raise bond prices, so investors invest more in bonds and more in commodities. D) Lower interest rates lower bond prices, so investors invest less in bonds and more in commodities. Answer: A Diff: 2 Topic: Application 2, Commodity Prices and Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

15) Recall the Application. What is the conclusion regarding the link between monetary policy and commodity prices? A) We should be cautious in linking monetary policy and commodity prices because there is no simple relationship between the two. B) It is certain that there is a negative relationship between monetary policy and commodity prices. Expansionary policy lowers commodity prices. C) It is certain that there is a positive relationship between monetary policy and commodity prices. Expansionary policy raises commodity prices. D) It is certain that there is no relationship between monetary policy and commodity prices. Expansionary policy does not change commodity prices. Answer: A Diff: 2 Topic: Application 2, Commodity Prices and Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 16) The supply of money is determined by the Federal Reserve and is dependent on the demand for money. Answer: FALSE Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 17) Interest rates will increase if the Fed conducts an open market purchase. Answer: FALSE Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 18) If the actual interest rate in the money market is higher than the equilibrium interest rate, there would be an excess supply of money. Answer: TRUE Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 27 Copyright © 2020 Pearson Education, Inc.

17.4 Interest Rates and How They Change Investment and Output (GDP) 1) An open market ________ by the Fed increases the money supply, which leads to ________ interest rates and increased GDP. A) purchase; increased B) purchase; decreased C) sale; increased D) sale; decreased Answer: B Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 2) An open market ________ by the Fed decreases interest rates and ________ investment. A) purchase; increases B) purchase; decreases C) sale; increases D) sale; decreases Answer: A Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 3) An open market purchase by the Fed: A) increases investment and increases output. B) increases investment and decreases output. C) decreases investment and increases output. D) decreases investment and decreases output. Answer: A Diff: 1 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

4) An open market ________ by the Fed decreases the money supply, which leads to ________ interest rates and a fall in investment spending. A) sale; increased B) sale; decreased C) purchase; increased D) purchase; decreased Answer: A Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 5) An open market ________ by the Fed increases interest rates and ________ output. A) sale; increases B) sale; decreases C) purchase; increases D) purchase; decreases Answer: B Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 6) An open market sale by the Fed: A) increases the money supply and increases output. B) increases the money supply and decreases output. C) decreases the money supply and increases output. D) decreases the money supply and decreases output. Answer: D Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

7) Actions by the Federal Reserve to influence the level of GDP are known as: A) monetary policy. B) fiscal policy. C) cyclical policy. D) procyclical policy. Answer: A Diff: 1 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 8) An increase in the reserve requirement: A) increases the money supply, which leads to increased interest rates and a decrease in GDP. B) increases the money supply, which leads to decreased interest rates and a decrease in GDP. C) decreases the money supply, which leads to increased interest rates and a decrease in GDP. D) decreases the money supply, which leads to decreased interest rates and a decrease in GDP. Answer: C Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 9) A decrease in the reserve requirement: A) increases the money supply, which leads to increased interest rates and a fall in investment spending. B) increases the money supply, which leads to decreased interest rates and a rise in investment spending. C) decreases the money supply, which leads to increased interest rates and a fall in investment spending. D) decreases the money supply, which leads to decreased interest rates and a rise in investment spending. Answer: B Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

10) If the Fed wished to decrease GDP, it could: A) increase the reserve requirement or conduct an open market sale. B) increase the reserve requirement or conduct an open market purchase. C) decrease the reserve requirement or conduct an open market sale. D) decrease the reserve requirement or conduct an open market purchase. Answer: A Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 11) If the Fed wished to decrease interest rates, it could: A) increase the reserve requirement or conduct an open market sale. B) increase the reserve requirement or conduct an open market purchase. C) decrease the reserve requirement or conduct an open market sale. D) decrease the reserve requirement or conduct an open market purchase. Answer: D Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 12) If the Fed wished to decrease inflation, it could: A) increase the reserve requirement or conduct an open market sale. B) increase the reserve requirement or conduct an open market purchase. C) decrease the reserve requirement or conduct an open market sale. D) decrease the reserve requirement or conduct an open market purchase. Answer: A Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

13) The exchange rate is: A) the rate at which banks can borrow from the Fed. B) the slope of the investment function. C) the price at which one currency trades for another currency. D) the rate at which one can translate money into consumption goods. Answer: C Diff: 1 Topic: Monetary Policy and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 14) Lower U.S. interest rates cause the value of the dollar to: A) rise, making U.S. goods relatively cheaper on world markets. B) rise, making U.S. goods relatively more expensive on world markets. C) fall, making U.S. goods relatively cheaper on world markets. D) fall, making U.S. goods relatively more expensive on world markets. Answer: C Diff: 2 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 15) Higher U.S. interest rates cause the value of the dollar to: A) rise, making U.S. goods relatively cheaper on world markets. B) rise, making U.S. goods relatively more expensive on world markets. C) fall, making U.S. goods relatively cheaper on world markets. D) fall, making U.S. goods relatively more expensive on world markets. Answer: B Diff: 2 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

16) An open market purchase by the Fed causes the value of the dollar to: A) rise, increasing net exports. B) rise, reducing net exports. C) fall, increasing net exports. D) fall, reducing net exports. Answer: C Diff: 3 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 17) An open market sale by the Fed causes the value of the dollar to: A) rise, increasing net exports. B) rise, reducing net exports. C) fall, increasing net exports. D) fall, reducing net exports. Answer: B Diff: 2 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 18) A rise in the value of a currency is called a(n): A) depreciation. B) appreciation. C) consolation. D) integration. Answer: B Diff: 1 Topic: Monetary Policy and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

19) A decrease in the value of a currency is called a(n): A) depreciation. B) appreciation. C) consolation. D) integration. Answer: A Diff: 1 Topic: Monetary Policy and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 20) The appreciation of the dollar will make U.S. goods ________ to foreigners and make imports ________ for U.S. residents. A) more expensive; more expensive B) cheaper; cheaper C) more expensive; cheaper D) cheaper; more expensive Answer: C Diff: 1 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 21) The depreciation of the dollar will make U.S. goods ________ to foreigners and make imports ________ for U.S. residents. A) more expensive; more expensive B) cheaper; cheaper C) more expensive; cheaper D) cheaper; more expensive Answer: D Diff: 1 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

22) A U.S. company that wishes to sell more to other countries would favor: A) an appreciation of the dollar. B) a depreciation of the dollar. C) neither an appreciation nor a depreciation of the dollar. D) higher interest rates. Answer: B Diff: 2 Topic: Monetary Policy and International Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 23) A decrease in the money supply will tend to reduce investment. Answer: TRUE Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 24) When the Fed increases the money supply, it leads to lower interest rates. Answer: TRUE Diff: 1 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 25) Spending on consumer durables decreases as the interest rate increases. Answer: TRUE Diff: 1 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

26) When the Fed conducts an open market sale, it leads to a higher level of investment and output in the economy. Answer: FALSE Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 27) To increase the level of output, the Fed should conduct an open market sale. Answer: FALSE Diff: 1 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 28) An increase in the money supply will appreciate a country's currency. Answer: FALSE Diff: 1 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 29) An increase in the reserve requirement will lead to increased net exports. Answer: FALSE Diff: 2 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

30) Explain what happens to the money supply, interest rates, investment spending and GDP when the Fed makes open market bond purchases. Answer: When the Fed purchases bonds in the open market, they transfer money to the market, so the money supply increases. When the money supply increases, money becomes less expensive to obtain, which means interest rates are lower. Lower interest rates will encourage more investment spending, and when investment spending increases, GDP will increase. Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 31) Describe the channels through which an open market purchase of bonds by the Fed affects output in a closed economy. Answer: An open market purchase of bonds by the Fed leads to a rightward shift in the money supply. As a result, interest rates decrease, which in turn increases investment. The higher levels of investment translate into higher output levels. Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 32) Describe the channels through which an open market sale of bonds by the Fed affects output in a closed economy. Answer: An open market sale of bonds leads to a leftward shift in the money supply. As a result, interest rates increase, which in turn reduce investment. The lower levels of investment translate into lower output levels. Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

33) Describe the channels through which open market purchases by the Fed affects output in an open economy. Answer: Open market purchases lead to an increase in money supply. As a result, interest rates decrease, which not only leads to increased investment but also depreciates the exchange rate and raises net exports. The higher levels of net exports, in addition to the higher levels of investment, result in higher output levels. Diff: 3 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 34) What is the "good news" and the "bad news" about a lower value of the U.S. dollar? Answer: The "good news" about a lower value of the dollar is that U.S. goods become less expensive to residents of other countries and so they buy more of them and U.S. exports increase. The "bad news" is that a lower value of the dollar will make it more expensive for U.S. residents to buy foreign goods. Diff: 2 Topic: Monetary Policy and International Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 35) What is the "good news" and the "bad news" about a higher value of the U.S. dollar? Answer: The "good news" about a higher value of the dollar is that a higher value will make it less expensive for U.S. residents to buy foreign goods. The "bad news" is that U.S. goods become more expensive to residents of other countries, so they buy less of them and U.S. exports decrease. Diff: 2 Topic: Monetary Policy and International Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

17.5 Monetary Policy Challenges for the Fed 1) If the current level of GDP exceeds full employment, the level of GDP can be reduced by: A) reducing taxes. B) increasing spending. C) reducing the money supply. D) lowering interest rates. Answer: C Diff: 1 Topic: Monetary Policy Challenges for the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 2) If the current level of GDP is below full employment, the level of GDP can be raised by: A) increasing the money supply. B) raising taxes. C) reducing government spending. D) raising the interest rates. Answer: A Diff: 1 Topic: Monetary Policy Challenges for the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 3) A lag occurs in monetary policy because: A) it takes time to implement a policy. B) once policy is implemented, it takes time for a policy to work. C) Republicans and Democrats fight over every policy. D) both A and B are true. Answer: D Diff: 1 Topic: Monetary Policy Challenges for the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

4) The time it takes the Fed to formulate a policy is referred to as: A) the inside lag for monetary policy. B) the inside lag for fiscal policy. C) the outside lag for monetary policy. D) the outside lag for fiscal policy. Answer: A Diff: 1 Topic: Monetary Policy Challenges for the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 5) The time it takes the firms to respond to a higher or a lower interest rate is referred to as: A) the inside lag for monetary policy. B) the inside lag for fiscal policy. C) the outside lag for monetary policy. D) the outside lag for fiscal policy. Answer: C Diff: 1 Topic: Monetary Policy Challenges for the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 6) An inside lag is: A) a lag in implementing policy. B) the period of time it takes for policies to work. C) a policy aimed at increasing GDP. D) a policy aimed at reducing GDP. Answer: A Diff: 1 Topic: Lags in Monetary Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

7) An outside lag is: A) a lag in implementing policy. B) the period of time it takes for policies to work. C) a policy aimed at increasing GDP. D) a policy aimed at reducing GDP. Answer: B Diff: 1 Topic: Lags in Monetary Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 8) Inside lags are: A) longer for monetary policy than for fiscal policy. B) longer for fiscal policy than for monetary policy. C) the same for fiscal policy and monetary policy. D) more variable for monetary policy than for fiscal policy. Answer: B Diff: 1 Topic: Lags in Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 9) Outside lags for monetary policy occur because: A) firms must change investment plans before monetary policy can be effective. B) it takes time to identify a problem. C) once a problem is diagnosed, it still takes time to implement policy changes. D) once changes are finally diagnosed and implemented, policies are immediately effective. Answer: A Diff: 1 Topic: Lags in Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

10) Which of the following is an example of an expectation of inflation? A) Producers expect their prices on average to be higher next year. B) Producers expect the prices they pay for raw materials to be higher next year. C) Workers expect that the prices they pay for goods and services will be higher next year. D) All of the above are correct. Answer: D Diff: 1 Topic: Expectations of Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 11) The real rate of interest is defined as the: A) expected inflation rate minus the nominal interest rate. B) expected inflation rate plus the nominal interest rate. C) nominal interest rate minus the expected inflation rate. D) nominal inflation rate plus the expected inflation rate. Answer: C Diff: 1 Topic: Expectations of Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 12) When the expected rate of inflation is added to the real interest rate, the result is called the: A) preferred rate. B) nominal interest rate. C) adjustment rate. D) differential rate. Answer: B Diff: 1 Topic: Expectations of Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

Recall the Application about the effectiveness of committees in making decisions about monetary policy to answer the following question(s). 13) Recall the Application. If the Federal Reserve was making a decision on changing interest rates: A) the chairperson, acting alone, would typically make a better decision than the Board of Governors. B) the Board of Governors would typically make a better decision than the chairperson acting on his/her own. C) the Board of Governors would typically make an equally good decision as would the chairperson acting on his/her own. D) neither the Board of Governors nor the chairperson, acting alone, would tend to make accurate predictions. Answer: B Diff: 2 Topic: Application 3, The Effectiveness of Committees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 14) Recall the Application. The experiment conducted by Blinder showed that the actual process of having committee meetings and discussions: A) tended to polarize the group into two distinct factions. B) improved the group's overall performance. C) magnified the individual group members' differences. D) related to the average performance of the individual group members. Answer: B Diff: 1 Topic: Application 3, The Effectiveness of Committees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 15) If the monthly unemployment rate increase mentioned in the Application was a temporary aberration, the best economic decision by the committee would be to: A) increase the money supply to stimulate the economy. B) decrease the money supply to stimulate the economy. C) decrease the money supply to slow the economy down. D) not change monetary policy. Answer: D Diff: 2 Topic: Application 3, The Effectiveness of Committees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 43 Copyright © 2020 Pearson Education, Inc.

16) If the monthly unemployment rate increase mentioned in the Application wound up being a permanent and not temporary change, the best economic decision by the committee would most likely be to: A) increase the money supply to stimulate the economy. B) decrease the money supply to stimulate the economy. C) decrease the money supply to slow the economy down. D) not change monetary policy. Answer: A Diff: 2 Topic: Application 3, The Effectiveness of Committees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 17) The inside lags for monetary policy are relatively long compared to those for fiscal policy. Answer: FALSE Diff: 1 Topic: Lags in Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 18) The outside lags related to monetary policy tend to be quite long. Answer: TRUE Diff: 1 Topic: Lags in Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 19) When the public expects inflation, real and nominal rates of interest will be the same. Answer: FALSE Diff: 1 Topic: Expectations of Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

20) The real interest rate is the nominal interest rate plus the expected inflation rate. Answer: FALSE Diff: 1 Topic: Expectations of Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 21) When people expect inflation, they assume that prices are going to increase at a certain rate and factor this into their decision making. Answer: TRUE Diff: 1 Topic: Expectations of Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 22) When the public expects inflation, real and nominal interest rates will differ because inflation needs to be accounted for in calculating the real return from lending and borrowing. Answer: TRUE Diff: 1 Topic: Expectations of Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 23) Why might economic policies aimed at stabilization actually increase the magnitudes of economic fluctuations? Answer: Well-timed economic policies can reduce the magnitudes of economic fluctuations. But if the policies are poorly timed, they might work in the opposite direction of the desired outcome. The poor timing can come from lags in implementation, for instance, delay between the time that the policies are implemented and the time they take effect. Diff: 2 Topic: Lags in Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

24) Explain why real and nominal rates of interest will differ when the public expects inflation. Answer: When the public expects inflation, real and nominal interest rates will differ to account for inflation when calculating the real return from lending and borrowing. The nominal interest rate is equal to the real interest rate plus the rate of expected inflation. Diff: 1 Topic: Expectations of Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation

Survey of Economics: Principles, Applications, and Tools, 8e (O'Sullivan/Sheffrin/Perez) Chapter 18 International Trade and Finance 18.1 Comparative Advantage and Trade 1) Markets exist: A) so people can buy and sell things. B) because people are self-sufficient. C) because each person specializes in the production of many products. D) as an arrangement where buyers do not interact with sellers. Answer: A Diff: 1 Topic: Comparative Advantage and Exchange Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 2) To explore the rationale for specialization, economists use the: A) marginal principle. B) principle of opportunity cost. C) real-nominal principle. D) principle of marginal exchange. Answer: B Diff: 1 Topic: Comparative Advantage and Exchange Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

Jesse April

Kites /hour 8 12

Snowboards /hour 1 3

Table 18.1 3) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.1 shows how much of each good Jesse and April can paint in one hour. Jesse's opportunity cost of painting one kite is painting: A) 1/12 of a snowboard. B) 1/8 of a snowboard. C) 1/3 of a snowboard. D) 3 snowboards. Answer: B Diff: 1 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 4) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.1 shows how much of each good Jesse and April can paint in one hour. Jesse's opportunity cost of painting one snowboard is painting: A) 1/8 of a kite. B) 1.5 kites. C) 8 kites. D) 12 kites. Answer: C Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

5) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.1 shows how much of each good Jesse and April can paint in one hour. April's opportunity cost of painting one kite is painting: A) 1/12 of a snowboard. B) 1/4 of a snowboard. C) 3 snowboards. D) 4 snowboards. Answer: B Diff: 1 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 6) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.1 shows how much of each good Jesse and April can paint in one hour. April's opportunity cost of painting one snowboard is painting: A) 1.5 kites. B) 3 kites. C) 4 kites. D) 12 kites. Answer: C Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 7) Based on the data in Table 18.1: A) Jesse should specialize in painting kites and trade for snowboards. B) Jesse should specialize in painting snowboards and trade for kites. C) April should specialize in both goods. D) Jesse should specialize in both goods. Answer: A Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

8) Based on the data in Table 18.1: A) April should specialize in painting kites and trade for snowboards. B) April should specialize in painting snowboards and trade for kites. C) Jesse should specialize in both goods. D) April should specialize in both goods. Answer: B Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 9) Based on the data in Table 18.1, if Jesse and April choose to specialize and trade, then: A) April will specialize in painting kites and trade kites for snowboards. B) April will specialize in painting snowboards and trade snowboards for kites. C) Jesse will specialize in painting snowboards and trade snowboards for kites. D) None of the above; specialization and trade are not beneficial for Jesse and April. Answer: B Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 10) The ability of one person or nation to produce a good at a lower absolute cost than another is called a(n): A) market advantage. B) comparative advantage. C) absolute advantage. D) specialization advantage. Answer: C Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

11) The ability of one person or nation to produce a good at a lower opportunity cost than another is called a(n): A) market advantage. B) comparative advantage. C) absolute advantage. D) specialization advantage. Answer: B Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 12) An individual or country that has a comparative advantage in the production of one good: A) must have an absolute advantage in the good's production. B) must not have an absolute advantage in the good's production. C) may or may not have an absolute advantage in the good's production. D) must not have an absolute advantage in the production of the other good. Answer: C Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

Jesse April

Kites /hour 8 12

Snowboards /hour 1 3

Table 18.2 13) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.2 shows how much of each good Jesse and April can paint in one hour. Which of the following is TRUE? A) April has an absolute advantage in painting kites but not snowboards. B) April has an absolute advantage in painting snowboards but not kites. C) April has an absolute advantage in painting both goods. D) April does not have an absolute advantage in painting either good. Answer: C Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 14) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.2 shows how much of each good Jesse and April can paint in one hour. Which of the following is TRUE? A) April has a comparative advantage in painting kites but not snowboards. B) April has a comparative advantage in painting snowboards but not kites. C) April has a comparative advantage in painting both goods. D) April does not have a comparative advantage in painting either good. Answer: B Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

15) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.2 shows how much of each good Jesse and April can paint in one hour. Which of the following is TRUE? A) April has both an absolute and comparative advantage in painting kites. B) April has both an absolute and comparative advantage in painting snowboards. C) April has neither an absolute nor comparative advantage in painting kites. D) April has neither an absolute nor a comparative advantage in painting snowboards. Answer: B Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 16) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 18.2 shows how much of each good Jesse and April can paint in one hour. Which of the following is TRUE? A) Jesse has an absolute advantage in painting kites but not snowboards. B) Jesse has an absolute advantage in painting snowboards but not kites. C) Jesse has an absolute advantage in painting both goods. D) Jesse has an absolute advantage in painting neither good. Answer: D Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

Nigel Mia

Hair Pins /hour 4 9

Bandanas /hour 10 3

Table 18.3 17) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 18.3. Nigel's opportunity cost of producing one bandana is: A) 1/4 of a hair pin. B) 2/5 of a hair pin. C) 2.5 hair pins. D) 4 hair pins. Answer: B Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 18) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 18.3. Nigel's opportunity cost of producing one hair pin is: A) 1/3 of a bandana. B) 2.5 bandanas. C) 3 bandanas. D) 10 bandanas. Answer: B Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

19) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 18.3. Mia's opportunity cost of producing one bandana is: A) 1/3 of a hair pin. B) 2.5 hair pins. C) 3 hair pins. D) 9 hair pins. Answer: C Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 20) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 18.3. Mia's opportunity cost of producing one hair pin is: A) 1/3 of a bandana. B) 2.5 bandanas. C) 3 bandanas. D) 10 bandanas. Answer: A Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 21) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 18.3. Which of the following is TRUE? A) Nigel has an absolute advantage in producing hair pins but not bandanas. B) Nigel has an absolute advantage in producing bandanas but not hair pins. C) Nigel has an absolute advantage in producing both goods. D) Nigel does not have an absolute advantage in producing either good. Answer: B Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

22) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 18.3. Which of the following is TRUE? A) Nigel has a comparative advantage in producing hair pins but not bandanas. B) Nigel has a comparative advantage in producing bandanas but not hair pins. C) Nigel has a comparative advantage in producing both goods. D) Nigel does not have a comparative advantage in producing either good. Answer: B Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 23) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 18.3. Which of the following is TRUE? A) Nigel has both an absolute and comparative advantage in hair pin production. B) Nigel has both an absolute and comparative advantage in bandana production. C) Nigel has neither an absolute nor comparative advantage in hair pin production. D) Nigel has neither an absolute nor a comparative advantage in bandana production. Answer: B Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 24) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 18.3. Which of the following is TRUE? A) Mia has an absolute advantage in producing hair pins but not bandanas. B) Mia has an absolute advantage in producing bandanas but not hair pins. C) Mia has an absolute advantage in producing both goods. D) Mia does not have an absolute advantage in producing either good. Answer: A Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

25) Jimbo has a comparative advantage over Ned in producing a good if A) Jimbo can produce more of the good than Ned can in a given time period. B) Jimbo has a lower opportunity cost of producing the good than does Ned. C) Jimbo has to trade off more than Ned does to produce the good. D) Jimbo has a higher opportunity cost of producing the good than does Ned. Answer: B Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

Deena Artie

Wind Chimes 9 6

Sun Dials 12 8

Table 18.4 26) Consider two individuals, Artie and Deena, who produce wind chimes and sun dials. Artie's and Deena's weekly productivity are shown in Table 18.4. Which of the following is TRUE? A) Artie has a comparative advantage in producing wind chimes but not sun dials. B) Artie has a comparative advantage in producing sun dials but not wind chimes. C) Artie has a comparative advantage in producing both goods. D) Artie does not have a comparative advantage in producing either good. Answer: D Diff: 3 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

27) Consider two individuals, Artie and Deena, who produce wind chimes and sun dials. Artie's and Deena's weekly productivity are shown in Table 18.4. Which of the following is TRUE? A) Deena has an absolute advantage in producing both goods, and a comparative advantage in producing wind chimes. B) Deena has an absolute advantage in producing both goods, and a comparative advantage in producing sun dials. C) Deena has an absolute and a comparative advantage in producing both goods. D) Deena has an absolute advantage in producing both goods, but no one has a comparative advantage in producing either good. Answer: D Diff: 3 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 28) Trade results from: A) comparative advantage. B) absolute advantage. C) self-sufficiency. D) diminishing returns. Answer: A Diff: 2 Topic: Comparative Advantage and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 29) An import is a product: A) produced in and purchased by residents of the home country. B) produced in and sold to the residents of a foreign country. C) produced in the home country and sold in another country. D) produced in a foreign country and purchased by the residents of the home country. Answer: D Diff: 1 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

30) An export is a product: A) produced in and purchased by residents of the home country. B) produced in and sold to the residents of a foreign country. C) produced in the home country and sold in another country. D) produced in a foreign country and purchased by the residents of the home country. Answer: C Diff: 1 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 31) A rich nation will trade with a poor nation because the: A) rich nation has the absolute advantage in producing all products. B) poor nation has the absolute advantage in producing all products. C) poor nation has the comparative advantage in producing a product. D) rich nation has the comparative advantage in producing all products. Answer: C Diff: 2 Topic: Comparative Advantage and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 32) For country A, an export is a good produced in: A) country B and purchased by residents of country B. B) country B and purchased by residents of country A. C) country A and purchased by residents of country B. D) country A and purchased by residents of country A. Answer: C Diff: 1 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

33) For country A, an import is a good produced in: A) country B and purchased by residents of country B. B) country B and purchased by residents of country A. C) country A and purchased by residents of country B. D) country A and purchased by residents of country A. Answer: B Diff: 1 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 34) Outsourcing allows a company to take advantage of the ________ of other countries, and in doing so it can produce its products at a lower cost. A) comparative advantages B) diminishing returns C) trade imbalances D) market failures Answer: A Diff: 1 Topic: Outsourcing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 35) The cost savings from outsourcing often lead to ________ for consumers and ________ for the outsourcing company. A) lower prices; less output B) lower prices; more output C) higher prices; less output D) higher prices; more output Answer: B Diff: 1 Topic: Outsourcing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

36) Jobs lost to outsourcing can be partially offset by jobs gained from: A) higher production costs. B) higher opportunity costs. C) greater trade imbalances. D) increased output from another industry. Answer: D Diff: 1 Topic: Outsourcing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 37) When a U.S. company shifts some of its production to Mexico, it is engaging in: A) outsourcing. B) insourcing. C) self-sufficiency. D) involuntary exchange. Answer: A Diff: 1 Topic: Outsourcing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 38) A U.S. company is attempting to cut costs by shifting some of its services to Thailand. This process of shifting production of products or services overseas to cut costs often results in: A) greater potential for market failure for those products and services. B) greater economic uncertainty in the market for those products and services. C) lower consumer prices on those products or services. D) lower production quantities of those products or services. Answer: C Diff: 1 Topic: Outsourcing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

39) When a U.S. company shifts its call-center operations overseas to reduce costs, it is applying the economic concept of: A) thinking at the margin. B) comparative advantage. C) diminishing returns. D) using assumptions to simplify. Answer: B Diff: 2 Topic: Outsourcing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade Recall the Application about productivity in the nation of Latvia in the 1990s to answer the following question(s). 40) According to this Application, in the 1990s EU countries had ________ in the production of all products compared to Latvia. A) an absolute advantage and a comparative advantage B) an absolute advantage but not a comparative advantage C) a comparative advantage but not an absolute advantage D) neither an absolute advantage nor a comparative advantage Answer: B Diff: 1 Topic: Application 1, Absolute Disadvantage and Comparative Advantage in Latvia Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 41) According to this Application, workers in the EU were more productive than workers in Latvia in the 1990s, yet EU nations still purchased products from Latvia. This is because Latvia ________ in the production of the products it sold to EU nations. A) had an absolute advantage B) had a comparative advantage C) used fewer resources D) had a higher opportunity cost Answer: B Diff: 1 Topic: Application 1, Absolute Disadvantage and Comparative Advantage in Latvia Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

42) According to this Application, workers in the EU were more productive than workers in Latvia in the 1990s, yet despite this, EU nations chose to trade with Latvia. Engaging in trade with Latvia allowed ________ to become more productive. A) workers in the EU but not workers in Latvia B) workers in Latvia but not workers in the EU C) neither workers in the EU nor in Latvia D) workers in both the EU and in Latvia Answer: D Diff: 1 Topic: Application 1, Absolute Disadvantage and Comparative Advantage in Latvia Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 43) According to this Application, workers in the EU were more productive than workers in Latvia in the 1990s, yet despite this, EU nations chose to buy timber from Latvia. If EU governments decide to buy timber only from the EU, then: A) its citizens will be better off while their producers will be worse off. B) its citizens and producers will be worse off. C) its citizens and producers will be better off. D) its citizens will be worse off and producers will be better off. Answer: D Diff: 1 Topic: Application 1, Absolute Disadvantage and Comparative Advantage in Latvia Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 44) If Libby can produce 20 gallons of beer or 5 gallons of wine per hour, her opportunity cost of one gallon of beer is 4 gallons of wine. Answer: FALSE Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions

45) A comparative advantage is the ability of one person or nation to produce a good at an opportunity cost that is lower than that of another person or nation. Answer: TRUE Diff: 1 Topic: Specialization and the Gains from Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 46) If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can produce 30 milk shakes or 16 banana splits in an hour, then Eddie has a comparative advantage in producing milk shakes. Answer: TRUE Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 47) If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can produce 30 milk shakes or 16 banana splits in an hour, then Eddie has a comparative advantage in producing banana splits. Answer: FALSE Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 48) If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can produce 30 milk shakes or 16 banana splits in an hour, then Tina has a comparative advantage in producing milk shakes. Answer: FALSE Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

49) If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can produce 30 milk shakes or 16 banana splits in an hour, then Tina has a comparative advantage in producing banana splits. Answer: TRUE Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 50) If a person has an absolute advantage in some activity, she must have a comparative advantage in that activity as well. Answer: FALSE Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 51) A person or a country can have comparative advantage in all activities. Answer: FALSE Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 52) If a person has a comparative advantage in some activity, she must have an absolute advantage in that activity as well. Answer: FALSE Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

53) Absolute advantage occurs when one producer has greater productivity compared to another producing the same product. Answer: TRUE Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 54) The principles of comparative advantage and specialization only apply to trade between different nations. Answer: FALSE Diff: 1 Topic: Comparative Advantage and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 55) Imports are products produced in the home country and sold in another country. Answer: FALSE Diff: 1 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 56) Exports are products produced in the home country and sold in another country. Answer: TRUE Diff: 1 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 57) Trade will be beneficial for a nation with a comparative advantage in producing a certain product. Answer: TRUE Diff: 1 Topic: Comparative Advantage and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 20 Copyright © 2020 Pearson Education, Inc.

58) Trade is only beneficial if a nation has an absolute advantage in producing all products. Answer: FALSE Diff: 1 Topic: Comparative Advantage and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 59) What does it mean for a person or nation to have a comparative advantage in producing a product? Answer: Having a comparative advantage means the person or nation has the ability to produce the product at a lower opportunity cost than another person or nation. Diff: 1 Topic: Specialization and the Gains from Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 60) Explain what is meant by the economic principle of voluntary exchange. Answer: If two people both produce goods and each has a comparative advantage, and they exchange goods with each other for mutual benefit, it is called a voluntary exchange. Diff: 1 Topic: Specialization and the Gains from Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

61) Consider two individuals, Ozzy and Sharon, who produce toy boats and yoyos. Ozzy's and Sharon's hourly productivity are as follows: Ozzy Sharon

Yoyos /hour Toy boats /hour 12 4 10 5

Who has the absolute advantage or comparative advantage in the production of yoyos or boats? Answer: Sharon has the absolute advantage in boats and Ozzy has the absolute advantage in yoyos. Sharon also has the comparative advantage in boats while Ozzy has it in yoyos, because Sharon's opportunity cost of producing one boat per hour is 2 yoyos, and Ozzy's opportunity cost of producing one boat per hour is 3 yoyos. Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 62) What does it mean for a nation to have an absolute advantage in producing a product? Answer: If a country has the ability to produce a product at a lower resource cost than anyone else, the country is said to have an absolute advantage. Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

63) Consider two individuals, Celia and Sondra, who produce bracelets and pendants. Celia's and Sondra's hourly productivity are as follows:

Celia Sondra

Bracelets /hour 4 10

Pendants /hour 1 2

Who has the absolute advantage or comparative advantage in the production of bracelets or pendants? Answer: Sondra has the absolute advantage in producing both goods, but Sondra only has comparative advantage in the production of bracelets, not pendants. Celia has a comparative advantage in the production of pendants. Sondra's opportunity cost of a bracelet is 1/5 of a pendant, and her opportunity cost of a pendant is 5 bracelets. Celia's opportunity cost of a bracelet is 1/4 of a pendant, and her opportunity cost of a pendant is 4 bracelets. Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 64) Define the term "import." Answer: An import is a product produced in a foreign country and purchased by residents of the home country. Diff: 2 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 65) Define the term "export." Answer: An export is a product produced in the home country and sold in another country. Diff: 2 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade

66) Imagine two countries, Zorba and Anduluvia. Zorba is producing everything at a lower resource cost than Anduluvia. If the two countries trade what is the reason? Answer: Just because Zorba has an absolute advantage in the production of all goods does not mean that it's not beneficial for the two countries to trade. Suppose there are only two goods. Zorba may have a comparative advantage in only one of the two goods, while Anduluvia may have a comparative advantage in the other. So Zorba could be made better off by specializing in the good in which it has the comparative advantage and trading with Anduluvia for the other good. Diff: 2 Topic: Comparative Advantage and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 18.2 Protectionist Policies 1) An import ban results in: A) a decrease in the supply of the product. B) an increase in the product's price. C) a decrease in the quantity of the product bought and sold. D) all of the above. Answer: D Diff: 1 Topic: Import Bans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 2) An import quota: A) limits the amount of a good that can be imported, thus decreasing prices. B) limits the amount of a good that can be imported, thus increasing prices. C) increases the amount of a good imported, thus decreasing prices. D) increases the amount of a good imported, thus increasing prices. Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

3) A(n) ________ is a trade policy by which a nation agrees to limit its exports of a good in order to avoid more restrictive trade policies. A) tariff B) voluntary export restraint (VER) C) import quota D) import ban Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 4) Exporting nations often agree to voluntary export restraints (VERs) in an attempt to: A) employ more workers in the importing nation. B) avoid more restrictive trade policies. C) increase global welfare. D) decrease inflation. Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 5) Voluntary export restraints (VER): A) have the same effect as an import ban. B) are illegal under the international trading rules. C) violate the spirit of international trade agreements. D) all of the above Answer: C Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

6) Which of the following benefits from a quota or VER? A) consumers B) domestic producers C) the government D) all of the above Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 7) A(n) ________ is a tax on an imported good. A) tariff B) import quota C) voluntary export restraint (VER) D) export quota Answer: A Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 8) Import bans, import quotas, voluntary export restraints (VERs), and tariffs on goods all: A) increase equilibrium quantities and prices. B) decrease equilibrium quantities and prices. C) increase equilibrium quantities, but decrease prices. D) decrease equilibrium quantities, but increase prices. Answer: D Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

9) Import bans, import quotas, voluntary export restraints (VERs), and tariffs on goods all: A) increase imports and raise prices for consumers. B) reduce imports and prices for consumers. C) reduce imports and raise prices for consumers. D) increase imports and reduce prices for consumers. Answer: C Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 10) Which of the following situations will arise in the domestic market following the imposition of a tariff? A) imports decrease, domestic production increases, prices increase B) imports increase, domestic production increases, prices increase C) imports increase, domestic production decreases, prices decrease D) imports decrease, domestic production increases, prices decrease Answer: A Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 11) Which of the following situations will arise in the domestic market following the imposition of an import ban? A) imports increase, domestic production increases, prices increase B) imports increase, domestic production decreases, prices decrease C) imports decrease, domestic production increases, prices increase D) imports decrease, domestic production increases, prices decrease Answer: C Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

12) Which of the following situations will arise in the domestic market following the imposition of an import quota? A) imports increase, domestic production decreases, prices decrease B) imports decrease, domestic production increases, prices decrease C) imports decrease, domestic production decreases, prices increase D) imports decrease, domestic production increases, prices increase Answer: D Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 13) Which of the following situations will arise in the domestic market following the imposition of a voluntary export restraint? A) imports increase, domestic production increases, prices increase B) imports decrease, domestic production increases, prices increase C) imports increase, domestic production decreases, prices decrease D) imports decrease, domestic production increases, prices decrease Answer: B Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 14) Which of the following situations will arise in the domestic market following the removal of an import quota? A) imports increase, domestic production increases, prices increase B) imports increase, domestic production decreases, prices decrease C) imports decrease, domestic production increases, prices decrease D) imports decrease, domestic production decreases, prices increase Answer: B Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

Figure 18.1 15) Refer to Figure 18.1. With free trade, what is the equilibrium quantity of gloves in Duckland? A) 100 B) 80 C) 60 D) 40 Answer: A Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 16) Refer to Figure 18.1. With free trade, what is the equilibrium price of gloves in Duckland? A) $0 B) $8 C) $9 D) $11 Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

17) Refer to Figure 18.1. With an import ban, what is the equilibrium quantity of gloves in Duckland? A) 100 B) 80 C) 60 D) 40 Answer: C Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 18) Refer to Figure 18.1. With an import ban, what is the equilibrium price of gloves in Duckland? A) $0 B) $8 C) $9 D) $12 Answer: D Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 19) Refer to Figure 18.1. With free trade, how many gloves are produced domestically in Duckland? A) 100 B) 80 C) 60 D) 0 Answer: D Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

20) Refer to Figure 18.1. With an import ban, how many gloves are produced domestically in Duckland? A) 100 B) 80 C) 60 D) 0 Answer: C Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 21) Refer to Figure 18.1. With a tariff or quota, what is the equilibrium quantity of gloves in Duckland? A) 100 B) 80 C) 60 D) 40 Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 22) Refer to Figure 18.1. With a tariff or quota, what is the equilibrium price of gloves in Duckland? A) $8 B) $9 C) $10 D) $11 Answer: C Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

23) Refer to Figure 18.1. With a tariff, how much does the government collect for each glove imported into Duckland? A) $0 B) between $2 and $3 C) between $8 and $10 D) more than $10 Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 24) Tariffs ________ prices for domestic consumers and import quotas ________ prices for domestic consumers. A) raise; lower B) lower; raise C) raise; also raise D) lower; also lower Answer: C Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 25) Importers collect additional revenues from a ________, and governments collect additional revenues from ________. A) tariff; voluntary export restraints B) quota; import bans C) quota; tariffs D) voluntary export restraint; quotas Answer: C Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

26) Which of the following tariffs resulted in worldwide retaliation against the United States during the Great Depression? A) the Pasta Tariff B) the Chicken tariff C) the Smoot-Hawley tariff D) the Tariff of Abominations Answer: C Diff: 1 Topic: Responses to Protectionist Policies Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 27) In 1995, the United States threatened to impose 100 percent tariffs on ________ from ________ if it didn't loosen its protectionist policies. A) luxury cars; Japan B) auto parts; Japan C) brandies; France D) light trucks; Germany Answer: A Diff: 1 Topic: Responses to Protectionist Policies Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

Recall the Application about the impact tariffs have on lower income households to answer the following question(s). Economists have found that tariffs in the United States fall most heavily on lower-income consumers. In the United States, tariffs are very high on textiles, apparel items and footwear, and within these categories the highest tariffs fall on the cheapest products. In general, to protect U.S. industries, tariffs are highest on laborintensive goods. 28) According to this Application, tariffs in the United States are very high on textiles, apparel items and footwear. These tariffs disproportionately impact lower-income households because: A) lower-income households tend to purchase more of these items than do higher-income households. B) these products represent a higher fraction of consumption of lower-income households than higher-income households. C) the tariffs are only applicable to lower-income households. D) higher-income households tend to purchase products produced in the United States, which are not subject to tariffs. Answer: B Diff: 1 Topic: Application 2, The Impact of Tariffs on the Poor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 29) According to this Application, tariffs in the United States are very high on textiles, apparel items, and footwear, and within these categories tariffs are highest on the cheapest products. These tariffs disproportionately impact lower-income households because: A) higher-income consumers tend to refuse to purchase products with tariffs. B) only lower-income consumers buy cheap, imported products. C) these cheaper products tend to be purchased by lower-income consumers. D) higher-income consumers can deduct the tariff from their income taxes. Answer: C Diff: 1 Topic: Application 2, The Impact of Tariffs on the Poor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

30) If the tariffs on textiles, apparel items, and footwear mentioned in the Application were replaced by equivalent voluntary export restraints (VERs), low-income consumers would probably: A) be better off. B) be worse off. C) be no better or worse off. D) not be subject to the VERs. Answer: C Diff: 1 Topic: Application 2, The Impact of Tariffs on the Poor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 31) If the tariffs on textiles, apparel items, and footwear mentioned in the Application were replaced by equivalent voluntary export restraints (VERs), who would benefit the most? A) low-income consumers B) high-income consumers C) the U.S. government D) the foreign manufacturer Answer: D Diff: 1 Topic: Application 2, The Impact of Tariffs on the Poor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 32) A voluntary export restraint occurs when one country prevents a specific product from being imported from another country. Answer: FALSE Diff: 1 Topic: Import Bans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

33) If a country bans the importation of a particular good, the market equilibrium is shown by the intersection of the foreign demand curve and the domestic supply curve. Answer: FALSE Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 34) An import quota is the same as an import ban. Answer: FALSE Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 35) The equilibrium price under an import quota is below the price that occurs with an import ban. Answer: TRUE Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 36) The equilibrium price under an import quota is below the price that occurs with free trade. Answer: FALSE Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 37) Voluntary export restraints are illegal under international trading rules. Answer: FALSE Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 36 Copyright © 2020 Pearson Education, Inc.

38) From the perspective of consumers, a quota is preferred to a tariff. Answer: FALSE Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 39) A restriction on imports is likely to reduce further restrictions on trade. Answer: FALSE Diff: 1 Topic: Responses to Protectionist Policies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 40) Import restrictions create an incentive to smuggle. Answer: TRUE Diff: 1 Topic: Responses to Protectionist Policies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 41) List four protectionist policies. Answer: Protectionist policies include import bans, import quotas, voluntary export restraints, and tariffs. Diff: 1 Topic: Protectionist Policies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 42) What is an import quota? Answer: An import quota is a government-imposed limit on the quantity of a good that can be imported. Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 37 Copyright © 2020 Pearson Education, Inc.

43) What is a voluntary export restraint (VER)? Answer: A voluntary export restraint (VER) is a scheme under which an exporting country voluntarily limits its exports. Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 44) What is a tariff? Answer: A tariff is a tax on an imported good. Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 45) Would consumers benefit more from a tariff or a quota on imports? Answer: In both cases, the price of the good is higher than it would be under free trade. The difference lies in who collects the money. In the case of a quota, importers collect the money. In the case of a tariff, the government collects the money, which can then be used to reduce consumers' taxes or to finance public programs. So a tariff is more attractive from a consumer perspective. Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

46) Using a graph, illustrate what the market effects of a quota, a tariff, or a complete ban on imports would be. Answer:

As shown in the graph, the demand for the product is the same in all cases; the question is what the supply curve would look like. In the case of the complete ban, the supply curve is the domestic supply curve. It shifts to the right if the tariff or quota is put in place, and shifts further to the right in the world without trade barriers. So free trade has the highest quantity and lowest price, an import ban has the lowest quantity and highest price, and the tariff or quota is somewhere in between the two cases. Diff: 2 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 18.3 A Brief History of International Tariff and Trade Agreements 1) The average tariff rate of the United States is about ________ of the value of their imports. A) 1.6 percent B) 7.4 percent C) 59 percent D) 100 percent Answer: A Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

2) The average tariff rate of the United States in the 1930s was about ________ of the value of their imports. A) 1.6 percent B) 7.4 percent C) 59 percent D) 100 percent Answer: C Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 3) Which of the following trade agreements, which took effect in 1994 and was implemented over a 15-year period, eliminates all tariffs and other trade barriers between its members? A) North American Free Trade Agreement B) World Trade Organization C) Asian Pacific Economic Cooperation D) General Agreement on Tariffs and Trade Answer: A Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 4) Which of the following groups of countries were members of NAFTA? A) Japan, Canada, and Mexico B) the United States, Japan, and Mexico C) the United States, France, and Germany D) the United States, Canada, and Mexico Answer: D Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

5) Which of the following is NOT a member of DR-CAFTA? A) Mexico B) the United States C) Honduras D) the Dominican Republic Answer: A Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 6) If the United States has reason to believe that the trade policies of another country violate the GATT, then to which organization do they send their complaint? A) the World Trade Organization (WTO) B) the International Monetary Fund (IMF) C) the United Nations (UN) D) the World Bank (WB) Answer: A Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 7) Which of the following trade agreements provides for the development of a single market among its members? A) North American Free Trade Agreement B) World Trade Organization C) European Union D) Asian Pacific Economic Cooperation Answer: C Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

8) The WTO and GATT promote trade by: A) reducing tariffs. B) eliminating quotas. C) reducing agricultural subsidies. D) all of the above. Answer: D Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 9) Today, the average U.S. tariff is 1.6 percent of the value of imported goods, which is very low by historical standards. Answer: TRUE Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 10) The first major international trade agreement following World War II was the North American Free Trade Agreement (NAFTA). Answer: FALSE Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 11) What are GATT and the WTO? Answer: GATT is the General Agreement on Tariffs and Trade. It is an international agreement, established in 1947, that has lowered trade barriers among its more than 149 nation members. The WTO is the World Trade Organization, which was established in 1995 to enforce GATT and other international trade agreements, resolve trade disputes, and host trade negotiations. Diff: 2 Topic: A Brief History of International Tariff and Trade Agreements Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention

18.4 How Exchange Rates Are Determined 1) The rate at which one currency can be traded for another is called the: A) terms of trade. B) transfer rate. C) exchange rate. D) coupon rate. Answer: C Diff: 1 Topic: What Are Exchange Rates? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 2) If the price of smoothies is $3.50 in the United States and the exchange rate is 110 yen per dollar, then what is the yen price of smoothies? A) 110 yen B) 240 yen C) 318 yen D) 385 yen Answer: D Diff: 1 Topic: What Are Exchange Rates? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 3) If the price of watermelons is 5 pesos in Argentina and the exchange rate is 4 pesos per dollar, then what is the dollar price of watermelons? A) $0.75 B) $0.80 C) $1.25 D) $2.00 Answer: C Diff: 1 Topic: What Are Exchange Rates? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

4) If the price of papayas is 12 baht in Thailand and the exchange rate is 30 baht per dollar, then what is the dollar price of papayas? A) $0.40 B) $2.50 C) $2.90 D) $26.00 Answer: A Diff: 1 Topic: What Are Exchange Rates? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 5) If the yen to dollar exchange rate moves from 105 to 115 yen per dollar, then the dollar has ________ and the yen has ________. A) depreciated; depreciated B) depreciated; appreciated C) appreciated; depreciated D) appreciated; appreciated Answer: C Diff: 1 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 6) If the dollar to euro exchange rate moves from 1.1 to 0.9 dollars per euro, then the dollar has ________ and the euro has ________. A) depreciated; depreciated B) depreciated; appreciated C) appreciated; depreciated D) appreciated; appreciated Answer: C Diff: 1 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

7) An appreciation is: A) a decrease in the value of currency. B) a decrease in the trade deficit. C) an increase in the trade surplus. D) an increase in the value of currency. Answer: D Diff: 1 Topic: What Are Exchange Rates? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 8) A depreciation is: A) a decrease in the value of currency. B) a decrease in the trade deficit. C) an increase in the trade surplus. D) an increase in the value of currency. Answer: A Diff: 1 Topic: What Are Exchange Rates? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 9) If the dollar depreciates against the British pound, U.S. goods sold in ________ would become less expensive and British goods sold in ________ would become more expensive. A) the United States; the United States B) the United States; Great Britain C) Great Britain; Great Britain D) Great Britain; the United States Answer: D Diff: 2 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

10) If the dollar depreciates against the yen, U.S. goods sold in ________ would become less expensive and Japanese goods sold in ________ would become more expensive. A) the United States; the United States B) the United States; Japan C) Japan; Japan D) Japan; the United States Answer: D Diff: 2 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 11) As the Indian rupee depreciates relative to the dollar, total spending on Indian goods and assets will increase. Therefore, in the foreign exchange market, the: A) supply curve of dollars is upward sloping. B) demand curve for dollars is upward sloping. C) supply curve of euros is downward sloping. D) demand curve for euros is upward sloping. Answer: A Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 12) As the dollar depreciates relative to the Russian ruble, U.S. goods become cheaper for Russians to purchase. Therefore, in the foreign exchange market, the: A) supply curve of dollars is downward sloping. B) demand curve for dollars is downward sloping. C) supply curve of euros is downward sloping. D) demand curve for euros is upward sloping. Answer: B Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

13) The exchange rate between currencies of different countries is controlled primarily by ________ in currency markets. A) diplomatic relations B) supply and demand C) tariff rates D) the outsourcing agreements Answer: B Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 14) Spending on goods from a country will ________ as the value of its currency gets cheaper against the U.S. dollar. A) decrease B) increase C) reverse D) go to other countries Answer: B Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

Figure 18.2 15) Referring to Figure 18.2, if the exchange rate is currently 11 pesos per dollar, then we expect the dollar to ________ and the peso to ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate Answer: C Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 16) Referring to Figure 18.2, if the exchange rate is currently 14 pesos per dollar, then we expect the dollar to ________ and the peso to ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate Answer: B Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

17) Referring to Figure 18.2, the dollar is likely to appreciate if the exchange rate is either ________ or ________ pesos to the dollar. A) 10; 11 B) 11; 12 C) 12; 13 D) 13; 14 Answer: A Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 18) Referring to Figure 18.2, the dollar is likely to depreciate if the exchange rate is either ________ or ________ pesos to the dollar. A) 10; 11 B) 11; 12 C) 12; 13 D) 13; 14 Answer: D Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 19) Referring to Figure 18.2, the peso is likely to appreciate if the exchange rate is either ________ or ________ pesos to the dollar. A) 10; 11 B) 11; 12 C) 12; 13 D) 13; 14 Answer: D Diff: 2 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

20) Referring to Figure 18.2, the peso is likely to depreciate if the exchange rate is either ________ or ________ pesos to the dollar. A) 10; 11 B) 11; 12 C) 12; 13 D) 13; 14 Answer: A Diff: 2 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 21) Referring to Figure 18.2, U.S. goods will become more expensive in Mexico if the exchange rate goes from ________ to ________ pesos to the dollar. A) 12; 11 B) 12; 13 C) 13; 11 D) 14; 10 Answer: B Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 22) Referring to Figure 18.2, U.S. goods will become cheaper in Mexico if the exchange rate goes from ________ to ________ pesos to the dollar. A) 12; 11 B) 12; 13 C) 11; 13 D) 10; 14 Answer: A Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

23) Referring to Figure 18.2, Mexican goods will become more expensive in the United States if the exchange rate goes from ________ to ________ pesos to the dollar. A) 12; 11 B) 12; 13 C) 11; 13 D) 10; 13 Answer: A Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 24) Referring to Figure 18.2, Mexican goods will become cheaper in the United States if the exchange rate goes from ________ to ________ pesos to the dollar. A) 12; 11 B) 12; 13 C) 13; 11 D) 13; 10 Answer: B Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

Figure 18.3 25) Referring to Figure 18.3, a depreciation of the dollar is represented by a movement from point: A) c to d. B) b to a. C) a to c. D) c to a. Answer: C Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 26) Referring to Figure 18.3, an appreciation of the dollar is represented by a movement from point: A) a to d. B) c to d. C) a to c. D) b to c. Answer: B Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

27) Referring to Figure 18.3, the effect of an increase in U.S. interest rates is represented by a movement from point: A) a to d. B) c to b. C) a to b. D) d to c. Answer: B Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 28) Referring to Figure 18.3, the effect of a decrease in U.S. prices is represented by a movement from point: A) d to a. B) b to c. C) a to d. D) a to b. Answer: A Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 29) Referring to Figure 18.3, the effect of a decrease in U.S. interest rates is represented by a movement from point: A) d to a. B) c to b. C) c to d. D) b to c. Answer: D Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

30) Referring to Figure 18.3, the effect of an increase in U.S. prices is represented by a movement from point: A) c to b. B) b to a. C) d to a. D) a to d. Answer: D Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 31) Referring to Figure 18.3, the effect of an increase in Japanese interest rates is represented by a movement from point: A) c to d. B) b to a. C) d to c. D) d to a. Answer: C Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 32) Referring to Figure 18.3, the effect of a decrease in Japanese prices is represented by a movement from point: A) d to a. B) c to b. C) c to d. D) d to c. Answer: D Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

33) Referring to Figure 18.3, the effect of a decrease in Japanese interest rates is represented by a movement from point: A) b to a. B) a to b. C) b to c. D) a to d. Answer: A Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 34) Referring to Figure 18.3, the effect of an increase in Japanese prices is represented by a movement from point: A) d to c. B) c to d. C) a to b. D) a to d. Answer: B Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 35) A(n) ________ in U.S. interest rates will cause a decrease in the demand for U.S. dollars and a(n) ________ in the (per dollar) exchange rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: D Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

36) A(n) ________ in U.S. interest rates will cause an increase in the demand for U.S. dollars and a(n) ________ in the (per dollar) exchange rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 37) A(n) ________ in U.S. prices will cause a decrease in the demand for U.S. dollars and a(n) ________ in the (per dollar) exchange rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 38) A(n) ________ in U.S. prices will cause an increase in the demand for U.S. dollars and a(n) ________ in the (per dollar) exchange rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

39) An increase in Swiss interest rates will cause: A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. B) a decrease in the demand for U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. C) an increase in the supply of U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. D) a decrease in the supply of U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. Answer: C Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 40) A decrease in Swiss interest rates will cause: A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. B) a decrease in the demand for U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. C) an increase in the supply of U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. D) a decrease in the supply of U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. Answer: D Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

41) An increase in Swiss prices will cause: A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. B) a decrease in the demand for U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. C) an increase in the supply of U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. D) a decrease in the supply of U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. Answer: D Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 42) A decrease in Swiss prices will cause: A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. B) a decrease in the demand for U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. C) an increase in the supply of U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. D) a decrease in the supply of U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. Answer: C Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 43) The exchange rate of currencies between countries affects the prices of the goods purchased and sold between them. Answer: TRUE Diff: 1 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

44) If the dollar appreciates against the peso it means that U.S. goods become more expensive in Mexico. Answer: TRUE Diff: 1 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 45) If the dollar depreciates against the euro it means that French-made goods become more expensive in the United States. Answer: TRUE Diff: 1 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 46) The exchange rate between currencies of different countries is controlled primarily the by supply and demand in currency markets. Answer: TRUE Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 47) If the exchange rate is 0.8 euro per dollar, one dollar is equal to 1.25 euros. Answer: FALSE Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

48) The dollar will depreciate against the euro when the European Central Bank raises interest rates. Answer: TRUE Diff: 1 Topic: Changes in Demand or Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 49) The dollar will appreciate if interest rates fall in the United States. Answer: FALSE Diff: 1 Topic: Changes in Demand or Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 50) Suppose that you are an Israeli citizen and had invested in a one-year U.S. bond that yielded 5 percent. The bond cost $5,000 and paid $5,250 at the end of the year. At the time you bought the bond, the exchange rate was 3.8 shekels/dollar. How many shekels did the bond cost? If the exchange rate fell to 3.5 shekels/dollar over this time period, what would the return on your investment be? Answer: The bond cost 19,000 shekels and would have returned 19,950 shekels at the end of the year had the exchange rate stayed constant. However, at the end of the year, your investment was worth 18,375 shekels, so your effective rate of return on the investment was -625 / 19,000 = -3.3 percent. Diff: 2 Topic: What Are Exchange Rates? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 51) If the current exchange rate is 0.65 British pounds per dollar, what is the dollar price of one British pound? If the exchange rate changes to 0.70 British pounds per dollar, what is the new dollar value of one British pound? Answer: At 0.65 pounds per dollar, 1 dollar / 0.65 pounds = $1.54 per pound. At 0.70 pounds per dollar, 1 dollar / 0.70 pounds = $1.43 per pound. Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 60 Copyright © 2020 Pearson Education, Inc.

52) What will happen to the exchange rate between the euro and the U.S. dollar if U.S. interest rates increase? Answer: Higher U.S. interest rates will increase the demand for dollars, so all else equal the dollar will appreciate in value relative to the euro. Diff: 1 Topic: Changes in Demand or Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 53) What will happen to the exchange rate between the British pound and the U.S. dollar if British prices increase? Answer: British price increases will decrease the supply of dollars, so all else equal the dollar will appreciate in value relative to the pound. British price increases will also decrease the demand for British pounds in the United States. Diff: 1 Topic: Changes in Demand or Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 18.5 Fixed and Flexible Exchange Rates 1) If a country's currency depreciates, the country will experience a ________ in exports and a ________ in imports. A) rise; rise B) fall; fall C) rise; fall D) fall; rise Answer: C Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

2) If a country's currency appreciates, the country will experience a ________ in exports and a ________ in imports. A) rise; rise B) fall; fall C) rise; fall D) fall; rise Answer: D Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 3) If the value of the U.S. dollar changes from 1.4 euros to 1.2 euros, we would expect that the United States would experience a ________ in exports and a ________ in imports. A) rise; rise B) fall; fall C) rise; fall D) fall; rise Answer: C Diff: 2 Topic: Fixing the Exchange Rate Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 4) If the value of the U.S. dollar changes from 1.2 euros to 1.4 euros, we would expect that the United States would experience a ________ in exports and a ________ in imports. A) rise; rise B) fall; fall C) rise; fall D) fall; rise Answer: D Diff: 2 Topic: Fixing the Exchange Rate Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

5) The efforts of a nation to influence exchange rates is known as: A) open market operations. B) foreign exchange market intervention. C) rate discrimination. D) establishing terms of trade. Answer: B Diff: 1 Topic: Fixing the Exchange Rate Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 6) In the United States, the ________ has the official responsibility for foreign exchange intervention. A) State Department B) Treasury Department C) International Trade Commission D) Department of Commerce Answer: B Diff: 1 Topic: Fixing the Exchange Rate Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 7) If the U.S. government enters the foreign exchange market and purchases dollars to attain a specific exchange rate with the yen, the dollar will ________ and the yen will ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate Answer: C Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

8) If the U.S. government enters the foreign exchange market and sells dollars to attain a specific exchange rate with the yen, the dollar will ________ and the yen will ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate Answer: B Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 9) If the Japanese government enters the foreign exchange market and purchases yen to attain a specific exchange rate with the dollar, the dollar will ________ and the yen will ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate Answer: B Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 10) If the Japanese government enters the foreign exchange market and sells yen to attain a specific exchange rate with the dollar, the dollar will ________ and the yen will ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate Answer: C Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

11) A currency system in which governments try to keep the values of their currencies constant against another is called a ________ exchange rate system. A) fixed B) stable C) consistent D) flexible Answer: A Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 12) A balance of payments deficit occurs when: A) exports exceed imports. B) the supply of a nation's currency exceeds the demand for the currency at the current exchange rate. C) the demand for a nation's currency exceeds the supply of the currency at the current exchange rate. D) the supply of a nation's currency is equal to the demand for the currency at the current exchange rate. Answer: B Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 13) A balance of payments surplus occurs when: A) exports exceed imports. B) the supply of a nation's currency exceeds the demand for the currency at the current exchange rate. C) the demand for a nation's currency exceeds the supply of the currency at the current exchange rate. D) the supply of a nation's currency is equal to the demand for the currency at the current exchange rate. Answer: C Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

14) Suppose the United States is experiencing a balance of payments deficit. To prevent the exchange rate from depreciating, the U.S. Treasury must: A) sell foreign currency and buy dollars. B) sell dollars and buy foreign currency. C) sell both dollars and foreign currency. D) buy both dollars and foreign currency. Answer: A Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 15) Suppose the United States is experiencing a balance of payments surplus. To prevent the exchange rate from appreciating, the U.S. Treasury must: A) sell foreign currency and buy dollars. B) sell dollars and buy foreign currency. C) sell both dollars and foreign currency. D) buy both dollars and foreign currency. Answer: B Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 16) In a fixed exchange rate system, a decrease in the exchange rate at which a currency is pegged is called a(n): A) appreciation. B) devaluation. C) revaluation. D) depreciation. Answer: B Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

17) In a fixed exchange rate system, an increase in the exchange rate at which a currency is pegged is called a(n): A) appreciation. B) devaluation. C) revaluation. D) depreciation. Answer: C Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 18) A country undertakes a devaluation in order to: A) increase its net exports. B) decrease its net exports. C) raise the value at which its currency is pegged. D) move to a flexible exchange rate system. Answer: A Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 19) A country that is experiencing a balance of payments surplus can correct this situation by: A) revaluing its currency. B) devaluing. C) keeping its peg as long as possible. D) abandoning its currency in favor of the US dollar or the euro. Answer: A Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

20) A country that is experiencing a balance of payments deficit can correct this situation by: A) revaluing its currency. B) devaluing its currency. C) keeping its peg as long as possible. D) abandoning its currency in favor of the US dollar or the euro. Answer: B Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 21) A country that is experiencing a balance of payments surplus and decides to keep its exchange rate at the current level will: A) experience a trade deficit. B) gain foreign currency. C) buy more of its own currency. D) lose foreign currency. Answer: B Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 22) A country that is experiencing a balance of payments deficit and decides to keep its exchange rate at the current level will: A) experience a trade surplus. B) gain foreign currency. C) sell more of its own currency. D) lose foreign currency. Answer: D Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

23) A country undertakes a revaluation in order to: A) increase its net exports. B) decrease its net exports. C) lower the value at which its currency is pegged. D) move to a flexible exchange rate system. Answer: B Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 24) A currency system in which exchange rates are determined in free markets is called a: A) fixed exchange rate system. B) gold standard. C) flexible exchange rate system. D) all of the above Answer: C Diff: 1 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 25) Under the Bretton Woods system: A) all nations fixed the value of their currencies against the dollar. B) the United States was the only nation with a fixed exchange rate. C) the United States was the only nation with floating exchange rates. D) all nations allowed the value of their currencies to be determined by the free market. Answer: A Diff: 1 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

26) Under a fixed exchange rate system, if the inflation rate in the United States is 5 percent a year and the inflation rate in Australia is 0 percent a year, then the U.S. real exchange rate will: A) remain constant. B) increase 5 percent a year. C) decrease 5 percent a year. D) possibly increase or decrease. Answer: B Diff: 2 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 27) Under a fixed exchange rate system, if the inflation rate in the United States is 0 percent a year and the inflation rate in Australia is 5 percent a year, then the U.S. real exchange rate will: A) remain constant. B) increase 5 percent a year. C) decrease 5 percent a year. D) may increase or decrease. Answer: C Diff: 2 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 28) Under a fixed exchange rate system, if the inflation rate of the United States exceeds the inflation rate of other nations, the: A) dollar will depreciate. B) dollar will not change. C) United States will develop a trade deficit. D) United States will develop a trade surplus. Answer: C Diff: 2 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

29) Under a fixed exchange rate system, if the inflation rate of the United States is less than the inflation rate of other nations, the: A) dollar will not change. B) dollar will appreciate. C) United States will develop a trade deficit. D) United States will develop a trade surplus. Answer: D Diff: 2 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics Recall the Application about how the collapse of the housing boom and the worldwide recession of 2007 led to problems for some countries in the Euro-zone to answer the following question(s). When the euro was launched in 1999, the vision of its founders was to use the monetary union to further unify Europe economically and politically. They envisioned a large economic market, comparable to the United States with integrated goods and financial markets. They believed that by moving to a single currency with agreements on a number of fiscal rules that they could achieve economic stability and growth. 30) Recall the Application. Unlike the Euro-zone, the United States does not just have a single currency, but also has a ________ that provides transfers to areas in economic distress. A) single central bank B) national trade agreement C) unified fiscal system D) federally funded emergency account Answer: C Diff: 1 Topic: Application 3, A Troubled Euro Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

31) Recall the Application. The European nations that adopted the euro as a common currency no longer have their own central banks and are therefore no longer able to conduct their own independent: A) fiscal policy. B) monetary policy. C) international investment. D) trade policy. Answer: B Diff: 1 Topic: Application 3, A Troubled Euro Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 32) Recall the Application. Greece faced a major financial crisis in 2010 as its budgetary imbalance became quite severe. Since Greece is a member of the Euro-zone, it could no longer ________ as a potential solution to its financial problems. A) depreciate its currency B) cut spending C) raise taxes D) reduce wages and prices Answer: A Diff: 1 Topic: Application 3, A Troubled Euro Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 33) Foreign exchange market intervention involves the purchase or sale of currencies by governments to influence the market exchange rate. Answer: TRUE Diff: 1 Topic: Fixing the Exchange Rate Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

34) If the U.S. government wants to increase the price of the dollar relative to the euro, it could buy euros with dollars in the foreign exchange market. Answer: FALSE Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 35) Under a flexible exchange rate system, exchange rates are determined by free markets. Answer: TRUE Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 36) An exchange rate system in which governments try to keep currency values from fluctuating against one another is a fixed exchange rate system. Answer: TRUE Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 37) A country facing a balance of payments deficit will change the pegged value of its currency; this is called a revaluation. Answer: FALSE Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 38) The Bretton Woods exchange rate system was replaced by a gold standard. Answer: FALSE Diff: 1 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 73 Copyright © 2020 Pearson Education, Inc.

39) Suppose that the free market exchange rate for the dollar is 115 yen, but the U.S. and Japanese governments want it to be 120 yen/dollar. What can the governments do? Illustrate your answer with a graph. Answer:

As is shown in the graph, the initial demand and supply for the dollar intersect at an exchange rate of 115 yen/dollar. In order to raise the price of the dollar, the governments need to increase the demand for the dollar (shown in the graph as a shift in the demand curve). They would do this by selling yen for dollars until the exchange rate rises to the desired level of 120 yen/dollar. Diff: 2 Topic: Fixing the Exchange Rate, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 40) Explain what is meant by a devaluation of a currency. Under what circumstances would a country devalue its currency? Answer: In a fixed exchange rate system, a country faces a balance of payments deficit when the supply of its currency exceeds the demand at the fixed exchange rate. The country can lower the value at which the currency is pegged to increase its net exports; this is called a devaluation. Diff: 2 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

41) Explain what is meant by a revaluation of a currency. Under what circumstances would a country devalue its currency? Answer: In a fixed exchange rate system, a country faces a balance of payments surplus when the demand for its currency exceeds the supply at the fixed exchange rate. The country can increase the value at which the currency is pegged to reduce its net exports; this is called a revaluation. The opposite would be the case for a devaluation. Diff: 2 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 42) Distinguish between fixed and flexible exchange rate systems. Answer: A fixed exchange rate system is a system in which governments peg exchange rates to prevent their currencies from fluctuating. A flexible exchange rate system is a system in which exchange rates are determined by free markets. Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 43) Explain when a country would face a balance of payments deficit and when it would face a balance of payments surplus if it was operating under a fixed exchange rate system. Answer: Under a fixed exchange rate system, a country would face a balance of payments deficit when the supply of that country's currency exceeds the demand for the currency at the current exchange rate. The country would face a balance of payments surplus when the demand for its currency exceeds the supply of its currency at the current exchange rate. Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics

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Test Bank for Survey of Economics: Principles, Applications and Tools Brian Rosario

Survey of Economics: Principles, Applications and Tools Eighth Edition

Arthur O’Sullivan Steven M. Sheffrin Stephen J. Perez