TEST BANK For Foundations of MicroEconomics 9th Edition. Robin Bade, Michael Parkin by digitaldownload87

Foundations of MicroEconomics 9e Robin Bade, Michael Parkin (Test Bank All Chapters, 100% Original Verified, A+ Grade) Foundations of Microeconomics, 9e (Bade) Chapter 1 Getting Started 1.1 Definition and Questions 1) Scarcity exists because A) human wants exceed the resources available to satisfy them. B) some individuals have low income. C) the costs of production are high. D) some people make bad economic decisions. E) people take too much leisure time. Answer: A Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 2) Scarcity A) is the inability to satisfy all our wants. B) leads to higher prices. C) applies only to people living in poverty. D) is not something that affects very rich people. E) used to exist everywhere but has been eliminated in advanced economies. Answer: A Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 3) Scarcity requires that we A) produce efficiently. B) learn to limit our wants. C) have the most rapid economic growth possible. D) have unlimited resources. E) make choices about what goods and services to produce. Answer: E Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

4) Scarcity means that A) what we can produce with our resources is greater than our material wants. B) resources are unlimited. C) wants are greater than what we can produce with our resources. D) governments must make up for shortages in resources. E) choices made in self-interest cannot be the same as those made in the social interest. Answer: C Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 5) Because human wants are insatiable and unlimited while available resources are limited, people are said to face the problem of A) scarcity. B) why to produce. C) macroeconomics. D) microeconomics. E) social interest versus self-interest. Answer: A Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 6) Which of the following statements BEST describes the study of economics? Economics studies how A) to organize production so that scarcity does not occur. B) firms make profits. C) we make choices in the face of scarcity. D) to create incentives so that scarcity does not exist. E) businesses reach decisions. Answer: C Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

7) Scarcity forces people to A) choose among available alternatives. B) cheat and steal. C) be unwilling to help others. D) live at a low standard of living. E) consume as much as they can as quickly as they can. Answer: A Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 8) Scarcity means we must A) consume less. B) produce less. C) make choices. D) earn more. E) work more. Answer: C Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 9) What is the reason that all economic issues and problems occur? A) All nations use some form of money to buy and sell goods and services. B) Humans are always wasteful and inefficient in production and consumption. C) Powerful governments are able to control production and consumption. D) Human wants exceed the resources available to satisfy them. E) People seek only their own self-interest. Answer: D Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

10) The study of economics is best described as a study of A) the factors that influence the stock and bond markets. B) capitalism. C) the choices made in producing goods and services. D) coping with scarcity, and choices made as a result of scarcity in a society. E) how people earn a living. Answer: D Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 11) Which of the following statements BEST describes the study of economics? Economics studies how A) to organize production so that scarcity does not occur. B) firms make profits. C) we make choices in the face of scarcity. D) to create incentives so that scarcity does not exist. E) businesses reach decisions. Answer: C Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 12) Which of the following BEST defines economics? A) Economics teaches how to limit our wants. B) Economics studies how to choose the best alternative when coping with scarcity. C) Economics helps you earn as much money as possible. D) Economics analyzes all aspects of human behavior in general. E) Economics is concerned with prices and quantities of goods and services, both at the individual level and at the industry level. Answer: B Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

13) Economics is the social science that studies A) the real reasons people buy goods and services. B) the psychology of individuals and businesses. C) whether a nation has enough natural resources. D) how people make choices to cope with scarcity. E) how choices made in the social interest could eliminate scarcity. Answer: D Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 14) Economics is best defined as the social science that studies A) how a person can get everything he or she wants. B) the reason money exists. C) the way to eliminate choices in our decisions. D) the choices that societies, and the people and institutions that make up societies, make in dealing with the issue of scarcity. E) how choices made in the social interest must conflict with choices made in the self-interest. Answer: D Topic: Definition of economics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 15) Microeconomics includes the study of the A) aggregate effects on the national economy. B) recessions and inflation in the global economy. C) choices made by individuals and businesses. D) reasons why the government changes interest rates. E) nationwide unemployment rate. Answer: C Topic: Microeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

16) The primary focus of microeconomics is A) to examine the operation of the entire (aggregate) economy. B) to examine the behavior and operation of the individual units or sectors that make up the economy. C) our government's monetary policy. D) the levels of employment and inflation. E) to study how we managed to eliminate scarcity. Answer: B Topic: Microeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 17) Which of the following is a microeconomic issue? A) The price of gasoline increases in the United States this year. B) The Brazilian economy experiences rapid economic growth. C) The unemployment rate soars in Spain. D) Inflation skyrockets in Russia. E) The U.S. government cuts taxes to combat a recession. Answer: A Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 18) Which of the following is a microeconomic issue? A) Growth in the U.S. economy slowed. B) Increased federal government expenditures have lowered the unemployment rate. C) The effect the COVID-19 pandemic has on the unemployment rate. D) The quantity of wheat grown in the United States increases this year. E) The U.S. government cuts taxes to combat a recession. Answer: D Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Revised AACSB: Reflective thinking

19) Which of the following is a microeconomic topic? i. K-Mart's decision to close stores that are not making a profit ii. Home Depot's choice to hire more full-time employees because its sales increased iii. Delta Airlines changes its fares. A) i only B) ii only C) i and iii D) ii and iii E) i, ii, and iii Answer: E Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 20) Which of the following is a microeconomic topic? A) Northwest Airlines analyzes the benefits of adding one more flight to Salt Lake City. B) Unemployment soars as taxes increase. C) The government leaves interest rates unchanged as the economy improves. D) Germany's government increases taxes to avoid a budget deficit. E) Chinese economic growth slows. Answer: A Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 21) Which of the following is a microeconomic topic? i. Gas prices increase after a hurricane hits the gulf coast. ii. Xavier starts a new business designing web pages. iii. Abby decides to practice an extra hour of soccer instead of studying. A) i, ii and iii B) i only C) ii and iii D) ii only E) i and ii Answer: A Topic: Microeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

22) Macroeconomics is the study of A) the actions of individual consumers. B) national or global economies. C) the actions of individual businesses. D) the government. E) how ceteris paribus affects causation. Answer: B Topic: Macroeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 23) Which of the following BEST describes macroeconomics? A) It analyzes the aggregate effects on the national economy of the choices made by individuals, firms, and governments. B) It studies the choices that individuals and businesses make when coping with scarcity. C) It examines how the choices that individuals affect governments. D) It is not a social science because its predictions cannot be tested. E) Proving causation is never a problem for macroeconomics. Answer: A Topic: Macroeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 24) Which of the following is a topic studied in macroeconomics? A) the pricing decisions in the computer hardware industry B) the effect on economic growth if the government raises taxes C) how the wheat industry determines how much wheat to grow D) the impact of labor unions on wages E) the impact of higher prices for gasoline on the number of SUVs people buy Answer: B Topic: Macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

25) Which of the following is a macroeconomic topic? A) The federal government's decision to spend more on environmental protection B) The county government's decision to increase the sales tax for your county C) Why did production and jobs expand rapidly in 2017? D) General Motors decides what prices to set for their new models. E) The effect of floods in agricultural areas on the price and quantity of wheat Answer: C Topic: Macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Revised AACSB: Reflective thinking 26) Which of the following is a macroeconomic issue? A) The price of a ticket to Walt Disney World in Orlando is increased. B) The National Football League signs a new television contract. C) The number of jobs and production in Zimbabwe increase. D) The Iowa corn harvest is smaller than normal. E) Utilities are required to install more anti-pollution devices. Answer: C Topic: Macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 27) Which of the following is a macroeconomic topic? i. China increases interest rates to slow its economic growth. ii. Congress lowers tax rates to try to lower the unemployment rate. iii. Nissan decides to produce more electric Leaf models and fewer Altima sedans. A) i and ii B) i, ii and iii C) iii only D) i and iii E) ii and iii Answer: A Topic: Macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

28) When you make the decision to spend your time attending class, which economic question are you answering? A) What? B) How? C) For whom? D) Why? E) Is this in the social interest? Answer: A Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 29) Of the three major economic questions, which of the following is the BEST example of a "What?" question? A) Should automobiles be produced using workers or robots? B) Should higher-income or lower-income people buy SUVs? C) Should we make faster microprocessors or pest-resistant corn? D) Should migrant workers or domestic workers be used to pick grapes? E) What should doctors be paid? Answer: C Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 30) When Ford decides to increase production of hybrid cars, it directly answers the ________ question. A) what B) how C) for whom D) where E) why Answer: A Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

31) When Delta decides to quit flying to Lithuania, it directly answers the ________ question. A) what B) why C) for whom D) how E) when Answer: A Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 32) The question of "What goods and services get produced?" most closely relates to which of the following issues? A) the distribution of goods and services in the economy B) producing goods and services in the least costly manner C) building a missile defense system, or putting a computer in every elementary school classroom D) obtaining specialized training to increase one's income E) taxing high income workers to give payments to poor households Answer: C Topic: Economic questions, what Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 33) When a home builder decides to computerize all of its production schedules, it directly answers the ________ question. A) for whom B) what C) where D) how E) why Answer: D Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

34) When Fresh Express Salads decides to mechanically pick all of its lettuce, it directly answers the ________ question. A) what B) how C) for whom D) where E) when Answer: B Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 35) When the power company decides to use manpower to bury its lines, it directly answers the ________ question. A) what B) for whom C) how D) why E) when Answer: C Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 36) The question of "How are goods and services produced?" most closely addresses which of the following issues? A) Should Ford build SUVs or luxury cars? B) Should Ford use expensive industrial robots or inexpensive Mexican autoworkers to produce SUVs? C) Should contractors build residential housing or shopping malls? D) Is income distributed fairly in the United States? E) Why are Christmas trees popular only in December? Answer: B Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

37) Of the three major economic questions, which of the following is the BEST example of a "How?" question? A) Should we produce more heavy fleece coats? B) Should we collect tolls on turnpikes using human toll collectors or mechanized toll machines? C) Should we build log homes or build factories from bricks? D) Should we spend more on health care? E) Should we eat more oatmeal? Answer: B Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 38) Which economic question depends on the incomes that people earn and the prices they pay for goods and services? A) What? B) How? C) For whom? D) Why? E) Where? Answer: C Topic: Economic questions, for whom Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 39) When the federal government decides to pay senators more than it pays soldiers, it answers the ________ question. A) why B) how C) for whom D) what E) where Answer: C Topic: Economic questions, for whom Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

40) When a third string NFL quarterback earns more than a police officer, society answers the ________ question. A) for whom B) what C) how D) why E) social interest vs. self-interest Answer: A Topic: Economic questions, for whom Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 41) When unskilled teens earn less than college graduates, society answers the ________ question. A) how B) what C) for whom D) why E) social interest versus self-interest Answer: C Topic: Economic questions, for whom Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 42) Canada has nationalized health care, so that everyone, regardless of their ability to pay, has some access to health care. Based on this observation, Canada has decided that "everyone, regardless of their ability to pay" is the answer to what microeconomic question? A) What type of health care will be produced and in what quantity? B) How will health care be produced? C) For whom will health care be produced? D) Why will we offer health care? E) Must we offer health care? Answer: C Topic: Economic questions, for whom Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Analytic skills

43) Choices that are best for the individuals that make them are choices in pursuit of A) the social interest. B) efficiency. C) incentives. D) self-interest. E) equity. Answer: D Topic: Self interest Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 44) Self interest A) reflects choices that are best for society as a whole. B) reflects choices that are best for the individual who makes them. C) has nothing to do with determining what goods are produced. D) occurs only when wants exceed available resources. E) cannot be used to determine how goods are produced. Answer: B Topic: Self interest Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 45) Choices that are best for the society as a whole are choices in pursuit of A) answering the "how" question. B) the social interest. C) self-interest. D) incentives. E) answering the "for whom" question. Answer: B Topic: Social interest Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

46) The characteristic from which all economic problems arise is A) political decisions. B) providing a minimal standard of living for every person. C) how to make a profit. D) hunger. E) scarcity. Answer: E Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 47) All economic questions and problems arise from A) the fact that society has more than it needs. B) turmoil in the stock market. C) the unequal distribution of income. D) a society's wants exceeding what its scarce resources can produce. E) the difference between self-interest and social interest. Answer: D Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 48) Scarcity results from the fact that A) people's wants exceed the resources available to satisfy them. B) not all goals are desirable. C) we cannot answer the major economic questions. D) choices made in self-interest are not always in the social interest. E) the population keeps growing. Answer: A Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

49) To economists, scarcity means that A) limited wants cannot be satisfied by the unlimited resources. B) a person looking for work is not able to find work. C) the number of people without jobs rises when economic times are bad. D) there can never be answers to the what, how or for whom questions. E) unlimited wants cannot be satisfied by the limited resources. Answer: E Topic: Scarcity Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 50) Which of the following statements is TRUE regarding scarcity? A) Scarcity affects poorer countries only. B) An economy experiences scarcity only when the incomes of its citizens decline. C) Poor people experience scarcity more often than do rich people. D) All citizens in a wealthy economy experience scarcity. E) Scarcity could be overcome if people would make all choices in the social interest. Answer: D Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 51) People must make choices because A) most people enjoy shopping. B) of scarcity. C) there are many goods available. D) the question "What goods and services are produced?" is not adequately answered. E) making choices is in the social interest. Answer: B Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

52) Which of the following is a microeconomic issue? A) Why has unemployment risen nationwide? B) Why has economic growth been rapid in China? C) What is the impact on the quantity of Pepsi purchased if consumers' tastes change in favor of non-carbonated drinks? D) Why is the average income lower in Africa than in Latin America? E) Why did overall production increase within the United States last year? Answer: C Topic: Microeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 53) Microeconomics includes the study of A) how countries decide to fund their budget deficits. B) the choices that individuals and businesses make. C) how a nation promotes economic growth. D) the effect on the national economy of the choices that individuals make. E) the overall amount of production within the economy. Answer: B Topic: Microeconomics Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 54) The question "Should we produce LCD televisions or computer monitors?" is an example of a ________ question. A) what B) how C) for whom D) where E) why Answer: A Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

55) When Ferrari decides to produce 1,200 360 Modenas each year, Ferrari is answering the ________ question. A) for whom B) how C) what D) why E) scarcity Answer: C Topic: Economic questions, what Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 56) Whether a company produces fishing rods mostly by hand or using high-tech machinery is a question of A) "For whom will goods be produced?" B) "When will the goods be produced?" C) "Where will the goods be produced?" D) "How will the goods be produced?" E) "Why will the goods be produced?" Answer: D Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 57) When a landscaping company decides to use drafting software and computers instead of hiring designers to draw design plans by hand, it is answering the ________ question. A) how B) what C) for whom D) opportunity cost E) why Answer: A Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

58) The question "Should we produce houses using bricks or wood?" is an example of a ________ question. A) what B) how C) for whom D) where E) why Answer: B Topic: Economic questions, how Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 59) The question "Should economics majors or sociology majors earn more after they graduate?" is an example of a ________ question. A) what B) how C) for whom D) where E) why Answer: C Topic: Economic questions, for whom Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking 60) If a decision is made and it is the best choice for society, the decision is said to be A) a valid economic choice. B) made in self-interest. C) made in social interest. D) consistent with scarcity. E) a want-maximizing choice. Answer: C Topic: Social interest Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

1.2 The Economic Way of Thinking 1) In economics, cost is measured as ________, and benefit is measured as ________. A) what you must give up to get something; what you are willing to give up to get it B) what you are willing to give up to get it; what you must give up to get something C) the amount of money that you pay for something; the amount of money that someone else is willing to pay you D) what you are willing to pay on the margin; what the government pays you when you are unemployed or retired E) the amount of money that you pay on the margin; the amount of money that you receive on the margin Answer: A Topic: Benefits and costs Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 2) An opportunity cost is A) the dollar amount that is paid. B) anything the decision maker believes costs to be. C) the benefits of the highest-valued alternative forgone. D) whatever is paid out and cannot be reduced or reversed. E) another term for all the sunk costs. Answer: C Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 3) Economists measure opportunity cost A) only when it is on the margin. B) as the best thing given up. C) as the sum of all forgone opportunities. D) as the same as marginal benefit. E) as equal to the sum of all the sunk costs. Answer: B Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

4) The opportunity cost of a decision is measured in terms of A) time. B) the price of the alternative we choose. C) the next best thing given up. D) the price of a new opportunity that arises. E) sunk cost. Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 5) You have chosen to take a trip during spring break. If you had not gone, you would either have worked at a temporary job or studied for exams. The opportunity cost of your trip is A) the wages you would have earned from working. B) the lower grade earned by not studying. C) the wages you would have earned from working and the lower grade earned by not studying. D) the value of the trip. E) We cannot determine what the opportunity cost is without knowing which alternative, working or studying, you would have preferred. Answer: E Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 6) If Jessie studies economics for two hours instead of going to the movies with her friends, then A) the benefit of studying is the missed movie. B) the opportunity cost of studying is the missed movie. C) Jesse definitely is making a rational choice. D) Jessie is ignoring a sunk cost. E) Jessie is not responding to any incentives. Answer: B Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

7) The value of the best thing that a person must give up when making a decision is known as the ________ cost. A) direct B) benefit C) opportunity D) explicit E) sunk Answer: C Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 8) Ali decides to attend the one-hour review session for microeconomics instead of working at his job. His job pays him $10 per hour. Ali's opportunity cost of attending the review session is A) the $10 he could have earned at his job. B) the value of the session minus the $10 he could have earned at his job. C) nothing, because the review session does not cost anything. D) equal to the benefit he gets from the review session. E) the one-hour review session. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills 9) Suppose that, instead of taking this test, you could either have worked and earned income or partied and had a pleasurable time. Your opportunity cost of taking the test is the A) forgone work. B) forgone party. C) forgone working and partying. D) forgone working or partying, depending on which was your next best choice. E) test because you are taking it. Answer: D Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

10) The benefit from a good or service that you purchase is measured by A) the dollar amount that is paid for the good or service. B) the dollar amount you can get by selling the good or service. C) what you are willing to give up to obtain the good or service. D) how strong the incentives were that lead to buying the good or service. E) None of the above answers is correct because there is no way to measure the benefit you receive from purchasing a good or service. Answer: C Topic: Benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 11) Suppose you take a trip during spring break. To determine the benefit of taking the trip, you A) calculate the opportunity cost of the trip. B) measure what you are willing to give up to take the trip. C) determine the sunk cost of taking the trip. D) calculate the value of the next best alternative foregone. E) must measure what the trip is worth to you and then subtract the cost of the trip. Answer: B Topic: Benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 12) Rational choice A) is a choice that uses the available resources to best achieve the objective of the person making the choice. B) is always efficient. C) is what you must give up to get what you want. D) is made by comparing different incentives. E) provides the answer to only the "how" question. Answer: A Topic: Rational choice Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

13) A rational choice is one that A) always turns out for the best for the decision maker. B) creates no costs for the decision maker. C) must be made with perfect information. D) uses the available resources to most effectively satisfy the wants of the person making the choice. E) is made in the social interest rather than the self-interest. Answer: D Topic: Rational choice Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 14) What is NOT true about rational choice? A) It can result in different decisions for different individuals. B) It involves comparing costs and benefits. C) It might turn out not to have been the best choice after the event. D) It is a choice that uses the available resources to best achieve the objective of the person making the choice. E) It is the same for all individuals. Answer: E Topic: Rational choice Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 15) The cost of a one-unit increase in an activity is called the A) opportunity benefit. B) rational cost. C) marginal cost. D) marginal benefit. E) margin. Answer: C Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

16) The opportunity cost of a one-unit increase in an activity A) is greater than the marginal benefit. B) is called rational cost. C) decreases as you do more of it. D) is called marginal cost. E) is measured by what the person is willing to give up to get one more unit of the activity. Answer: D Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 17) Mothers Against Drunk Drivers (MADD) campaigned to increase the legal penalties of drunk driving. This successful campaign ________ of drunk driving. A) increased the marginal benefit B) decreased the marginal benefit C) increased the marginal cost D) decreased the marginal cost E) had no effect on the marginal cost or marginal benefit but did affect the total benefit Answer: C Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 18) The marginal cost of an activity ________ as you do more of it. A) increases B) decreases C) doesn't change D) changes ONLY IF the marginal benefit of the activity does not change E) changes ONLY IF the marginal benefit of the activity changes Answer: A Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

19) A professor changes the penalty for cheating on exams from getting a 0 on the exam to getting an F in the course. The professor has A) increased the marginal cost of cheating. B) decreased the marginal benefit of cheating. C) made all the students act in the social interest. D) recognized that students don't respond to incentives. E) recognized that students don't make rational choices. Answer: A Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 20) The benefit of a one-unit increase in an activity A) is called marginal cost. B) is always greater than the opportunity cost of that activity. C) decreases as you do more of it. D) is measured by what you must give up. E) is called rational-choice benefit. Answer: C Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 21) Huey has eaten two hamburgers and is considering a third. The marginal benefit in his decision is the pleasure from consuming A) the two previous hamburgers. B) all three hamburgers. C) just the third hamburger. D) just the second hamburger. E) the third hamburger minus the pleasure from consuming zero hamburgers. Answer: C Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills

22) What typically happens to benefits as the amount of an activity is increased? A) Total benefits remain constant. B) Marginal benefit increases. C) Marginal benefit remains constant. D) Marginal benefit decreases. E) The marginal benefit changes ONLY IF the marginal cost changes. Answer: D Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 23) Suppose you eat two hamburgers for lunch. The marginal benefit of the first burger is ________ of the second burger. A) larger than the marginal benefit B) smaller than the marginal benefit C) equal to the marginal benefit D) not related to the marginal benefit E) equal to the marginal cost AND the marginal benefit Answer: A Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills 24) A choice made by comparing all relevant alternatives systematically and incrementally is A) an opportunity cost. B) a choice on the margin. C) a benefit. D) a sunk cost. E) a choice made in the social interest. Answer: B Topic: On the margin Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

25) Making choices on the margin means A) scribbling on the edges of your notebook paper. B) comparing all relevant alternatives systematically and incrementally. C) making a decision based on emotions. D) making decisions in the largest possible increments. E) taking account of all marginal benefits, all opportunity costs, and all sunk costs. Answer: B Topic: On the margin Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 26) Decision making on the margin involves A) comparing the marginal cost and marginal benefits when making a decision. B) comparing the total cost and the total benefit when making a decision. C) eliminating the additional cost when making a decision. D) determining the total benefits of a decision. E) comparing the benefits from the social interest to the benefits from the person's self-interest. Answer: A Topic: On the margin Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 27) In making your decision whether to take a trip during spring break, you compare all the other activities you could undertake. As a result, you A) are making a choice on the margin. B) limit the cost and the benefits you can gain. C) are not making a rational choice. D) do not face an opportunity cost. E) must have made a choice in the social interest. Answer: A Topic: On the margin Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

28) To make a rational choice, a person A) compares the extra benefits of one more unit to the extra costs of one more unit. B) adds the total benefits and the total costs and then compares the two totals. C) adds the total benefits to determine if the total is large enough. D) adds the total costs to determine if the total is small enough. E) takes account of all benefits and all opportunity costs, including both marginal costs and sunk costs. Answer: A Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 29) In order to determine whether to major in economics, a rational individual compares the ________ of the decision. A) marginal benefit and marginal cost B) opportunity cost and the sunk cost C) positive benefits and normative costs D) normative benefits and positive costs E) self-interest and social-interest Answer: A Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 30) In order to make a rational choice, people must A) only know what they want. B) be able to afford the choice decided upon. C) decide quickly without wasting time. D) compare marginal costs and marginal benefits. E) determine what is in the social interest. Answer: D Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

31) Instead of studying for an additional two hours for the economics final, Leann decides to watch a movie. Leann is making A) a decision that does not involve an opportunity cost. B) a rational decision if her marginal cost from the movie is greater than her marginal benefit. C) a rational decision if her marginal benefit from the movie is greater than her marginal cost. D) an irrational decision because studying is more important than watching a movie. E) a decision that is not on the margin because she will see the entire movie. Answer: C Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 32) When Gabriel made a rational choice to spend his entire allowance on candy bars, he did so by comparing the A) benefits of the candy bars to the desires he had for the candy bars. B) marginal benefits of the candy bars to the marginal costs of the candy bars. C) opportunity costs of the candy bars to the scarcity of the candy bars. D) benefits of the candy bars to the scarcity candy bars. E) self-interest to the social interest. Answer: B Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 33) As part of its proposal to win the 2012 Olympics, London developed a carbon offset plan to reduce the Games' impact on the environment. In 2011, the organizers decided to drop this plan to reduce emissions. We can conclude that A) the marginal cost of reducing emissions exceeded the marginal benefits of reducing emissions. B) the organizers are not making a rational decision. C) the organizers are ignoring a sunk cost. D) there are no incentives to reduce carbon emissions. E) it is difficult to calculate the cost of reducing emissions. Answer: A Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

34) Going skiing will cost Adam $80 a day. He also loses $40 per day in wages because he has to take time off from work. Adam still decides to go skiing. A) His decision is rational if Adam's marginal benefit of spending a day skiing is greater than his marginal cost. B) The $80 price of skiing is not an opportunity cost and so did not affect Adam's decision. C) He loses a total of $120 per day, so his decision is irrational. D) Adam's lost $40 per day in wages is not an opportunity cost and so did not affect his decision. E) Adam is definitely making a decision that is in the social interest. Answer: A Topic: Making rational choices Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 35) The decision to go to graduate school is a rational one for a college student if the A) cost is not too great. B) marginal cost exceeds the marginal benefit of graduate school. C) marginal benefit of graduate school exceeds the marginal cost. D) opportunity cost of graduate school equals zero. E) student carefully compared the social benefits of this decision. Answer: C Topic: Making rational choices Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 36) An incentive is A) an inducement to take a particular action. B) the marginal cost of some course of action. C) the marginal benefit of some course of action. D) the net gain of some course of action. E) a constraint that society imposes on those who make self-interested choices. Answer: A Topic: Incentives Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

37) An incentive is A) a reward or a penalty that encourages or discourages an action. B) when people make rational choices by comparing costs and benefits. C) what you must give up to get something. D) a choice is made on the margin. E) a good or service that satisfies wants. Answer: A Topic: Incentives Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 38) A change in a marginal benefit or cost will A) increase consumption. B) decrease production. C) cause an individual to make a rational choice. D) increase sunk costs. E) change incentives. Answer: E Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 39) Proponents of cuts in income tax rates argue that when income tax rates are cut, workers have an incentive to increase their work hours. This argument is based on the assumption that A) workers are irrational. B) workers make decisions based on the marginal benefit of each hour worked compared to the marginal cost of work. C) the opportunity cost of working is negative. D) the marginal cost of each additional work hour is not important to most workers. E) workers make decisions based on the social interest. Answer: B Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

40) Your economics professor offers 10 points extra credit if you attend a review session before your next exam. This extra credit is an example of A) a decrease in marginal benefit to attend the review session. B) an increase in marginal cost to attend the review session. C) a rational choice. D) an incentive to attend the review session. E) None of the above answers is correct. Answer: D Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 41) If the marginal benefit of getting a college degree rises, rational people will A) attend college in greater numbers. B) drop out of college. C) not change their behavior. D) require that college get easier. E) raise the marginal cost of attending college. Answer: A Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 42) Opportunity cost is best defined as A) how much money is paid for something. B) how much money and time it takes to consume something. C) the value of the highest-valued alternative that is forgone in making a choice. D) the total of all other alternatives that are forgone in making a choice. E) the sunk cost of any decision. Answer: C Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

43) John has two hours of free time this evening. He ranked his alternatives, first go to a concert, second go to a movie, third study for an economics exam, and fourth answer his e-mail. What is the opportunity cost of attending the concert for John? A) attending a movie B) studying for an economics exam C) answering his e-mail D) attending a movie, studying for an economics exam, and answering his e-mail E) going to the concert because that is what John chooses to do Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills 44) Jamie has enough money to buy either a Mountain Dew, or a Pepsi, or a bag of chips. He chooses to buy the Mountain Dew. The opportunity cost of the Mountain Dew is A) the Pepsi and the bag of chips. B) the Pepsi or the bag of chips, whichever is the highest-valued alternative forgone. C) the Mountain Dew. D) the Pepsi because it is a drink, as is the Mountain Dew. E) zero because he enjoys the Mountain Dew. Answer: B Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills 45) Amy can study for an hour or spend that hour sleeping or going out for dinner. If she decides to study for the hour, the opportunity cost of the hour spent studying is A) definitely going to sleep. B) studying, since this is the choice she opted for. C) sleeping or going out for dinner, whichever she would have preferred the most. D) sleeping and going out for dinner. E) definitely going out to dinner because she must eat at some time. Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills

46) If there is no scarcity A) the opportunity cost of an action would be greater than its sunk cost. B) an action would have zero opportunity cost. C) choices are no longer rational. D) marginal cost of an action is greater than its marginal benefit. E) all marginal benefits would equal zero. Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Analytic skills 47) The benefit of an activity is A) purely objective and measured in dollars. B) the gain or pleasure that it brings. C) the value of its opportunity cost. D) measured by what must be given up to get one more unit of the activity. E) not measurable on the margin. Answer: B Topic: Benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 48) The ________ of something is the gain or pleasure that it brings. A) opportunity cost B) benefit C) marginal cost D) rational choice E) rational margin Answer: B Topic: Benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

49) The cost of a one-unit increase in an activity A) is called the total one-unit cost. B) is called the marginal cost. C) decreases as more of the activity is done. D) is called the marginal benefit/cost. E) is called the unit cost. Answer: B Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 50) The marginal benefit of an activity is i. the benefit from a one-unit increase in the activity. ii. the benefit of a small, unimportant activity. iii. measured by what the person is willing to give up to get one additional unit of the activity. A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: D Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 51) The additional benefit of increasing some activity by one-unit is called the A) marginal benefit. B) opportunity cost. C) total benefit. D) scarcity. E) unit cost/benefit. Answer: A Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

52) If the marginal benefit of the next slice of pizza exceeds the marginal cost, you will A) eat the slice of pizza. B) not eat the slice of pizza. C) be unable to choose between eating or not eating. D) eat half the slice. E) More information is needed about how much the marginal benefit exceeds the marginal cost to determine if you will or will not eat the slice. Answer: A Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 53) When people make rational choices, they A) behave selfishly. B) do not consider their emotions. C) weigh the costs and benefits of their options and act to satisfy their wants. D) necessarily make a decision in the social interest. E) are necessarily making the best decision. Answer: C Topic: Rational choice Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 54) By donating $1,000 to the Salvation Army, Caroline reduces her taxable income. To Caroline, the reduction in her taxable income is A) a marginal benefit. B) an opportunity cost. C) an incentive. D) a marginal cost. E) the margin. Answer: C Topic: Incentives Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking

1.3 Economics As Social Science and Policy Tool 1) Correlation means A) "after this, therefore because of this." B) other things remaining the same. C) a natural experiment has been conducted. D) the tendency for the values of two variables to move in a predictable and related way. E) "on the margin." Answer: D Topic: Correlation Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 2) Correlation means A) holding everything else constant. B) after this, therefore because of this. C) the values of two variables move in a predictable and related way. D) making statements about how the world should be. E) the same as causation. Answer: C Topic: Correlation Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 3) In examining two variables, we find that as one variable changes, the other changes. These variables are said to be A) independent. B) correlated. C) statistics. D) significantly related. E) casually related. Answer: B Topic: Correlation Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

4) When economists use the term "correlation," they are referring to A) cause and effect relationships between variables. B) how two variables move together in a predictable way. C) positive economics. D) normative economics. E) economic policy. Answer: B Topic: Correlation Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 5) The tendency for the values of two variables to move in a predictable and related way is known as A) a natural experiment. B) a normative relationship. C) an economic model. D) correlation. E) a policy relationship. Answer: D Topic: Correlation Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 6) A positive statement i. makes a statement about how the world operates. ii. is a true statement. iii. can be tested against the facts. A) i and ii B) i and iii C) ii and iii D) i, ii and iii E) i only Answer: B Topic: Positive statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

7) Which of the following is a positive statement? A) An increase in college tuition is not fair to students. B) A recession leads to higher enrollments at universities. C) University bookstore prices are too high. D) Parking tickets on campus impose an excessive fee. E) The school needs more parking for students. Answer: B Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 8) The statement that "increases in the tax on gasoline increase the price of gasoline" is an example of a A) normative statement. B) positive statement. C) macroeconomic statement. D) rational-decision statement. E) marginal statement. Answer: B Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 9) "Lower ticket prices would lead to more people attending ball games." This statement is a A) statement assessing the social interest versus the private interest. B) normative statement. C) positive statement. D) macroeconomic statement. E) statement that confuses marginal cost and sunk cost. Answer: C Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

10) A statement that argues that "if taxes on gasoline increase, gasoline consumption will decrease" is an example of what kind of statement? A) a marginal statement B) a macroeconomic statement C) a normative statement D) a positive statement E) a statement that violates rational choice Answer: D Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 11) Which of the following statements is a positive statement? A) Our country must increase military spending. B) There should be a computer in every elementary school classroom. C) We need to spend less on luxury items for the wealthy, and more on necessities for the less fortunate. D) Online shopping increased by 50 percent this Christmas season. E) Too many people are unemployed. Answer: D Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 12) Which of the following is an example of a positive economic statement? A) Voter ID laws should be strictly enforced in all states. B) Illegal immigration is the biggest threat to national security that we face today. C) Medicare recipients should only be allowed to visit a doctor for non-emergency reasons on Mondays, Wednesdays, and Fridays. D) The death penalty is a strong deterrent to violent criminal activity. E) The Affordable Care Act should be repealed. Answer: D Topic: Positive and normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

13) Increasing income tax rates will solve the "Social Security time bomb issue" is an example of A) business economic policy. B) a positive economic statement. C) marginal cost exceeding marginal benefit. D) answering the "how" question. E) globalization. Answer: B Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 14) Which of the following is a positive statement? A) The rich should pay more in taxes. B) Everyone should have some knowledge of economics. C) Taxes on gasoline should be lower so that gasoline is more affordable to the poor. D) If we reduce welfare payments given to the poor, they will find jobs. E) Social Security must be reformed. Answer: D Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 15) Normative statements i. describe how the world is. ii. describe how the world ought to be. iii. depend on people's values and cannot be tested. A) i only. B) ii only. C) iii only. D) ii and iii. E) i and iii. Answer: D Topic: Normative statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

16) A normative statement A) depends on someone's values. B) cannot use the word "should." C) says what is currently believed about the way the world operates. D) MUST be tested to determine if it is correct. E) CAN be tested to determine if it is correct. Answer: A Topic: Normative statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 17) The important characteristic of normative statements is that they A) explain what really exists. B) are based on somebody's values and cannot be tested. C) explain what normally happens in the real world. D) help guide us to what will normally occur if some economic variable changes its value. E) do not use the ceteris paribus assumption. Answer: B Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 18) A normative statement i. can be tested as to whether it is true or false. ii. is considered negative. iii. depends on a person's values. A) i only B) iii only C) i and iii D) ii and iii E) i, ii, and iii Answer: B Topic: Normative statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

19) Which of the following is a normative statement? A) Flood victims should pay for their own rebuilding. B) When the price of kiwi fruit increases, fewer people eat kiwi fruit. C) An increase in the supply of computers has caused computer prices to fall. D) Recessions lead to increases in the unemployment rate. E) Hurricanes strike mainly Florida and North Carolina. Answer: A Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 20) Which of the following is an example of a normative economic statement? A) Universal access to quality health insurance is the most important domestic policy issue of our time. B) Extending the time in which laid-off workers are eligible to receive government unemployment compensation has increased the unemployment rate. C) Lowering marginal income tax rates depresses consumer spending. D) Prices rise when the government prints too much money. E) Interest rates rise when the government runs persistent budget deficits. Answer: A Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 21) A statement that "All children should receive free health care" is an example of what kind of statement? A) a fair statement B) a natural experiment statement C) a normative statement D) a positive statement E) a statement on the margin Answer: C Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

22) Which of the following statements is a normative statement? A) Inflation has been at an all-time low this year. B) The minimum wage should be increased to $8.50 per hour. C) Unemployment this month has increased by less than 0.5 percentage point. D) Additional spending on education has not produced any rise in test scores. E) Pepsi is less expensive than Coke this week. Answer: B Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 23) Which of the following is an example of a normative statement? A) If cars become more expensive, fewer people will buy them. B) Car prices should be affordable. C) If wages increase, firms will fire some workers. D) Fewer people die in larger cars than in smaller cars. E) Cars emit pollution. Answer: B Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 24) Which of the following statements is a normative statement? A) Every American household should have health care insurance coverage. B) Military spending as a percent of government spending decreased by 5 percent in the 1990s. C) Welfare reform has decreased the amount the government spends on welfare. D) The price of computers fell last year. E) Fewer people are unemployed this year than last year. Answer: A Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

25) Congress and the President passed a national health care policy. This is an example of A) the government using economic tools to make policy decisions. B) answering the "how" question. C) increasing the marginal cost of health care. D) increasing the marginal benefit of health care. E) normative versus positive economics. Answer: A Topic: Government economic policy Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 26) When the Dallas Cowboys score more than 30 points in a game, they win the game. This is an example of A) an economic theory. B) a correlation. C) an incentive to win the game. D) a normative statement. E) a statement on the margin. Answer: B Topic: Correlation Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 27) A positive statement A) must always be right. B) cannot be tested. C) might be right or wrong. D) depends on someone's value judgment. E) cannot be negative. Answer: C Topic: Positive statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking

28) Which of the following is a positive statement? A) Taxes should be lower because then people get to keep more of what they earn, so they will work more. B) My economics class should last for two terms because it is my favorite class. C) A 10 percent increase in income leads to a 4 percent increase in the consumption of beef. D) Given their negative impact on productivity, the government should eliminate labor unions. E) The class average on this test should be more than 80 percent. Answer: C Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 29) Which of the following is NOT a normative economic statement? A) States should reduce the tax on heating fuel oil during the winter. B) People over the age of 75 should not be allowed to drive cars. C) Teenagers are responsible for most driving fatalities. D) We don't spend enough money on anti-smoking campaigns. E) The price of gasoline is too high. Answer: C Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 1.4 Economics As a Life Skill and Job Skill 1) Economics graduates do NOT A) work in private firms. B) work in the government. C) work in international organizations. D) pursue graduate programs in law. E) None of the above are correct because economics graduates do all of the opportunities. Answer: E Topic: Economics as a job skill and work skill Skill: Level 1: Definition Section: Checkpoint 1.4 Status: New AACSB: Reflective thinking

2) According to the online website payscale.com, economics majors have a median salary of about A) $18,000. B) $36,000. C) $72,000. D) $102,000. E) $122,000. Answer: C Topic: Economics as a job skill and work skill Skill: Level 1: Definition Section: Checkpoint 1.4 Status: New AACSB: Reflective thinking 3) Sort the following majors according to mid-career income, from highest to lowest. i. Economics ii. Business iii. Chemical Engineering iv. Sociology A) i, ii, iii, iv B) iii, i, ii, iv C) ii, iii, i, iv D) ii, i, iii, iv E) i, iv, iii, ii Answer: B Topic: Economics as a job skill and work skill Skill: Level 1: Definition Section: Checkpoint 1.4 Status: New AACSB: Reflective thinking 1.5 Appendix: Making and Using Graphs 1) The horizontal axis in a graph A) measures time on a scatter diagram. B) measures the quality of a variable. C) is named the y-axis. D) is named the x-axis. E) is called the origin. Answer: D Topic: Axes Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

2) Most economic graphs have two lines perpendicular to each other. The vertical line is called the A) origin. B) y-axis. C) x-axis. D) variable. E) time axis. Answer: B Topic: Axes Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 3) The vertical axis in a graph A) is named the y-axis. B) is named the x-axis. C) measures time in a cross-section and time series graph. D) has no origin. E) measures time ONLY in a time series graph. Answer: A Topic: Axes Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 4) Most economic graphs have two lines perpendicular to each other. Where these lines meet is called the A) origin. B) y-axis. C) x-axis. D) variable. E) point of beginning. Answer: A Topic: Origin Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

5) A graph of the value of one variable against the value of another variable is known as a A) two-dimensional graph. B) three-dimensional graph. C) time-series graph. D) scatter diagram. E) two-variable graph. Answer: D Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 6) A scatter diagram can be used to see A) if the value of a variable is rising or falling. B) the value of a variable for different groups in a population. C) if a relationship exists between two variables. D) how a variable behaves over time. E) whether a variable is positively or negatively related to itself. Answer: C Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 7) To show how a variable ________, we typically use a ________. A) relates to another variable; time series graph B) relates to another variable; pie chart C) changes over time; time series graph D) changes over time; cross section graph E) changes over time; cross time chart Answer: C Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

8) Which type of graph is most useful in determining if two variables are correlated? A) time-series B) scatter diagram C) cross-section D) variable-correlation figure E) None of the above answers is correct. Answer: B Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

9) The figure above shows a A) time-series graph. B) scatter diagram. C) cross-section graph. D) slope. E) trend diagram. Answer: B Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

10) A time-series graph measures A) the value of one variable against the value of another variable. B) the value of an economic variable for different groups in a population at a point in time. C) time on the x-axis and the variable or variables in which we are interested on the y-axis. D) time on the y-axis and the variable or variables in which we are interested on the x-axis. E) time on both the x-axis and y-axis and the variable or variables in which we are interested in the rest of the figure. Answer: C Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 11) A time series graph A) shows how a variable changes over time. B) uses bars rather than lines. C) shows points in a scatter diagram. D) is similar to a cross-section graph because both can show trends over time. E) is in the shape of a pie. Answer: A Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 12) A steep slope in a time series graph means the variable is A) high. B) falling. C) rising or falling quickly. D) rising or falling slowly. E) very close to its trend point. Answer: C Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

13) Which type of economic graph reveals trends in data? A) cross-section graph B) time-series graph C) scatter diagram D) Answers A and C are correct. E) Answers A, B, and C are all correct. Answer: B Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 14) A time series graph A) shows how a certain variable changes over time. B) uses bars rather than lines. C) shows points that are scattered. D) depicts a series of good economic times a nation had. E) is not useful if the goal is to determine a variable's trend. Answer: A Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 15) A time-series graph displays the price of gold. The slope of the line is negative for periods when the A) price of gold is falling. B) price of gold is rising. C) quantity of gold is falling. D) price of gold is low and not changing. E) price of gold fluctuates. Answer: A Topic: Time-series graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

16) A graph shows the wage rate of factory workers. The slope of the line is positive for periods when the wage rate is A) falling. B) rising. C) high and not changing. D) low and falling. E) high and falling. Answer: B Topic: Time-series graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 17) A trend is A) a measure of closeness on a scatter diagram. B) a general tendency for a variable to rise or fall. C) the maximum value of a variable. D) the minimum value of a variable. E) the difference between the maximum value of a variable and the minimum value of the variable. Answer: B Topic: Trend Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 18) A time series graph reveals whether there is a ________, which represents ________. A) trend in a variable; a general tendency for the variable to rise or fall B) relationship between two variables; a cross-section relationship C) trends in two variables; unrelated variables D) relationship between two variables; a trend in a variable E) cross-section relationship; a general tendency for the variables to rise or fall Answer: A Topic: Trend Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

19) Trend refers to A) the scale used on the x- and y-axes. B) increases but not decreases of a variable. C) decreases but not increases of a variable. D) a general tendency for a variable to rise or fall. E) the difference between the maximum value of the variable and the minimum value of the variable. Answer: D Topic: Trend Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

20) In the above figure, the diagram shows A) a downward trend in x. B) an upward trend in x. C) a scatter diagram. D) a two-variable scatter diagram. E) a cross-section graph between x and time. Answer: A Topic: Trend Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

21) A cross-section graph A) is divided into different sections. B) shows the values of an economic variable for different groups in a population at a point in time. C) measures time on the x-axis and the variable in which we are interested on the y-axis. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 22) A graph that shows the value of an economic variable for different groups in a population at a given time is called a A) scatter diagram. B) time-series graph. C) pie chart. D) cross-section graph. E) fixed-time diagram. Answer: D Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 23) A graph shows the average wage of various demographic groups in 2012. The kind of graph used to show these data would be a A) scatter diagram. B) time-series graph. C) cross-section graph. D) Venn diagram. E) fixed-year figure. Answer: C Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

24) A graph showing the values of an economic variable for different groups in a population at a point in time is called a A) cross-section graph. B) time-series graph. C) scatter diagram. D) Venn diagram. E) None of the above answers is correct. Answer: A Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 25) ________ shows the values of a variable for different groups in the population at a certain point in time. A) A time-series graph B) The origin C) A cross-section graph D) A scatter plot E) A trend-line graph Answer: C Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 26) A cross-section graph A) is divided into different sections. B) shows values of an economic variable for different groups in a population at a point in time. C) measures time on the x-axis and the variable in which we are interested on the y-axis. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: B Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

27) You have data for the amount of rainfall in 50 cities for the month of June. The type of graph to best display these data would be a A) time-series graph. B) multi-variable time series graph. C) cross-section graph. D) scatter diagram. E) trend-line diagram. Answer: C Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 28) You have data for sales of pizza for each of the 50 states in 2011. The type of graph to best display these data would be a A) cross-section graph. B) time-series graph. C) scatter diagram. D) multi-variable time-series graph. E) trend-line diagram. Answer: A Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 29) A graph shows the average SAT scores for males and females in 2012. The kind of graph used to show these data would be a A) scatter diagram. B) time-series graph. C) cross-section graph. D) time-stationary graph. E) trend figure. Answer: C Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

30) Demonstrating how an economic variable changes from one year to the next is best illustrated by a A) scatter diagram. B) time-series graph. C) linear graph. D) cross-section graph. E) Venn diagram. Answer: B Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 31) To show the values of an economic variable for different groups in a population at a point in time, it is best to use a A) scatter diagram. B) time-series graph. C) linear graph. D) cross-section graph. E) trend-section diagram. Answer: D Topic: Cross-section graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 32) A graph that shows how the amount of advertising expenditure differs among various industries can be shown A) by a cross-section graph. B) by a time-series graph. C) as a trend. D) by a scatter diagram. E) by a trend-section graph. Answer: A Topic: Cross-section graph Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

33) A linear relationship A) when graphed, is a straight line. B) when graphed, is a line whose slope changes. C) can be a positive or a negative relationship. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: D Topic: Linear relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 34) A positive relationship exists between two variables if A) one variable has "positively" no effect on the other variable. B) a decrease in one variable is associated with an increase in the other variable. C) a decrease in one variable is associated with a decrease in the other variable. D) an increase in one variable is associated with both a decrease and an increase in the other variable. E) None of the above answers is correct. Answer: C Topic: Positive relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 35) If two variables are positively related, then A) one variable causes the other. B) an increase in one variable is accompanied by a decrease in the other. C) an increase in one variable is accompanied by an increase in the other. D) they change together, but not necessarily in the same direction. E) neither variable can be positively related to any other variable. Answer: C Topic: Positive relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

36) As a person increases his or her caloric intake, the person's weight increases, ceteris paribus. The relationship between the person's caloric intake and the person's weight is an example of A) unrelated variables. B) a positive relationship. C) a negative relationship. D) a single point on a graph. E) a trended relationship. Answer: B Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 37) If there is a positive relationship between two variables A) the graph of the relationship will be upward sloping. B) the graph of the relationship will be downward sloping. C) the slope of the line graphing the relationship will be negative. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 38) If the change in y = 10 and the change in x = 3, there is A) a positive relationship between y and x. B) a negative relationship between y and x. C) an independent relationship between y and x. D) no relationship between y and x. E) a +0.33 relationship between the two variables. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

39) Whenever people's incomes increase, they buy more guitars. Hence a scatter diagram shows that the relationship between income and guitars purchased is A) a positive relationship. B) a linear relationship. C) a negative relationship. D) some sort of relationship, but whether it is positive or negative depends on whether income is plotted on the vertical or horizontal axis. E) a U-shaped relationship. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 40) Which of the following statements is correct? A) When a line slopes downwards moving to the right, the variable measured on the x-axis and the variable measured on the y-axis are directly related. B) When a line slopes upwards moving to the right, the variable measured on the x-axis and the variable measured on the y-axis are directly related. C) The higher the temperature, the more ice cream people consume. Thus the temperature and ice cream consumption are inversely related. D) If two variables are directly related, a graph of the two variables has a negative slope. E) None of the above statements is correct. Answer: B Topic: Positive and negative relationships Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 41) If x increases whenever y decreases, then x and y are A) not related. B) positively related. C) directly related. D) negatively related. E) related but whether positively or negatively related depends on whether the x variable or the y variable is plotted on the vertical axis. Answer: D Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

42) Whenever one variable increases, another variable decreases. The two variables are A) definitely related through a third variable. B) negatively related. C) positively related. D) unrelated to each other. E) related but whether positively or negatively related depends on which variable is plotted on the vertical axis. Answer: B Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 43) If x increases and as a result y decreases, then x and y are A) not related because the relationship is a causal one. B) positively related. C) negatively related. D) directly related. E) trend-line related. Answer: C Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 44) "As the price of gasoline increases, fewer people buy cars that are gas guzzlers." A graph showing this relationship would A) have a negative slope. B) have a positive relationship. C) have a direct relationship. D) be a horizontal line. E) be a vertical line. Answer: A Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

45) As the number of days without rain increases, the amount of wheat grown per acre declines. A graph showing this relationship shows A) a horizontal line. B) a vertical line. C) a positive relationship. D) a line with a positive slope. E) None of the above answers is correct. Answer: E Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 46) As the price of home heating oil rises, families buy less home heating oil. Hence a scatter diagram with the price of home heating oil on the vertical axis and the quantity purchased on the horizontal axis reveals a ________ relationship. A) positive B) linear C) time-series D) negative E) cross-sectional Answer: D Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 47) If the change in y = -4 and the change in x = 2, there is A) an independent relationship between y and x. B) a positive relationship between y and x. C) a negative relationship between y and x. D) no relationship between y and x. E) a relationship between x and y but more information is needed to determine if it is a negative or positive relationship. Answer: C Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

48) An independent relationship between two variables is shown in a graph by A) an upward-sloping line. B) a horizontal or a vertical line. C) a downward-sloping line. D) a steeply sloped line. E) any straight line curve. Answer: B Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 49) If two variables are unrelated, their graph is A) either a horizontal or a vertical line. B) a downward-sloping line. C) an upward-sloping line. D) a curved line. E) None of the above answers is correct because it is not possible to graph unrelated variables. Answer: A Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 50) Consider a diagram in which the variable measured on the y-axis remains constant while the variable measured on the x-axis increases. The graph of these two variables is A) a vertical line. B) a horizontal line. C) a line that has positive slope. D) a line that has a negative slope. E) non-existent because the two variables are not related. Answer: B Topic: Unrelated variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

51) A graph shows the price of a pound of cucumbers on the vertical axis and the quantity of new cars sold by Honda on the horizontal axis. The price of a pound of cucumbers remains constant as the quantity of new cars sold increases. The graph of these data is a A) horizontal line. B) vertical line. C) curve with a maximum. D) positively sloped line. E) negatively sloped line. Answer: A Topic: Unrelated variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 52) Matt pays a $50 a month membership fee at Bruno's Gym. He can exercise at the gym as many times as he wishes. If the membership fee is measured along the vertical axis and the number of times he exercises is measured along the horizontal axis, the graph between his membership fee and the number of times he exercises will A) be a horizontal line. B) be positively sloped. C) be negatively sloped. D) be a vertical line. E) start out positively sloped and then, as Matt loses interest, become negatively sloped. Answer: A Topic: Unrelated variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

53) In the above figure, as the y variable increases A) the x variable is constant. B) the x variable increases. C) the x variable decreases. D) the x variable at first increases but then decreases. E) the x variable probably changes, but more information is needed to determine if it increases, decreases, or stays the same. Answer: A Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

54) In the above figure, a negative relationship between x and y is shown in Figure A) A. B) B. C) C. D) D. E) B and Figure C. Answer: B Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

55) In the above figure, no relationship between x and y is shown in Figure A) A. B) B. C) C. D) D. E) A and Figure B. Answer: C Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

56) In the diagram above, which figure(s) show(s) a direct relationship between the variables? A) both B and C B) both A and C C) only A D) only D E) only B Answer: B Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

57) In the diagram above, which figure(s) show(s) an inverse relationship between the variables? A) both B and C B) only B C) both A and C D) only D E) only C Answer: B Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 58) In the diagram above, which figure(s) show(s) no relationship between the variables? A) both B and C B) only B C) both A and C D) only D E) both A and B Answer: D Topic: Unrelated variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 59) If a curve rises and then falls, it has a A) maximum. B) minimum. C) linear relationship. D) constant slope relationship. E) slope that is negative and then positive. Answer: A Topic: Maximum Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

60) As a shoe factory adds more workers, shoe production grows, reaches a maximum, and then shrinks. In a diagram that has the number of workers on the horizontal axis and the number of shoes on the vertical axis, the relationship between the number of workers and the number of shoes starts as ________ and then, after the maximum point, is ________. A) positive; negative B) negative; positive C) linear; negative D) positive; linear E) positive; nonexistent Answer: A Topic: Maximum Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 61) As a curve approaches a maximum point, the slope will A) be positive and then negative after the maximum point. B) be negative and then positive after the maximum point. C) remain constant on either side of the maximum point. D) increase before and after the maximum point. E) decrease before and after the maximum point. Answer: A Topic: Maximum Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

62) In the figure above, the relationship between the x variable and the y variable A) is positive. B) is negative. C) starts by being positive and then becomes negative. D) starts by being negative and then becomes positive. E) is non-existent because the two variables are unrelated. Answer: C Topic: Maximum Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 63) If a curve falls and then rises, it A) has a maximum. B) has a minimum. C) has a linear relationship. D) has a constant slope relationship. E) shows no relationship between the two variables. Answer: B Topic: Minimum Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

64) Moving from left to right, a U-shaped curve starts with a A) positive slope, reaches a maximum, then ends with a negative slope. B) positive slope, reaches a minimum, then ends with a negative slope. C) negative slope, reaches a maximum, then ends with a positive slope. D) negative slope, reaches a minimum, then ends with a positive slope. E) negative slope, reaches a minimum, then ends with a negative slope. Answer: D Topic: Minimum Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 65) The minimum point of a U-shaped curve A) is a point where the variable is neither increasing nor decreasing. B) has a slope equal to zero. C) has the maximum slope possible. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Minimum Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 66) An economist observed that as more computers are added to a factory, the costs of production initially decline, reach a minimum, and then rise. In a diagram that has costs on the vertical axis and the number of computers on the horizontal axis, the relationship always is A) negative and then linear after the minimum point. B) positive and then negative after the minimum point. C) negative and then positive after the minimum point. D) linear and then positive after the minimum point. E) negative both before and after the minimum point. Answer: C Topic: Minimum Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

67) If whenever one variable increases, another variable also increases, then these two variables are ________ related. A) positively B) negatively C) inversely D) cross-sectionally E) trend-line Answer: A Topic: Positive relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

68) The graph shows a A) positive relationship that becomes steeper. B) negative relationship that becomes steeper. C) positive relationship that becomes less steep. D) negative relationship that become less steep. E) negative trend between the total cost of a cake and the output of cakes. Answer: A Topic: Positive relationship Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

69) A graph of the relationship between two variables is a line that slopes down to the right. These two variables are ________ related. A) positively B) directly C) negatively D) not E) trend-line Answer: C Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 70) A graph shows that the number of U.S. tourists visiting a Caribbean island increases as the temperature in the northeastern United States falls. The graph shows A) a positive relationship. B) a direct relationship. C) a negative relationship. D) no relationship. E) an invalid relationship. Answer: C Topic: Negative relationship Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

71) The graph shows a A) positive relationship that becomes less steep. B) negative relationship that is linear. C) positive relationship that is linear. D) negative relationship that become less steep. E) None of the above answers is correct. Answer: B Topic: Negative relationship Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

72) The graph shows A) a relationship with a minimum. B) a relationship with a maximum. C) no relationship. D) a linear relationship. E) a cross-section relationship. Answer: B Topic: Maximum Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

73) The graph shows A) a relationship with a minimum. B) a relationship with a maximum. C) no relationship. D) a relationship that becomes less steep. E) a cross-section relationship. Answer: A Topic: Minimum Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 74) Two variables are unrelated if their graph is i. a vertical line. ii. a 45 degree line. iii. a horizontal line. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

75) The graph shows A) a positive relationship that becomes less steep. B) a negative relationship that is linear. C) a positive relationship that is linear. D) no relationship between the variables. E) a trend relationship between the variables. Answer: D Topic: Unrelated variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 76) A slope is measured as the A) value of the variable measured on the y-axis divided by the value of the variable measured on the x-axis. B) value of the variable measured on the x-axis divided by the value of the variable measured on the y-axis. C) change in the value of variable on the y-axis divided by the change in the value of the variable on the x-axis. D) value of the variable measured on the y-axis minus the value of the variable measured on the x-axis. E) change in the value of variable on the x-axis divided by the change in the value of the variable on the y-axis. Answer: C Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 81 Copyright © 2021 Pearson Education, Inc.

77) A slope is measured as the A) value of the variable measured on the y-axis divided by the value of the variable measured on the x-axis. B) value of the variable measured on the x-axis divided by the value of the variable measured on the y-axis. C) change in the value of variable on the y-axis divided by the change in the value of the variable on the x-axis. D) value of the variable measured on the y-axis minus the value of the variable measured on the x-axis. E) value of the variable measured on the x-axis minus the value of the variable measured on the y-axis. Answer: C Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 78) "The change in the value of the variable measured on the y-axis divided by the change in the value of the variable measured on the x-axis" is the definition of A) a graph. B) slope. C) a curve. D) a relationship. E) a trend. Answer: B Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 79) The slope of a line equals the change in the variable measured along the A) x-axis divided by the change in the variable measured along the y-axis. B) y-axis divided by the change in the variable measured along the x-axis. C) x-axis minus the change in the variable measured along the y-axis. D) x-axis multiplied by the change in the variable measured along the y-axis. E) y-axis minus the change in the variable measured along the x-axis. Answer: B Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

80) The slope A) of a straight line is the same regardless of where on the line it is calculated. B) equals the change in the value of the variable measured on the x-axis divided by the change in the variable measured on the y-axis. C) will be small if a large change in the variable measured on the y-axis is associated with a small change in the variable measured on the x-axis. D) equals the change in the value of the variable measured on the y-axis minus the change in the variable measured on the x-axis. E) falls as the x variable increases if the line has a negative slope. Answer: A Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 81) With y measured on the vertical axis and x measured on the horizontal axis, the slope of a straight line is defined as A) y/x. B) x/y. C) (change in y)/(change in x). D) (change in x)/(change in y). E) y - x. Answer: C Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 82) In a graph, a straight line has a negative slope if the line A) is vertical. B) is horizontal. C) falls from left to right. D) rises from left to right. E) shows a trend. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

83) A curve with a positive but decreasing slope represents a relationship where, every time the variable measured along the horizontal axis increases by one unit, the variable measured along the vertical axis A) increases by a constant amount. B) increases by an increasing amount. C) increases by a decreasing amount. D) decreases. E) does not change by much. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 84) The slope A) of a straight line is the same regardless of where on the line it is calculated. B) equals the change in the value of the variable measured on the vertical axis divided by the change in the variable measured along the horizontal axis. C) will be small if a large change in the variable measured on the vertical axis is associated with a small change in the variable measured along the horizontal axis. D) Answers A and B are correct. E) Answers A and C are correct. Answer: D Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 85) Which of the following statements is correct? A) The slope of a straight line changes depending where on the line it is calculated. B) The slope of a curved line is not defined because it is impossible to calculate the slope along a curved line. C) A straight line that slopes upward moving to the right has a positive slope. D) Answers A and B are correct. E) Answers A and C are correct. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

86) If a small change in the x variable results in a large change in the y variable, the curve will be A) positively sloped. B) negatively sloped. C) steep. D) flat. E) trended. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 87) Suppose the relationship between a person's age and his or her height is plotted with the age measured along the x-axis and the height measured along the y-axis. Then, the curve showing this relationship is A) a straight line with a positive slope. B) positively sloped and becoming less steep. C) a straight line with a negative slope. D) negatively sloped and becoming less steep. E) positively sloped and becoming more steep. Answer: B Topic: Positive slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 88) If the quantity of the variable on the y-axis increases by 10 when the quantity of the variable on the x-axis decreases by 2, then the slope of the curve equals A) 2. B) -10. C) 10. D) -5. E) None of the above answers is correct. Answer: D Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

89) If the quantity of the variable on the y-axis increases by 3 when the quantity of the variable on the x-axis increases by 4, then the slope of the curve equals A) 3. B) 4. C) 3/4. D) 4/3. E) 1. Answer: C Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

90) The above figure shows the relationship between the price of a slice of pizza and how many slices of pizza Ricardo buys in a week. Between points A and B, the slope of the line equals A) -5. B) -4. C) -3. D) -1. E) -2. Answer: D Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

91) The above figure shows the relationship between the price of a slice of pizza and how many slices of pizza Ricardo buys in a week. Between points A and B, the slope of the line is ________ the slope of the line between points B and C. A) greater than B) equal to C) less than D) unrelated to E) not comparable to Answer: B Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 92) Moving rightward along a straight line, the slope of the line A) always increases. B) always decreases. C) stays the same. D) increases if the line slopes upward to the right. E) decreases if the line slopes downward to the right. Answer: C Topic: Slope of a straight line Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 93) A straight line falls when moving rightward along it. Hence the slope of the line is A) positive. B) negative. C) undefined. D) zero because it is a straight line. E) perhaps positive, negative, or zero, but without more information it is impossible to determine. Answer: B Topic: Slope of a straight line Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

94) The table above shows data on two variables. If these data were graphed, the slope of the line would be A) 1/2. B) 4/3. C) 2/3. D) 3/4. E) 2. Answer: D Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

95) The slope of the line shown in the above figure is A) -1/3. B) -5. C) -1. D) -3. E) -10. Answer: D Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 88 Copyright © 2021 Pearson Education, Inc.

96) The slope of the line shown in the above figure is A) 5. B) 2/5. C) 2/3. D) 5/2. E) 2. Answer: B Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

97) The slope of the line shown in the above figure is A) -1 1/3. B) -1 2/3. C) -1.25. D) -0.80. E) 5. Answer: C Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

98) The figure above shows the relationship between the time a student spends studying and the student's GPA that semester. The slope of the relationship at point A equals A) 3. B) 3/20 C) 2/20. D) 1/20. E) 0. Answer: D Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

99) In the above figure, which of the figures shows a relationship between x and y with a negative slope? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure A and Figure B Answer: B Topic: Negative slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

100) In the above figure, which of the figures show(s) a relationships between x and y with a positive slope? A) Figure A and Figure D B) Figure B and Figure C C) Figure C only D) Figure D only E) Figure A and Figure B Answer: A Topic: Positive slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

101) The figure above shows the relationship between the time a student spends studying and the student's GPA that semester. This figure shows ________ relationship between the time spent studying and the GPA. A) a positive but not linear B) a negative C) no D) a positive, linear E) a cross-sectionally trended Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

102) The figure above shows the relationship between the time a student spends studying and the student's GPA that semester. The slope of the relationship at point A ________ the slope at point B. A) is greater than B) is less than C) is equal to D) cannot be compared to E) can be compared but more information is needed to determine whether the slope is greater than, less than, or equal to Answer: A Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

103) In the above, which figure(s) show relationship between the variables that is always positive? A) Figure A only B) Figures C and D C) Figures A and C D) Figures A, C, and D E) Figures A and B Answer: C Topic: Positive relationship Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

104) In the above, which figure(s) show a relationship between the variables that is always negative? A) Figure A only B) Figure D only C) Figures A and C D) Figures A, C, and D E) Figure B only Answer: B Topic: Negative relationship Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 105) In the above, which figure shows both a positive and a negative relationship between the variables? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A, B, and D Answer: B Topic: Positive and negative relationships Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 106) In the above, which figure(s) has (have) at least one point at which the slope equals zero? A) Figure B only B) Figures A and C C) Figure D only D) Figures A, C, and D E) Figures A and D Answer: A Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

107) In the above, in which figure(s) is the slope the same at every point? A) Figure A only B) Figures A and C C) Figure B only D) Figures A, C, and D E) Figures C and D Answer: A Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

108) The figure above shows the relationship between the price of a dozen roses and the quantity of roses a florist can sell. The relationship between the price and the quantity the florist can sell is A) positive. B) negative. C) nonexistent. D) linear. E) cross-sectionally trended. Answer: B Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

109) The figure above shows the relationship between the price of a dozen roses and the quantity of roses a florist can sell. The slope between points A and B is A) 20. B) 16. C) 2. D) 4 E) nonexistent because at point A, no roses are sold. Answer: C Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 110) The figure above shows the relationship between the price of a dozen roses and the quantity of roses a florist can sell. The slope between points B and C equals A) 16. B) 8. C) 4. D) 2. E) 14. Answer: C Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 111) The figure above shows the relationship between the price of a dozen roses and the quantity of roses a florist can sell. The slope between points C and D equals A) 8. B) 4. C) 2. D) 1. E) 12. Answer: D Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

112) In the figure above, between points A and B, what is the slope of the line? A) 4 B) 1 C) 3 D) -3 E) 0 Answer: D Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

113) What is the slope of the line in the graph? A) +1/2 B) -1/2 C) + 2 D) -2 E) -3/4 Answer: A Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

114) The slope of the curve at point B A) is greater than the slope at point A. B) is less than the slope at point A. C) is equal to the slope at point A. D) cannot be compared with the slope at point A. E) can be compared with the slope at point A, but more information is needed to determine if the slope is greater than, less than, or equal to the slope at point A. Answer: B Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 115) The Latin term "ceteris paribus" means A) "false unless proven true." B) "other things remaining the same." C) "after this, therefore because of this." D) "what is true of the whole is not necessarily true of the parts." E) "obviously true." Answer: B Topic: Ceteris paribus Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Reflective thinking

116) Which of the following statements is the best example of the term ceteris paribus? A) An economist holds other factors constant when he examines the relationship between tax rates and tax revenues. B) More money should be spent on cleaning up the environment. C) The government budget surplus was $200 billion in 2000 because the economy was growing. D) An increase in the budget surplus after an increase in tax rates implies that tax rate increases cause budget surpluses. E) When studying the effects of a budget deficit, an economist must take account of all the factors involved. Answer: A Topic: Ceteris paribus Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Reflective thinking 117) To graph a relationship involving more than two variables, we use which assumption? A) linear assumption B) positive relationship assumption C) marginal analysis D) ceteris paribus E) trend assumption Answer: D Topic: Ceteris paribus Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 118) To graph a relationship among several variables, we hold all but ________ variable(s) constant and use the ________ assumption. A) one; scarcity B) two; ceteris paribus C) three; scarcity D) one; ceteris paribus E) one; absence of trend Answer: B Topic: Relationships among more than two variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

119) We are investigating the relationship among three variables. We have graphed two of them. Suppose that the variable that is not measured on the x-axis or the y-axis changes. Then, there is A) a movement along the plotted curve. B) a shift in the plotted curve. C) no impact on the plotted curve because the variable is not measured on either of the axes. D) an omitted variable. E) a violation of the absence of trend assumption. Answer: B Topic: Relationships among more than two variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 120) When analyzing graphically the relationship between more than two variables, which of the following must be used? A) positive slope assumption B) assumption of little change C) ceteris paribus D) negative slope assumption E) the assumption that only relevant factors change Answer: C Topic: Ceteris paribus Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 121) Ceteris paribus when graphing a relationship refers to A) letting all the variables change at once. B) changing the origin of the graph. C) holding constant all but two variables. D) rescaling the coordinates. E) swapping the axes so that the x-axis is the vertical axis and the y-axis is the horizontal axis. Answer: C Topic: Ceteris paribus Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

122) When two variables in a graph are related to a third, changing the third causes A) a movement along the curve. B) a shift of the curve. C) no change in the curve because the third variable isn't on the axes. D) either a shift or a movement in the curve but more information is needed to determine which occurs. E) None of the above answers is correct. Answer: B Topic: Relationships among more than two variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 123) On a graph showing the relationship between x and y, the ceteris paribus condition implies that A) no other variables are related to x and y. B) the value of x is held constant. C) the value of y is held constant. D) other variables not shown are held constant. E) the value of x and the value of y are held constant. Answer: D Topic: Ceteris paribus Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 124) Three variables are related and two of them are plotted in a figure. If the variable that is not measured on either the x-axis or the y-axis changes, then there is A) a movement along the drawn curve. B) a shift in the curve. C) no impact on the curve because the variable is not measured on either of the axes. D) either a shift in the curve or a movement along the curve, but more information is needed to determine which. E) None of the above answers is correct. Answer: B Topic: Changes in third variable Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

125) The above figure shows how many pounds of peanuts farmers are willing to sell at different prices per pound of peanuts. If the price of a pound of peanuts is $1 and the price of a pound of pecans is $2, peanut farmers are willing to sell A) no peanuts. B) 1,000 pounds of peanuts. C) 2,000 pounds of peanuts. D) 4,000 pounds of peanuts. E) more than 4,000 pounds of peanuts. Answer: A Topic: Relationships among more than two variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 126) In the above figure, while drawing the line showing the relationship between the price of a pound of peanuts and the quantity sold, the A) price of a pound of pecans does not change. B) price of a pound of peanuts does not change. C) the quantity of peanuts that farmers supply does not change. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: A Topic: Ceteris paribus Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

127) In the figure above, suppose the price of a pound of pecans is negatively related to the quantity of peanuts that farmers are willing to supply. If the price of pecans increases A) the curve will shift rightward. B) the curve will shift leftward. C) there is a movement along the curve. D) the curve will be unaffected. E) None of the above answers is correct because the graph assumes that the price of pecans does not change. Answer: B Topic: Relationships among more than two variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 128) To graph a relationship that involves more than two variables, we use A) a positive relationship. B) a direct relationship. C) a negative relationship. D) ceteris paribus. E) movement up along one of the lines showing the relationship between x and y. Answer: D Topic: Relationships among more than two variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

129) In the figure above, an increase in z leads to a A) movement up along one of the lines showing the relationship between x and y. B) movement down along one of the lines showing the relationship between x and y. C) rightward shift of the line showing the relationship between x and y. D) leftward shift of the line showing the relationship between x and y. E) trend change in both x and y. Answer: D Topic: Relationships among more than two variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills 130) In the figure above, ceteris paribus, an increase in x is associated with A) an increase in y. B) a decrease in y. C) an increase in z. D) a random change in z. E) no change in either y or z. Answer: B Topic: Ceteris paribus Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

1.6 Integrative Questions 1) Suppose you decide to attend summer school and that this is considered a rational choice. When making this choice A) you must ignore the problem of scarcity. B) you considered the marginal cost and marginal benefit of your choice. C) you have used the ceteris paribus assumption. D) you have made a positive statement. E) you must have considered the social interest. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 2) John decides to leave college early and play professional sports. Which of the following economic principles does John use? i. personal economic policies ii. marginal cost versus marginal benefit analysis iii. normative versus positive economics A) i and ii B) i, ii and iii C) ii only D) i and iii E) ii and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

3) Which of the following is TRUE? i. A rational choice is always made in the pursuit of social interest. ii. Economics is a social science. iii. Economists try to understand how the economic world works by testing positive statements. A) ii and iii B) only i C) only ii D) only iii E) i and ii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 4) Which of the following is TRUE? i. A rational choice is made on the margin. ii. Microeconomics is the study of the national economy while macroeconomics is the study of the global economy. iii. Economists try to understand how the economic world works by testing normative statements. A) only i B) i and iii C) only ii D) only iii E) i and ii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

5) Will, Bill, and Phil decide to study an extra hour for an exam. Instead of studying, they could have gone out to eat, played football, or watched TV. Which of the following statements is correct? A) The benefit the three students receive must be the same because they all make the same choice. B) The students made a rational choice as long as they face no scarcity. C) The students could each have different opportunity costs. D) The marginal cost of the decision is the same if they make the same score on the exam. E) Going out to eat, playing football, and watching TV are all called sunk costs. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 6) Which of the following is TRUE regarding a normative statement? i. It uses the ceteris paribus assumption. ii. It is a value judgment. iii. It accounts for opportunity costs. A) i and iii B) ii and iii C) i only D) ii only E) i, ii, and iii Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 7) To help unscramble cause and effect, economists A) use the concept of opportunity costs. B) must use the ceteris paribus assumption. C) answer the "what" question. D) answer the "how" question. E) must use normative statements. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

8) Which of the following is TRUE regarding this statement? "The president's decision to spend more money on national defense is smart." A) This is a normative statement. B) The federal government does not face scarcity. C) This topic would be studied in microeconomics. D) Social interest must always be more important than self-interest. E) Ceteris paribus does not apply to the government. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 9) Gregory is considering attending a concert with a ticket price of $40. He estimates that the cost of driving to the concert and parking there will add an additional $20. In order to attend the concert, Gregory will have to take time off from his part-time job. He estimates that he will lose 5 hours at work, at a wage of $8 per hour. In terms of dollars, Gregory's opportunity cost of attending the concert equals A) $80. B) $100. C) $40. D) $60. E) $20. Answer: B Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Application of knowledge

10) Kevin is re-finishing an antique grandfather clock that he purchased at a flea market for $300. He expects to be able to sell the clock for $450. At the last minute, Kevin discovers that he needs to repair the gears at a cost of $175 to make the clock worth $450 to potential buyers. It turns out that he could also sell the clock now, without completing the additional repairs, for $250. What should Kevin do? A) He should sell the clock now for $250. B) He should keep the clock but not make the repairs since the original $300 is a sunk cost. C) He should complete the additional repairs and sell the clock for $450. D) He should keep the clock after making the repairs since it is not rational to spend a total of $475 on an item that can only be sold for $450. E) Kevin is indifferent between selling the clock as is or selling it after completing the repairs. Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Application of knowledge 11) Which of the following scenarios describes an action that is NOT rational from an economic point of view? A) After drinking one martini (shaken, not stirred), James buys and drinks a second martini even though the marginal benefit of the second martini is lower than the marginal benefit of the first. B) Eric buys a replacement ticket to the basketball game after he realizes that he accidentally left his original ticket at home. C) Emily chooses to attend a social event on Tuesday night instead of studying even though she has an important exam on Wednesday morning. D) US Airways sells a last minute ticket to Don for $50 even though its average cost per passenger is $250. E) none of the above Answer: E Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Application of knowledge

12) Because resources are scarce, economists would say that A) the best things in life are always free. B) people's wants are unlimited. C) every choice has an opportunity cost. D) anything worth doing is worth doing well. E) there are no benefits from cooperation. Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking 13) Wichita is building a convention center and financing it with revenues raised from a city hotel tax. Local politicians assert that the convention center is essentially free for Wichita residents because out-of-town visitors are paying for it. Someone who is practicing the economic way of thinking would disagree because A) they believe that Wichita does not need a new convention center. B) there are other projects that could be undertaken with the tax funds. C) the convention center may not pass a marginal cost-benefit test. D) the hotel tax may lead to a decline in visits to Wichita. E) the hotel tax may reduce commercial property values in the area. Answer: B Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking

14) Suppose that your public library charges a fixed monthly membership fee of $12. Members are allowed to check out as many books as they want under this plan. The average member checks out 4 books per month. Suppose that your public library changes its policy. Now each book costs $3 to check out but there is no longer a monthly membership fee. What effect do you think the new policy will have on the total number of books checked out from your library each month? The new policy is likely to ________ the number of booked checked out because ________. A) leave unchanged; members have already shown that they are willing to pay $12 to check out 4 books per month B) leave unchanged; the average cost of the library service is the same under both plans C) reduce; the marginal benefit of checking out books is now lower under the new policy D) reduce; the marginal cost of checking out books is now higher under the new policy E) increase; the average benefit of checking out more than 4 books is now higher under the new policy Answer: A Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Application of knowledge 15) In New York City, when he was the mayor Michael Bloomberg recommended that the city, with the help of private donors, make cash payments to poor and underprivileged parents who can certify that their children are attending school on a regular basis. The payments would start after third grade and go through high school, rising each year as dropout rates get higher and a child's forgone earning potential is higher. What economic concept does this policy represent? A) public goods B) technological progress C) externalities D) the "invisible hand" E) incentives Answer: E Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking

16) Nathan drinks three cups of coffee per day. The marginal benefit that he enjoys from drinking the third cup is A) less than the marginal benefit that he receives from drinking the second cup. B) the same as the total benefit from drinking all three cups minus the total benefit of drinking the first two cups. C) both A and B. D) greater than the marginal benefit that he receives from drinking the second cup. E) none of the above. Answer: C Topic: Integrative Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking 1.7 Chapter Figures

1) The relationship between distance traveled in 5 hours and speed shown in the figure above is A) direct, linear. B) inverse, linear. C) direct, non-linear. D) inverse, positive. E) direct, negative. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

2) The relationship between distance traveled in five hours and speed shown in the figure above is A) positive. B) negative. C) inverse. D) cross-sectional. E) multilateral. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

3) The figure above shows the relationship between distance sprinted and recovery time. The curve becomes steeper because as the distance sprinted increases A) the extra recovery time needed from sprinting another 100 yards increases. B) the extra recovery time needed from sprinting another 100 yards decreases. C) the recovery time increases. D) the recovery time decreases. E) the relationship between distance sprinted and recovery time becomes more inverse. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

4) The figure above shows the relationship between study time and the number of problems worked. The curve becomes less steep because as you study more A) study time becomes less effective. B) study time becomes more effective. C) the number of problems worked increases. D) the number of problems worked decreases. E) the relationship between study time and the number of problems worked changes from direct to inverse. Answer: A Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

5) The figure above shows the relationship between the journey length and the cost of trip per mile. The curve becomes flatter because as the journey length increases A) the fall in the cost per mile becomes smaller. B) the fall in the cost per mile becomes greater. C) the cost per mile decreases. D) the cost per mile increases. E) the cost per mile remains unchanged. Answer: A Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

6) What is the slope of the line in the figure above? A) 0.75 B) -0.75 C) 1.33 D) -1.33 E) zero Answer: A Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

7) What is the slope of the line in the figure above? A) 0.75 B) -0.75 C) 1.33 D) -1.33 E) zero Answer: B Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

8) In the figure above, what is the slope of the curve at point A? A) 0.75 B) -0.75 C) 1.33 D) -1.33 E) zero Answer: B Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 1.8 Essay: Definition and Questions 1) What is the relationship between wants, resources, scarcity, and choices? Discuss the relationship for an individual and for a society. Answer: A person faces scarcity whenever his or her wants exceed what he or she can obtain using his or her resources. Because the person cannot fulfill all of his or her wants, the person is forced to choose which wants will be satisfied and which wants will remain unsatisfied. The same results hold true for a society. All societies face scarcity because people's wants are essentially infinite, so that the resources available are not sufficient to fulfill everyone's wants. Because of this fact, societies must make choices about which (and whose) wants will be satisfied and which (and whose) wants will remain unsatisfied. Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

2) Why do economists say that even very rich people face scarcity? Answer: A person faces scarcity whenever his or her wants exceed what he or she can obtain using his or her resources. Even very rich people want things that they cannot have. An older rich person, for instance, might want to have all of his or her youthful energy, but medical science cannot (yet) provide this service. Alternatively, another rich person might enjoy life so much that he or she wants 25 hours in a day in order to have more time for more enjoyment. But, such a want is impossible. By way of another, perhaps more realistic example, Malcolm Forbes was the founder of Forbes magazine and was very rich. However, he did not win every piece of art that he bid upon at auctions. Even though Mr. Forbes was very rich, he still passed on some art when the price got so high that he thought given his resources, the price exceeded what he was willing to pay. Mr. Forbes wanted the art, but he was not willing to bid higher in order to win it. Mr. Forbes faced scarcity. Topic: Scarcity Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication 3) What do economists mean when they discuss "scarcity"? Answer: Scarcity occurs whenever people's wants exceed the ability of the available resources to meet these wants. Because people's wants are effectively infinite-it is always possible to imagine more good things to want to have-wants will always exceed what can be produced with the available resources, and so scarcity will always be present. Topic: Scarcity Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication 4) Define economics and describe its branches of study. Answer: Economics is the social science that studies the choices made by individuals, businesses, government, and entire societies as they cope with scarcity. It has two branches, microeconomics and macroeconomics. Microeconomics is the study of the choices made by individuals and businesses, the way they interact, and the influence that governments exert on these choices. Macroeconomics is the study of the aggregate (total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make. Topic: Definition of economics Skill: Level 2: Using definitions Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication

5) Why does scarcity lead to the what, how, and for whom questions? Answer: Human wants exceed the resources available to satisfy them, thereby creating the problem of scarcity of goods and services. Everyone wants more than he or she can have, be it a student dreaming of a faster computer or an extraordinarily rich business leader wishing for more vacation time. Because not all wants can be satisfied, people must make choices about which wants to satisfy. The choices resulting from scarcity mean that people must decide what gets produced, how are the products produced, and for whom are the products produced. Topic: Scarcity and economic questions Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication 6) List and explain the three fundamental economic questions that must be answered by all economic systems. Answer: First, all economic systems must answer the question of "what goods and services get produced and in what quantities?" In other words, among the near infinite types of goods and services, society must decide what will be produced and how much of each good and service will be produced. Next, every economic system must decide, "how are goods and services produced?" This question needs to be answered because there are always many ways to produce a particular good or service (for instance, using a lot of workers and only a little machinery, or a lot of machinery and fewer workers), so the method that will be used must be decided. Finally, once the goods and services are produced the society must decide "for whom are the various goods and services produced?" In other words, societies must decide whether the goods and services are distributed so that everyone gets about the same amount or whether they are distributed so that some people get more than others. Topic: Economic questions Skill: Level 1: Definition Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication 7) Pumpkins are grown in New Mexico with the aid of fertilizer. Hence, fertilizer is a partial answer to which of the three economic question? Answer: Fertilizer is used to help produce the pumpkins, so it is a partial answer to the "How are goods and services produced?" question. Topic: Economic questions, how Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Reflective thinking

8) Different nations answer the what, how, and for whom questions differently. China, for instance, builds dams using many workers and only a little capital equipment. The United States builds dams using a few workers and a lot of capital equipment. Which economic question are these two nations answering and why do the answers differ? Answer: The nations are answering the "how" question because they are determining how to produce a dam. In the main part, the answers differ because the nations have different amounts of capital equipment and labor. China has more people and less capital equipment. Hence it makes sense for China to build dams using many workers and only a little capital equipment. The U.S. has more capital equipment and less labor. Thus it makes sense for the United States to build dams using a lot of capital equipment and only a few workers. Topic: Economic questions, how Skill: Level 4: Applying models Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication 9) The question "Will doctors or lawyers have higher annual incomes?" represents which of the three basic economic questions? Answer: The amount of goods and services a person can purchase depends on the person's income. Hence the question of who should be paid more, lawyers or doctors, essentially asks whether lawyers or doctors will be able to buy more goods and services. Thus the question is a microeconomic "For whom?" question. Topic: Economic questions, for whom Skill: Level 3: Using models Section: Checkpoint 1.1 Status: Old AACSB: Written and oral communication 1.9 Essay: The Economic Way of Thinking 1) What is the difference between microeconomics and macroeconomics? Answer: Microeconomics studies the decisions of smaller economic actors, such as individual consumers or individual firms, and how the government can affect these decisions, say through how it regulates an industry. Macroeconomics studies the aggregate, or economy-wide, consequences of the decisions made by individuals and firms. Macroeconomics also studies the aggregate effects of government policies, such as the Federal Reserve's decisions to raise or lower interest rates. Topic: Microeconomics and macroeconomics Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

2) What is an opportunity cost? Give an example. Answer: An opportunity cost of something is the best thing you must give up to get it. For example, the cost of attending class might be the extra hour of sleep you lose, or the opportunity cost of buying a taco might be the soda you can no longer buy. Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication 3) Your friend is preparing for this exam and in your practice session makes the following statement: "Instead of attending microeconomics class for two hours, Kiki could have played tennis or watched a movie. Therefore, the opportunity cost of attending class is the tennis and the movie she had to give up." Is your friend's analysis correct or not? Explain your answer. Answer: Your friend's analysis is incorrect. The opportunity cost of an action is the (single) best thing she had to give up, not ALL the things she had to give up. Kiki's opportunity cost of studying for her exam is either the tennis or the movie, whichever she would have done had she not studied. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication 4) Rather than go out to eat by yourself, you decide to stay at home and fix dinner for yourself and your two roommates. Your roommates applaud your decision. Your roommates tell you that your decision to eat at home has no opportunity cost because you already have all the dinner ingredients in your pantry. Is this comment correct? Answer: Your roommates' comment is incorrect. The opportunity cost of preparing dinner at home is whatever is the best thing you give up, which, given your choice boiled down to staying home or going out, is going out to eat. Hence the opportunity cost of fixing dinner at home is going out to eat. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

5) Shaniq can spend the next hour studying for a finance test, hiking along the Oregon coast, watching reruns of Lost on television, or napping. If she decides to study, what is the opportunity cost of her choice: hiking, watching television, or napping? Answer: With the information given, it is impossible to determine the opportunity cost. The opportunity cost is the highest-valued alternative forgone and the problem does not give Shaniq's ranking of the options. For instance, if Shaniq thinks that if she had not studied she would have watched Lost, then watching Lost is the opportunity cost. However, if Shaniq thinks that if she were not studying, she would be strolling along the beach, then the beach walk is the opportunity cost. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication 6) For spring break, Melanie will either stay home or go to Daytona Beach. At home, Melanie pays $10 per day for food and earns $90 a day at her job. At Daytona Beach, Melanie will stay with friends and so has no lodging cost. She will pay $20 per day for food. In terms of dollars, Melanie's opportunity cost per day of going to Daytona Beach is how much? Answer: Melanie's opportunity cost of going to Daytona Beach is $100 per day. If she goes, she spends $10 extra for food and loses $90 income from her job, for a total opportunity cost of $100. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 7) Why is the benefit of something measured by what you are willing to give up? Answer: The benefit of a good or service, say a slice of pizza, is the pleasure it brings the consumer. But it is impossible to measure someone's pleasure. In order to measure the benefit of the slice of pizza, we need something that we can measure. Thus, to measure the benefit of the slice of pizza, we ask the consumer what he or she is willing to give up to get the slice of pizza. So, if the consumer was willing to give up, say, three hot dogs to get the slice of pizza, we can determine that the benefit of the slice of pizza to the consumer is three hot dogs. Topic: Benefit Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

8) Define marginal cost and marginal benefit. Answer: Marginal cost is the opportunity cost of a one-unit increase in an activity. Marginal benefit is the benefit of a one-unit increase in an activity. Topic: Marginal benefit, marginal cost Skill: Level 1: Definition Section: Checkpoint 1.2 Status: Old AACSB: Reflective thinking 9) In New State, the bottling law requires that people get a refund of five cents when they return an empty bottle or can. Why does the state pay people to return bottles? In your answer, be sure to mention the role played by rational choice. Answer: Policy makers know that people making rational choices respond to incentives. Instead of throwing away bottles and cans, people will now bring the used bottles and cans to the designated areas for recycling in order to receive their payment. Thus policy makers have taken advantage of people's rational decision making in order to reduce litter and clean the environment. Topic: Incentives Skill: Level 3: Using models Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication 10) Must a rational choice always work out well? In other words, is it possible for someone to regret a rational decision? Answer: It is not necessarily the case that a rational choice always works out well; sometimes people will come to regret a rational decision. Decisions are made based on the information at hand. Sometimes that information is incomplete. For instance, when faced with a math midterm on Thursday, on Wednesday night a student might believe that he or she has a strong grasp of the subject and hence rationally decide to go to a movie rather than study. When the test reveals that the student actually understood little about the math and the student earns a low score, he or she likely regrets not studying. But the regret does not imply that the decision to see the movie was irrational. Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication

11) Discuss what is necessary to make rational decisions. Be sure to mention opportunity cost, marginal cost, and marginal benefit. Answer: Economists assume that people act rationally, making choices in increments and comparing marginal costs and benefits. Costs are measured as opportunity cost, which is the value of the best thing that must be given up. Benefits are subjective, measured by what you are willing to give up. Marginal cost is the additional cost of one more unit of the good and marginal benefit is the additional benefit of one more unit. Marginal cost increases and marginal benefit decreases as more of the activity is considered. A rational decision compares the marginal benefit of the decision to its marginal cost. If the marginal benefit exceeds the marginal cost, the (rational) decision is to undertake the action being contemplated. If the marginal benefit is less than the marginal cost, the (rational) decision is to not undertake the action being considered. Topic: Making rational choices Skill: Level 2: Using definitions Section: Checkpoint 1.2 Status: Old AACSB: Written and oral communication 1.10 Essay: Economics As A Life Skill and Job Skill 1) What is a positive statement? Give an example. Answer: A positive statement addresses "what is" and can be tested. An example of a positive statement is "An increase in the price of gasoline decreases the quantity of gasoline demanded." Topic: Positive statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 2) What is the difference between positive and normative statements? Answer: Positive statements tell what is and normative statements tell what ought to be. Positive statements can be tested to determine if they are correct or not, while normative statements use value judgments and so cannot be tested. For example, two economists might agree on the positive assertion that if the government spent its funds purchasing pharmaceutical drugs for poor older Americans rather than poor children, then poor older Americans would use more drugs and poor children would use fewer. But they might disagree on the normative conclusion of whether the government should pursue this policy. One economist might argue "It is not fair to have senior citizens suffer because they cannot afford medicine" and the other economist might argue "It is not fair to have children suffer because their parents cannot afford medicine." Topic: Positive and normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Written and oral communication

3) Two economists can agree that raising the minimum wage creates unemployment yet one might argue that raising the minimum wage is a good policy and the other that it is a bad policy. Why can this difference exist? Be sure to use the terms positive and normative in your answer. Answer: Positive statements are statements that describe how the world is. Positive statements can be tested and so, ultimately, any disagreements about positive statements should be resolved. The statement that "Raising the minimum wage creates unemployment" is a positive statement and, on the basis of repeated testing, most economists agree that it is a correct positive statement. Normative statements, however, are statements that describe how the world ought to be. Normative statements depend on people's values and cannot be tested. So one economist might argue that raising the minimum wage is a good policy because this economist thinks that, although it is unfortunate that some people lose their jobs, the fact that others retain their jobs and their wages rise more than outweighs the harm created by the unemployment. Another economist might strongly differ because the second economist thinks that the harm inflicted on people who lose their jobs more than outweighs any good from some workers being paid more. This difference of opinion can last indefinitely because there is no way to test the two economists' beliefs to determine which is correct. Topic: Positive and normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Written and oral communication 4) Explain whether the statement, "There is life on Mars," is a normative or positive statement. Answer: The statement is a positive statement because it does not depend on a value judgment. Instead, it is a statement that tries to describe "what is" and hence is testable. Of course, in order to test the assertion, it would be necessary to go to Mars to ascertain if there is life present. While it is difficult (!) at present to actually carry out the test, nonetheless the statement is testable and hence is a positive statement. Topic: Positive statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Written and oral communication 5) Explain whether the statement, "Hillary Clinton was elected President of the United States in 2016," is a normative or positive statement. Answer: The statement is a positive statement because it does not depend on a value judgment. Instead, it is a statement that tries to describe "what is" and hence is testable. Now, it is indeed the case that Hillary Clinton was not elected president in 2016, so when we test the statement we discover that it is incorrect. But, whether the statement is correct or not has no bearing on whether the statement is positive or normative. Thus, the statement "Hillary Clinton was elected President in 2016" is a positive, albeit incorrect, statement. Topic: Positive statements Skill: Level 3: Using models Section: Checkpoint 1.3 Status: Old AACSB: Written and oral communication 129 Copyright © 2021 Pearson Education, Inc.

6) What is a normative statement? Give an example. Answer: A normative statement is a statement about what ought to be. It is a value judgment or opinion and so cannot be proven true or false. An example of a normative statement is "Students should attend school year round to receive a better education." Topic: Normative statements Skill: Level 1: Definition Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 7) Explain whether the statement "The government should increase tariffs on Japanese cars to protect the American car industry from competition," is a normative or positive statement. Answer: The statement is normative. The statement is a normative statement because it depends on a value judgment, namely that the government should protect the American car industry from competition. Topic: Normative statements Skill: Level 2: Using definitions Section: Checkpoint 1.3 Status: Old AACSB: Reflective thinking 1.11 Essay: Appendix: Making and Using Graphs 1) Why do economists use graphs? Answer: Graphs help economists, and others, to visualize the relationships between economic variables. Graphs that plot variables together help economists understand if the variables are related and how they are related. Graphs also help provide a visual picture of economic models that link different variables. Indeed, many other disciplines use such visual models. For example, architects work with blueprints (their model) and the blueprints represent every detail of a building. Economists' models do not reflect of every detail of the real world, but the graphs that they use nonetheless are valuable because they help clarify the linkages between the variables. Topic: Basic idea Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills

2) What kind of information is conveyed in a time-series graph? Answer: A time series graph reveals four types of information. First, it shows the actual value of the variable or variables at each point in time. Second, it shows whether the variable or variables are rising or falling as time passes. Third, it shows the speed with which the variable or variables are changing. Finally, it shows the presence or absence of a trend. Topic: Time-series graph Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 3) In the diagram below, label the x-axis, the y-axis, and the origin.

Answer:

The figure above has the x-axis, the y-axis, and the origin labeled. Topic: Basic idea Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 131 Copyright © 2021 Pearson Education, Inc.

4) The table above shows how many blouses Katie and Kim will purchase at different prices for a blouse. In the figure, label the axes and put the price on the y-axis and the quantity of blouses on the x-axis. Plot the data for Katie in the figure. Then, plot the data for Kim in the figure.

Answer:

The figure above shows the labeled axes and has drawn in it the relationships between the price and the quantity of blouses purchased for Katie and Kim. Topic: Scatter diagrams Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 132 Copyright © 2021 Pearson Education, Inc.

5) The figure above shows the price of a DVD player from 1996 to 2000. a. What type of graph is illustrated above? b. What is the trend in the price of a DVD player? Answer: a. The graph is a time-series graph because it plots time along the horizontal axis and the price of a DVD player along the vertical axis. b. The trend in the price of a DVD player is negative, that is, the price of a DVD player has generally decreased from one year to the next. Topic: Time-series graph Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 1 Status: Old AACSB: Analytic skills 6) What are the two different types of relationships that variables can have? Explain each. What do these relationships look like when they are graphed? Answer: Variables can have two relationships: positive (or direct) and negative (or inverse). A positive relationship occurs when the variables move in the same direction, so that when one increases, the other also increases. A negative relationship occurs when the variables move in the opposite direction, so that when one increases, the other decreases. When a positive relationship is graphed, the line slopes upward to the right. When a negative relationship is graphed, the line slopes downward to the right. Topic: Relationships Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

7) What is the difference between a positive and a negative relationship? Answer: Two variables are positively related when an increase (decrease) in one is associated with an increase (decrease) in the other. In this case, the variables move together, in the same direction. Two variables are negatively related when an increase (decrease) in one is associated with a decrease (increase) in the other. In this case, the variables move in the opposite direction. Topic: Relationships Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 8) A graph of two variables is a vertical line. What is the interpretation of this result? Answer: When the graph of two variables is a vertical line, the variables are not related because, with this graph, whenever the variable measured along the vertical axis changes, the variable measured along the horizontal axis does not change. Topic: Unrelated variables Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

9) The figure above shows how the sales of the video game "Tomb Raider—Lara Retires" change when the advertising spent on the game changes. Is the relationship between advertising and the number of games sold positive, negative, or neither? Explain your answer. Answer: The figure shows that there is a positive relationship between advertising and the number of video games sold. The relationship is positive because the two variables move together: If advertising increases, so, too, does the number of games sold. Topic: Positive relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 134 Copyright © 2021 Pearson Education, Inc.

10) The figure above shows how the relationship between the number of hours per week a high school student spends on the web and the student's SAT score. Is the relationship between hours on the web and the SAT score positive, negative, neither? Explain your answer. Answer: The figure shows that there is a negative relationship between hours on the web and the student's SAT score. The relationship is negative because the two variables move in opposite directions: If hours on the web increase, the SAT score decreases. Topic: Negative relationship Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills

11) A graph has a point that is either a maximum or a minimum. To the left of the point, the slope of relationship is positive. To the right of the point, the slope is negative. Is the point a maximum point or a minimum point? Be sure to draw a figure that supports your answer. Answer:

The point is a maximum point. Examine the figure above. The slope of a curved line at any point equals the slope of a straight line that touches the curved line at only that one point. Thus to the left of the maximum point, take point A. The slope of the straight line that touches the curved line at only point A is positive, so the slope of the relationship is positive. Similarly, take point B to the right of the maximum point. As the straight line shows, the slope of the relationship at point B is negative. Indeed, whenever there is a maximum point, the slope of the relationship to the left of the maximum is positive and the slope to the right is negative. Topic: Maximum Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 2 Status: Old AACSB: Analytic skills 12) What does the slope of a straight line equal? How is the slope of a curved line calculated? Answer: The slope of a straight line is calculated between two points on the line. Between the two points on the line, the slope equals the change in the value of the variable measured on the vertical axis (the y-axis) divided by the change in the value of the variable measured on the horizontal axis (the x-axis). The slope of a curved line is calculated at a point on the line. At that point on the curved line, draw a straight line that touches the curved line at only that point. Then, calculate the slope of the straight line. The slope of the curved line at that point equals the slope of the straight line. Topic: Slope Skill: Level 1: Definition Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

13) In the figure above, what can you deduce about the slope of the curve? Answer: The slope is positive and increasing in size as we move rightward along the curve. Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

14) The table above shows how the number of books Katie buys each year depends on her income. a. What kind of relationship exists between Katie's income and the number of books she purchases?

b. Plot the relationship between Katie's income and the number of books she purchases in the above figure. Measure income along the vertical axis and the number of books along the horizontal axis. Be sure to label the axes. c. What is the slope of the relationship between $50,000 and $70,000 of income? d. What is the slope of the relationship between $90,000 and $110,000 of income? e. Comment on the similarity or dissimilarity of your answers to parts (c) and (d).

Answer: a. There is a positive relationship. When Katie's income increases, so too does her purchase of books.

b. The relationship is plotted in the figure above. c. The slope equals the change in the value of the variable measured on the vertical axis, income, divided by the change in the value of the variable measured along the horizontal axis, the number of books. Between $50,000 and $70,000 of income, the number of books purchased increases from 14 to 16. Hence income increases by $20,000 and the number of books increases by 2, so the slope equals $20,000/2 = 10,000. d. As with the previous answer, the slope equals the change in income divided by the change in books. Between $90,000 and $110,000 of income, the number of books purchased increases from 18 to 20. Hence income increases by $20,000 and the number of books increases by 2, so the slope equals $20,000/2 = 10,000. e. The slopes in parts (c) and (d) are equal. But, they MUST be equal because the relationship between Katie's income and the number of books she purchases is linear. For a linear relationship, the slope is the same regardless of where it is measured. Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

15) Graph the data in the table above in the figure. Label the axes.

a. Is the relationship between X and Y positive or negative? b. What is the slope when X = 4? c. What is the slope when X = 8? Answer:

The figure labels the axes and graphs the relationship. a. The relationship between X and Y is negative. b. The slope equals -2. c. The slope equals -2. Topic: Slope Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 140 Copyright © 2021 Pearson Education, Inc.

16) In the diagram below, draw a straight line with a slope of zero.

Answer:

A horizontal line has a slope of zero. The figure above shows a horizontal line with a slope of zero. Topic: Slope of a straight line Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

17) What does the slope of the line shown in the above figure equal? Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or Topic: Slope of a straight line Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

18) What does the slope of the line shown in the above figure equal? Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or Topic: Slope of a straight line Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 142 Copyright © 2021 Pearson Education, Inc.

19) What does the slope of the line shown in the above figure equal? Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or Topic: Slope of a straight line Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

20) What does the slope of the line shown in the above figure equal? Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or Topic: Slope of a straight line Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills

21) What does the slope of the curved line at point A shown in the above figure equal? Answer: The slope of a curved line equals the slope of a straight line that touches the curved line at only that point. And, the slope of a straight line equals the change in variable on the y-axis divided by the change in the variable on the x-axis. Measure the slope of the straight line from point A to where the line crosses the x-axis, at 15. Thus the straight line has a slope of Therefore the curve line at point A also has a slope equal to -6. Topic: Slope Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 3 Status: Old AACSB: Analytic skills 22) "It is impossible to represent a three variable relationship in a two-dimensional graph." Is this statement true or false? Explain your answer. Answer: The statement is false because it is possible to represent a three variable relationship in a two dimensional graph. To do so, start by focusing on two of the variables. Assume that the third variable does not change (the ceteris paribus assumption) and then graph the relationship between the two variables. The graph shows how these two variables are related when the third variable does not change. When the third variable does change, then the entire relationship between the two graphed variables changes. In other words, the line showing the relationship between the two graphed variables shifts so that it becomes an entirely new line. The shift in the line shows how the third variable influences the other two. Topic: Relationships among more than two variables Skill: Level 2: Using definitions Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

23) Jamie is preparing to take his SAT tests. The table above shows how Jamie's score depends on the number of hours a week Jamie studies a. Plot the relationship in the figure, putting the hours studied on the horizontal axis.

b. Is the relationship you plotted positive or negative? c. What happens to the slope of the relationship as hours studied increase? d. Suppose Jamie can enroll in an SAT prep course and, by so doing, for every possible number of hours he studies, his score will be 100 points higher. Plot the new relationship between the number of hours studied and Jamie's SAT score in the figure. e. How many variables are involved in the figure you just completed?

Answer:

a. The figure above plots the relationship between the number of hours Jamie studies and his SAT score. b. The relationship is positive: As Jamie increases the hours he studies, his SAT score increases. c. The relationship is nonlinear, so the slope of the relationship changes as the number of hours studied changes. In the figure, the slope of the relationship decreases in size as the number of hours studied increases. d. The figure above also plots the relationship between the hours Jamie studies and his SAT score if Jamie takes an SAT preparation course. e. There are three variables: The number of hours Jamie studies, whether or not he takes an SAT preparation course, and his SAT score. Topic: Relationships among more than two variables Skill: Level 3: Using models Section: Chapter 1 Appendix - Checkpoint 4 Status: Old AACSB: Analytic skills

Foundations of Microeconomics, 9e (Bade) Chapter 2 The U.S. and Global Economies 2.1 What, How, and For Whom? 1) Items that are purchased by individuals for their own enjoyment are called A) consumption goods and services. B) capital goods. C) government goods and services. D) exports of goods and services. E) private goods. Answer: A Topic: Consumption goods and services Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 2) Items bought by individuals to provide personal enjoyment are termed A) consumption goods. B) personal goods. C) consumption or investment goods. D) standard goods. E) pleasure goods. Answer: A Topic: Consumption goods and services Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 3) What would be an example of a consumption good? A) Antonio, the manager of the local Taco Hut, purchases a new deep fryer. B) The local driver's license office purchases a new digital camera and printer. C) Rhianna gets a haircut. D) Jake buys an iPhone. E) Donald Trump purchases furniture for his office. Answer: D Topic: What we produce Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

4) Which of the following is a consumption good or service? A) a personal computer purchased in order to play games at home B) a United Airline ticket counter C) the Starship, SpaceX's proposed human-carrying rocket D) a United Parcel Service truck delivering Christmas gifts E) a satellite dish installed by Cox Cable to download programs that are then distributed through its cable system Answer: A Topic: Consumption goods and services Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 5) What would be an example of a consumption service? A) Rhianna gets a haircut. B) Jake buys an iPhone. C) Antonio, the manager of the local Taco Hut, purchases a new deep fryer. D) The local driver's license office purchases a new digital camera and printer. E) Donald Trump purchases furniture for his office. Answer: A Topic: Consumption goods and services Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 6) The largest share of total production in the United States is A) consumption goods and services. B) capital goods. C) government goods and services. D) exported goods and services. E) imported goods and services. Answer: A Topic: Consumption goods and services Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

7) Items bought by businesses to help produce other goods and services are called A) consumption goods and services. B) capital goods. C) government goods and services. D) exports of goods and services. E) productive goods. Answer: B Topic: Capital goods Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 8) Which of the following is NOT a consumption good? A) Nike swimming trunks B) marriage counseling services C) a UPS truck D) a Subway sandwich E) a U.S. government bond Answer: C Topic: Capital goods Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Application of knowledge 9) An item that is purchased to increase businesses' productive resources is A) an export. B) a government good. C) a capital good. D) a consumption good. E) a productive good. Answer: C Topic: Capital goods Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

10) What would be an example of capital good? A) Jeanette buys a new dress. B) The local driver's license office purchases a new digital camera and printer. C) Antonio, the manager of the local Taco Hut, purchases a new deep fryer. D) Apple sells computers to Japan. E) Rhianna gets a haircut. Answer: C Topic: Capital goods Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 11) The difference between consumption and capital goods is that A) only big corporations can afford capital goods. B) capital goods are used to produce additional goods while consumption goods are not. C) capital goods are provided by the government. D) consumption goods can be enjoyed by many people at the same time. E) it is illegal to export capital goods. Answer: B Topic: Consumption and capital goods Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 12) Which of the following is NOT an example of a capital good? A) a miner's cap B) a GPS tracking device C) an airport kiosk D) a U.S. government bond E) a stethoscope Answer: D Topic: Capital goods Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Application of knowledge

13) Which of the following is NOT considered one of the factors of production? A) land B) labor C) capital D) technology E) entrepreneurship Answer: D Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 14) Which of the following correctly lists the categories of factors of production? A) land, labor, capital, and entrepreneurship B) land, buildings, capital, and entrepreneurship C) labor, machines, buildings, capital, and entrepreneurship D) forests, fish, buildings, capital, and entrepreneurship E) labor, money, stocks, and bonds Answer: A Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 15) Which of the following is NOT a factor of production? A) money B) capital C) land D) entrepreneurial ideas E) labor Answer: A Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

16) Goods and services are produced by using four factors of production A) land, labor, capital, and entrepreneurship. B) land, labor, money, and equipment. C) natural resources, human resources, financial assets, and entrepreneurial resources. D) labor, human capital, physical capital, and financial capital. E) land, labor, capital, and money. Answer: A Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 17) Factors of production are the A) goods that are bought by individuals and used to provide personal enjoyment. B) goods that are bought by businesses to produce productive resources. C) productive resources used to produce goods and services. D) productive resources used by government to increase the productivity of consumption. E) goods and services produced by the economy. Answer: C Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 18) The productive resource that includes all the "gifts of nature" is called A) land. B) labor. C) capital. D) entrepreneurship. E) land if undeveloped and capital if developed. Answer: A Topic: Land Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

19) Economists classify energy and water as part of which factor of production? A) land B) labor C) capital D) entrepreneurship E) land if undeveloped and capital if developed Answer: A Topic: Land Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 20) As a factor of production, oil reserves are counted as A) land. B) labor. C) capital. D) entrepreneurship. E) financial capital. Answer: A Topic: Land Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 21) Which of the following has been the largest contributor to increases in the quantity of labor in the United States during the past 50 years? A) The proportion of men taking paid jobs has increased. B) The proportion of women taking paid jobs has increased. C) The proportion of young adults entering college has decreased. D) The proportion of seniors taking early retirement has decreased. E) None of the above because the quantity of labor has actually decreased. Answer: B Topic: Labor Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

22) The concept of human capital describes A) human skills, that is, the quality of labor. B) human population, that is, the quantity of labor. C) the number of machines per employed worker. D) the number of workers per operating machine. E) the number of machines (capital) that have been produced by people (humans). Answer: A Topic: Human capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 23) Which factor of production does human capital enhance? i. land ii. labor iii. capital A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: B Topic: Labor, human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 24) Human capital can be increased through A) investment in new technology. B) education, on-the-job training, and work experience. C) investment in new machinery. D) decreases in population. E) increasing the nation's production of consumption goods. Answer: B Topic: Human capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

25) The United States possesses a large amount of human capital. As a result of this fact, in the United States there is a A) large amount of machinery and equipment. B) large number of people and a great deal of land. C) highly skilled and educated labor force. D) large number of kind and generous humans. E) large amount of machinery (capital) that is run by people (humans). Answer: C Topic: Labor, human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 26) Jan is attending college and studying to be an investment broker. To improve her chances of employment following college, she has interned at a top brokerage firm during the last two summers. Jan's internship has increased her A) natural labor. B) human capital. C) consumption services. D) natural resources. E) entrepreneurship capital. Answer: B Topic: Labor, human capital Skill: Level 4: Applying models Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 27) Which of the following is NOT directly related to human capital? A) a college education B) a summer internship C) knowledge of computer programing D) an MRI machine E) an understanding of real estate markets Answer: D Topic: Human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Application of knowledge

28) Human capital ________ as you work. As a result, the ________ of goods and services ________. A) increases; quantity; increases B) declines; quality; increases C) improves; quality; does not change D) does not change; quality; does not change E) decreases; quantity; decreases Answer: A Topic: Human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 29) Capital, as a factor of production, refers to A) money, stocks, and bonds. B) the production technology used by firms. C) the tools and instruments used to produce other goods and services. D) the production factors imported from abroad. E) stocks and bonds, but not money. Answer: C Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 30) The total value of capital in the United States is around A) $60 trillion. B) $10 trillion. C) $79 trillion. D) $100 trillion. E) $145 trillion. Answer: A Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

31) Capital is a factor of production. Which of the following is an example of capital? i. $1,000 in money ii. 100 shares of Microsoft stock iii. $10,000 in bonds issued by General Motors iv. a drill press in your local machine shop A) i and ii B) ii only C) iii only D) iv only E) ii and iii Answer: D Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 32) Capital is a factor of production. An example of capital as a factor of production is A) money. B) stocks. C) bonds. D) machines. E) education. Answer: D Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 33) One of the productive resources is capital. Capital includes A) money borrowed from a bank. B) a company's stocks and bonds. C) tools, buildings, and machine tools. D) toys, t-shirts, CD players, and pencils. E) money in a savings account at a bank. Answer: C Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

34) A newspaper printing press is an example of A) a capital good. B) a factor of production. C) something that influences labor productivity. D) a good that was once an output of the production process. E) All of the above are correct. Answer: E Topic: Capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Application of knowledge 35) Which of the following is NOT considered capital? A) an assembly line at a General Motors plant B) a computer used by your instructor for presentations in class C) stocks and bonds that are sold by Pepsico D) the furniture in the President's office E) a nail gun used for building houses Answer: C Topic: How do we produce? Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 36) Entrepreneurship, as a factor of production, refers to A) the technology used by firms. B) the human capital accumulated by workers. C) the value of the firm's stock. D) the human resource that organizes labor, land, and capital. E) the capital the firm uses. Answer: D Topic: Entrepreneurship Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

37) The productive resource that organizes labor, land, and capital is A) human capital. B) financial capital. C) entrepreneurship. D) government. E) capital. Answer: C Topic: Entrepreneurship Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 38) Payments to the factors of production are A) rent, mortgage, interest, and bonds. B) rent, interest, bonds, and profit or loss. C) rent, wages, interest, and profit or loss. D) rent, wages, profit or loss, and bonus. E) land, labor, capital, and entrepreneurship. Answer: C Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 39) ________ paid for the use of land; ________ paid for the services of labor; and ________ paid for the use of capital. A) Rent is; wages are; interest is B) Rent is; interest is; wages are C) Interest is; wages are; profit is D) Mortgages are; interest is; wages are E) Rent is; wages are; profit is Answer: A Topic: Resource payments Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

40) The income paid for the use of land is called A) rent. B) wages. C) interest. D) profit. E) land capital. Answer: A Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 41) The income paid to labor is called A) rent. B) wages. C) interest. D) profit. E) human capital. Answer: B Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 42) Which factor of production is paid "interest"? A) land B) labor C) capital D) entrepreneurship E) human capital Answer: C Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

43) The owners of the resource ________ are paid ________. A) land; wages B) labor; profit C) capital; rent D) capital; interest E) entrepreneurship; wages Answer: D Topic: Resource payments Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 44) Which factor of production is paid "profit"? A) land B) labor C) capital D) entrepreneurship E) human capital Answer: D Topic: Resource payments Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 45) The functional distribution of income measures which of the following? A) how federal tax revenues are related to the business function that employs taxpayers B) the distribution of earnings by the factors of production C) the proportion of income generated by the four types of expenditures on goods and services D) the distribution of income among households E) the distribution of income among nations Answer: B Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

46) In the United States, the productive factor that, as a group, receives the largest fraction of the nation's total income is A) labor. B) capital. C) consumption goods and services. D) entrepreneurship. E) land. Answer: A Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 47) According to the functional distribution of income, in the United States A) capital earns most of the income. B) labor earns most of the income. C) land earns most of the income. D) entrepreneurs earn most of the income. E) the income earned by capital and labor are approximately equal. Answer: B Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 48) The data show that more than 60 percent of the total income earned in the United States goes to A) labor. B) land. C) capital. D) entrepreneurship. E) profit. Answer: A Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

49) The majority of the income earned in the United States is paid in A) rent. B) wages. C) interest. D) profit. E) dividends. Answer: B Topic: Functional distribution of income Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 50) The personal distribution of income measures which of the following? A) how federal tax revenues are related to the type of businesses that employs the taxpayers B) the distribution of earnings by the factors of production C) proportion of income generated by the four types of expenditures on goods and services D) the distribution of income among households E) the distribution of income among nations Answer: D Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 51) In the United States, the poorest 20 percent of households earn roughly ________ percent of total income. A) 20 B) 10 C) 15 D) 3 E) 0.5 Answer: D Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

52) The personal distribution of income in the United States shows that A) income is equally distributed. B) the poorest 20 percent of individuals receive approximately 20 percent of total income. C) the richest 20 percent of individuals receive approximately 50 percent of total income. D) the poorest 60 percent of individuals receive approximately 50 percent of total income. E) the richest 20 percent of individuals receive approximately 25 percent of total income. Answer: C Topic: Personal distribution of income Skill: Level 3: Using models Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 53) The richest 20 percent of individuals in the United States receive about ________ of the nation's total income. A) 21 percent B) 51 percent C) 91 percent D) 99 percent E) 23 percent Answer: B Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 54) When the total U.S. production of goods and services is divided into consumption goods and services, capital goods, government goods and services, and export goods and services, the largest component is A) consumption goods and services. B) capital goods. C) government goods and services. D) export goods and services. E) capital goods and government goods and services tie for the largest component. Answer: A Topic: What we produce Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

55) An example of a capital good is A) a fiber optic cable TV system. B) an insurance policy. C) a haircut. D) an iPod. E) a slice of pizza. Answer: A Topic: What we produce Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 56) Which of the following correctly lists the categories of factors of production? A) machines, buildings, land, and money B) hardware, software, land, and money C) capital, money, and labor D) owners, workers, and consumers E) land, labor, capital, and entrepreneurship Answer: E Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 57) In economics, the factor of production "land" includes all of the following EXCEPT A) energy. B) plastics. C) wild plants. D) animals, birds, and fish. E) oil. Answer: B Topic: Land Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

58) Human capital is A) solely the innate ability we are born with. B) the money humans have saved. C) the knowledge humans accumulate through education and experience. D) machinery that needs human supervision. E) any type of machinery. Answer: C Topic: Human capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 59) When Ethan continues his education beyond high school, he is increasing his A) capital. B) wage rate. C) human capital. D) quantity of labor. E) rent. Answer: C Topic: Human capital Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 60) ________ is the human resource that organizes labor, land, and capital. A) Human capital B) Human skill C) A gift of nature D) Entrepreneurship E) Profit Answer: D Topic: Entrepreneurship Skill: Level 2: Using definitions Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

61) Wages are paid to ________ and interest is paid to ________. A) entrepreneurs; capital B) labor; capital C) labor; land D) entrepreneurs; land E) labor; entrepreneurs Answer: B Topic: Payments for the factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 62) The income earned by entrepreneurs is A) interest. B) wages. C) profit or loss. D) rent, wages, and interest. E) a mixture of rent, wages, interest, and profit. Answer: C Topic: Profit Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 63) Dividing the nation's income among the factors of production, the largest percentage is paid to A) labor. B) land. C) capital. D) entrepreneurship. E) labor and capital, with each receiving about 41 percent of the total income. Answer: A Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

64) ________ earned the highest amount of income among the factors of production in the United States. A) Labor B) Capital C) Land D) Entrepreneurship E) Investment Answer: A Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 65) In the United States, the richest 20 percent of households receive about ________ percent of total income. A) 4 B) 15 C) 23 D) 50 E) 33 Answer: D Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 66) In the United States, the poorest 20 percent of households receive about ________ percent of total income. A) 3 B) 15 C) 23 D) 49 E) 20 Answer: A Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

67) The personal distribution of income shows A) that labor receives the largest percentage of total income. B) how profit accounts for the largest fraction of total income. C) that the richest 20 percent of households receive 23 percent of total income. D) that interest accounts for most of the income of the richest 20 percent of households. E) that the poorest 20 percent of households receive less than 4 percent of total income. Answer: E Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 2.2 The Global Economy 1) Compared to the world, the rate of U.S. population growth is A) slower than in the world as a whole. B) about the same as in the world as a whole. C) much faster than in the world as a whole. D) incomparable because U.S. residents are born with a much greater chance of accumulating a lot of human capital. E) incomparable because we do not have accurate world population statistics. Answer: A Topic: World population Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 2) Approximately ________ people live in the United States and ________ people live in the world. A) 430 million; 8.6 billion B) 330 million; 7.6 billion C) 230 million; 5.6 billion D) 330 million; 3.6 billion E) 230 million; 6.6 billion Answer: B Topic: The people Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

3) The most people live in ________ economies and the fewest people live in ________ economies. A) developing; emerging market B) advanced; emerging market C) advanced; developing D) emerging market; developing E) developing; advanced Answer: A Topic: The countries Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 4) When describing the IMF broad country classification, the most accurate statement is that A) the category with the greatest number of countries is the advanced economies. B) the emerging market economies are countries that were, until the early 1990s, part of the Soviet Union or its satellites in Central and Eastern Europe and Asia. C) most of the nations in Western Europe are considered emerging market economies. D) most of the world's population lives in advanced economies. E) about 50 percent of the world's population live in the advanced economies and the other 50 percent live in the emerging market and developing economies. Answer: B Topic: Classification of economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 5) Which of the following is NOT classified as an advanced economy? A) South Korea B) Australia C) Russia D) Hong Kong E) the United Kingdom Answer: C Topic: Advanced economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

6) Canada is classified by the International Monetary Fund as A) an advanced economy. B) a developing economy. C) a transition economy. D) an emerging market economy. E) a natural-resource based economy. Answer: A Topic: Advanced economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 7) ________ economies include ________. A) Advanced; France, Australia and South Korea B) Advanced; the United States, Taiwan and Russia C) Advanced; Russia, Canada and Singapore D) Emerging; Taiwan, Russia and Singapore E) Emerging; Saudi Arabia, Poland and Taiwan Answer: A Topic: Advanced economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 8) Most countries in the world are classified as A) advanced. B) in transition. C) developing. D) industrialized. E) emerging market. Answer: C Topic: Developing economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

9) Most of the world's population lives in A) advanced economies. B) developing economies. C) transition economies. D) emerging market economies. E) island nations. Answer: B Topic: Developing economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 10) Which of the following is TRUE? i. The advanced economies account for more than half of global production. ii. Almost four out of every five people in the world live in the developing economies. iii. In the advanced economies, agriculture accounts for a larger part of total production than in the developing economies. A) only i and ii B) only ii and iii C) only i and iii D) only i E) i, ii, and iii Answer: A Topic: Developing economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 11) Nigeria would be classified by the International Monetary Fund as A) an advanced economy. B) a developing economy. C) a transition economy. D) an emerging market economy. E) a resource-based economy. Answer: B Topic: Developing economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

12) ________ economies include ________. A) Developing; Saudi Arabia and South Africa B) Developing; Poland and Russia C) Developing; China and Poland D) Emerging; Poland and Brazil E) Emerging; China and Canada Answer: A Topic: Developing economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 13) Poland is classified as A) an advanced economy. B) a developing economy. C) a transition economy. D) an emerging market economy. E) private economy. Answer: D Topic: Emerging market economies Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 14) The majority of the value of production in the world economy is produced in A) all of the developing economies taken together. B) all of Africa and the Middle East taken together. C) China and other Asian developing economies. D) all of the advanced economies taken together. E) all of the emerging market economies taken together. Answer: D Topic: What in the global economy Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

15) Which of the following correctly describes how the "global pie is baked"? A) Advanced economies account for about 40 percent of the value of the world's production. B) The United States' share of economic pie is increasing while China's share is decreasing. C) The increase in manufacturing has taken place in mainly the advanced economies. D) Asia accounts for about 40 percent of the global pie. E) Emerging economies account for about 25 percent of the global pie. Answer: A Topic: What in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 16) Physical capital differences across countries can be seen in the fact that A) more advanced economies typically have more sophisticated technology. B) furniture factories in China use machines like those in North Carolina. C) students in India study the same subjects as those in the United States. D) advanced economies produce 53 percent of the world's income. E) the iPhone's components are produced in 30 countries. Answer: A Topic: How in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 17) The charitable organization Creating Hope International trains women in Afghanistan to become tailors. This effort reduces A) physical capital differences between advanced and developing economies. B) entrepreneurship differences between advanced and developing economies. C) agricultural differences between advanced and developing economies. D) manufacturing differences between advanced and developing economies. E) human capital differences between advanced and developing economies. Answer: E Topic: How in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

18) Which of the following is an example of an effort to decrease physical capital differences between an advanced and a developing economy? A) American troops build roads in Afghanistan. B) Through World Vision, women and children in Africa receive education. C) Peace Corps volunteers teach English around the world. D) Creating Hope International trains women in Afghanistan to become tailors. E) Habitat for Humanity builds houses for low income families in the United States. Answer: A Topic: How in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 19) Of the following, the country with the highest average income per day in the world is A) Russia. B) the United States. C) Brazil. D) India. E) China. Answer: B Topic: Income in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 20) Income equality has A) increased within countries but has narrowed across countries. B) not changed in the advanced economies over the past 50 years. C) narrowed within countries but increased across countries. D) increased in developing economies as manufacturing has decreased. E) decreased in the United States as manufacturing has increased. Answer: A Topic: Income in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

21) The world population is approximately ________ people. A) 7.6 million B) 2 trillion C) 7.6 billion D) 7.6 trillion E) 760 million Answer: C Topic: Population Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 22) Which of the following statements is TRUE? A) Income inequality within most countries has increased during the past 20 years. B) Income inequality across the entire world has decreased during the past 20 years. C) Income inequality within most countries and across the entire world has not changed much during the past 20 years. D) Both A and B are correct. E) None of the above is correct. Answer: D Topic: Income in the global economy Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 23) The percentage of the world's population that lives in the advanced economies is A) more than 71 percent. B) between 51 percent and 70 percent. C) between 31 percent and 50 percent. D) between 20 percent and 30 percent. E) less than 20 percent. Answer: E Topic: Population Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

24) The emerging market economies are A) the largest grouping including the nations of China and India. B) in transition from state-owned production to free markets. C) most of the nations of Western Europe. D) the nations that are currently agricultural in nature. E) the nations with the highest standards of living. Answer: B Topic: Emerging market economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 25) Compared to the developing economies, the advanced economies have ________ human capital and ________ physical capital. A) more; more B) more; less C) the same; the same D) less; more E) less; less Answer: A Topic: Advanced economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 26) In the advanced economies, ________ of the factories use advanced capital equipment, and in the developing economies, ________ of the factories use advanced capital equipment. A) virtually all; virtually all B) some; some C) virtually all; none D) some; none of E) virtually all; some Answer: E Topic: Advanced economies Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

2.3 The Circular Flows 1) ________ the owners of the factors of production, while ________ what amounts of those factors to hire. A) Households are; firms determine B) Households are; the government determines C) The government is; firms determine D) Firms are; households determine E) Firms are; the government determines Answer: A Topic: Households vs. firms Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 2) What two groups of decision makers are represented in the basic circular flow model? A) governments and financial institutions B) lenders and borrowers C) wholesalers and retailers D) bankers and regulators E) households and firms Answer: E Topic: Circular flow Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 3) Dan missed class the day the professor covered the circular flow model. Dan asked his friend Joan to explain markets to him. Joan correctly stated that a market A) requires a physical location for buyers and sellers to get together. B) is any arrangement that brings buyers and sellers together. C) must include a written contract between buyers and sellers. D) is only a place to purchase groceries. E) must have many buyers and only one seller, who is willing to sell to all the buyers. Answer: B Topic: Markets Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

4) The decisions of firms and households are A) coordinated by markets. B) made independently of one another. C) controlled by but not totally coordinated by the government. D) unexplainable by the circular flow model. E) coordinated by but not totally controlled by the government. Answer: A Topic: Markets Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 5) The circular flow model is used to show the A) flow of renewable natural resources. B) recycling process of production materials. C) expansions and contractions of economic activity. D) flow of expenditures and incomes in the economy. E) flow of supply and the flow of demand. Answer: D Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 6) The circular flow model shows the A) distribution of income and consumption goods across income levels. B) combinations of the factors of production needed to produce goods and services. C) flow of expenditure and incomes that arise from the households', firms', and governments' decisions. D) flow of natural resources from firms to the private market to government and back to firms. E) distribution of income to the different factors of production. Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

7) The circular flow model shows the flow of A) expenditure and income throughout the economy. B) only money throughout the economy. C) only funds in stock and bond markets. D) only tax payments and government expenditures. E) goods markets and factor markets as they move through the economy. Answer: A Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 8) In the circular flow model, there are generally two types of markets: the ________ market and the ________ market. A) producers; consumers B) households; firms C) service; goods D) goods; factor E) supply; demand Answer: D Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 9) In the circular flow model, consumption goods are bought and sold in the A) goods market. B) financial market. C) factor markets. D) government market. E) monetary flows. Answer: A Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

10) In the circular flow model, which of the following is on the buying side in the goods market? i. firms ii. households iii. federal, state, and local governments A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: E Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 11) In the circular flow model, which of the following is on the selling side in the goods market? A) federal, state, and local governments B) only households C) exporters D) only firms E) both firms and households Answer: D Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 12) The circular flow model shows that goods and services flow from A) businesses to households. B) households to business. C) the factor market to businesses. D) the goods market to businesses. E) the factor markets to the goods markets. Answer: A Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

13) As the circular flow model points out, a choice that households make is how A) many resources a firm will hire. B) many goods and services are produced. C) many goods and services are purchased. D) much labor is hired. E) much the government will collect in taxes and how much the government will spend on transfer payments. Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 14) In the circular flow model, which of the following owns the factors of production? A) only federal, state, and local governments B) only households C) only firms D) both firms and households E) firms, households, and all levels of government Answer: B Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 15) In the circular flow model, the factor markets are the markets in which A) consumption goods and services are bought and sold. B) government goods and services are provided. C) land, labor, capital, and entrepreneurship are bought and sold. D) investment goods and services are bought and sold. E) governments impose all their taxes. Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

16) A money flow in the circular flow diagram is i. the government's collection of taxes. ii. Chevrolet's production of SUVs. iii. Nike's payment of wages to its workers. A) i and iii B) i, ii and iii C) i only D) ii only E) ii and iii Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 17) A real flow in the circular flow diagram is i. a firm's payments of wages to its workers. ii. a household's purchase of a new car. iii. a farmer's use of land to grow corn. A) ii and iii B) i only C) i and iii D) ii only E) i, ii and iii Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 18) An example of a real flow in the circular flow diagram is A) a household's supply of work effort at its new business. B) the government's payment of wages to a soldier. C) Nike's payment of wages to workers in China. D) your county's collection of property taxes. E) a teacher's salary at the local high school. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

19) An example of a money flow in the circular flow diagram is A) a student's payment of tuition to her university. B) the government's operation of the court system. C) the government's financing of the national debt. D) a firm's production of goods to sell to a foreign country. E) a farmer's use of land to grow wheat. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 20) As the circular flow model shows, the factors of production flow from A) firms to households through the factor market. B) households to firms through the factor market. C) firms to households through the goods market. D) households to firms through the goods market. E) the goods market through firms to the factor markets. Answer: B Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 21) In the circular flow model, the factors of production flow in the A) same direction as do the rents, wages, interest, and profits. B) opposite direction as do the rents, wages, interest, and profits. C) opposite direction as does the government. D) same direction as does the goods market. E) opposite direction as does the goods market. Answer: B Topic: Circular flow model Skill: Level 4: Applying models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

22) In the goods market, firms ________ and households ________. A) purchase goods and services; supply goods and services B) supply land, labor, capital, and entrepreneurship services; hire land, labor, capital, and entrepreneurship services C) pay rent, wages, interest, and profit; earn rent, wages, interest, and profit D) supply goods and services; purchase goods and services E) hire land, labor, capital, and entrepreneurship services; supply goods and services Answer: D Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 23) In the factor market, firms ________ and households ________. A) hire land, labor, capital, and entrepreneurship services; purchase goods and services B) supply land, labor, capital, and entrepreneurship services; hire land, labor, capital, and entrepreneurship services C) pay rent, wages, interest, and profit; earn rent, wages, interest, and profit D) purchase goods and services; supply goods and services E) supply goods and services; purchase goods and services Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 24) Which of the following transactions takes place in factor markets? A) Henry receives a commission from his employer for selling a new automobile. B) Jake purchases 1,000 shares of stock in the Walmart Corporation through his online trading account. C) Sam enters the winning bid on a grand piano at a local auction. D) Justin receives $30 in exchange for mowing his neighbor's lawn. E) Lucille receives a $500 check from the U.S. Social Security Administration. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Application of knowledge

25) Which markets are depicted in the basic circular flow model? A) the goods market and the stock market B) the factor market and the bond market C) the goods market and the factor market D) the money market and the foreign exchange market E) the stock market and the bond market Answer: C Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 26) In the circular flow model, which of the following flows in the opposite direction from the flow of factors of production? A) finished goods and services B) wages, rent, interest, and profit C) interests payments of Federal, state, and local governments D) firm's profit incentives E) the goods market Answer: B Topic: Circular flow model Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 27) Terri is enrolled in her first economics course. She is required to give a presentation about the circular flow. Which of the following statements should she include in her presentation? A) Households choose the amount of the factors of production to provide the firms. B) Firms choose the amount of the factors of production to provide households. C) Households receive wages for the amount of entrepreneurship they provide firms. D) Firms pay wages for the amount of entrepreneurship they provide households. E) The flows of goods and services and payments for the goods and services flow in the same direction. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

28) Aaron locked himself out of his house and had to pay $40 to Brianna, who works for Lucky Locksmith, to open his door. Based on this transaction in the economy and using concepts from the circular flow model, which of the following is TRUE? A) Brianna earned income from supplying her labor services. B) Aaron earned income from supplying his labor services. C) Brianna purchased goods and services. D) Aaron acted as a firm in this transaction. E) Aaron supplied goods and services. Answer: A Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 29) In the circular flow model A) the government is represented as a separate market. B) the government buys goods and services from firms. C) goods and services are sold by households and purchased by firms. D) factor markets are where goods rather than services are bought and sold. E) the government has no direct interaction with either households or firms. Answer: B Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 30) In the circular flow model with the government sector, transfers A) flow in the same direction as do taxes. B) flow in the opposite direction as do taxes. C) to households flow in the same direction as do expenditures on goods and services. D) to firms flow in the same direction as do rent, wages, interest, and profits. E) flow only through the goods market. Answer: B Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

31) What would be an example of a government good? A) Jake buys an iPhone. B) The local driver's license office purchases a new digital camera and printer. C) Antonio, the manager of the local Taco Hut, purchases a new deep fryer. D) Donald Trump purchases furniture for his office. E) Rhianna gets a haircut. Answer: B Topic: Government goods and services Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 32) In the circular flow model with the government sector, taxes A) flow in the opposite direction as do transfers. B) flow in the same direction as do transfers. C) on households flow in the same direction as do the goods and services. D) on firms flow in the same direction as do factors of production. E) flow from the goods market to the factor markets. Answer: A Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 33) Which of the following is NOT shown explicitly in the circular flow model? A) the government's purchases in the goods market B) the taxes the government collects from households C) the government's interaction with firms D) the legal system E) the transfers the government makes to households Answer: D Topic: Circular flow and the government Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

34) Which of the following is a function of the U.S. federal government? A) providing the legal and social framework for economic activity B) distributing private goods and services C) deciding for whom firms should produce goods and services D) deciding how much to produce of private goods and services E) determining what wages firms will pay their workers Answer: A Topic: Federal government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 35) Which of the following is NOT a function of the federal government? A) collecting property taxes B) making social security and welfare payments C) making transfers to state and local governments D) providing public goods and services E) imposing a personal income tax Answer: A Topic: Functions of the federal government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 36) Households and firms in the U.S. economy interact with those in the rest of the world in the ________ market and in the ________ market. A) goods; factor B) goods; financial C) government; goods D) financial; factor E) firm; government Answer: B Topic: Circular flow model, international flows Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

37) An example of a U.S. export is A) a TV made in China sold to a buyer in Azerbaijan. B) matchbooks made in Mexico sold to a buyer in New Jersey. C) pasta made in Italy sold to buyers in Spain. D) diamonds mined in Africa sold to buyers in South America. E) a washing machine made in Indiana sold to a buyer in France. Answer: E Topic: Circular flow model, international flows Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 38) Goods produced in the United States and sold in other countries are called A) exports. B) imports. C) foreign goods. D) capital goods. E) capital account goods. Answer: A Topic: Exports Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 39) An export good is a good produced A) in the United States and sold to foreigners living in the United States. B) by foreigners in the United States and purchased by U.S. households. C) in another country and purchased by U.S. residents. D) in the United States and sold in other countries. E) in another country and purchased by foreigners not residing in the United States. Answer: D Topic: Exports Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

40) Computers and insurance coverage produced in the United States and sold to people in other nations are categorized as A) U.S. consumption goods and services. B) foreign capital goods. C) U.S. government goods and services. D) U.S. exports of goods and services. E) U.S. imports of goods and services. Answer: D Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 41) The Colorado Ski Shop sold 60 ski jackets to a Belgian company's headquarters located in Paris, France. The ski jackets are a A) U.S. export good. B) capital good. C) government good. D) U.S. consumption service. E) U.S. import. Answer: A Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 42) A market is defined as A) the physical place where goods (but not services) are sold. B) the physical place where goods and services are sold. C) any arrangement that brings buyers and sellers together. D) a place where money is exchanged for goods. E) another name for a store. Answer: C Topic: Markets Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

43) In the circular flow model A) only firms sell in markets. B) only households buy from markets. C) some firms only sell and some firms only buy. D) the money used to buy goods and the goods themselves travel in the same direction. E) both firms and households buy or sell in different markets. Answer: E Topic: Markets Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 44) ________ choose(s) the quantities of goods and services to produce, while ________ choose(s) the quantities of goods and services to buy A) Households; firms B) Firms; households and the government C) The government; firms D) Firms; only households E) Households; the government Answer: B Topic: Households vs. firms Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 45) ________ choose the quantities of factors of production to hire and ________ choose the quantities of goods and services to produce. A) Entrepreneurs; firms B) Firms; firms C) Markets; markets D) Factor markets; goods markets E) Firms; households Answer: B Topic: Households vs. firms Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

46) In the circular flow model, rent, wages, interest, and profit paid flow from ________ through ________ to ________. A) households; goods markets; firms as payment for goods B) firms; factor markets; households C) firms; goods markets; households D) households; factor markets; firms E) firms; goods markets; firms Answer: B Topic: Households vs. firms Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 47) A circular flow model shows the interrelationship between the ________ markets and the ________ markets. A) household; goods B) household; factor C) business; household D) expenditure; income E) goods; factor Answer: E Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 48) In the circular flow model, the expenditures on goods and services flow in the A) same direction as goods and services in all cases. B) same direction as goods and services ONLY IF they both flow through the goods market. C) same direction as goods and services ONLY IF they both flow through the factor market. D) opposite direction as goods and services. E) same direction as factor markets. Answer: D Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

49) Households receive transfers from ________, and firms receive transfers from ________. A) government; government B) firms; households C) government; government and households D) firms and government; government E) government; no one Answer: A Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 50) U.S. exports of goods and services flow to households and firms in ________, and U.S. financial inflows of capital flow to households and firms in ________. A) the United States; the United States B) the United States; the rest of the world C) the rest of the world; the United States D) the rest of the world; the rest of the world E) the United States; the rest of the world and the United States Answer: C Topic: Circular flow model, international flows Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking 2.4 Integrative Questions 1) If a product becomes more popular and consumers want more produced, which of the following best describes what happens to move more factors of production into that industry? A) An agency of the Federal government directs the movement of factors. B) The chief executive officers or presidents of corporations require that factors leave one industry and move to the other industry. C) Factor owners voluntarily move their factors because they want to satisfy the interests of consumers. D) Wages, rent, interest, and profit increase in that industry, thereby giving factors the incentive to move to that industry. E) Consumers increase their demand for the products and, as a result, the taxes the producers must pay decrease enabling the producers to hire more factors of production. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 48 Copyright © 2021 Pearson Education, Inc.

2) What determines the income flows that households receive? A) an agency of the Federal government B) what they choose to produce, how much is sold, and the price received when sold C) their ownership of factors of production, how much they sell in the factor markets, and the prices received when sold D) financial institutions such as banks E) what they choose to consume Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 3) What determines the revenue flows received by businesses? A) an agency of the Federal government B) what they choose to produce, how much is sold, and the price received when sold C) their ownership of factors of production, how much they sell in the factor markets, and the prices received when sold D) financial institutions such as banks E) what they pay the factors of production they employ Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

2.5 Chapter Figures

The figure above shows the circular flow model. 1) In the figure above, which of the following represents a real flow of a factor of production? A) labor B) wages C) goods bought D) services sold E) firms' expenditures on factors of production Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

2) In the figure above, which of the following represents a money flow? A) goods purchased B) interest C) capital D) services sold E) goods supplied Answer: B Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 3) In the figure above, which of the following represents a real flow? A) expenditures on real estate services B) profit C) capital D) wages E) both B and D Answer: C Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 4) In the figure above, which of the following transactions take place in the factor markets? i. Michael, a student, orders a computer from Dell online. ii. Peter gets a job at a Walmart store. iii. Apple Computer opens a new store in Georgia. A) ii and iii B) only i C) only ii D) only iii E) i and ii Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

5) Margo orders a MacBook Pro computer from The Apple Store online to use it in her graphic design business. How will this be reflected in the figure above? A) as a flow of a factor of production B) as a flow of goods and services bought C) as expenditures on goods and services D) as goods and services supplied E) It won't be shown in the figure because this transaction takes place neither in goods markets nor in factor markets. Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

The figure above shows governments in the circular flow. 6) In the figure above, households A) receive transfers directly from governments. B) buy goods and services from governments in goods markets. C) receive transfers from governments through factor markets. D) sell factors of production to governments. E) pay taxes to governments through factor markets. Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

7) In the figure above, firms A) pay taxes directly to governments. B) sell goods and services to governments in goods markets. C) receive transfers from governments through factor markets. D) own factors of production. E) do all of the above. Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 8) In the figure above, governments A) collect taxes. B) coordinate economic activities of households and firms. C) hire factors of production. D) own factors of production. E) sell goods and services to household. Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 9) In the figure above, which of the following is TRUE? i. Governments coordinate economic activities of households and firms. ii. Governments buy goods and services in goods markets. iii. Households pay taxes directly to firms. A) only ii B) only i C) only iii D) i and ii E) ii and iii Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking

10) Social Security tax is deducted from your paycheck. In the figure above, this will be shown as A) taxes flowing from households to governments. B) taxes flowing from firms to governments. C) taxes flowing from households to firms. D) wages flowing from firms to households. E) wages flowing from firms to governments. Answer: A Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 2.6 Essay: What, How, and For Whom? 1) Explain the difference between consumption and capital goods. Answer: A difference lies in the identity of the purchaser. Consumption goods (and services) are purchased by households and investment goods are purchased by firms. Households buy consumption goods to use for personal enjoyment. They contribute to the person's standard of living. Firms buy capital goods to use as a factor of production. Capital goods are used along with the other factors of production, to help produce additional goods and services. Topic: Consumption and capital goods Skill: Level 3: Using models Section: Checkpoint 2.1 Status: Old AACSB: Written and oral communication 2) Identify the four factors of production, and tell what type of income is earned by each factor. Answer: The factors of production are land, which represents all the gifts of nature; labor, the work effort people put into producing goods and service; capital, goods that have been produced and are used as a productive resource to help produce other goods and services; and entrepreneurship, the human resource that organizes all the other factors of production. Land earns rent, labor earns wages, capital earns interest, and entrepreneurship earns profit or losses. Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

3) What are the payments each factor of production receives? Answer: Rent is paid for the use of land. Wages are paid for the services of labor. Interest is paid for the use of productive capital. Entrepreneurs earn a profit. Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 4) What is meant by the term "human capital"? Answer: Human capital refers to the skills people possess. These skills help increase the quality of labor. Human capital can be increased through education, on the job training, and experience. The knowledge and skill gained from these improvements are called human capital. Topic: Human capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 5) What effect, if any, will a good college education have on your human capital? Explain your answer. Answer: Human capital refers to the skills people possess. These skills can be gained through education, on the job training, and experience. Thus your college education is increasing your human capital. Topic: Human capital Skill: Level 3: Using models Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 6) Explain the differences between "human capital," "financial capital," and "capital." Answer: Human capital is the knowledge and skills people obtain from education, on-the-job training, and work experience. Financial capital is money, stocks, and bonds. Capital is tools, instruments, machines, buildings, and anything that had to be produced prior to production of the desired goods and services. Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

7) What is the difference between "capital" and "financial capital"? Which is a factor of production? Answer: "Capital" is the actual physical good, such as a factory, an assembly line, or a computer server. "Financial capital" is stocks, bonds, or money. Financial capital is used to fund the purchase of the (physical) capital. Financial capital is NOT a factor of production because it is not used to help produce goods and services. Capital, however, is a factor of production because capital is used to help produce goods and services. Topic: Capital Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 8) What is the difference between the functional and the personal distribution of income? Answer: The functional distribution of income shows how total income is divided among the factors of production. The personal distribution of income shows how total income is divided among households. Topic: Distributions of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 9) In the United States, which factor of production earns the largest share of the nation's total income? Answer: The largest fraction of the nation's total income is earned by labor. In the United States, wages paid to labor account for about 68 percent of the nation's total income. Topic: Functional distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking 10) In the United States, how does the income received by the richest 20 percent of individuals compare with the income received by the other 80 percent? Answer: In the United States, the richest 20 percent of individuals receive about 51 percent of the nation's total income. Thus the other 80 percent of individuals receive the remainder, about 49 percent of the nation's income. So the richest 20 percent of the individuals receive almost the same amount as the other 80 percent of people. Topic: Personal distribution of income Skill: Level 1: Definition Section: Checkpoint 2.1 Status: Old AACSB: Reflective thinking

2.7 Essay: The Global Economy 1) Compare and contrast the world population with that of the United States. Is the United States becoming a larger or a smaller part of the world's population? Answer: The U.S. population was approximately 329 million in 20199 It is growing at a rate of about one person in every 15 seconds. The world population in 2011 was about 7.6 billion and is growing at a rate of 30 people in the same 15 seconds. Hence the United States is becoming a smaller fraction of the world's population. Topic: Population Skill: Level 2: Using definitions Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 2) How many and what fraction of the world's people live in advanced economies? In emerging market and developing economies? Answer: There are approximately 7.6 billion people in the world. Of the 7.6 billion people, almost 1 billion or 15 percent, live in advanced economies. About 80 percent, or nearly 5.5 billion people live in developing economies. Topic: Population Skill: Level 1: Definition Section: Checkpoint 2.2 Status: Old AACSB: Reflective thinking 3) The International Monetary Fund divides nations into three groups. What are the three groups and what are the characteristics of each group? Answer: The International Monetary Fund divides nations into "advanced economies," "developing economies," and "emerging market economies." Advanced economies are the countries or regions that have the highest living standards. Industrialized nations such as the United States, Canada, and Japan are included, as are the newly industrialized Asian economies. Developing economies are the countries that have yet to achieve a high standard of living. Nations in Africa, Central America, and South America fall into this category. The emerging market economies are nations that are changing how they organize their economies. In the past, their economic system relied upon state-ownership of capital and direct government management of the economy. They now are moving to more reliance upon a system of free enterprise, that is, a system similar to what exists in the United States. Emerging market economies are Russia and the other nations in Eastern and Central Europe that used to be Russian satellites. Topic: Classification of countries Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Written and oral communication

4) Discuss the distribution of income around the world. Which countries have the highest average incomes? Which countries have the lowest average incomes? How has the distribution of income changed in recent years? Answer: Income is distributed unequally, with residents in the advanced economies having the highest average incomes. The highest living standard is in the United States, where the average income is $129 per day. Canada, Japan, the United Kingdom, and the Euro zone are close behind. In the poorest regions of the world, India and Africa, incomes are much lower. The average income is only $3 per day in India. The distribution of world income has become more equal in recent years because income in some very poor nations, especially China, has grown rapidly. Topic: Distributions of income Skill: Level 3: Using models Section: Checkpoint 2.2 Status: Old AACSB: Written and oral communication 5) Discuss the differences between developing and emerging market economies. Answer: Although the average income in emerging market economies is less than that in advanced economies, developing countries generally have lower levels of income than emerging market economies. Emerging market economies are in some ways as developed as the advanced economies because they often have a well-trained labor force and a reasonable capital stock, both of which are typically missing in developing economies. But emerging market economies are struggling to raise their living standards. The main difference between emerging market economies and other economies is their economic system. Emerging market economies operated under state-owned production for many years and are now moving towards a free market system. Developing economies generally do not have the same history of a very long period of time operating under a system of state-owned production. Topic: Developing and emerging market economies Skill: Level 5: Critical thinking Section: Checkpoint 2.2 Status: Old AACSB: Written and oral communication 2.8 Essay: The Circular Flows 1) What is a market? Must a market have a single physical location? Answer: A market is any arrangement that allows buyers and sellers to get together and transact their business. Although some markets have a physical location, such as a farmers' market where buyers and sellers of fresh corn can meet face-to-face, markets do not require an actual location. Indeed, many markets, such as the local market for apartments, do not have a single physical location. Nonetheless, buyers and sellers (tenants and landlords) arrange purchases and sales (the rental of apartments and houses) through means other than meeting in one central location. Topic: Markets Skill: Level 1: Definition Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication 59 Copyright © 2021 Pearson Education, Inc.

2) Explain the structure of the circular flow model. Answer: Households own the factors of production and sell the services from them to firms in the factor market. Income earned by households in the factor market is used to purchase goods and services from firms in the goods market. And the revenue the firms gain by selling the goods and services in the goods market is used to pay for the services of the factors of production they hire in the factor markets. Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication 3) How are the roles of the household different in the goods market and in the factor markets? Answer: In the goods market, households are buyers. They purchase the goods and services produced by the firms. In exchange for the goods and services, households pay firms. In the factor market, households are sellers. They provide the services from land, labor, capital, and entrepreneurship to the firms. In the factor markets, households receive payments from firms. Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication 4) Describe the circular flow of the economy by discussing the two markets where households and firms meet. Answer: Firms and households meet in two markets: the goods market and the factors market. In the goods markets, households buy the goods and services that firms sell. In this market, households give firms money in exchange for the goods and services. In the factors market, households sell the services of the factors of production to firms, which buy the services of these factors. In the factors market, firms pay households money in exchange for the productive resources. Hence households earn their incomes in the factors market and spend their incomes in the goods market. And firms earn their revenue in the goods market and pay their costs in the factors market. Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication

5) Describe the government's flows in the circular flow model of the economy. Answer: The government has several flows in the circular flow model. First, the government taxes households and firms. Hence, funds flow from households and firms to the government. Second, the government transfers income back to households, via payments such as social security. In this case, funds flow from the government to households. The government also purchases goods and services from firms in the goods market. In this case, goods and services flow to the government and payments flow to firms. Topic: Circular flow and the government Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Written and oral communication

6) Label the flows in the simplified circular flow diagram that ignores the government.

Answer:

The figure above shows the labeled flows. Topic: Circular flow model Skill: Level 2: Using definitions Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

7) Draw a circular flow diagram with households and firms and without government. Label the markets and the flows in the circular flow diagram. Answer:

A circular flow diagram with the markets and flows labeled is in the figure above. Topic: Circular flow model Skill: Level 3: Using models Section: Checkpoint 2.3 Status: Old AACSB: Reflective thinking

Foundations of Microeconomics, 9e (Bade) Chapter 3 The Economic Problem 3.1 Production Possibilities 1) The United States produced approximately ________ worth of goods and services in 2019. A) $21 trillion B) $21 billion C) $210 trillion D) $210 billion E) $2,100 trillion Answer: A Topic: Production possibilities Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Revised AACSB: Reflective thinking 2) Which of the following is an assumption used when drawing a production possibilities frontier? i. Human wants and desires are limited to what is available. ii. Only two goods are considered. iii. The level of technology is fixed and unchanging. A) i only B) ii only C) i and iii D) ii and iii E) i, ii, and iii Answer: D Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

3) In the production possibilities model, the vertical axis measures ________ and the horizontal axis measures ________. A) the quantity of a good or service; the quantity of another good or service B) the price of a good or service; the quantity of the good or service C) the price of a good or service; the price of another good or service D) the quantity of a good or service; time E) people's wants; the quantity of a good or service Answer: A Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 4) The production possibilities frontier illustrates the A) maximum combinations of goods and services that can be produced. B) resources the economy possess, but not its level of technology. C) goods and services that people want. D) limits to people's wants. E) amount of each good that people want to buy. Answer: A Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 5) When drawing a production possibilities frontier, which of the following is held constant? A) the amount of money in the economy B) the available factors of production and the state of technology C) the prices of goods and services D) the quantity of the goods and services that are produced E) None of the above because nothing is held constant when drawing the production possibilities frontier. Answer: B Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

6) A production possibilities frontier shows A) the various combinations of output a nation can produce a certain time, given its available resources and technology. B) the limits to future growth of a nation. C) how money can be allocated among two kinds of goods. D) that if price of one good decreases, the price of the other has to increase. E) that it is impossible to produce inefficiently. Answer: A Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 7) The production possibilities frontier is the A) maximum output that can be produced at an opportunity cost of zero. B) minimum output that can be produced when resources are used inefficiently. C) boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology. D) boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced when technology is changing. E) maximum opportunity cost combinations of goods and services. Answer: C Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 8) The production possibilities frontier is the boundary between the A) goods and services that the economy can produce. B) attainable and unattainable combinations of goods and services. C) wanted and unwanted combinations of goods and services. D) rational and irrational choices facing a society. E) affordable and unaffordable combinations of production. Answer: B Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

9) Consider a production possibility frontier with jeans on the vertical axis and shoes on the horizontal axis. As the country moves along the frontier closer to the horizontal axis A) more jeans are produced. B) the country eventually chooses an unattainable point. C) free lunches occur. D) more tradeoffs occur. E) more shoes are produced. Answer: E Topic: Production possibilities frontier Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 10) While moving along a production possibilities frontier, the amount of labor ________, the amount of capital ________, and the level of technology ________. A) is fixed; is fixed; varies B) varies; is fixed; varies C) varies; is fixed; is fixed D) is fixed; is fixed; is fixed E) varies; varies; varies Answer: D Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

11) The table above gives four production possibilities for airplanes and cruise ships. In possibility A, how many resources are devoted to the production of airplanes? A) 0 B) few C) most D) all E) It is impossible to tell without more information about the prices of airplanes and cruise ships. Answer: D Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 12) The table above gives four production possibilities for airplanes and cruise ships. In possibility A, how many resources are devoted to the production of cruise ships? A) 0 B) few C) most D) all E) It is impossible to tell without more information about the prices of airplanes and cruise ships. Answer: A Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 13) Moving from one point to another on a production possibilities frontier implies A) increasing the production of both goods. B) decreasing the production of both goods. C) increasing the production of one good and decreasing the production of another. D) holding the production levels of both goods constant. E) changing the amount of factors of production that are employed. Answer: C Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 5 Copyright © 2021 Pearson Education, Inc.

14) Assume that an association of young workers has lobbied Congress to require that all workers retire once they reach the age of fifty. What impact would this law have on the nation's production possibilities frontier? A) no impact at all B) The level of unemployment would decrease so the production possibilities frontier would shift outward. C) The nation would move to a new position on its production possibilities frontier but the frontier itself would not shift. D) The production possibilities frontier would shift inward. E) The number of young workers would increase so the production possibilities frontier would shift outward. Answer: D Topic: Production possibilities frontier Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 15) A major earthquake occurs in the central part of the United States. What impact would this have on the nation's production possibilities frontier and why? A) It would shift outward because unemployment would be reduced. B) Nothing would happen because the nation would still have the same capabilities. C) A tradeoff would occur to replace the resources and goods destroyed. D) It would shift inward because some of the nation's resources, such as capital and labor, would be destroyed. E) It would not shift because people would get to work to replace any capital that was destroyed. Answer: D Topic: Production possibilities frontier Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 16) When all of the available factors of production are being efficiently employed, the A) economy is producing at a point within its PPF. B) economy is producing at a point on its PPF. C) economy is producing at a point beyond its PPF. D) PPF disappears. E) opportunity cost of changing production is infinite. Answer: B Topic: Attainable points Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 6 Copyright © 2021 Pearson Education, Inc.

17) In a production possibilities frontier diagram, the attainable production points are shown as A) only the points on the production possibilities frontier. B) only the points beyond the production possibilities frontier. C) only the points inside the production possibilities frontier. D) the points inside and the points on the production possibilities frontier. E) ANY of the production points. Answer: D Topic: Attainable points Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 18) In the production possibilities frontier model, an unattainable point lies A) only on the production possibilities frontier itself. B) only inside the production possibilities frontier. C) only outside the production possibilities frontier. D) both on and outside the production possibilities frontier. E) There are no unattainable points in the production possibilities model. Answer: C Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 19) Production efficiency is represented by ________ a production possibilities frontier. A) all points on B) all points inside C) all points outside D) a movement along E) only one point on Answer: A Topic: Production efficiency Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

20) If an economy cannot produce more of one good without producing less of another good, this implies that which of the following has been achieved? A) allocative efficiency B) minimum marginal cost C) PPF efficiency D) production efficiency E) maximum marginal benefit Answer: D Topic: Production efficiency Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 21) Production efficiency occurs A) anywhere inside or on the production possibilities frontier. B) when the total cost of production is minimized. C) at all points on the production possibilities frontier. D) at only one point on the production possibilities frontier. E) at all points inside the production possibilities frontier. Answer: C Topic: Production efficiency Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 22) When production efficiency does NOT occur, i. an economy is producing at a point within its PPF. ii. there are unemployed resources. iii. allocative efficiency cannot occur. A) i only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Production efficiency Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

23) If there is unemployment in an economy, then the A) production possibilities frontier will shift inwards. B) economy is operating at an unattainable point. C) production possibilities frontier will shift outwards. D) economy is producing at a point inside the production possibilities frontier. E) production possibilities frontier must be bowed inward. Answer: D Topic: Attainable points, unemployment Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 24) If a society moves from a period of time with significant unemployment to a time with full employment, its production possibilities frontier will A) shift leftward. B) shift rightward. C) not shift because the society moves from one point on the frontier to a point inside the frontier. D) not shift because the society moves from a point inside the frontier to a point on the frontier. E) not shift because the society moves from one point on the frontier to a point outside the frontier. Answer: D Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 25) Suppose that an economy is currently producing at a point that lies inside of its production possibilities set. Which of the following would best explain this circumstance? A) The economy does not have enough resources to produce at a point closer to the frontier of the production possibilities set. B) The prevailing level of technology prevents the economy from producing at a point closer to the frontier of the production possibilities set. C) The economy is experiencing a high level of unemployment. D) Any of the above statements could explain this situation. E) None of the above statements could explain this situation. Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

26) Which of the following statements is correct? A) An increase in productivity moves the economy from inside the production possibilities frontier to the frontier itself. B) An increase in productivity shifts the economy from producing at a point on the production possibilities frontier to a point outside the production possibilities frontier. C) An increase in unemployment shifts the economy further inside its production possibilities frontier. D) An increase in unemployment shifts the economy from a point outside the production possibilities frontier back to the production possibilities frontier. E) A reduction in unemployment shifts the entire production possibilities frontier outward. Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 27) A point on the production possibilities frontier reflects an A) attainable point with full employment of all resources. B) attainable point without full employment of all resources. C) unattainable point with full employment of all resources. D) unattainable point without full employment of all resources. E) None of the above answers is correct. Answer: A Topic: Attainable points, full employment Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 28) Suppose a country operates on its production possibility frontier when it produces 1,000 books and 1,000 tables. The combination of ________ reflects ________. A) 500 books and 1,000 tables; an inefficient but attainable point B) 1,000 books and 500 tables; an efficient point C) 1,000 books and 1,000 tables; a free lunch D) 500 books and 500 tables; an attainable and efficient point E) 1,000 books and 1,500 tables; a free lunch Answer: A Topic: Attainable points, inefficiency Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

29) Consider a production possibility frontier with books and tables. A combination of 1,000 books and 500 tables is on the frontier. Which of the following are necessarily TRUE? i. Production of 700 books and 400 tables is attainable but inefficient. ii. Production of 1,000 books and 600 tables is unattainable. iii. Production of 500 books and 1,000 tables is inside the frontier. A) i and ii B) i, ii and iii C) i and iii D) ii and iii E) i only Answer: A Topic: Attainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

30) The table above shows a production possibilities frontier for an economy. Which of the following combinations is unattainable? A) 0 loaves of bread and 800 books B) 100 loaves of bread and 800 books C) 200 loaves of bread and 800 books D) 300 loaves of bread and 200 books E) 0 loaves of bread and 0 books Answer: C Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

31) The table above shows a production possibilities frontier for an economy. If the economy tried to produce a combination of 250 loaves of bread and 800 books A) there is some unemployment. B) there is full employment. C) the tradeoff between bread and books is inefficient. D) it cannot produce this combination because it lacks enough resources or technology. E) it is enjoying a free lunch. Answer: D Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

32) The figure above shows the production possibilities frontier for a country. A combination of 4 million gallons of milk and 4 million gallons of ice cream is A) unattainable. B) attainable and production efficient. C) attainable and production inefficient. D) unattainable and production efficient. E) More information is needed to determine if the point is attainable or not. Answer: A Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

33) The figure above shows the production possibilities frontier for a country. A combination of 3 million gallons of milk and 3 million gallons of ice cream is A) unattainable. B) attainable and production efficient. C) attainable and production inefficient. D) unattainable and production efficient. E) More information is needed to determine if the point is attainable or not. Answer: B Topic: Attainable points, full employment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 34) The figure above shows the production possibilities frontier for a country. A combination of 2 million gallons of milk and 2 million gallons of ice cream is A) unattainable. B) attainable and production efficient. C) attainable and production inefficient. D) attainable but more than production efficient. E) More information is needed to determine if the point is attainable or not. Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

35) Point D in the above PPF figure is A) an attainable production combination with unemployed resources. B) a tradeoff. C) an unattainable production combination. D) a production combination that can be attained once resources are fully employed. E) More information is needed to determine which of the above answers is correct. Answer: C Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 36) Which point in the figure above is an attainable combination that would have unemployed resources? A) point A B) point B C) point C D) point D E) point A and point B Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

37) The figure above shows a nation's production possibilities frontier. In the figure, point A shows A) the maximum quantity of pizza that can be produced. B) the minimum quantity of pizza that the society must produce. C) an unattainable point. D) an attainable point with unemployed resources. E) More information is needed to determine which of the above answers is correct. Answer: A Topic: Attainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 38) The figure above shows a nation's production possibilities frontier. In the figure, point B shows A) an unattainable point. B) an attainable point. C) a point with a free lunch. D) a point with no tradeoff. E) a point at which there are unemployed resources. Answer: A Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

39) The figure above shows the production possibilities frontier for a country. In order for it to produce at point E, the A) country would need to acquire more resources and/or more advanced technology. B) production of compact cars would need to decrease. C) production of SUVs would need to decrease. D) country would need to use its resources more efficiently. E) country would need to determine that compact cars and SUVs are equally important to it. Answer: A Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 40) The figure above shows the production possibilities frontier for a country. If the country is producing at point D, then the A) resources are being used efficiently. B) technology associated with producing SUVs and compact cars is advancing. C) resources are not being used efficiently and/or are unemployed. D) production of SUVs and compact cars is maximized. E) None of the above answers is correct because it is not possible to produce at point D. Answer: C Topic: Attainable points, unemployment Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

41) The above figure shows the production possibility frontier for an economy. The point or points that are attainable and production efficient are A) points B and C. B) points A, B, and C. C) point E. D) points A, B, C, and D. E) points A and D. Answer: B Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 42) The above figure shows the production possibility frontier for an economy. The point or points that are attainable are A) points B and C. B) points A, B, and C. C) point E. D) points A, B, C, and D. E) points A and D. Answer: D Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

43) The above figure shows the production possibility frontier for an economy. The point or points that are NOT attainable are A) points B and C. B) points A, B, and C. C) point E. D) points A, B, C, and D. E) points A and D. Answer: C Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 44) In order for Ireland to grow more potatoes, wool production must decrease. This situation is an example of A) producing at a point that lies beyond the PPF. B) zero opportunity cost. C) opportunity benefit. D) a free lunch. E) a tradeoff. Answer: E Topic: Tradeoffs Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 45) As we move along the production possibilities frontier A) the production of one good increases as the production of the other good decreases. B) the possibilities of tradeoffs diminish. C) a tradeoff is not possible because nations need all goods. D) more of both goods can be produced. E) less of both goods can be produced. Answer: A Topic: Tradeoffs Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

46) Which of the following statements is correct? A) If capital is idle, the economy is producing at its full potential. B) The production possibilities frontier shows that there are no limits to production. C) A tradeoff is a limit that forces an exchange or a substitution of one thing for something else. D) Any point on or within the PPF is production efficient. E) None of the above answers is correct. Answer: C Topic: Tradeoffs Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 47) When a nation is producing on its production possibilities frontier, if more resources are used to produce one good, then the production of other goods A) MUST increase. B) MUST decrease. C) MUST remain the same. D) MUST change, but they might increase or decrease. E) MIGHT increase if the nation can produce more efficiently. Answer: B Topic: Tradeoffs Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 48) The negative slope of the production possibilities frontier represents the idea A) that free lunches are possible. B) of tradeoffs, that in order to produce more of one good, the nation must produce less of another. C) of unemployment. D) of inefficient production. E) that prices rise as less is produced. Answer: B Topic: Tradeoffs Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

49) A movement from one point on a production possibilities frontier to another represents A) a tradeoff. B) a free lunch. C) full employment of labor but not capital. D) unemployment. E) an advance in technology. Answer: A Topic: Tradeoffs Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 50) The saying "There's no such thing as a free lunch," applies A) when there is some unemployment. B) on the production possibilities frontier. C) to unattainable combinations of goods and services. D) when more of one good can be produced without decreasing production of another. E) at all points inside the PPF. Answer: B Topic: Tradeoffs Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 51) A free lunch (the absence of a tradeoff) when the production of a good is increased is possible for the entire economy only if A) less of some product is produced. B) prices are decreased. C) prices are increased. D) resources are used inefficiently. E) there is a movement along the PPF. Answer: D Topic: Free lunches Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

52) A movement from a point inside the production possibilities frontier to a point on the production possibilities frontier represents A) a tradeoff. B) a free lunch. C) full employment of labor but not capital. D) unemployment of labor but not capital. E) an infinite opportunity cost. Answer: B Topic: Free lunches Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 53) A reason the production possibilities frontier exists is A) unlimited resources and technology. B) scarcity of resources. C) scarcity of resources and unlimited technology. D) unemployment. E) that people's wants are unlimited. Answer: B Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 54) The production possibilities frontier is a graph showing the A) exact point of greatest efficiency for producing goods and services. B) tradeoff between free lunches. C) maximum combinations of goods and services that can be produced. D) minimum combinations of goods and services that can be produced. E) resources available for the economy's production use. Answer: C Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

55) The production possibilities frontier is a boundary that separates A) the combinations of goods that can be produced from the combinations of services. B) attainable combinations of goods and services that can be produced from unattainable ones. C) equitable combinations of goods and services that can be produced from inequitable ones. D) fair combinations of goods and services that can be consumed from unfair ones. E) affordable production points from unaffordable points. Answer: B Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 56) Points inside the PPF are all A) unattainable and have fully employed resources. B) attainable and have fully employed resources. C) unattainable and have some unemployed resources. D) attainable and have some unemployed resources. E) unaffordable. Answer: D Topic: Attainable points, inefficiency Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 57) During a time of high unemployment, a country can increase the production of one good or service A) without decreasing the production of something else. B) but must decrease the production of something else. C) and must increase the production of something else. D) by using resources in the production process twice. E) but the opportunity cost is infinite. Answer: A Topic: Free lunches Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

58) Moving along the production possibilities frontier itself illustrates A) the existence of tradeoffs. B) the existence of unemployment of some factors of production. C) the benefits of free lunches. D) how free lunches can be exploited through trade. E) how tradeoffs need not occur if the economy is efficient. Answer: A Topic: Tradeoffs Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 59) The production possibilities frontier illustrates which of the following economic ideas? A) efficiency B) tradeoffs C) opportunity cost D) all of the above E) none of the above Answer: D Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 60) Points on the PPF are all A) unattainable and have fully employed resources. B) free lunches. C) inefficient. D) attainable and have some unemployed resources. E) production efficient. Answer: E Topic: Production efficiency Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

3.2 Opportunity Cost 1) In a production possibilities frontier graph, the cost of producing more units of a good is measured by the A) dollar value of the resources used to produce the good. B) amount of the other good or service that must be forgone. C) dollar value of the additional output. D) area in the arc between the PPF and a straight line drawn between the starting point and the ending point. E) None of the above answers is correct. Answer: B Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 2) The opportunity cost of producing one more unit of a good is calculated by dividing the A) increase in the quantity of that good by the decrease in the quantity of other good. B) total quantity of that good by the total quantity of other good. C) decrease in the quantity of the other good by the increase in the quantity of the good whose opportunity cost we're calculating. D) total quantity of the other good by the total quantity of the good whose opportunity cost we're calculating. E) price of the good whose opportunity cost we are calculating by the number of units of the other good that are forgone. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 3) To find the opportunity cost of producing one more unit of any product while on the production possibilities frontier requires A) setting the amounts of the two products equal to each other. B) setting the change in one product equal to the change in the other product. C) dividing the amount of the product forgone by the amount of the product gained. D) subtracting the change in the product whose production increased from the change in the product whose production decreased. E) None of these describes how to find opportunity cost. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 24 Copyright © 2021 Pearson Education, Inc.

4) To calculate the opportunity cost per unit, you divide the decrease in the quantity of the forgone item by the A) decrease in the quantity of the other item. B) increase in the quantity of the other item obtained. C) price of the item obtained. D) price of the item forgone. E) price of the item obtained and then multiply by the price of the item forgone. Answer: B Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 5) On a production possibilities frontier, 500 pounds of apples and 1,200 pounds of bananas can be produced while at another point on the same frontier, 300 pounds of apples and 1,300 pounds of bananas can be produced. Between these points, what is the opportunity cost of producing a pound of bananas? A) 2 pounds of bananas B) 200 pounds of apples C) 2 pounds of apples D) 0.5 a pound of apples E) 12/5 = 2.4 pounds of apples Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 6) On a production possibilities frontier, 500 pounds of apples and 1,200 pounds of bananas can be produced while at another point on the same frontier, 300 pounds of apples and 1,300 pounds of bananas can be produced. Between these points, what is the opportunity cost of producing a pound of apples? A) 2 pounds of bananas B) 100 pounds of bananas C) 2 pounds of apples D) 0.5 of a pound of bananas E) 5/12 of a pound of bananas Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 25 Copyright © 2021 Pearson Education, Inc.

7) A country produces only apples and bananas. Moving from point A to point B along its production possibilities frontier, 5 apples are forgone and 4 bananas are gained. What is the opportunity cost of a banana? A) 4 apples B) 5/4 of an apple C) 4/5 of an apple D) 1 banana E) None of the above answers is correct. Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 8) A country produces only apples and bananas. Moving from point A to point B along its production possibilities frontier, 5 apples are gained and 4 bananas are forgone. What is the opportunity cost of an apple? A) 4 bananas B) 5/4 of a bananas C) 4/5 of a banana D) 1 apple E) None of the above answers is correct. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

9) Robinson Crusoe divides his time between catching fish and gathering fruit. Part of his production possibilities frontier is given in the above table. If Mr. Crusoe is on his PPF and he increases the amount of fruit he gathers from 56 to 90 pounds, the opportunity cost is A) 37 pounds of fish. B) 31 pounds of fish. C) 17 pounds of fish. D) 34 pounds of fruit. E) 90 pounds of fruit. Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 10) Robinson Crusoe divides his time between catching fish and gathering fruit. Part of his production possibilities frontier is given in the above table. Mr. Crusoe, while lonesome, is efficient and always stays on his PPF. Mr. Crusoe is consuming 20 pounds of fish. Then he decides to slowly become a vegetarian and decrease his consumption of fish to 9 pounds. This decision means that Mr. Crusoe will A) incur an opportunity cost of 9 pounds of fruit. B) incur an opportunity cost of 20 pounds of fish. C) be able to enjoy a gain of 9 pounds of fruit. D) incur an opportunity cost of 99 pounds of fruit. E) incur an opportunity cost of 9 pounds of fish. Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

11) The table above shows a nation's production possibilities frontier. If the nation wants to produce 4 robots and 34 pizzas A) it will shift the production possibilities frontier. B) the opportunity cost is 9 pizzas. C) the nation will be producing inefficiently. D) it will be unable to do so because the production point is unattainable. E) the nation will then be producing at a production efficient point. Answer: D Topic: Unattainable points Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 12) The table above shows a nation's production possibilities frontier. If the nation chooses to increase the production of robots from 2 to 3 and it is on its PPF, it will have to forgo ________ pizzas. A) 37 B) 34 C) 3 D) 35.5 E) None of the above answers is correct. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

13) The table above shows a nation's production possibilities frontier. The opportunity cost of a robot between combination D and E is A) 4 pizzas. B) 34 pizzas. C) 30 pizzas. D) 1/4 of a pizza. E) undefined because neither point is production efficient. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

14) The figure above shows the production possibilities frontier for a country. The opportunity cost of a gallon of milk between combination point A and B is A) 4 gallons of ice cream for a gallon of milk. B) 3 gallons of ice cream for a gallon of milk. C) 1 gallon of ice cream for a gallon of milk. D) 1/3 of a gallon of ice cream for a gallon of milk. E) zero because at point A, zero milk is being produced. Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

15) The figure above shows the production possibilities frontier for a country. If the economy is operating at point B, then the opportunity cost of another million gallons of milk is A) 4 gallons of ice cream for a gallon of milk. B) 3 gallons of ice cream for a gallon of milk. C) 1 gallon of ice cream for a gallon of milk. D) 1/3 of a gallon of ice cream for a gallon of milk. E) zero because after producing another million gallons of milk, then zero gallons of ice cream are produced. Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

16) The above figure shows the production possibility frontier for a country. Suppose the country is producing at point A. What is the opportunity cost of increasing the production of rice to 12 tons? A) 15 thousand bottles of wine B) 6 thousand bottles of wine C) 9 thousand bottles of wine D) 12 tons of rice E) Nothing, it is a free lunch. Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

17) The above figure shows the production possibility frontier for a country. Suppose the country is producing at point D. What is the opportunity cost of increasing the production of rice to 15 tons? A) 9 thousand bottles of wine B) 6 thousand bottles of wine C) 15 thousand bottles of wine D) 12 tons of rice E) Nothing, it is a free lunch. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 18) The above figure shows the production possibility frontier for a country. Suppose the country is producing at point E. What would be the opportunity cost to increase the production of wine to 9 thousand bottles? A) 12 tons of rice B) 15 thousand bottles of wine C) 9 thousand bottles of wine D) 3 tons of rice E) Nothing, it is a free lunch. Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 19) The above figure shows the production possibility frontier for a country. Suppose the country is producing at point D. What would be the opportunity cost to move to point C? A) 6 thousand bottles of wine B) 15 thousand bottles of wine C) 12 tons of rice D) Nothing, it is a free lunch. E) This movement is not possible without economic growth. Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

20) The above figure shows the production possibility frontier for a country. Suppose the country is producing at point A. What would be the opportunity cost to increase the production of rice to 12 tons? A) 6 thousand bottles of wine B) 15 thousand bottles of wine C) 9 thousand bottles of wine D) 6 tons of rice E) Nothing, it is a free lunch. Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 21) The above figure shows the production possibility frontier for a country. What is the opportunity cost per ton of rice to move from point B to point D? A) 1,000 bottles of wine B) 500 bottles of wine C) 2 bottles of wine D) 1/2 of a bottle of wine E) None of the above answers is correct. Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 22) The above figure shows the production possibility frontier for a country. What is the opportunity cost per ton of rice to move from point D to E? A) 3,000 bottles of wine B) 333 bottles of wine C) 3 bottles of wine D) 1/3 of a bottle of wine E) None of the above answers is correct. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

23) The above figure shows the production possibility frontier for a country. What is the opportunity cost to move from point D to point E? A) 6 thousand bottles of wine B) 15 thousand bottles of wine C) 6 tons of rice D) 9 thousand bottles of wine E) Nothing, it is a free lunch. Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 24) The above figure shows the production possibility frontier for a country. What is the opportunity cost to move from point D to point B? A) 12 tons of rice B) 15 thousand bottles of wine C) 6 thousand bottles of wine D) 9 thousand bottles of wine E) Nothing, it is a free lunch. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 25) Moving from a point inside the production possibilities frontier to a point on the production possibilities frontier, the opportunity cost of producing more of the good on the horizontal axis A) increases. B) decreases. C) is constant. D) is 0. E) is infinite. Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

26) Consider a production possibility frontier with jeans on the vertical axis and shoes on the horizontal axis. As a country moves along the frontier closer to the vertical axis A) the opportunity cost of producing jeans increases. B) the opportunity cost of producing shoes increases. C) there are fewer tradeoffs. D) inefficient production occurs. E) the opportunity cost of producing jeans decreases. Answer: A Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 27) Suppose that in a PPF graph, wheat is on the vertical axis and jets are on the horizontal axis. Moving down along the PPF, the A) number of jets increases and the opportunity cost of jets increases. B) amount of wheat increases and the opportunity cost of wheat increases. C) number of jets increases and the opportunity cost of jets decreases. D) amount of wheat increases and opportunity cost of wheat decreases. E) opportunity cost of jets AND wheat both increase. Answer: A Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 28) Why is a production possibilities frontier bowed out (concave)? A) The bowed shape reflects constant opportunity cost. B) The bowed shape reflects decreasing opportunity cost. C) The bowed shape indicates that opportunity cost at first decreases at a decreasing rate, and then begins to decrease at an increasing rate. D) The bowed shape indicates that opportunity cost at first increases at a decreasing rate, and then begins to increase at an increasing rate. E) The bowed shape reflects increasing opportunity cost. Answer: E Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

29) The bowed out (concave) shape of the production possibilities curve implies that as production of one good A) increases, society must forgo increasing amounts of another good. B) increases, society must forgo decreasing amounts of another good. C) decreases, production of other goods decreases as well. D) increases, production of other goods increases as well. E) increases, society can obtain a free lunch. Answer: A Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 30) The idea of increasing opportunity cost is reflected in the A) bowed out shape of the production possibilities frontier. B) bowed in shape of the production possibilities frontier. C) linear shape of the production possibilities frontier. D) positive slope of the production possibilities frontier. E) fact that the PPF shows there are unattainable production points. Answer: A Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 31) A bowed out production possibilities frontier shows A) that resources are equally productive in all uses. B) increasing opportunity cost. C) that resources are not equally productive in all uses. D) Both answers B and C are correct. E) Both answers A and B are correct. Answer: D Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

32) The opportunity cost of a good increases as more of it is produced because A) there is no such thing as a free lunch. B) resources are not equally productive in all activities. C) producing more of a good requires additional resources. D) the number of forgone alternatives also increases. E) people want the good less as more is produced. Answer: B Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 33) As an economy increasingly specializes in producing one good, the opportunity cost of that good increases. The opportunity cost increases because A) resources are not equally productive in all activities. B) what must be paid to resources increases. C) human wants are virtually unlimited. D) not all goods are equally valuable. E) as more of a good is produced, the profit from its production must rise. Answer: A Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 34) As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good? A) It remains constant. B) It decreases. C) It increases. D) It might increase, decrease, or remain constant depending on how much people value the additional units of the good. E) None of these depicts what happens to opportunity cost. Answer: C Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

35) When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost A) increases. B) decreases. C) remains constant. D) might increase, decrease, or remain constant depending on how much people value the additional units of the good. E) cannot be predicted. Answer: A Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 36) A bowed out PPF reflects which of the following ideas? i. Increasing opportunity cost ii. Resources are not equally productive in all activities. iii. Prices of goods increase over time. A) i only B) i and ii C) i and iii D) ii and iii E) i, ii, and iii Answer: B Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 37) If there is increasing opportunity cost, then when moving downward on a production possibilities frontier, the opportunity cost of the good on the horizontal axis ________ as more of the good is produced. A) increases and the PPF gets steeper B) increases and the PPF gets flatter C) decreases and the PPF gets steeper D) decreases and the PPF gets flatter E) does not change and the PPF gets steeper Answer: A Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

38) A bowed out production possibility frontier shows that the A) opportunity cost of a good is constant as more of the good is produced. B) opportunity cost of a good decreases as more of the good is produced. C) opportunity cost of a good increases as more of the good is produced. D) opportunity cost relationship is linear. E) opportunity cost of producing another good is negative. Answer: C Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 39) Why does a nation experience increasing opportunity cost? A) As the nation moves from a production point within the PPF to one on the PPF, opportunity costs increase. B) As the nation moves from a production point within the PPF to another point also within the PPF, opportunity costs increase. C) When the amount of resources increases, the opportunity cost of all goods and services increases. D) Resources are not equally productive in producing different kinds of goods and services. E) Because the nation cannot produce at the unattainable production points that lie beyond the PPF. Answer: D Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 40) The fact of increasing opportunity cost when moving on the PPF means that A) to increase the production of one product requires larger and larger sacrifices of the other good. B) to decrease the production of one product requires smaller and smaller sacrifices of the other good. C) to increase the production of one product requires smaller and smaller sacrifices of the other good. D) when the government forces a movement from one point on the PPF to another point, no production is lost. E) the PPF will be a negatively sloped straight line. Answer: A Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 38 Copyright © 2021 Pearson Education, Inc.

41) Production possibilities frontiers usually curve out and away from the origin. The implication of this curvature is that A) as resources are used to produce one good, fewer resources are available to produce another good. B) the opportunity cost of producing a good goes down as more of that good is produced. C) technological change is present. D) the opportunity cost of producing a good stays the same regardless of how much of that good is produced. E) some resources are better at producing one good while other resources are better at producing alternative goods. Answer: E Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 42) If the production possibilities frontier between two goods were a straight line, then the opportunity cost of one good in terms of another would be A) constant. B) increasing. C) decreasing. D) zero. E) either constant, increasing, or decreasing but more information is needed to determine which. Answer: A Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 43) If the production possibilities frontier between two goods is a straight line, then the A) opportunity cost is not a ratio. B) resources are equally productive in both goods. C) line does not qualify as a production possibilities frontier because the unattainable production points are too close to the inefficient production points. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

44) As an economy moves down along a straight line production possibilities frontier, what happens to the opportunity cost of producing the good on the horizontal axis? A) It remains constant. B) It decreases. C) It increases. D) Above the midpoint it decreases until it equals 1 at the midpoint, and then it increases. E) None of these depict what happens to opportunity cost. Answer: A Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 45) If the production possibilities frontier between bottled water and water in a jug is a straight line, which of the following statements would be correct? A) A large amount of unemployment must exist. B) Resources are equally productive at producing either product. C) There is no tradeoff between the two goods. D) There is no decrease in the production of one good when the production of the other is increased. E) Producing more of one good gives the economy a free lunch. Answer: B Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

46) The table above shows the production possibilities for an economy. Drawing a PPF with books on the vertical axis and bread on the horizontal axis, a movement from possibility B to possibility C to possibility D shows the opportunity cost of ________ moving down along the PPF. A) books is decreasing B) bread is decreasing C) bread is increasing D) books is constant E) books and bread are both increasing Answer: C Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 47) The table above shows the production possibilities for an economy. The opportunity cost of a loaf of bread is ________ when moving from possibility B to possibility C. A) 1/2 of a book B) 2 books C) 200 books D) 100 loaves of bread E) 1 loaf of bread Answer: B Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

48) The table above presents the production possibilities frontier for a nation. Using the information in the table, moving from possibility C to B means that A) 4 units of capital goods are given up to get 55 units of consumption goods. B) 2 units of capital goods are given up to get 55 additional units of consumption goods. C) 4 units of capital goods are given up to get 10 additional units of consumption goods. D) 4 units of capital goods are given up to get 45 units of consumption goods. E) 2 units of capital goods are given up to get 10 additional units of consumption goods. Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 49) The table above presents the production possibilities frontier for a nation. Using the information in the table, when moving from possibility C to D, the cost of 1 unit of a capital good in terms of the consumption goods forgone is ________ consumption goods per capital good. A) 25 B) 15 C) 20 D) 10 E) an undefined amount of Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

50) The table above presents the production possibilities frontier for a nation. Using the information in the table, when moving from possibility A to B to C to ultimately E, the cost of a unit of capital goods in terms of consumption goods A) increases. B) decreases. C) remains the same. D) decreases from possibility A to C, and then increases from possibility C to D. E) cannot be calculated. Answer: A Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

51) The figure above illustrates a small country's production possibilities frontier. Based on the figure, we can tell that the nation's resources are A) equally productive in all tasks because the slope is negative. B) equally productive in all tasks because the production possibilities frontier is bowed out. C) not equally productive in all tasks because the slope is negative. D) not equally productive in all tasks because the production possibilities frontier is bowed out. E) unlimited because the slope is negative and the PPF is bowed out. Answer: D Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

52) The figure above illustrates a small country's production possibilities frontier. Moving from point A to point B, the per unit opportunity cost of a tablet is ________ per tablet. A) 2 computers B) 4/3 of a computer C) 100 computers D) 1/2 of a computer E) 1 tablet Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 53) The figure above illustrates a small country's production possibilities frontier. Moving from point C to point B, the per unit opportunity cost of computers is ________ per computer. A) 4 tablets B) 5/4 of a tablet C) 4/5 of a tablet D) 1/4 of a tablet E) 1 computer Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

54) The figure above shows the production possibilities frontier for a country. In order for it to move from producing at point A to producing at point B, the country would need to A) decrease SUV production by 1 million. B) decrease SUV production by 3 million. C) decrease SUV production by 4 million. D) decrease compact car production by 3 million. E) acquire more resources and/or more advanced technology. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 55) The figure above shows the production possibilities frontier for a country. In order for it to move from producing at point A to producing at point B, the country would need to incur an opportunity cost of A) 1 million SUVs. B) 3 million SUVs. C) 4 million SUVs. D) 3 million compact cars. E) 0 because the gain in compact cars exceeds the loss in SUVs. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 45 Copyright © 2021 Pearson Education, Inc.

56) The figure above shows the production possibilities frontier for a country. How does the opportunity cost of compact cars forgone per SUV gained moving from point C to point B compare with the movement from point B to point A? A) The opportunity cost of moving from point C to point B is greater than the movement from point B to point A. B) The opportunity cost of moving from point C to point B is the same as the movement from point B to point A. C) The opportunity cost of moving from point C to point B is less than the movement from point B to point A. D) The opportunity costs cannot be compared because the units of moving from point C to point B differ from the units of moving from point B to point A. E) More information is needed to determine how the two opportunity costs compare. Answer: C Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 57) Once you find the opportunity cost of producing one unit of a good, to find the opportunity cost of producing the other good, you must A) take the inverse. B) multiply by the total amount produced of the second good. C) divide by the total amount produced of the second good. D) do nothing because the opportunity cost for the first good is the same as the opportunity cost for the second good. E) None of the answers is correct. Answer: A Topic: Opportunity cost is a ratio Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 58) While moving on the production possibilities frontier, if the opportunity cost of producing one good is 1/2, the opportunity cost of producing the other good (in the same range) is A) 1/2. B) 1/4. C) 2. D) 4. E) an amount that cannot be calculated without more information. Answer: C Topic: Opportunity cost is a ratio Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 46 Copyright © 2021 Pearson Education, Inc.

59) The opportunity cost of producing more of one good on a production possibilities frontier is A) a dollar amount. B) a ratio of quantities. C) a ratio of prices. D) equal to the area inside the production possibilities frontier. E) a theoretical concept which cannot be measured. Answer: B Topic: Opportunity cost is a ratio Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 60) The opportunity cost of one more slice of pizza in terms of sodas is the A) number of pizza slices we have to give up in order to get one extra soda. B) number of sodas we have to give up in order to get one extra pizza slice. C) total number of sodas that we have divided by the total number of pizza slices that we have. D) total number of pizza slices that we have divided by the total number of sodas that we have. E) price of a pizza slice minus the price of a soda. Answer: B Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 61) Moving between two points on a PPF, a country gains 6 automobiles and forgoes 3 trucks. The opportunity cost of 1 automobile is A) 3 trucks. B) 6 automobiles - 3 trucks. C) 2 trucks. D) 1/2 of a truck. E) 1 automobile. Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

62) Moving between two points on a PPF, a country gains 8 desktop computers and forgoes 4 laptop computers. The opportunity cost of 1 desktop computer is A) 4 laptops. B) 8 desktops. C) 1 desktop. D) 2 laptops. E) 1/2 of a laptop. Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 63) A country produces only cans of soup and ink pens. If the country produces on its bowed outward PPF and increases the production of cans of soup, the opportunity cost of additional A) cans of soup is increasing. B) cans of soup is decreasing. C) cans of soup remains unchanged. D) ink pens is increasing. E) More information is needed to determine what happens to the opportunity cost. Answer: A Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 64) Moving along a country's PPF, a reason opportunity costs increase is that A) unemployment decreases as a country produces more and more of one good. B) unemployment increases as a country produces more and more of one good. C) technology declines as a country produces more and more of one good. D) some resources are better suited for producing one good rather than the other. E) technology must advance in order to produce more and more of one good. Answer: D Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

65) Increasing opportunity cost exists A) in the real world. B) as long as there is high unemployment. C) only in theory but not in real life. D) for a country but not for an individual. E) inside the PPF but not on the PPF. Answer: A Topic: Increasing opportunity costs Skill: Level 1: Definition Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking 3.3 Economic Growth 1) Which of the following is the best definition of economic growth? A) the investment in capital and consumption goods by an economy B) the opportunity cost of capital C) the opportunity cost of consumption D) increased development of land and entrepreneurship E) the sustained expansion of production possibilities Answer: E Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 2) The sustained expansion of production possibilities is called A) economic investment. B) production expansion. C) opportunity cost of growth. D) economic growth. E) production possibilities. Answer: D Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

3) Which of the following would most likely cause a country's production possibilities set to shift outward at every point along the frontier? A) a decrease in idle capital B) a decrease in unemployment C) a technological advance in only one sector of the economy D) a general technological advance that affects all sectors of the economy E) none of the above Answer: D Topic: Economic growth and the PPF Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 4) Consider a PPF with consumption goods on the horizontal axis and capital goods on the vertical axis. If the country operates on its PPF near its ________ axis, this country ________. A) vertical; will experience greater economic growth B) vertical; will not face opportunity costs C) horizontal; will have a larger chance at economic growth D) horizontal; faces larger tradeoffs E) vertical; is operating at an inefficient point Answer: A Topic: Economic growth and the PPF Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 5) Economic growth depends upon which of the following? i. Increasing the quantity of labor ii. Lowering the prices of goods and services iii. Advancing technology A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

6) Economic growth depends upon which of the following? i. Improving the quality of labor ii. Technological advancement iii. Increasing the amount of capital A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 7) As an economy grows A) its PPF shifts outward. B) it can eliminate scarcity. C) the opportunity cost of production will approach 0. D) the opportunity cost of production will increase. E) its PPF does not shift; instead, the production point moves from inside the PPF to be closer to the PPF. Answer: A Topic: Economic growth and the PPF Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 8) The opportunity cost of economic growth is A) 0, because it means an expansion of production possibilities. B) the decrease in the current production of productive factors. C) a slower accumulation of human capital. D) the decrease in the current production of consumption goods. E) the increase in the nation's capital stock and/or its technology. Answer: D Topic: Economic growth, opportunity cost Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

9) What is the opportunity cost of economic growth? A) current period consumption goods B) current period capital goods C) land D) both current period consumption and capital goods E) both current period capital goods and land Answer: A Topic: Economic growth, opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

10) The above figure shows the PPF for a country that produces computers and computer factories. Which of the following would most likely shift the PPF from PPF0 in one year to PPF1 in the next? A) Nothing, because the PPF does not shift. B) Increase the production of computers from 9 million (at point C) to 11 million (at point B). C) Decrease the production of computers from 11 million (at point B) to 9 million (at point C) and build 9 new computer factories. D) Increase consumption of both computers and computer factories. E) Decrease production of both computers and computer factories by moving into the interior of the PPF. Answer: C Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

11) The above figure shows the PPF for a country that produces computers and computer factories. The nation's production possibilities frontier is PPF0. At which of the following production points would the economy grow most rapidly? A) Point A B) Point B C) Point C D) It makes no difference among the three points because they are all production efficient. E) More information is needed to answer the question. Answer: A Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

12) Suppose Puerto Rico and Hawaii currently have the same production possibilities so that the above figure is the PPF for hotels and consumption goods in the two areas. Hotels are a capital good that,once built, will help produce still more consumption goods. If Puerto Rico produces more hotels than Hawaii A) Hawaii's PPF will shift outward further than Puerto Rico's PPF. B) Hawaii's PPF will shift inward. C) Puerto Rico's PPF will not shift. D) Puerto Rico's and Hawaii's PPF will shift outward by the same amount. E) Puerto Rico's PPF will shift outward further than Hawaii's PPF. Answer: E Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

13) Suppose Puerto Rico and Hawaii currently have the same production possibilities so that the above figure is the PPF for hotels and consumption goods in the two areas. Hotels are a capital good that,once built, will help produce still more consumption goods. According to the figure, which island will have more rapid economic growth? A) Hawaii B) Both Hawaii and Puerto Rico will grow at the same speed. C) Puerto Rico D) Neither Hawaii nor Puerto Rico will grow. E) More than one of the above answers is correct. Answer: C Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

14) Suppose India and France have the same PPF, shown in the figure above. Based on their current production points, which is India's most likely future PPF? A) PPF2 B) PPF1 C) PPF0 D) either PPF0 or PPF1 E) None of the above because economic growth will not happen in India. Answer: A Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

15) Suppose India and France have the same PPF, shown in the figure above. Based on their current production points, which is France's most likely future PPF? A) PPF2 B) PPF1 C) PPF0 D) either PPF0 or PPF1 E) None of the above because economic growth will not happen in India. Answer: B Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 16) Suppose India and France have the same PPF, shown in the figure above. Based on their current production points, India's most likely future PPF is ________, and France's most likely future PPF is ________. A) PPF1; PPF1 B) PPF2; PPF2 C) PPF0; PPF0 D) PPF2; PPF1 E) PPF1; PPF2 Answer: D Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

17) Suppose that Germany, France, Estonia, and India all have the same production possibilities, illustrated in the figure above. Based on the production points in the figure, which country is most likely to expand its PPF to PPF3? A) India B) Germany C) Estonia D) France and Germany equally E) France Answer: B Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 18) Suppose that Germany, France, Estonia, and India all have the same production possibilities, illustrated in the figure above. Based on the production points in the figure, which country is most likely to expand its PPF to PPF1? A) France and Germany equally B) India C) Estonia D) France E) Germany Answer: B Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

19) Suppose that Germany, France, Estonia, and India all have the same production possibilities, illustrated in the figure above. Based on the production points in the figure, India is most likely to expand its PPF to A) PPF3 or PPF2. B) PPF3. C) PPF1. D) PPF1. or PPF2. E) PPF2. Answer: C Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 20) Suppose that Germany, France, Estonia, and India all have the same production possibilities, illustrated in the figure above. Based on the production points in the figure, Germany is most likely to expand its PPF to A) PPF3 or PPF2. B) PPF3. C) PPF1. D) PPF1 or PPF2. E) PPF2. Answer: B Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 21) To increase its economic growth, a nation should A) limit the number of people in college because they produce nothing. B) encourage spending on goods and services. C) encourage education because that increases the quality of labor. D) increase current consumption. E) eliminate expenditure on capital goods. Answer: C Topic: Economic growth Skill: Level 2: Using definitions Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

22) Other things equal, if Mexico devotes more resources to train its population than Spain A) Mexico will be able to eliminate opportunity cost faster than Spain. B) Mexico will be able to eliminate scarcity faster than Spain. C) Spain will grow faster than Mexico. D) Mexico will have more current consumption than Spain. E) Mexico will grow faster than Spain. Answer: E Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 23) If a nation devotes a larger share of its current production to consumption goods, then A) its economic growth will slow down. B) its PPF will shift outward. C) its PPF will shift inward. D) some productive factors will become unemployed. E) it must produce at a point within its PPF. Answer: A Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 24) Which of the following statements is correct? i. As the economy grows, the opportunity costs of economic growth decrease. ii. Economic growth has no opportunity cost. iii. The opportunity cost of economic growth is current consumption forgone. A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: C Topic: Economic growth Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

25) When a country's production possibilities frontier shifts outward over time, the country is experiencing A) no opportunity cost. B) economic growth. C) higher unemployment of resources. D) a decrease in unemployment of resources. E) an end to opportunity cost. Answer: B Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 26) The opportunity cost of economic growth is ________ and the benefit of economic growth is ________. A) increased current consumption; increased future consumption B) increased current consumption; decreased future consumption C) decreased current consumption; increased future consumption D) decreased current consumption; decreased future consumption E) nothing; increased future consumption Answer: C Topic: Economic growth Skill: Level 1: Definition Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking 3.4 Specialization and Trade 1) If Wendy can produce more of all goods than Tommy in an hour, then A) Wendy has an absolute advantage in all goods. B) Wendy does not need to trade with Tommy in order to achieve the gains from trade. C) Wendy has a comparative advantage in all goods. D) Tommy has an absolute advantage in all goods. E) Only Tommy, but not Wendy, can benefit from trade between the two of them. Answer: A Topic: Absolute advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

2) Mac can bake more cookies than Monica per hour. It must be TRUE that A) Monica has an absolute advantage in cookie baking. B) Mac has an absolute advantage in baking cookies. C) Mac has a comparative advantage in baking cookies. D) Monica has a comparative advantage in baking cookies. E) Mac cannot benefit by trade between the two of them. Answer: B Topic: Absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 3) When Mik has an absolute advantage in the production of two goods over Tommy, Mik A) is less productive than Tommy. B) is better off if he does not engage in specialization and trade with Tommy. C) is more productive in producing both goods than Tommy. D) always has a comparative advantage over Tommy in the production of both goods. E) cannot gain from trade with Tommy. Answer: C Topic: Absolute advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 4) If John can produce 10 chairs or 20 lamps during a week while Mary can produce 12 chairs or 22 lamps in the same time, who has the absolute advantage in producing each good? A) Mary in producing both goods B) John in producing both goods C) Mary in producing chairs, John in producing lamps D) John in producing chairs, Mary in producing lamps E) Both Mary and John in both goods Answer: A Topic: Absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

5) If Toni has an absolute advantage in both sewing and ironing when compared to Tom, then A) they might benefit from trading, but we need more information to determine in which task they should specialize. B) neither Toni nor Tom can benefit from trading with each other. C) Toni should specialize in sewing, and Tom should specialize in ironing. D) Toni cannot benefit from trading with Tom, but Tom can benefit from trading with Toni. E) Tom cannot benefit from trading with Toni, but Toni can benefit from trading with Tom. Answer: A Topic: Absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 6) If a country has A) an absolute advantage in producing a good, it definitely also has a comparative advantage in producing that good. B) an absolute advantage in producing a good, it might or might not have a comparative advantage in producing that good. C) a comparative advantage in production of a good, it must also have an absolute advantage in producing that good. D) an absolute advantage in producing a good, it definitely will not have a comparative advantage in producing that good. E) None of the above answers is correct. Answer: B Topic: Absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 7) Hank requires 1 hour to cut the grass and 3 hours to clean the house. His sister Holly requires 1 hour to cut the grass and 4 hours to clean the house. Which of the following statements is TRUE? A) Hank has a comparative advantage in both cutting the grass and cleaning the house. B) Hank and Holly both have a comparative advantage in cutting the grass. C) Hank has a lower opportunity cost of cutting the grass. D) Hank has an absolute advantage in both cutting the grass and cleaning the house. E) Holly has a comparative advantage in cutting the grass. Answer: E Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

8) The United States can use all its resources to produce 250 DVDs or 500 shoes. China can use all of its resources to produce 30 DVDs or 300 shoes. The opportunity cost of producing a DVD in the United States is A) 2 shoes. B) 1/2 of a shoe. C) 20 shoes. D) 500 shoes. E) 1 DVD. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

9) In the table above, how many jackets must Mary forgo for every dress she makes? A) 12 jackets B) 3/4 of a jacket C) 2/3 of a jacket D) 1 1/2 jackets E) 8 jackets Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 10) In the table above, how many jackets must Mark forgo for every dress he makes? A) 1 jacket B) 16 jackets C) 2/3 of a jacket D) 1 1/2 jackets E) 24 dresses Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

11) In the above table, for Mary the opportunity cost of producing a dress is ________ and the opportunity cost for Mark of producing a dress is ________. A) 1 1/2 jackets; 2/3 of a jacket B) 1 1/2 jackets; 2 1/2 jackets C) 1 1/4 jackets; 1/2 of a jacket D) 1 jacket; 1 jacket E) 1 dress; 1 dress Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 12) A country has a comparative advantage in the production of a good if it can A) produce more of the good than another country. B) produce more of the good most efficiently. C) produce the good on and remain on its production possibilities frontier. D) trade off producing the good for another good. E) produce the good at the lowest opportunity cost. Answer: E Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 13) Having a comparative advantage means a nation can A) benefit from trade. B) produce at a higher opportunity cost. C) produce more of the good. D) produce without incurring an opportunity cost. E) produce the good at a point beyond its PPF. Answer: A Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

14) When a person has a comparative advantage in producing a good or service, the person has A) a higher opportunity cost in producing that product than someone else. B) a constant opportunity cost in producing that product. C) a decreasing opportunity cost in producing that product. D) a lower opportunity cost in producing that product than someone else. E) an increasing marginal benefit in producing the good. Answer: D Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 15) Which of the following best describes comparative advantage? A) being able to produce more output than any other country B) using the fewest number of resources to produce a given amount of output C) having the largest number of resources compared to other countries D) forgoing the fewest units of one product to produce a unit of another product E) It is the same as absolute advantage. Answer: D Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 16) Which of the following is correct about comparative advantage? A) Some countries will have a comparative advantage in everything. B) Having a comparative advantage without an absolute advantage is impossible. C) A comparative advantage in a good means that the country can produce more of the good than any other country. D) A country has a comparative advantage in the production of a good if it can produce the good at lower opportunity cost than any other country. E) None of the above answers is correct. Answer: D Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

17) John can make pizza at a lower opportunity cost than Allen, but Allen can make more pizzas per day than John. Therefore A) John cannot benefit from trade with Allen. B) Allen cannot benefit from trade with John. C) John has a comparative advantage in pizza. D) John has an absolute advantage in pizza. E) Allen has a comparative advantage in pizza. Answer: C Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 18) Alice and Gene work in the mailroom, sorting and delivering mail. In order for them to benefit from specialization and trade, Alice must A) be able to both sort and deliver faster than Gene. B) be equally productive in both sorting and delivering. C) have a comparative advantage in both sorting and delivering. D) have a comparative advantage in one task and Gene must have a comparative advantage in the other task. E) be equally productive as Gene in both sorting and delivering. Answer: D Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 19) When one person's opportunity cost of producing a good is lower than another person's opportunity cost of producing the same good, it is called A) an absolute advantage. B) a comparative advantage. C) specialization. D) production possibilities. E) a tradeoff. Answer: B Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

20) For country Gamma the opportunity cost for producing 1 computer is 10 tons of steel. For country Beta the opportunity cost for producing 1 computer is 6 tons of steel. Which country has the comparative advantage in the production of steel? A) Gamma B) Beta C) Both have the comparative advantage in the production of steel. D) Neither country has the comparative advantage in the production of steel. E) More information is needed to determine which of the two nations has the comparative advantage. Answer: A Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 21) For country North, the opportunity cost incurred when 3 tractors are produced is 21 watches. For country South, the opportunity cost incurred when 5 tractors are produced is 100 watches. Which country has the comparative advantage in the production of tractors? A) North B) South C) Both have the comparative advantage in the production of tractors. D) Neither country has the comparative advantage in the production of tractors. E) More information is needed about which country has the comparative advantage in the production of watches. Answer: A Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 22) If Country A can produce an extra plane by giving up two boats, and Country B can produce an extra plane by giving up three boats, then A) Country A has a comparative advantage over Country B in the production of planes. B) Country B has a comparative advantage over Country A in the production of planes. C) The two countries have no incentive to trade with one another. D) Country A would like to trade with B, but B cannot gain by trading with A. E) Country A has an absolute advantage in producing planes and a comparative advantage in producing boats. Answer: A Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 66 Copyright © 2021 Pearson Education, Inc.

23) David takes 10 minutes to process a customer, and 20 minutes to stock the shelves. Danny takes 15 minutes to process a customer, and 15 minutes to stock the shelves. Which of the following statements is TRUE? A) David has an absolute advantage in performing both tasks. B) Danny has an absolute advantage in performing both tasks. C) David has a comparative advantage in processing customers but not in stocking shelves. D) Danny has a comparative advantage in processing customers but not in stocking shelves. E) Danny has a comparative advantage in processing customers and in stocking shelves. Answer: C Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 24) Rika's opportunity cost of producing 100 t-shirts is 50 jackets. Jeff's opportunity cost of producing 75 t-shirts is 25 jackets. Who should specialize in jackets? A) Rika B) Jeff C) neither D) both E) More information is needed about their production possibilities frontiers to determine who should specialize in jackets. Answer: A Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 25) On a typical acre of land, Iowa can produce either 300 pounds of beef or 100 pounds of soybeans in a year. On a typical acre of land, Nebraska can produce 150 pounds of beef or 200 pounds of soybeans. Which of the following is correct? A) Nebraska should produce soybeans because its opportunity cost of soybeans is lower. B) Nebraska should produce soybeans because its opportunity cost of soybeans is higher. C) Iowa should produce soybeans because its opportunity cost of soybeans is lower. D) Iowa should produce soybeans because its opportunity cost of soybeans is higher. E) Nebraska and Iowa should divide each acre evenly between soybean and beef production. Answer: A Topic: Achieving the gains from trade Skill: Level 5: Critical thinking Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

26) Huey and Steve can grow potatoes or tomatoes. The table above shows the pounds of potatoes and tomatoes Huey and Steve can grow in a week. Based on the table, Huey's opportunity cost of producing one pound of tomatoes is A) 1.5 pounds of potatoes. B) 0.66 pound of potatoes. C) 0, because he has an absolute advantage in it. D) 0, because he has a comparative advantage in it. E) 1.0 pound of potatoes. Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 27) Huey and Steve can grow potatoes or tomatoes. The table above shows the pounds of potatoes and tomatoes Huey and Steve can grow in a week. Based on the table, Steve has a comparative advantage in A) both potatoes and tomatoes. B) neither potatoes nor tomatoes. C) potatoes. D) tomatoes. E) More information is needed about Huey's comparative advantage in order to determine Steve's comparative advantage. Answer: C Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

28) Huey and Steve can grow potatoes or tomatoes. The table above shows the pounds of potatoes and tomatoes Huey and Steve can grow in a week. Based on the table, which of the following statements is correct? A) Steve has an absolute advantage in both potatoes and tomatoes. B) Steve has a comparative advantage in both potatoes and tomatoes. C) Steve has an absolute advantage in potatoes only. D) Huey has an absolute advantage in potatoes only. E) Huey has an absolute advantage in both potatoes and tomatoes. Answer: E Topic: Absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 29) If Tom can wax a car in fewer hours than Jerry, then Tom definitely has A) a comparative advantage in car waxing. B) an absolute advantage in car waxing. C) both a comparative and an absolute advantage in car waxing. D) neither a comparative nor an absolute advantage in car waxing. E) an undetermined advantage because we do not know how long it takes Tom and Jerry to wash a car. Answer: B Topic: Comparative advantage versus absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

30) In the table above, Jack's opportunity cost for 1 pound of food is ________ and his opportunity cost for 1 pound of clothing is ________. A) 1 pound of clothing; 4 pounds of food B) 1/2 of a pound of clothing; 2 pounds of food C) 1/3 of a pound of clothing; 3 pounds of food D) 2 pounds of clothing; 2 pounds of food E) 1 pound of food; 1 pound of clothing Answer: B Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 31) In the table above, Jill's opportunity cost for 1 pound of food is ________ and her opportunity cost for 1 pound of clothing is ________. A) 1 pound of clothing; 4 pounds of food B) 1/2 of a pound of clothing; 2 pounds of food C) 1/3 of a pound of clothing; 3 pounds of food D) 2 pounds of clothing; 2 pounds of food E) 1 pound of food; 1 pound of clothing Answer: C Topic: Opportunity cost Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

32) In the table above, Jack's comparative advantage is producing ________ and Jill's comparative advantage is producing ________. A) clothing; food B) clothing and food; nothing C) nothing; clothing and food D) food; clothing E) clothing; clothing Answer: A Topic: Comparative advantage Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

33) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. If Deb spends all her time assembling packets, how many can she assemble? A) 32 B) 40 C) 64 D) 160 E) 22 Answer: B Topic: Production possibilities frontier Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

34) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. What is Deb's opportunity cost of assembling 1 packet? A) 160 envelopes B) 40 envelopes C) 4 envelopes D) 1/4 of an envelope E) 4 packets Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 35) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. Which of the following statements is correct? A) Deb has a comparative advantage in assembling packets. B) Pete has an absolute advantage in both assembling packets and stuffing envelopes. C) Deb has a comparative advantage in stuffing envelopes. D) Deb has an absolute advantage in both assembling packets and stuffing envelopes. E) Deb has a comparative advantage in both assembling packets and stuffing envelopes. Answer: C Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 36) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. If Deb and Pete specialize and trade, how many packets will be assembled? A) 40 B) more than 40 and less than 80 C) 80 D) 160 E) more than 80 and less than 160 Answer: D Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

37) Gabriel operates a ranch in Idaho where he raises cattle and grows potatoes. The figure above illustrates his production possibilities frontier. What is Gabriel's opportunity cost of growing another ton of potatoes? A) 400 cows B) 80 cows C) 100 cows D) 0 cows E) 1 ton of potatoes Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 38) Gabriel operates a ranch in Idaho where he raises cattle and grows potatoes. The figure above illustrates his production possibilities frontier. What is Gabriel's opportunity cost of raising another 100 cows? A) 1.25 tons of potatoes B) 5.0 tons of potatoes C) 3.0 tons of potatoes D) 1.0 ton of potatoes E) 100 cows Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 73 Copyright © 2021 Pearson Education, Inc.

39) In the above figure, Jack's opportunity cost of producing 1 gallon of soda is ________ of bottled water. A) 1 gallon B) 1/2 of a gallon C) 6 gallons D) 1/4 of a gallon E) 2 gallons Answer: E Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 40) In the above figure, Jack's opportunity cost of producing 1 gallon of bottled water is ________ of soda. A) 2 gallons B) 1/2 of a gallon C) 6 gallons D) 1/4 of a gallon E) 1 gallon Answer: B Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 74 Copyright © 2021 Pearson Education, Inc.

41) In the above figure, Jill's opportunity cost of producing 1 gallon of soda is ________ of bottled water. A) 2 gallons B) 1/2 of a gallon C) 4 gallons D) 1 gallon E) 1/4 of a gallon Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 42) In the above figure, Jill's opportunity cost of producing 1 gallon of bottled water is ________ of soda. A) 2 gallons B) 1/2 of a gallon C) 4 gallons D) 1 gallon E) 1/4 of a gallon Answer: D Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 43) Using the figure above, if Jack and Jill specialize and gain from trade, then A) Jack produces equal amounts of gallons of water and bottled water. B) Jack specializes in the production of bottled water. C) Jack and Jill produce beyond their PPF. D) Jack specializes in the production of soda. E) Jack specializes on the production of soda and water. Answer: B Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

44) The figure above shows the production possibilities frontiers for the United Kingdom and France. What is the opportunity cost of one bushel of wheat in France? A) 1/4 of a pound of fish B) 4 pounds of fish C) 1 pound of fish D) 100 pounds of fish E) 2 pounds of fish Answer: A Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 45) The figure above shows the production possibilities frontiers for the United Kingdom and France. What is the opportunity cost of one bushel of wheat for the United Kingdom? A) 1/4 of a pound of fish B) 1/2 of a pound of fish C) 1 pound of fish D) 200 pounds of fish E) 2 pounds of fish Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

46) The figure above shows the production possibilities frontiers for the United Kingdom and France. If the United Kingdom and France specialize and engage in trade, the United Kingdom will produce ________ and France will produce ________. A) wheat; wheat B) wheat; fish C) fish; wheat D) fish; fish E) both wheat and fish; both wheat and fish Answer: C Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 47) The figure above shows the production possibilities frontiers for the United Kingdom and France. If the United Kingdom and France specialize and engage in trade, the United Kingdom will export ________ and France will export ________. A) wheat; wheat B) wheat; fish C) fish; wheat D) fish; fish E) nothing; nothing Answer: C Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 48) What is gained when people engage in specialization and trade? A) Specialization and trade allow people to consume outside their individual production possibilities frontiers. B) Specialization and trade allow people to consume inside their production possibilities frontiers. C) Specialization and trade allow people to consume at a point on their production possibilities frontiers. D) Specialization and trade allow people to produce outside their individual production possibilities frontiers. E) There are no gains from specialization and trade. Answer: A Topic: Achieving the gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 77 Copyright © 2021 Pearson Education, Inc.

49) Gains from trade A) occur when one party to the trade has an absolute advantage in both goods. B) result in being able to consume beyond the trading individuals' production possibilities frontiers. C) occur when people do not specialize. D) occur when opportunity costs are equal. E) always benefit one party but not the other party of any trade. Answer: B Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 50) Consider the United States' production of soy beans and running shoes. If the United States has an absolute advantage in the production of both goods compared to China A) both countries can gain from trade. B) only the United States can gain from trade. C) only China can gain from trade. D) each country will be able to produce at a point beyond its PPF. E) only the United States will be able to operate beyond its PPF. Answer: A Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 51) To achieve gains from trade, a country A) needs to have an absolute advantage in the production of all goods. B) specializes in the producing a good in which it has a lower opportunity cost. C) must produce at a point beyond its PPF. D) should produce at the midpoint of its PPF. E) needs to have an absolute advantage in the production of at least one good. Answer: B Topic: Achieving the gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

52) Specialization and trade A) does not benefit anyone. B) allows nations to produce inside their individual production possibilities frontier. C) allows nations to consume combinations of products that are outside their individual production possibilities frontier. D) shifts the production possibilities frontier inward. E) shifts the production possibilities frontier outward. Answer: C Topic: Achieving the gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 53) The United States is one of the richest nations in the world A) so it does not need to trade with poor nations in order to achieve any gains from trade. B) so it might not have a comparative advantage in producing any goods. C) but it can still benefit from specialization and trade. D) so it must have a comparative advantage in the production of all goods. E) so it must have an absolute advantage in the production of all goods. Answer: C Topic: Achieving the gains from trade Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 54) Specialization and trade make a country better off because with trade, the country can consume at a point A) outside its production possibilities frontier. B) inside its production possibilities frontier. C) on its production possibilities frontier. D) on its trading partner's production possibilities frontier. E) inside its trading partner's production possibilities frontier. Answer: A Topic: Achieving the gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

55) By specializing and trading, a country is able to A) obtain the absolute advantage in the goods it produces. B) consume but not to produce combinations of goods that lie beyond its production possibilities frontier. C) produce but not to consume combinations of goods that lie beyond its production possibilities frontier. D) BOTH produce and consume combinations of goods that lie beyond its production possibilities frontier. E) NEITHER produce nor consume combinations of goods that lie beyond its production possibilities frontier. Answer: B Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 56) With no international trade, a country ________ consume at a point outside of its PPF; with international trade, a country ________ consume at a point outside of its PPF. A) cannot; can B) can; cannot C) can; can D) cannot; cannot E) None of the above answers is correct because the presence or absence of international trade has nothing to do with where a country consumes in comparison to its PPF. Answer: A Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

57) In terms of a nation's production possibilities frontier, what impact does international trade have? A) International trade shifts the nation's production possibilities frontier outward. B) International trade shifts the nation's production possibilities frontier inward. C) International trade allows the nation to consume at a point outside its production possibilities frontier. D) International trade shifts the production possibilities frontier outward for the goods that are exported and inward for the goods that are imported. E) International trade shifts the production possibilities frontier outward for the goods that are imported and inward for the goods that are exported. Answer: C Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 58) The gains from trade include i. lower prices from competition ii. greater output from specialization iii. greater variety of goods and services available A) i and iii only B) ii and iii only C) i and ii only D) i, ii, and iii E) ii only Answer: D Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 59) If a nation has an absolute advantage in producing a good, then it A) will have a comparative advantage in producing that good. B) will have no need to trade with other nations. C) will always specialize in that good. D) might or might not have a comparative advantage in producing that good. E) will not have a comparative advantage in producing that good. Answer: D Topic: Comparative advantage versus absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

60) In one hour John can produce 20 loaves of bread or 8 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is TRUE? A) Phyllis has a comparative advantage in producing bread. B) John has a comparative advantage in producing cakes. C) Phyllis has an absolute advantage in both goods. D) John has an absolute advantage in both goods. E) Phyllis has a comparative advantage in producing both cakes and bread. Answer: C Topic: Absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 61) "Comparative advantage" is defined as a situation in which one person can produce A) more of all goods than another person. B) more of a good than another person. C) a good for a lower dollar cost than another person. D) a good for a lower opportunity cost than another person. E) all goods for lower opportunity costs than another person. Answer: D Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 62) Scott and Cindy both produce only pizza and tacos. In one hour, Scott can produce 20 pizzas or 40 tacos. In one hour, Cindy can produce 30 pizzas or 40 tacos. Scott's opportunity cost of producing 1 taco is A) 1/2 of a pizza. B) 1 pizza. C) 2 pizzas. D) 20 pizzas. E) 2 tacos. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

63) Scott and Cindy both produce only pizza and tacos. In one hour, Scott can produce 20 pizzas or 40 tacos. In one hour, Cindy can produce 30 pizzas or 40 tacos. Cindy's opportunity cost of producing 1 taco is A) 3/4 of a pizza. B) 1 pizza. C) 30 pizzas. D) 40 pizzas. E) 1 1/3 tacos. Answer: A Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 64) Scott and Cindy both produce only pizza and tacos. In one hour, Scott can produce 20 pizzas or 40 tacos. In one hour, Cindy can produce 30 pizzas or 40 tacos. Based on these data A) Cindy has a comparative advantage at producing tacos. B) Scott has a comparative advantage at producing tacos. C) Cindy and Scott have the same comparative advantage in producing tacos. D) neither Cindy nor Scott has a comparative advantage in producing tacos. E) Cindy and Scott have the same comparative advantage in producing pizzas. Answer: B Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 65) In one hour John can produce 20 loaves of bread or 16 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is TRUE? A) Phyllis has a comparative advantage in producing bread. B) John has a comparative advantage in producing cakes. C) Phyllis has an absolute advantage in both goods. D) John has an absolute advantage in both goods. E) Phyllis has a comparative advantage in producing both cakes and bread. Answer: B Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

66) Comparative advantage is most closely related to which of the following concepts? A) productivity B) efficiency C) opportunity cost D) competition E) fairness Answer: C Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 67) If workers in Mexico produce fewer goods and services per hour than workers in the United States in all areas of production, then A) the United States will benefit from trade with Mexico, but Mexico will not. B) Mexico will benefit from trade with the United States, but the United States will not. C) neither Mexico nor the United States will benefit from trade with the other. D) both the United States and Mexico will benefit from trade with the other. E) it is unknown whether either country can benefit from trade with the other. Answer: D Topic: Achieving the gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking

3.5 Chapter Figures

1) The figure above shows a production possibilities frontier. In the figure, which of the following combinations of the two goods cannot be produced with the current resources and technology? A) 2 million cell phones and 13 million DVDs B) 4 million cell phones and 4 million DVDs C) 1 million cell phones and 14 million DVDs D) 3 million cell phones and 5 million DVDs E) 5 million cell phones and no DVDs Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

2) The figure above shows a production possibilities frontier. In the figure, which of the following combinations of the two goods are efficient? A) 2 million cell phones and 13 million DVDs B) 5 million cell phones and 15 million DVDs C) no cell phones and 15 million DVDs D) 4 million cell phones and 4 million DVDs E) None of these combinations is efficient. Answer: C Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 3) The figure above shows a production possibilities frontier. In the figure, the economy faces a tradeoff when ________ cell phones and ________ DVDs. are produced. A) 3 million; 9 million B) 2 million; 9 million C) 3 million; 8 million D) 4.5 million; no E) 5 million; 15 million Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 4) The figure above shows a production possibilities frontier. In the figure, when the economy moves from point E to point D, what is the opportunity cost of a DVD? A) 0.25 cell phones B) 0.5 cell phones C) 1 cell phone D) 4 cell phones E) zero Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

5) The figure above shows a production possibilities frontier. In the figure, when the economy moves from point D to point C, the opportunity cost of producing one more DVD ________, and when it moves from point C to D, the opportunity cost of producing one more cell phone ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases E) increases; remains the same Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 6) The figure above shows a production possibilities frontier. In the figure, when the economy moves from point C to point B, what is the opportunity cost of a DVD? A) 0.5 cell phones B) 2 cell phones C) 0.5 million cell phones D) 2 million cell phones E) zero Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

7) The figure above shows how the PPF for cell phones and new cell-phone factories can expand. In the figure, if the economy produced 4 million cell phones using the resources efficiently, the PPF would A) expand, but not as far as shown in the figure. B) not expand. C) expand farther than shown in the figure. D) expand along the vertical axis and not along the horizontal axis. E) expand evenly along both axes. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

8) The figure above shows how the PPF for cell phones and new cell-phone factories can expand. In the figure, if the economy chose the point on this year's PPF that is above point K, the next year's PPF would A) shift outward along the horizontal axis farther than the new PPF shown in the figure. B) shift outward along the horizontal axis, but not as far as the new PPF shown in the figure. C) shift outward along the vertical axis, not along the horizontal axis. D) shift inward along the horizontal axis. E) shift inward along the vertical axis. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills 9) The figure above shows how the PPF for cell phones and new cell-phone factories can expand. In the figure, if the economy chose the point on this year's PPF that is below point K, the next year's PPF would A) shift outward along the horizontal axis farther than the new PPF shown in the figure. B) shift outward along the horizontal axis, but not as far as the new PPF shown in the figure. C) shift outward along the vertical axis, not along the horizontal axis. D) shift inward along the horizontal axis. E) shift inward along the vertical axis. Answer: B Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.3 Status: Old AACSB: Analytic skills

The figure above shows Liz's and Joe's production possibilities for Salads and Smoothies. 10) Liz has a comparative advantage in ________ and an absolute advantage in ________. A) smoothies only; both goods B) smoothies only; smoothies only C) both goods; both goods D) salads only; both goods E) salads only; salads only Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 11) Liz has a comparative advantage in ________ because ________. A) smoothies; her opportunity cost of producing smoothies is lower than Joe's B) salads; her opportunity cost of producing salads is lower than Joe's C) smoothies; she can produce more smoothies per hour than Joe can D) salads; she can produce more salads per hour than Joe can E) both goods; she can produce more of both goods per hour than Joe can Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 90 Copyright © 2021 Pearson Education, Inc.

12) Given the information in the figure above, Liz ________ benefit from trade with Joe because ________. A) can; each of them has a comparative advantage in one of the goods B) can; each of them has an absolute advantage in one of the goods C) cannot; she has an absolute advantage in both goods D) cannot; she has a comparative advantage in both goods E) can; Joe is more productive in producing one of the goods Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 13) Given the information in the figure above, Joe can benefit from trade as far as the price at which he buys Liz's smoothies is A) below 5 salads per smoothie. B) not higher than 2 salads per smoothie. C) not lower than 2 salads per smoothie. D) not lower than 1 salad per smoothie. E) not higher than 4 salads per smoothie. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 14) Using the figure above, suppose with no trade Liz and Joe each produce at point A on their respective PPFs. Then, Liz suggests that they specialize and trade. She would produce only smoothies and Joe would produce only salads. Then she would sell 10 smoothies to Joe at a price of 2.5 salads per smoothie. In this scenario A) Liz gains 10 smoothies and 5 salads, and Joe gains 5 smoothies. B) Liz gains 5 smoothies, and Joe gains 10 smoothies. C) Liz gains 10 smoothies, and Joe loses 5 smoothies. D) Liz gains 5 smoothies and 5 salads, and Joe loses 5 salads. E) Neither of the individuals gains from trade. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

15) Using the figure above, suppose with no trade Liz and Joe each produce at point A on their respective PPFs. Then, Joe suggests that they specialize and trade. He would produce only salads and Liz would produce only smoothies. Then, Joe says, he would buy 16 smoothies from Liz at a price of 1.5 salads per smoothie. Liz should A) accept Joe's offer since she will gain 4 smoothies and 4 salads. B) accept Joe's offer, as she will be as well off as with no trade. C) not accept Joe's offer, as the price he offers is too low for her to gain from trade. D) not accept Joe's offer since she would lose 2 smoothies and 2 salads. E) accept Joe's offer since she will gain 4 salads. Answer: A Topic: The economic problem Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills 3.6 Integrative Questions 1) As technology advances A) all opportunity costs decrease. B) the PPF shifts outward. C) a country moves toward the midpoint along its PPF and can produce more of both goods. D) all opportunity costs increase. E) the PPF shifts inward because unemployment occurs. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 2) If a country is operating at a point of production efficiency A) it enjoys a free lunch when increasing production. B) it produces on its production possibilities frontier. C) it must specialize in the production of a good. D) it operates on its trade line. E) it cannot be producing at its point of comparative advantage. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

3) Relative to Al, Joe has ________ if Joe can produce a good at a lower opportunity cost than Al. A) a comparative advantage B) more production efficiency C) a comparative benefit D) a marginal benefit E) a free lunch Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 4) Suppose that after specializing according to comparative advantage, a country is trading with another nation that also specializes according to its comparative advantage. Which of the following statements are TRUE for the first country? i. It enjoys gains from trade. ii. It must have an absolute advantage in the production of the good it produces. iii. It is producing at a point beyond its PPF. A) i only B) i and ii C) i and iii D) ii and iii E) i, ii, and iii Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

5) The table above gives the production possibilities frontier for two countries, Anaconda and Bear. This table shows that A) when Anaconda and Bear specialize and trade, Anaconda should specialize in the production of shoes. B) when Anaconda and Bear specialize and trade, Anaconda should produce at its production point E. C) Anaconda has an absolute advantage in the production of corn and shoes. D) Bear can consume no more than 2 bushels of corn and 700 pairs of shoes. E) Bear is unable to gain from trade with Anaconda. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 6) The table above gives the production possibilities frontier for two countries, Anaconda and Bear. The table shows that A) Bear achieves production efficiency ONLY at its production point A. B) Anaconda achieves production efficiency ONLY at its production point A. C) Anaconda has a comparative advantage in the production of corn. D) Bear has an absolute advantage in the production of both goods. E) Both answers A and B are correct. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills

7) The table above gives the production possibilities frontier for two countries, Anaconda and Bear. The opportunity cost of moving from production point B to production point C for Anaconda equals ________ and for Bear equals ________. A) 1 ton of corn; 1 ton of corn B) 650 pairs of shoes; 900 pairs of shoes C) 550 pairs of shoes; 700 pairs of shoes D) 100 pairs of shoes; 200 pairs of shoes E) 50 pairs of shoes; 100 pairs of shoes Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 8) The table above gives the production possibilities frontier for two countries, Anaconda and Bear. The opportunity cost of moving from ________ is greater for ________. A) point A to point B; Anaconda B) point B to point A; Bear C) point D to point E; Bear D) point E to point D; Bear E) any point to any other point; Bear Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytic skills 3.7 Essay: Production Possibilities 1) What does the vertical intercept of a production possibilities frontier represent? Answer: The vertical intercept is the maximum amount that can be produced if all available resources are dedicated to the production of the good or service measured on the vertical axis. Topic: Production possibilities frontier Skill: Level 2: Using definitions Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

2) What economic concepts are represented in the production possibilities model? Answer: There are a large number of economic concepts illustrated by the production possibilities frontier: ∙ Scarcity of resources: The production possibilities frontier is a frontier between attainable and unattainable combinations. ∙ Opportunity cost: The negative slope of the production possibilities frontier indicates that in order to get more of one good, you must produce less of the other (tradeoff). ∙ Increasing opportunity cost: The bowed out production possibilities frontier represents the changing opportunity costs when resources are specialized. ∙ Production efficiency: Points on the production possibilities frontier efficiently use all resources while points below the production possibilities frontier represent unemployed or misallocated resources and the possibility of a free lunch. Topic: Production possibilities frontier Skill: Level 5: Critical thinking Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication 3) How can a combination of goods be unattainable? Answer: A combination of goods can be unattainable if producing that combination requires more resources and technology than are available. Topic: Unattainable points Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 4) What does a production point beyond the production possibilities frontier represent? Answer: A production point beyond the production possibilities frontier is an unattainable combination of products. Topic: Unattainable points Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

5) "If Mexico is currently operating at a point beyond its production possibilities frontier, then there are unemployed or misallocated resources in Mexico." Is this statement true or false? Briefly explain your answer. Answer: The statement is false. It is false on two counts. First, production points beyond the production possibilities frontier are unattainable, so it is not possible for Mexico to be producing at such a point. Second, it is points within the production possibilities frontier that have unemployed or misallocated resources. Topic: Unattainable points Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication 6) "If Mexico is currently operating at a point inside its production possibilities frontier, then there are unemployed or misallocated resources in Mexico." Is this statement true or false? Briefly explain your answer. Answer: The statement is true. Points within the production possibilities frontier are attainable, so it is possible for Mexico to be producing at a point within its frontier. At points within the production possibilities frontier, there are unemployed or misallocated resources. Topic: Attainable points, unemployment Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking 7) Are all points inside the production possibilities frontier unattainable? Answer: No, all points within the production possibilities frontier are attainable, though there are unemployed resources at these points. Topic: Attainable points, unemployment Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Reflective thinking

8) In the movie Cast Away, Tom Hanks plays a FedEx efficiency expert stranded on a deserted island. While on the island, he divides his time between catching fish, gathering coconuts, painting, and building a raft. Suppose that these were Mr. Hanks' only activities. Did he face an opportunity cost from pursuing any of these activities? Why or why not? Answer: Yes, Mr. Hanks faces an opportunity cost from all of these endeavors. If he decides to use his time catching fish, he couldn't gather coconuts, paint, or build a raft. Whatever he would have been doing, not opting to catch fish is his opportunity cost of catching fish. Similarly, time spent on building his raft means less time painting, or fewer coconuts for breakfast, or fewer fish for dinner. Tradeoffs such as these are a feature of any economy that is operating on its production possibilities frontier and cannot be avoided. Topic: Tradeoffs Skill: Level 3: Using models Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication 9) What does it mean when a "free lunch" is available? Relate your answer to the production possibilities frontier. Answer: A free lunch means that there is no tradeoff, that is, the production of one good or service can be increased without decreasing the production of another good or service and thereby giving up some of the other good. A free lunch occurs when the economy is producing at a point within the production possibilities frontier because at these points some resource is unemployed. By utilizing the unemployed resource, more goods or services can be produced without giving up any other goods or services. Topic: Free lunches Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication 10) Describe the differences between tradeoffs and free lunches in terms of a PPF. Answer: A tradeoff is a constraint or limit that forces giving up one thing in exchange for something else. When resources are fully employed, a country operates on its PPF. Any movement from one point to another point along the PPF requires the country to make a tradeoff between the two goods because one good is given up to get some other good. A free lunch occurs when some resources are not being used or not being used in their most productive way. When a country operates inside its PPF and moves toward its PPF choosing a different combination of goods, the country enjoys a free lunch. It does not face a tradeoff. Topic: Tradeoffs and free lunches Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication

11) On a production possibilities frontier diagram, where are production points that have tradeoffs? Where are production points with a free lunch? Answer: A tradeoff is a situation in which a limit forces one thing to be given up in exchange for something else. Any point on the production possibilities frontier itself is a production point with a tradeoff. Why? Moving along the production possibilities frontier means that more of one good can be obtained only at the (opportunity) cost of giving up some other good, which means that there is a tradeoff. A free lunch is the absence of a tradeoff, that is, when the production of a good or service can be increased without decreasing the production of another good or service. A free lunch occurs at any point within the production possibilities frontier. At these points, resources are being used inefficiently. By utilizing the resource efficiently, more goods or services can be produced without giving up any other goods or services. Topic: Tradeoffs and free lunches Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication 12) Explain why a movement from a point inside a production possibilities frontier to the production possibilities frontier is described as a free lunch and a movement along a production possibilities frontier is described as a tradeoff. Answer: The key point to answer this question is the fact that producing more of a good requires more resources. Hence, if all resources are employed efficiently, as is the case when producing on the production possibilities frontier, producing more of one good means reallocating resources away from the production of another good; there is a tradeoff between the two goods. In other words, to produce more of one good, the production of another must be given up. If, however, resources are used inefficiently, as is the case when producing inside the production possibilities frontier, then the production of a good can be increased by using the resources efficiently; hence no tradeoff is required and the additional goods are a free lunch. Topic: Tradeoffs and free lunches Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Written and oral communication

13) Draw a production possibilities frontier between beans and peas. Label the unattainable points, the attainable points with fully employed resources, and the attainable points with unemployed resources. Answer:

The production possibilities frontier, with the points labeled, is above. Any point beyond the production possibilities frontier is unattainable. Any point on the production possibilities frontier is attainable and resources are fully employed. Finally, any point within the production possibilities frontier is attainable and has unemployed resources. Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

14) The figure above shows a nation's production possibilities frontier for apples and oranges. a. What combination of goods is represented by point A? b. What combination of goods is represented by point B? c. Which point represents an unattainable combination of goods? d. The movement from point C to point D results in a free lunch. What is the free lunch? Answer: a. 3 million bushels of apples and 3 million bushels of oranges b. 3 million bushels of apples and 4 million bushels of oranges c. Point B is an unattainable point. d. The movement from point C to point D results in an increase of 1 million bushels of oranges with no decrease in apples. Therefore the 1 million bushels of oranges are a free lunch. Topic: Production possibilities frontier Skill: Level 1: Definition Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills

15) Before the first Gulf War, Kuwait had the capacity to produce a certain amount of oil from its oil wells. After the war, it found that capacity greatly diminished because the oil wells were on fire. Draw Kuwait's PPF before and after the war, assuming that the only two goods produced are oil and food. Further assume that setting the oil wells on fire did not affect Kuwait's ability to produce food. Explain why the PPF before the war is different from the PPF after the war. Answer:

When a PPF is drawn, we draw it for a fixed amount of natural resources, along with fixed amounts of the other factors of production such as labor, capital, etc. Fire reduced Kuwait's natural resources temporarily, so the PPF after the war shifted inwards. However, because setting the oil wells on fire did not affect Kuwait's ability to produce food, the maximum amount of food production, the point where the PPF intersects the vertical axis, did not change. Topic: Production possibilities frontier Skill: Level 4: Applying models Section: Checkpoint 3.1 Status: Old AACSB: Analytic skills 3.8 Essay: Opportunity Cost 1) Moving on a bowed out PPF, what happens to the opportunity cost of its production as a nation specializes more in one product? Answer: The bowed out PPF indicates that as the amount of the good produced increases, the good's opportunity cost increases. Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Reflective thinking

2) Why is the production possibilities frontier bowed out? Answer: The production possibilities frontier is bowed out because resources are not equally productive in all uses. The resources used to produce robots are different from the resources used to produce pizzas. Thus, as more of one good is produced, say robots, less productive resources must be used to increase the number of robots produced. Hence the opportunity cost of the additional robots increases, which gives the production possibilities frontier a bowed out shape. Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Written and oral communication 3) Why does the production possibilities frontier have a bowed out shape rather than being a straight line? Answer: The fact that as the production of one good or service increases, its opportunity cost increases means that the production possibilities frontier will be bowed out. Only if the opportunity cost remained constant as the production of a good increases would the production possibilities frontier be a straight line. Topic: Increasing opportunity costs Skill: Level 4: Applying models Section: Checkpoint 3.2 Status: Old AACSB: Written and oral communication 4) When economists state that the opportunity cost of a product increases as more of it is produced, what do they mean? For instance, what is the opportunity cost? And, where in a PPF diagram does this statement apply and where does it not apply? Answer: In general, the opportunity cost of increasing the production of one good or service is the forgone production of another good or service. The statement that the opportunity cost of a product increases as more of it is produced applies to production points on the production possibilities frontier. On the production possibilities frontier, resources are fully employed. Hence to increase the production of one good or service, resources must be switched away from the production of another good or service and hence the production of that good or service decreases. And, as more of the first good or service is produced, the opportunity cost of an additional unit becomes larger, so that the opportunity cost increases. However, the assertion that the opportunity cost of a product increases as more of it is produced does not apply to production points within the production possibilities frontier. Production points within the production possibilities frontier are points at which there are resources being used inefficiently. From a production point with inefficiently used resources, to increase the production of a good, some of the resources can be used efficiently and so there is no opportunity cost in terms of forgone other products. Therefore from a point within the production possibilities frontier, the opportunity cost of increasing the production of a good is zero. Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Written and oral communication 103 Copyright © 2021 Pearson Education, Inc.

5) What is the relationship between the bowed out shape of the production possibilities frontier and the increasing opportunity cost of a good as more of it is produced? Answer: The production possibilities frontier is bowed out because the opportunity cost of a good increases as more of it is produced. As the first unit of the good measured along the horizontal axis is produced, resources that are extremely well suited for its production can be used. Because of the suitability, not many resources need to be devoted to its production, so the opportunity cost-the decrease in the production of the good measured along the vertical axis-is not large. Hence at this location along the production possibilities frontier, the slope of the production possibilities frontier is shallow. But, as more of the product is produced, resources that are not as well suited must be devoted to its production. Consider one of the last units of this good, just before the production possibilities frontier intersects the horizontal axis. By the time the nation produces this much of the product, to produce one more unit means that resources that are extremely poorly suited in its manufacture must be used. Because these resources are not well suited, a lot of them must be used and, because a lot of them must be used, the opportunity cost in terms of the forgone other good is large. With the large decrease in the production of the good along the vertical axis, the slope of the production possibilities frontier at this location is steep. So, the production possibilities frontier goes from having a shallow slope to a steep one, that is, the production possibilities frontier is bowed outward. Topic: Increasing opportunity costs Skill: Level 2: Using definitions Section: Checkpoint 3.2 Status: Old AACSB: Written and oral communication

6) A (very, very small) country produces milk and shirts and its production possibilities frontier is in the table above. a. The nation is currently producing at point B. What is the opportunity cost of two additional gallons of milk? At point C? At point D? What do your results show? b. Suppose the nation is initially producing 4 gallons of milk and 40 shirts. What is the opportunity cost of 2 additional gallons of milk? Explain your answer. Answer: a. At point B, the opportunity cost of 2 additional gallons of milk is 20 shirts. At point C, the opportunity cost of 2 additional gallons of milk at 30 shirts. At point D, the opportunity cost of 2 additional gallons of milk is 40 shirts. The opportunity cost of 2 additional gallons of milk increases as more milk is produced. b. Producing 4 gallons of milk and 40 shirts means that the nation is producing at a point within the interior of its production possibilities frontier. Hence the opportunity cost of producing an additional 2 gallons of milk is 0. The opportunity cost is 0 because at a production point in the interior of the production possibilities frontier there are unemployed resources. These unemployed resources can be put to work producing the additional 2 gallons of milk. Because they were not producing anything previously, there is no decrease in the production of shirts and hence no opportunity cost. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

7) Jean can either type her term paper or create Web pages during the limited time she has available. The table above shows her PPF. a. Can Jean type 90 pages and create 2 Web pages? b. Use the above numbers to calculate the opportunity cost of a typed page as she increases her time typing and decreases time creating a Web page. Answer: a. Jean cannot type 90 pages and create 2 Web pages because, as row D shows, that combination is beyond her PPF. b. The opportunity cost is the ratio of the decrease in the number of Web pages divided by the increase in the number of typed pages. The following table gives the opportunity cost for typed pages.

Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

8) The table above gives the production possibilities frontier for a nation that produces wheat and soybeans. Use the information in that table to complete the table below, which has in it the opportunity costs of moving from one production point to another. Do not forget to note the units of the opportunity costs.

Answer:

The table above gives the opportunity costs. The units of the opportunity costs are in the column headings. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

9) The figure above represents the production possibilities frontier for a country. a. The nation is currently producing at point B and wants to move to point C. What is the opportunity cost of the move? b. The nation is currently producing at point B and wants to move to point A. What is the opportunity cost of the move? c. The nation is currently producing at point D and wants to move to point B. What is the opportunity cost of the move? Answer: a. By moving from point B to point C, the production of automobiles decreases by 1 million, from 3 million to 2 million. The 1 million decrease in automobiles is the opportunity cost of the movement. b. By moving from point B to point A, the production of cameras decreases by 3 million, from 3 million to 0 million. The 3 million decrease in cameras is the opportunity cost of the movement. c. By moving from point D to point B the nation gains 1 million additional cameras and also gains 2 million additional automobiles. The opportunity cost of this movement is zero, because there are no goods forgone. No goods are forgone because the nation is moving from a point with inefficiently used resources, point D, to one at which resources are efficiently utilized, point B. Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills

10) The table above presents the production possibilities of Farmer Brown. Use these data to calculate Farmer Brown's opportunity cost of additional beef as Farmer Brown moves from point A to B to C to D. Also use the data to calculate Farmer Brown's opportunity cost of additional wheat as Farmer Brown moves from point D to C to B to A. Based on these costs, does Farmer Brown use resources that are more productive in one activity than the other or are they equally productive in both uses? Explain your answer. Answer: The opportunity cost of a pound of beef is 1 bushel of wheat between points A and B, 1 1/2 bushels of wheat between points B and C, and 2 bushels of wheat between points C and D. The opportunity cost of a bushel of wheat is 1/2 pound of beef between points D and C, 2/3 pound of beef between points C and B, and 1 pound of beef between points B and A. Farmer Brown does use resources that are more productive in one activity than the other because the opportunity costs of producing beef and wheat increase as more beef and wheat are produced. If the resources were equally productive in both activities, the opportunity costs would be constant. Topic: Increasing opportunity costs Skill: Level 3: Using models Section: Checkpoint 3.2 Status: Old AACSB: Analytic skills 3.9 Essay: Economic Growth 1) How is economic growth shown in a production possibilities frontier graph? Answer: Economic growth is illustrated as an outward shift of the PPF. Topic: Economic growth Skill: Level 2: Using definitions Section: Checkpoint 3.3 Status: Old AACSB: Reflective thinking

3.10 Essay: Specialization and Trade 1) What is comparative advantage? Give an example. Answer: Comparative advantage is the ability of a person to produce a good at a lower opportunity cost compared to another person. A lower opportunity cost means that the person gives up less to produce the good compared to another person. For example, one person may need to give up one hour of typing to get dinner made while another person must give up two hours of typing to produce the same dinner. Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication 2) "When a person has an absolute advantage in producing a good, the person necessarily has a lower opportunity cost of producing it." Is this assertion true or false? Answer: The assertion is incorrect. An absolute advantage is when a person can produce more of the good than someone else. A comparative advantage relies on a comparison of opportunity costs, so a person has a comparative advantage in producing a good if the person can produce the good at a lower opportunity cost. Topic: Comparative advantage versus absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication 3) "When a person is more productive in producing a good or service than another person, the first person has the comparative advantage in producing the good." Is this assertion correct or incorrect? Explain your answer. Answer: The assertion is incorrect. The statement describes an absolute advantage, that is, a person has an absolute advantage in the production of a good if the person can produce more of it in a given time period than someone else. Comparative advantage, however, relies on a comparison of opportunity costs. A person has a comparative advantage in producing a good if the person can produce the good at a lower opportunity cost than another person. Topic: Comparative advantage versus absolute advantage Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication

4) Why is it likely that the United States has an absolute advantage in goods and yet it still ends up importing them from other countries? Answer: The United States might have an absolute advantage in producing a good but not a comparative advantage. In this case, the opportunity cost of producing the good in the United States is higher than in another country. Thus the United States will import the product from the other country. Topic: Comparative advantage versus absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication 5) The United States has an absolute advantage in producing sugar over all of the other sugar producing countries. Does this fact mean that we should not import any sugar from the other countries? Answer: Having an absolute advantage doesn't mean that the United States should engage in the production of sugar. If the opportunity cost of sugar in the United States is higher than in the other countries, then the other countries will have the comparative advantage. The countries with the comparative advantage are the ones that should do the producing. Quite likely these other nations have the comparative advantage and so it would be good policy for the United States to import sugar from these nations. Topic: Comparative advantage versus absolute advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication 6) Japan can use all of its resources to produce 100 videos or 400 shoes. China can use all of its resources to produce 25 videos or 200 shoes. Which nation has the comparative advantage in shoes and which nation has the comparative advantage in videos? Answer: In Japan, the opportunity cost of producing a video is 4 shoes and in China it is 8 shoes. Therefore Japan has the comparative advantage in producing videos because its opportunity cost is lower. In Japan, the opportunity cost of producing a shoe is 1/4 of a video and in China the opportunity cost of producing a shoe is 1/8 of a video. China has the comparative advantage in producing shoes because its opportunity cost is lower. Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

7) The United States can use all of its resources to produce 50 computers or 4,000 shoes. Suppose that at world market prices, one computer exchanges for 100 shoes. Explain how the United States can gain from trade. Answer: In the United States, the opportunity cost to produce 1 computer is 80 pairs of shoes. The United States can then sell the computers on the world market for 100 shoes each and thereby be ahead by 20 shoes per computer. Topic: Comparative advantage Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

8) The table above shows the amounts of cloth and cheese that China and Pakistan can produce in an hour. Which country has the comparative advantage in cloth and which country has the comparative advantage in cheese? Answer: In China, to produce 8 cloths has an opportunity cost of 16 cheeses, so the opportunity cost of 1 cloth is (16 cheese)/(8 cloths) = 2 cheeses per cloth. In Pakistan, to produce 4 cloths has an opportunity cost of 12 cheeses. Hence the opportunity cost of 1 cloth is (12 cheeses)/(4 cloths) or 3 cheeses per cloth. Because China's opportunity cost of a cloth is lower, China has the comparative advantage in producing cloth. In China, to produce 16 cheeses has an opportunity cost of 8 cloths, so the opportunity cost of 1 cheese is (8 cloths)/(16 cheeses) = 1/2 cloth per cheese. In Pakistan, to produce 12 cheeses has an opportunity cost of 4 cloths. Hence the opportunity cost of 1 cheese is (4 cloths)/(12 cheeses) or 1/3 cloth per cheese. Because Pakistan's opportunity cost of a cheese is lower, Pakistan has the comparative advantage in producing cheese. Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

9) Omar and John can fix computers or write computer programs. The table above shows the number of computers they can fix and the lines of code they can write in a day. a. Who, if anyone, has the absolute advantage? b. Who has the comparative advantage in fixing computers? Why? c. Who has the comparative advantage in writing programs? Why? Answer: a. Omar has an absolute advantage in fixing computers and writing code because he can fix 12 per day compared to John who can fix only 4 per day, and can write 800 lines of code per day compared to John who can write only 200 lines a day. b. John has the comparative advantage in fixing computers. He has the comparative advantage because his opportunity cost of fixing one computer is 50 lines of computer code. Omar does not have a comparative advantage in fixing computers because his opportunity cost of fixing a computer is higher at 66.7 lines of code. c. Omar has the comparative advantage in writing programs. His opportunity cost of writing one line of code is .015 of a computer fixed. John does not have the comparative advantage in writing programs because his opportunity cost of writing one line of code is 0.02 computers fixed. (Alternatively, to write 1 line of code costs Omar the opportunity to repair 1.5 percent of a computer and costs John the opportunity to repair 2.0 percent of a computer.) Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

10) Two nations can produce computers and software in the amounts given in the table above. Does either nation have an absolute advantage in producing the products? Which nation has a comparative advantage in computers? Which nation has a comparative advantage in software? Explain your answers. Answer: Nation B has an absolute advantage in producing both goods because it can produce more of both in one day than can Nation A. Nation B has the comparative advantage in computer production and Nation A has the comparative advantage in software. The nation with the lowest opportunity cost of producing a good has the comparative advantage in that good. In Nation A, to produce 100 computers has the opportunity cost of 140 units of software forgone, so the opportunity cost of 1 computer equals (140 units of software)/(100 computers) = 1.4 units of software per computer. In Nation B, similar calculations show that the opportunity cost for a computer is 1.25 units of software per computer. Nation B's opportunity cost is lower, so Nation B has the comparative advantage in computers. For software, in Nation A the opportunity cost of a unit of software is (100 computers)/(140 units of software) = 0.71 computers per unit of software while in Nation B the opportunity cost is (120 computers)/(150 units of software) = 0.80 computers per unit of software. Nation A's opportunity cost is lower, so Nation A has the comparative advantage in software. Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

11) The figure above shows Prakash's and Gail's production possibilities frontiers for writing books and magazine articles. a. What is Prakash's opportunity cost of a book? What is Gail's opportunity cost? Who has the comparative advantage in writing books? b. Who has the comparative advantage in writing magazine articles? c. According to their comparative advantages, who should write books and who should write magazine articles? Answer: a. In a year, Prakash can write 2 books or 40 magazine articles. Hence the opportunity cost of 1 book is (40 magazine articles) ÷ (2 books) = 20 magazine articles per book. In a year, Gail can write 3 books or 30 magazine articles. Hence the opportunity cost of 1 book is (30 magazine articles) ÷ (3 books) = 10 magazine articles per book. Gail's opportunity cost of writing books is lower than Prakash's, so Gail has the comparative advantage in writing books. b. Prakash has the comparative advantage in writing magazine articles. c. Gail has the comparative advantage in writing books, so she should write books. Prakash has the comparative advantage in writing magazine articles, so he should write magazine articles. Topic: Comparative advantage Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

12) "When countries specialize in producing the good in which they have a comparative advantage and then trade with each other, only the country with the absolute advantage gains." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. Absolute advantage, which is essentially the ability to produce more of a good than another country, has nothing to do with the gains from trade. All nations gain from free international trade regardless of whether they possess an absolute advantage or not. Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication 13) "Because the United States is the largest economy in the world and can produce anything it needs domestically, there are no gains from trade for the United States." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The United States, like any other nation, gains from trade when it specializes according to comparative advantage. Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 3.4 Status: Old AACSB: Reflective thinking 14) How can a nation that is at an absolute DISADVANTAGE gain from trade? Answer: Being at an absolute disadvantage means that the nation can produce less than its trading partner, but it says nothing about the relative costs of producing the goods. International trade is based on comparative advantage, which means that the low-cost producer specializes in the production of a good and exports it to the other nation that has the higher cost of production. A nation that has an absolute disadvantage still has a lower opportunity cost of production for one of the goods and hence has the comparative advantage in the production of that good. Therefore this country will gain from trade, as will all its trading partners. Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication

15) Why do nations engage in international trade? Answer: Nations engage in international trade because they gain from trade. International trade results in a more efficient use of resources and thereby increases world output. As a result, it increases the amount of goods and services available for consumption in all nations and thereby makes all countries better off. Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Written and oral communication 16) Explain why specialization and trade increases a country's overall level of consumption. Answer: A country specializes in the activities in which it has the lowest opportunity cost. By trading, it can obtain goods and services at a lower opportunity cost than it would cost to produce the goods and services domestically. Hence the nation acquires goods and services at a lower cost than before and so the nation's consumption increases. In fact, trade allows the nation to consume at a point beyond its production possibilities frontier. Topic: Gains from trade Skill: Level 3: Using models Section: Checkpoint 3.4 Status: Old AACSB: Analytic skills

Foundations of Microeconomics, 9e (Bade) Chapter 4 Demand and Supply 4.1 Demand 1) A market is defined as A) a physical place where people buy only goods. B) a physical place where people buy both goods and services. C) a store where people buy physical goods. D) any arrangement that brings buyers and sellers together. E) a place where one good is bartered for another. Answer: D Topic: Markets Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 2) eBay A) is considered a market because eBay is profitable. B) is a market because buyers and sellers are brought together to buy and sell. C) would be a market if there was only one physical location. D) cannot function as a market. E) is not a market because buyers can buy from only one seller at any point in time. Answer: B Topic: Markets Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 3) Which of the following are examples of a market? i. the New York Stock Exchange ii. a used car lot iii. a website selling vacations to Disney World A) i, ii and iii B) i only C) iii only D) i and iii only E) ii and iii only Answer: A Topic: Markets Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Application of knowledge 1 Copyright © 2021 Pearson Education, Inc.

4) Which of the following statements is TRUE about a competitive market? A competitive market A) must have a physical location. B) includes markets for goods and services but not for inputs. C) has so many buyers and sellers that no one can influence the price. D) has one seller competing to sell his or her product. E) has a handful of sellers but always has many buyers. Answer: C Topic: Markets Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 5) What is the "quantity demanded"? A) the amount of a good people desire B) the amount of a good people are able and willing to buy during a specific time period and at a given price C) the amount of a good people are able and willing to buy at all possible prices D) the maximum amount of a good that can be consumed during a specific time period E) the minimum amount of a good that people are willing to buy during a specific time period and at a given price Answer: B Topic: Quantity demanded Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 6) The "quantity demanded" of any good or service is ________ during a specified time period and at a specified price. A) the amount people are willing to buy B) the amount people are able to buy C) the amount people are willing and able to offer D) the amount people are willing and able to buy E) the amount people are willing to buy because it is the amount sellers are willing to sell Answer: D Topic: Quantity demanded Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

7) The "law of demand" refers to the fact that, other things remaining the same, when the price of a good rises A) the demand curve shifts rightward. B) the demand curve shifts leftward. C) there is a movement down along the demand curve to a larger quantity demanded. D) there is a movement up along the demand curve to a smaller quantity demanded. E) the demand curve shifts rightward and there is a movement up along the demand curve to a smaller quantity demanded. Answer: D Topic: Law of demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 8) The law of demand refers to how A) demand changes when people's incomes change. B) demand changes when the prices of substitutes and complements change. C) the quantity demanded changes when the price of the good changes. D) the price of the good changes when people's demand for the good changes. E) the quantity demanded changes when the demand for the good changes. Answer: C Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 9) Which of the following describes the law of demand? When other things remain the same, as A) the price of gas falls, the quantity demanded of gas increases. B) the quantity demanded of bread increases, the price of bread falls. C) the price of peanut butter increases, the quantity demanded of jelly decreases. D) your income increases, you'll buy more hamburgers. E) more people decide to eat pizza, the demand for pizza increases. Answer: A Topic: Law of demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

10) Gasoline prices increase by 50 percent and other things remain the same. As a result, there is A) an increase in the demand for gasoline. B) a decrease in the demand for gasoline. C) no change in the quantity of gasoline demanded. D) a decrease in the quantity of gasoline demanded. E) More information is needed to determine if the demand for gasoline increases or decreases. Answer: D Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 11) In stores, it is common to find seasonal products marked down when the season ends. What explains this behavior? A) The law of demand is being used to increase the quantity demanded. B) The store is trying to increase its customers' demand for the product. C) The store manager must be trying to drive away customers by selling low quality products. D) The store is trying to increase its customers' incomes by increasing their purchasing power. E) The store is trying to sell the goods and realizes that they are substitutes for other goods whose prices have risen. Answer: A Topic: Law of demand Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 12) The law of demand implies that, other things remaining the same A) as the price of a cheeseburger rises, the quantity of cheeseburgers demanded increases. B) as the price of a cheeseburger rises, the quantity of cheeseburgers demanded decreases. C) as income increases, the quantity of cheeseburgers demanded increases. D) as the demand for cheeseburgers increases, the price of a cheeseburger falls. E) as more people demand cheeseburgers, the quantity demanded increases. Answer: B Topic: Law of demand Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

13) An increase in the quantity demanded is shown as A) a movement along the demand curve. B) a movement toward the demand curve. C) a rightward shift of the demand curve. D) a leftward shift of the demand curve. E) BOTH a movement along the demand curve and a shift of the demand curve. Answer: A Topic: Quantity demanded Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 14) Which of the following results in a movement upward along the demand curve for movies? A) an increase in the price of movie tickets B) a decrease in the price of movie tickets C) an increase in income, assuming that movies are a normal good D) a decrease in income, assuming that movies are a normal good E) a decrease in the price of Netflix, a substitute for movies Answer: A Topic: Quantity demanded Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 15) Which of the following is TRUE regarding demand? i. Demand is the relationship between quantity demanded and the price of a good when all other influences on buying plans remain the same. ii. Demand refers to one quantity at one time. iii. "Demand" and "quantity demanded" are the same thing. A) i only B) ii only C) i and ii D) iii only E) ii and iii Answer: A Topic: Quantity demanded versus demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

16) The price of cotton clothing falls. As a result A) the quantity demanded of cotton clothing increases. B) the demand for cotton clothing increases. C) the quantity demanded of cotton clothing decreases. D) the demand for cotton clothing decreases. E) both the demand for cotton clothing increases AND the quantity demand of cotton clothing increases. Answer: A Topic: Quantity demanded versus demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 17) The American Dairy Association starts a highly successful advertising campaign that makes most people want to drink more milk. As a result A) the demand for milk increases. B) the quantity demanded of milk increases. C) the price of milk falls to encourage people to drink more milk. D) the demand for milk is not affected. E) the demand for milk decreases because the price of milk rises. Answer: A Topic: Quantity demanded versus demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 18) A demand schedule shows A) the quantities that people plan to buy in all possible circumstances. B) the quantities that people plan to buy at each different price when all other influences on buying plans remain the same. C) the quantities that people would plan to buy if they could afford them at each different price when all other influences on buying plans remain the same. D) the quantities that people plan to buy at each different income when all other influences on buying plans remain the same. E) the quantities that people plan to buy at each different price as long as producers are willing to supply that quantity. Answer: B Topic: Demand schedule Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

19) A demand schedule A) shows the quantity demanded at one price. B) is a graph showing a relationship between the quantity demanded and the price of a good. C) is a list of the quantities demanded at each different price when all other influences on buying plans remain the same. D) shows that demand is on schedule. E) shows how the demand changes when the supply changes. Answer: C Topic: Demand schedule Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 20) The downward slope of a demand curve A) represents the law of demand. B) shows that as the price of a good rises, consumers increase the quantity they demand. C) indicates how the quantity demanded changes when incomes rise and the good is a normal good. D) indicates how demand changes when incomes rise and the good is a normal good. E) indicates how demand changes when the price changes and the good is a normal good. Answer: A Topic: Demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 21) A demand curve A) has an upward slope. B) has a downward slope. C) is a graph of the relationship between quantity demanded of a good and its price. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: D Topic: Demand curve Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

22) Demand curves slope ________ because as the price increases and other things remain the same, the quantity demanded ________. A) downward; decreases B) downward; increases C) upward; decreases D) upward; increases E) downward; does not change Answer: A Topic: Demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 23) The market demand curve A) cannot show how quantity demanded changes in response to a change in price. B) cannot show a change in demand for a good. C) is the horizontal sum of individual demand curves. D) is the vertical sum of individual demand curves. E) is upward sloping. Answer: C Topic: Individual and market demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

24) The figure above shows the market for sports drinks. Consider this statement: regarding the figure: "If the price falls from $3 to $1 per bottle, quantity demanded changes from 10 to 25 bottles." Which of the following states the same idea? A) A change in quantity demanded can be shown as a movement from point A to B. B) As demand changes from January to June, demand will increase from 10 to 25 bottles. C) If the price changes from $1 to $3, 15 more bottles are demanded. D) A change in demand from June to January decreases the demand for sports drinks. E) As the price of sports drinks falls, demand decreases. Answer: A Topic: Changes in quantity demanded versus change in demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Application of knowledge

25) The figure above shows the market for sports drinks. Which of the statements are TRUE? i. A change in demand is shown as a movement from C to A. ii. A change from point C to point B represents a change in the quantity demanded. iii. If the price increases from $1 to $3, quantity demanded will decrease from 25 to 10 bottles. A) i, ii and iii B) ii only C) i and iii D) iii only E) i and ii Answer: C Topic: Changes in quantity demanded versus change in demand Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 26) Consider a demand curve for apples. "A change in the price of apples leads to a ________ the demand curve for apples because ________. A) movement along; all other factors influencing buying plans are held constant B) shift in; all other factors influencing demand are held constant C) movement along; all other factors influencing demand are allowed to change D) shift in; changes in the prices of other fruit affect demand E) movement along; changes in the prices of other fruit affect demand Answer: A Topic: Changes in quantity demanded Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 27) Consider the market for burritos. The law of demand can be illustrated by A) a shift in the demand curve for burritos due to a change in the price of a burrito. B) a shift in the demand curve for burritos due to a change in the price of a taco. C) a movement along the demand curve for burritos when the price of a taco changes. D) a movement along the demand curve for burritos due to a change in the price of a burrito. E) a shift in the demand curve for burritos due to a shift in the supply curve of burritos. Answer: D Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Application of knowledge

28) The market demand curve for mangos is A) the same as the demand curve of one buyer in a market with many buyers. B) upward sloping because rich people can afford more mangos than poor people can buy. C) the horizontal sum of the individual demand curves of all the buyers. D) the vertical sum of the individual demand curves of all the buyers. E) the horizontal average of the individual demand curves of all the buyers. Answer: C Topic: Individual and market demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 29) There are five hundred buyers in the market for cheese. If we know each individual's demand curves, to find the market demand, we must A) add the prices that each buyer will pay at every quantity. B) add the quantities that each buyer will purchase at every price. C) multiply the price times quantity for each buyer and then add the resulting products together. D) average the price each buyer is willing to pay for each given quantity. E) give up because there is no way to find the market demand. Answer: B Topic: Individual and market demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 30) Market demand curves are obtained by A) determining the price each consumer is willing to pay for the good and summing those prices across all consumers. B) observing the prices and quantities sold in a market over time and plotting those pricequantity combinations in a graph. C) summing the quantities every consumer is willing to buy at each different price. D) observing the behavior of an individual consumer in a market. E) averaging the quantities every consumer is willing to buy at each different price. Answer: C Topic: Individual and market demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

31) The market demand curve for mousetraps is A) found by summing the quantities of mousetraps demanded at each income level by each buyer. B) found by summing the prices of mousetraps at each quantity of mousetraps demanded by each buyer. C) the horizontal sum of the individual demand curves for mousetraps of all the buyers. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: C Topic: Individual and market demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 32) To find the market demand curve for in-line skates, we must A) add the quantities demanded at every price and every income by every buyer of in-line skates. B) add the quantities demanded at prices that all buyers can afford to pay. C) sum horizontally the individual demand curves of all the buyers. D) take account of the skate buying plans of all actual and potential buyers in all possible situations. E) None of the above answers is correct because we need also to take account of the supply of in-line skates. Answer: C Topic: Individual and market demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

33) The table below shows the market for frozen yogurt and the three people who make up the market. Price ($ per serving) 7.00 6.00 5.00

Quantity demanded (servings per week) Jo Eli Sam 1 0 0 2 1 0 4 3 1

If the price is $6 per serving, ________ each week. A) the market demand is 3 servings B) the market supply is 3 servings C) the market demand is 7 servings D) there will be a shortage of frozen yogurt. E) there will be a surplus of frozen yogurt. Answer: A Topic: Market demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Application of knowledge 34) The phrase "a change in demand" refers to a A) movement along a demand curve. B) movement along the price curve. C) change in the quantity demanded of a good. D) shift of the demand curve. E) movement along the quantity curve. Answer: D Topic: Changes in demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

35) When demand increases A) consumers are willing to buy more at any price. B) consumers buy more of the good only if its price falls. C) the price is lower at any level of quantity demanded. D) consumers buy more of the good only if its price rises. E) the demand curve shifts leftward. Answer: A Topic: Changes in demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 36) A change in the demand for apples could result from any of the following EXCEPT A) a change in the number of buyers. B) increased preferences for fresh fruit consumption for health reasons. C) a change in the price of an apple. D) a change in the price of a banana. E) a change in income. Answer: C Topic: Changes in demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 37) Changes in which of the following factors do NOT shift the demand curve? A) the price of the good B) buyers' incomes C) the price of a substitute good D) the number of buyers E) the price expected in the future Answer: A Topic: Shifts of the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

38) If the demand for used cars decreases after the price of a new car falls, used cars and new cars are A) inferior goods. B) substitute goods. C) complementary goods. D) normal goods. E) The questions errs because it is the quantity of used cars, NOT the demand for used cars, that will change when the price of a new car falls. Answer: B Topic: Changes in demand, price of a substitute Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 39) Consumers regard Dell computers and Apple computers as substitutes. If the price of a Dell computer decreases, the A) demand for Dell computers increases. B) demand for Apple computers increases. C) demand for Apple computers decreases. D) supply of Dell computers increases. E) demand for Dell computers decreases. Answer: C Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 40) Which of the following increases the demand for a good or service? A) a fall in the price of the good or service B) a smaller number of consumers wanting to buy the good or service C) a rise in the price of the good or service D) a rise in the price of a substitute good or service E) a rise in the price of a complement Answer: D Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

41) Consider the market for smart phones. Which of the following shifts the demand curve rightward? A) an increase in the price of smart phones B) a decrease in the price of smart phones C) an increase in the price of land-line phone service, a substitute for smart phones D) a decrease in the number of smart phone buyers E) an increase in the supply of smart phones Answer: C Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 42) Which of the following shifts the demand curve for movies rightward? A) an increase in the price of Netflix, a substitute for movies B) an increase in the price of movie tickets C) a decrease in the price of move tickets D) an increase in movie star salaries E) an increase in the price of HDTV sets Answer: A Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 43) Which of the following shifts the demand curve for movies leftward? A) a decrease in the price of Netflix, a substitute for movies B) a decrease in the price of movie tickets C) an increase in the price of movie tickets D) an increase in movie star salaries E) an increase in incomes, assuming movies are a normal good Answer: A Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

44) Two brands of water, Natural Water and Mountain Water, are close substitutes. If the price of Mountain Water decreases, the fall in price A) shifts the demand curve for Natural Water rightward. B) shifts the demand curve for Natural Water leftward. C) increases the price of Natural Water. D) increases the demand for Mountain Water. E) More information is needed to determine if the demand curve for Natural Water shifts rightward or leftward. Answer: B Topic: Changes in demand, price of a substitute Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 45) Car insurance and cars are complements. If the price of car insurance increases, the A) demand for cars decreases. B) demand for cars increases. C) quantity of cars demanded decreases. D) quantity of cars demanded increases. E) More information is needed to determine if the demand increases or decreases. Answer: A Topic: Changes in demand, price of a complement Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 46) Consumers eat salsa with taco chips. The price of salsa rises. How does the increase in the price of salsa affect the demand for taco chips? A) It decreases the demand for taco chips. B) It increases the demand for taco chips. C) It has no effect on the demand for taco chips. D) It will decrease the demand for taco chips ONLY IF taco chips are a normal good. E) It could increase, decrease, or have no effect on the demand for taco chips, but more information is needed to determine the impact. Answer: A Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

47) What happens to the demand for a good if a complement's price increases? A) The demand decreases and the demand curve shifts rightward. B) The demand increases and the demand curve shifts rightward. C) The demand decreases and the demand curve shifts leftward. D) The demand increases and the demand curve shifts leftward. E) There is no impact on demand for the good and the demand curve does not shift. Answer: C Topic: Changes in demand, price of a complement Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 48) Hot dogs and hot dog buns are complements. If the price of a hot dog falls, then A) the demand for hot dogs will increase. B) the demand for hot dog buns will decrease. C) the quantity demanded of hotdogs will decrease. D) the demand for hot dog buns will increase. E) the quantity demanded of hot dog buns will increase. Answer: D Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 49) A popular dinner among college students today is sushi, green tea, and wasabi dip so these foods are complements. If the price of green tea increases and the price of wasabi dip increases, what would be the effect on demand for sushi at lunch? A) The demand for sushi would decrease. B) The demand for sushi would be unaffected, but the price would increase. C) The demand for sushi could increase or decrease. D) The demand for sushi would increase. E) The demand for sushi would be unaffected, but the price would decrease. Answer: A Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

50) Soda and hot dogs are complements for one another. If a shortage of carbonated water leads to an increase in the price of soda, then the A) demand for hot dogs increases. B) demand for hot dogs decreases. C) quantity of hot dogs demanded increases. D) quantity of hot dogs demanded decreases. E) More information is needed to determine if the demand increases or decreases. Answer: B Topic: Changes in demand, price of a complement Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 51) A student at New York University used to take the Redhound bus when she visited her grandmother in Boston. After graduating, although the bus fare and the plane fare were the same as they were when she was a student, with a well-paid job on Wall Street she now takes the plane to Boston to visit her grandmother. For this student, travel by Redhound bus is A) a normal good. B) an inferior good. C) a substitute good. D) a complement good. E) a good with negative preferences. Answer: B Topic: Inferior goods Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 52) If the demand for digital cameras increases when consumers' incomes rise, then digital cameras are A) a normal good. B) an inferior good. C) a substitute for camcorders. D) a complement to camcorders. E) made using advanced technology. Answer: A Topic: Normal goods Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

53) If the demand for a good increases when people's incomes increase A) the good is an inferior good. B) the law of demand is violated. C) the good's demand curve must be slope upward. D) the good is a normal good. E) the good is a substitute good for an inferior good. Answer: D Topic: Changes in demand, normal good Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 54) In a recession, consumers have less income to spend. As a result, if dining out is a normal good, then which of the following would happen to the demand curve for dining out? A) The demand curve would shift leftward. B) The demand curve would not shift but the price of dining out would rise. C) The effect on the demand curve is unknown. D) The demand curve would shift rightward. E) The demand curve would not shift but the price of dining out would fall. Answer: A Topic: Changes in demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 55) If macaroni and cheese is an inferior good, then a decrease in income results in A) an increase in the demand for macaroni and cheese. B) a decrease in the demand for macaroni and cheese. C) an increase in the supply of macaroni and cheese. D) a decrease in the supply of macaroni and cheese. E) Both answers A and D are correct. Answer: A Topic: Changes in demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

56) If income increases and the demand for bus rides decreases A) bus rides are a normal good. B) consumers are behaving irrationally. C) bus rides are an inferior good. D) bus rides are a substitute good. E) bus rides must be a complement good with some other good. Answer: C Topic: Changes in demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 57) Which of the following is TRUE? A) For an inferior good, when income increases, the demand curve shifts leftward. B) If the price of a substitute rises, the demand curve shifts leftward. C) If people expect the price of a good will rise in the future, the demand curve shifts leftward. D) An increase in population shifts the demand curve leftward. E) An increase in the cost of producing a good shifts the demand curve leftward. Answer: A Topic: Changes in demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 58) Ramen noodles are a staple food item for many college students. Ramen noodles are very inexpensive, easy to prepare, and can be combined easily with other foods. After students graduate, find employment, and earn a higher income, they decrease their Ramen noodle purchases significantly. In this case, Ramen noodles are A) a normal good. B) an inferior good. C) a complement for higher income people. D) a substitute good. E) None of the above answers is correct. Answer: B Topic: Changes in demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

59) Water bottlers announce that next month the price of bottled water will rise by 25 percent. Which of the following occurs immediately? A) The quantity of bottled water demanded increases. B) The quantity of bottled water demanded decreases. C) The demand for bottled water decreases. D) The demand for bottled water increases. E) None of the above answers is correct because it is the supply that immediately changes, not the demand. Answer: D Topic: Changes in demand, expectations Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 60) A huge 50 percent off sale on golf clubs is advertised for next week. What happens this week in the market for golf clubs? A) The supply of golf clubs increases. B) The supply of golf clubs decreases. C) The demand for golf clubs increases. D) The demand for golf clubs decreases. E) The demand for and the supply of golf clubs decreases. Answer: D Topic: Changes in demand, expectations Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 61) You are just about to finish college and are about to start a high paying job. Because of this new job, what is the most likely outcome in the market for cars? A) Your demand for cars will decrease. B) The market supply of cars will increase. C) Your demand for cars will increase. D) The market supply of cars will decrease. E) The demand and the supply for cars will decrease. Answer: C Topic: Changes in demand, expectations Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

62) Which of the following increases the demand for a good? A) a rise in the price of a complement B) the expectation that future income will be higher C) an increase in income, assuming the good is an inferior good D) a decrease in the number of buyers E) a fall in the price of a substitute Answer: B Topic: Changes in demand, expectations Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 63) Suppose that tattoos gained immense popularity with retired people as well as college students. This gain in popularity best reflects which of the following influences on buying plans? A) the price of a substitute good B) income C) expectations D) preferences E) the price of a complement good Answer: D Topic: Changes in demand, preferences Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 64) Consider the market for cellular phones. Which of the following shifts the demand curve leftward? A) studies showing using cellular phones can cause brain cancer B) a decrease in the price of cellular phones C) a decrease in the quantity demanded of cellular phones D) an increase in the services provided by cellular phones, such as text messaging E) an increase in the price of cellular phones Answer: A Topic: Changes in demand, preferences Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

65) Scooters and bicycles are substitutes. Suppose that the price of a bicycle falls. Which of the figures above best illustrates how this fall in price affects the demand curve for scooters? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the above answers is correct because the change in the price of a bicycle will affect the supply curve NOT the demand curve. Answer: B Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

66) Scooters are a normal good and buyers' incomes decrease. Which of the figures above best illustrates how this change affects the demand curve for scooters? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the above answers is correct because the decrease in income will affect the supply curve NOT the demand curve. Answer: B Topic: Changes in demand, normal good Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 67) Over the next few years more and more people prefer to ride on scooters. Which of the figures above best illustrates how this change affects the demand curve for scooters? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the above answers is correct because the change in tastes will affect the supply curve NOT the demand curve. Answer: A Topic: Changes in demand, number of buyers Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 68) A scooter uses much less gasoline than does a car. Suppose the price of gasoline rises substantially. Which of the figures above best illustrates how this change affects the demand curve for scooters? A) Figure A only B) Figure B only C) Figure C only D) Figure D only E) Both Figure A and Figure D Answer: A Topic: Changes in demand, preferences Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

69) In the above figure, the movement from point a to point b reflects A) a decrease in the price of pizza. B) an increase in the demand for pizza. C) an increase in the number of people who eat pizza. D) an increase in the price of the tomato sauce used to produce pizza. E) a decrease in the number of firms producing pizza. Answer: A Topic: Changes in quantity demanded Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 70) In the above figure, the shift in the demand curve from D to D1 can be the result of A) an increase in the price of pizza. B) an increase in the price of a sub sandwich, a substitute for pizza. C) an increase in the price of soda, a complement to pizza. D) a change in quantity demanded. E) a decrease in income if pizza is a normal good. Answer: B Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

71) In the above figure, the shift in the demand curve from D to D2 can be the result of A) an increase in income if pizza is a normal good. B) an increase in the price of a sub sandwich, a substitute for pizza. C) an increase in the price of soda, a complement to pizza. D) a change in quantity demanded. E) a decrease in the supply of pizza that raises the price of pizza. Answer: C Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

72) The figure above shows the market for iPods. Which of the following creates a movement from point A to point B? A) a requirement that all students at universities have an iPod B) a decrease in the price of iPods C) a decrease in the price of Zunes, a substitute for iPods D) an increase in the price of iPods E) an increase in people's incomes Answer: B Topic: Changes in quantity demanded Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

73) The figure above shows the market for iPods. Which of the following shifts the demand curve from D0 to D1? A) a decrease in the price of Zunes, a substitute for iPods B) an increase in the price of iPods C) a requirement that all students at universities have an iPod D) a decrease in the price of iPods E) an increase in people's incomes Answer: A Topic: Changes in demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 74) The figure above shows the market for iPods. Which of the following shifts the demand curve from D0 to D2? A) a decrease in the price of Zunes, a substitute for iPods B) an increase in the price of iPods C) a requirement that all students at universities have an iPod D) a decrease in the price of iPods E) a decrease in people's incomes if iPods are a normal good Answer: A Topic: Changes in demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

75) Pizza is a normal good. In the above figure, the shift in the demand curve from D to D2 can be the result of A) a decrease in the price of soda, a complement to pizza. B) an increase in the price of hamburgers, a substitute for pizza. C) a decrease in income. D) a study that shows that pizza is a very healthy food. E) an increase in the cost of producing pizza. Answer: C Topic: Changes in demand, normal good Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 76) In the above figure, the shift in the demand curve from D to D1 can be the result of A) a decrease in income if pizza is a normal good. B) a decrease in the price of a sub sandwich, a substitute for pizza. C) an increase in the price of soda, a complement to pizza. D) an increase in the number of teenagers, all of whom demand more pizza than do other age groups. E) new technology that increases the profit from producing pizza. Answer: D Topic: Changes in demand, number of buyers Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

77) In the above figure, ________ will shift in the demand curve from D to D1. A) an increase in income if pizza is an inferior good B) a decrease in the price of a sub sandwich, a substitute for pizza C) buyers' expectation that pizza will be less expensive next week D) a scientific article published that demonstrates eating pizza is good for one's health E) a fall in the cost of producing pizza Answer: D Topic: Changes in demand, preferences Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 78) Which of the following brings only an increase in the quantity demanded of a good? A) a decrease in income, assuming the good is an inferior good B) a rise in the price of a substitute good C) a fall in the price of the good itself D) an expectation that the good's price will rise in the future E) a decrease in income, assuming the good is a normal good Answer: C Topic: Quantity demanded versus demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 79) People consume more soup as temperatures falls. So, as cold weather approaches A) the quantity of soup demanded increases. B) the demand for soup increases. C) people move closer to their demand curve for soup. D) people move farther beyond their demand curves. E) both the demand AND the quantity demanded of soup increase. Answer: B Topic: Quantity demanded versus demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

80) The impact of an increase in the price of a particular good is illustrated as a A) leftward shift in its demand curve. B) rightward shift in its demand curve. C) movement upward and to the left along its demand curve. D) movement downward and to the right along its demand curve. E) rightward shift in its demand curve AND a movement upward and to the left along its demand curve. Answer: C Topic: Movement along the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

81) According to the figure above, which of the following events will increase the quantity demanded of bottled water? A) a fall in the price of soda B) a rise in the price of a fitness club membership C) an increase in the number of buyers of bottled water D) a fall in the price of bottled water E) a rise in the price of bottled water Answer: D Topic: Changes in quantity demanded Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

82) The table above gives the demand schedule for lattes at the Bottomless Cup. If the price of a latte is $3, then the quantity of lattes demanded is ________ an hour. A) 90 B) 30 C) 80 D) 60 E) 230 Answer: D Topic: Quantity demanded Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 83) Other things remaining the same, the quantity of a good or service demanded will increase if the price of the good or service A) rises. B) falls. C) does not change. D) rises or does not change. E) rises or falls. Answer: B Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

84) The "law of demand" indicates that if the University of Maine increases tuition, all other things remaining the same A) the demand for classes will decrease at the University of Maine. B) the demand for classes will increase at the University of Maine. C) the quantity of classes demanded will increase at the University of Maine. D) the quantity of classes demanded will decrease at the University of Maine. E) both the demand for and the quantity of classes demanded will decrease at the University of Maine. Answer: D Topic: Law of demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

85) The graph illustrates the demand for peanuts. Peanuts are a normal good because the A) demand curve for peanuts slopes downward. B) demand for peanuts increases when income increases. C) demand for peanuts increases when the price of one of its substitutes rises. D) peanuts have both substitutes and complements. E) demand curve shows that if the price of peanuts rises, there is a movement along the demand curve to a lower quantity demanded. Answer: B Topic: Normal goods Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

86) A normal good is DEFINED as a good A) with a downward sloping demand curve. B) for which demand increases when the price of a substitute rises. C) for which demand increases when income increases. D) for which demand increases when the number of demanders increases. E) for which demand increases when the price of a complement falls. Answer: C Topic: Normal goods Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

87) Soda and peanuts are complements. Other influences on buying plans remaining the same, a rise in the price of soda A) increases the demand for peanuts. B) decreases the demand for peanuts. C) decreases the demand for soda. D) increases the demand for soda. E) has no effect on the demand for peanuts, though it does change the quantity demanded of peanuts. Answer: B Topic: Changes in demand, price of a complement Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

88) People come to expect that the price of a gallon of gasoline will rise next week. As a result A) today's supply of gasoline increases. B) today's demand for gasoline increases. C) the price of a gallon of gasoline falls today. D) next week's supply of gasoline decreases. E) today's demand for gasoline and today's supply of gasoline do not change. Answer: B Topic: Changes in demand, expectations Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 89) One reason the demand for laptop computers might increase is a A) fall in the price of a laptop computers. B) fall in price of desktop computers. C) change in preferences as laptops have become more portable, with faster processors and larger hard drives. D) poor quality performance record for laptop computers. E) decrease in income if laptops are a normal good. Answer: C Topic: Changes in demand, preferences Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 90) Teenagers drink more soda than other age groups. If the number of teenagers increases, everything else remaining the same A) market demand for soda increases. B) market demand for soda decreases. C) market demand for soda does not change. D) there is a movement along the market demand curve for soda. E) None of the above answers is correct because the effect on the demand depends whether the supply curve shifts rightward, leftward, or not at all. Answer: A Topic: Changes in demand, number of buyers Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

91) The number of buyers of sport utility vehicles, SUV, decreases sharply. So the A) demand curve for SUVs shifts leftward. B) demand curve for SUVs shifts rightward. C) demand curve for SUVs does not shift, nor is there a movement along then demand curve. D) demand curve for SUVs does not shift, but there is a movement downward along it. E) supply curve for SUVs shifts rightward. Answer: A Topic: Changes in demand, number of buyers Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 92) When moving along a demand curve, which of the following changes? A) the consumers' incomes B) the prices of other goods C) the number of buyers D) the price of the good E) the consumers' preferences Answer: D Topic: Movement along the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

93) The graph illustrates the demand curve for soda. After a rise in the price of a soda from $1.00 a can to $2.00 a can, the quantity of soda demanded A) decreases from 2 cans to 0 cans a day. B) increases from 0 cans to 2 cans a day. C) remains unchanged. D) decreases from 1 can to 0 cans a day. E) cannot be determined from the figure because the demand curve will shift to a new curve. Answer: A Topic: Movement along the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 94) Pizza and tacos are substitutes, and the price of a pizza increases. Which of the following correctly indicates what happens? A) The demand for pizzas decreases and the demand for tacos increases. B) The demand for both goods decreases. C) The quantity of tacos demanded increases and the quantity of pizza demanded decreases. D) The quantity of pizza demanded decreases and the demand for tacos increases. E) The demand for each decreases because both are normal goods. Answer: D Topic: Changes in quantity demanded versus change in demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

95) If the price of a DVD falls i. the demand curve for DVDs will shift rightward. ii. the demand curve for DVDs will not shift. iii. there will be a movement along the demand curve for DVDs. A) i only B) ii only C) iii only D) ii and iii E) i and iii Answer: D Topic: Shifts in the demand curve versus movements along the demand curve Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

96) The figure shows the market for sports drinks. If the price of bottled water (a substitute for sports drinks) A) increases, then the demand curve for sports drinks shifts from D0 to D1. B) increases, then there will be a movement from point A to point B. C) decreases, then the demand curve for sports drinks shifts from D0 to D1. D) increases, then there will be a movement from point B to point A. E) increases, then the demand curve for sports drinks shifts from D0 to D2. Answer: A Topic: Changes in demand, price of a substitute Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Application of knowledge

97) The figure shows the market for sports drinks. If the price of sports drinks decreases (with all other factors influencing buying plans unchanged), which of the following is TRUE? i. There will be a movement from point A to point B. ii. The law of demand must be applied. iii. There will be a shift from D0 to D1. iv. There will be a shift from D0 to D2. A) ii and iii B) i and ii C) ii and iv D) iii only E) iv only Answer: B Topic: Changes in quantity demanded versus change in demand Skill: Level 4: Applying models Section: Checkpoint 4.1 Status: Old AACSB: Application of knowledge 4.2 Supply 1) To be part of the supply for a good, a producer must be A) only able to supply the good. B) only willing to supply the good. C) both able and willing to supply the good. D) both able and willing to supply the good, and have already identified a buyer. E) both able and willing to supply the good, and have already sold the good. Answer: C Topic: Producers Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 2) The quantity supplied of a good or service is the A) list of all quantities at different prices, as illustrated by a supply schedule and a supply curve. B) list of all quantities at different prices, as illustrated by a demand schedule and a demand curve. C) one quantity produced at a variety of prices. D) quantity produced at one price. Answer: D Topic: Quantity supplied Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

3) The law of supply states that, other things remaining the same A) demand increases when supply increases. B) if the price of a good increases, firms buy less of it. C) if the price of a good increases, the quantity supplied increases. D) as people's income increase, the supply of goods increases. E) if the price of a good increases, the supply increases. Answer: C Topic: Law of supply Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 4) The law of supply states that other things remaining the same, a decrease in the price of a kayak leads to A) a decrease in the supply of kayaks. B) a decrease in the quantity of kayaks supplied. C) an increase in the supply of kayaks. D) an increase in the quantity of kayaks supplied. E) an increase in the supply of kayaks AND a decrease in the quantity of kayaks supplied. Answer: B Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 5) Which of the following helps explain why the law of supply exists? A) Larger outputs result in lower costs of production. B) the law of increasing opportunity cost C) The costs of production remain constant throughout all levels of output. D) Sellers realize that if the price increases, they make larger profits and do not need to change their production. E) the law of demand Answer: B Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

6) The law of supply reflects the fact that A) people buy more of a good when its price falls. B) suppliers have an incentive to use their resources in the way that brings the biggest return. C) higher prices are more attractive to consumers because they signal a higher quality product. D) businesses can sell more goods at lower prices. E) the demand curve is downward sloping. Answer: B Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 7) The supply schedule A) shows the relationship between the quantity supplied and the price of a good when all other influences on selling plans remain the same. B) is a curve showing the relationship between the amount the sellers are willing and able to sell and the price of that good when all relevant factors change. C) shows one quantity at one price. D) is the schedule that suppliers have to keep or else they will be late. E) shows the relationship between the quantity supplied and the price of a good when all other influences on selling plans change. Answer: A Topic: Supply schedule Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 8) A supply curve A) slopes downward. B) slopes upward. C) is a graph of the relationship between quantity supplied of a good and its price. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: D Topic: Supply curve Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

9) Which of the following results in a movement upward along the supply curve for movies in theaters? A) an increase in the price of movie tickets B) a decrease in the price of movie tickets C) a decrease in the price of downloaded movies D) a decrease in movie star salaries E) an increase in the number of theaters Answer: A Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 10) If the price of iPads decreases A) there will be a movement down along the supply curve for iPads. B) there will be a rightward shift in the iPad supply curve. C) there will be a movement up along the supply curve for iPads. D) the supply curve for iPads shifts leftward. E) there has been a decrease in the price of iTunes songs. Answer: A Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Revised AACSB: Analytical thinking 11) Which of the following increases the quantity supplied of yoga pants but does NOT increase the supply of yoga pants? A) a decrease in the price of a yoga pants B) an increase in the price of a yoga pants C) a decrease in the number of suppliers of yoga pants D) an increase in the price of the resources used to produce yoga pants E) new technology that lowers the cost of producing yoga pants Answer: B Topic: Changes in quantity supplied versus change in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

12) When the price of oranges increases A) the supply of oranges increases. B) the quantity of oranges demanded increases. C) the quantity of oranges supplied increases. D) the supply of oranges decreases. E) none of the above Answer: C Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 13) Which of the following increases the supply of a product? A) lower prices for the resources used to produce the product B) some producers going bankrupt and leaving the industry C) a higher price for the product D) an increase in the expected future price of the product E) a decrease in productivity Answer: A Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 14) Which of the following does NOT increase the supply of personal computers, that is, does NOT shift the supply curve of personal computers? A) an advance in the technology used to produce personal computers B) an increase in the number of firms producing personal computer C) a fall in the cost of the components used to assemble personal computers D) a rise the price of a personal computer E) a change in the expected future price of a personal computer Answer: D Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

15) Which of the following shifts the supply curve of rutabagas rightward? (A rutabaga is a potato-like vegetable.) A) an increase in the price of a rutabaga B) an exceptionally cold summer that killed much of the rutabaga crop C) a fall in the price of fertilizer used to grow rutabagas D) Both answers A and C shift the supply curve of rutabagas rightward. E) Both answers A and B shift the supply curve of rutabagas rightward. Answer: C Topic: Shifts of the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 16) Mulch is shredded wood and is a by-product in the production of lumber. Because these two goods are produced together, they are A) complements in production. B) substitutes in production. C) inputs into the same production process. D) not related. E) normal goods in production. Answer: A Topic: Complements in production Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 17) A decrease in the price of a complement in production leads to A) a decrease in the supply of the good in question. B) an increase in the supply of the good in question. C) no change in the supply of the good in question. D) a decrease in the quantity supplied of the good in question. E) an increase in the supply of the good in question AND a decrease in the quantity supplied of the good in question. Answer: A Topic: Changes in supply, price of a complement in production Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

18) Milk can be used to produce cheese or butter. If the price of a pound of butter rises, what happens to the supply of cheese? A) The supply of cheese increases. B) The supply of cheese decreases. C) The supply of cheese stays the same, and there is no change in the quantity supplied of cheese. D) The supply of cheese stays the same, and there is a decrease in the quantity supplied of cheese. E) The supply of cheese could increase, decrease, or stay the same depending on what happens to the supply of butter. Answer: B Topic: Changes in supply, price of a substitute in production Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 19) Oil refiners can refine a barrel of petroleum so that it yields either more home heating oil or more diesel fuel. If the price of diesel fuel falls, there is A) an increase in the supply of home heating oil. B) a decrease in the supply of home heating oil. C) an increase in the quantity of home heating oil supplied. D) a decrease in the quantity of home heating oil supplied. E) an increase in the demand for home heating oil. Answer: A Topic: Changes in supply, price of a substitute in production Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 20) Which of the following increases the supply of gasoline? A) a situation where the quantity of gasoline demanded exceeds the quantity supplied B) an increase in the price of gasoline C) a decrease in the price of a resource used to produce gasoline, such as crude oil D) a decrease in the demand for gas-guzzling, sport utility vehicles E) an increase in income if gas-guzzling, sport utility vehicles are a normal good Answer: C Topic: Changes in supply, price of a resource Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

21) The United Auto Workers bargained for higher wages and more benefits for autoworkers. As a result of the higher wages and increased benefits i. the quantity of new automobiles supplied decreases. ii. the supply of new automobiles decreases. iii. the supply of new automobiles increases. A) only i B) only ii C) only iii D) both i and ii E) Neither i, ii, nor iii is correct. Answer: B Topic: Changes in supply, price of a resource Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 22) If the automobile workers' union successfully negotiates a wage increase for its members, how does the wage hike affect the supply of automobiles? A) The supply increases. B) The supply decreases. C) The quantity supplied increases. D) The quantity supplied decreases. E) Both answers B and D are correct. Answer: B Topic: Changes in supply, price of a resource Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 23) Plywood is used in the construction of houses. If the price of plywood rises, what happens to the supply of houses? A) The supply increases so that the supply curve shifts rightward. B) The supply decreases so that the supply curve shifts leftward. C) The quantity supplied increases, but there is no shift in the supply curve. D) The quantity supplied decreases, but there is no shift in the supply curve. E) The quantity supplied decreases, and the supply curve shifts leftward. Answer: B Topic: Changes in supply, price of a resource Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

24) It is expected that the price of a bushel of wheat will increase in one month. This belief will result in A) an increase in the current supply of wheat. B) a decrease in the current supply of wheat. C) a decrease in the future supply of wheat. D) no change in the current or future supply of wheat. E) an increase in the current quantity supplied of wheat. Answer: B Topic: Changes in supply, expectations Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 25) If the number of companies producing memory chips increases, then the A) supply of memory chips does not change. B) supply of memory chips increases. C) supply of memory chips decreases. D) quantity of memory chips supplied increases. E) demand for memory chips increases. Answer: B Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 26) An increase in the number of fast-food restaurants A) raises the price of fast-food meals. B) increases the demand for fast-food meals. C) increases the supply of fast-food meals. D) increases the demand for substitutes for fast-food meals. E) increases both the demand and supply of fast-food meals. Answer: C Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

27) An increase in the number of pineapple growers results in A) an increase in the quantity of pineapples supplied and no shift in the supply curve of pineapples. B) an increase in the supply of pineapples and a rightward shift in the supply curve of pineapples. C) an increase in the supply of pineapples and a leftward shift in the supply curve of pineapples. D) no change in the supply of pineapples and a movement along the supply curve of pineapples. E) None of the above answers is correct. Answer: B Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 28) If the number of sellers decreases, then the supply curve ________ and the supply ________. A) shifts rightward; increases B) shifts rightward; decreases C) shifts leftward; increases D) shifts leftward; decreases E) does not shift; does not change, but there is a decrease in the quantity supplied Answer: D Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 29) Which of the following results in an increase in the supply of a good or service? A) a fall in the price of the good or service B) a smaller number of sellers producing the good or service C) an increase in foreign imports of the good or service D) higher taxes imposed upon producers of the good or service E) a rise in the price of the good or service Answer: C Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

30) Researchers have found a hybrid of corn that is cheaper to grow. This technological breakthrough A) increases the demand for hybrid corn. B) increases the supply of hybrid corn. C) decreases the supply of hybrid corn. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 31) Suppose over the next several years the productivity of firms producing electric cars improves dramatically. The advance in productivity leads to A) a decrease in the supply of electric cars so that the supply curve shifts leftward. B) a decrease in the supply of electric cars so that the supply curve shifts rightward. C) an increase in the supply of electric cars so that the supply curve shifts leftward. D) an increase in the supply electric cars so that the supply curve shifts rightward. E) no change in the supply of electric cars, only a change in the quantity supplied of electric cars. Answer: D Topic: Changes in supply, shifts of the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 32) Which of the following increases the supply of a good and shifts its supply curve rightward? A) a smaller number of producers B) a higher wage paid to workers in the industry C) a technological advance in how the good is produced D) an increase in the cost of the resources used to produce the good E) an increase in the price of the good Answer: C Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

33) Which of the following increases the supply of a good? A) The price of a complement in production decreases. B) Producers expect higher prices for the good in the future. C) Productivity improves. D) Prices of inputs used to produce the good rise. E) The number of producers decreases. Answer: C Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 34) Advances in productivity increase supply because they might A) increase the price expected in the future. B) decrease the number of goods available. C) decrease the cost of production. D) raise the prices of resources used to produce the good. E) increase the number of firms producing the good. Answer: C Topic: Changes in supply, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 35) The number of corn producers increases, so the supply of corn ________ and the supply curve of corn ________. A) increases; shifts rightward B) increases; shifts leftward C) decrease; shifts rightward D) decreases; shifts leftward E) increases; does not shift Answer: A Topic: Changes in supply, shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

36) Which of the following shifts the supply curve for oranges? A) disastrous weather that destroys about half of this year's orange crop B) a newly discovered increase in the nutritional value of oranges C) an increase in the price of bananas, a substitute in consumption for oranges D) an increase in income for all orange consumers if oranges are a normal good E) an increase in the number of orange consumers Answer: A Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 37) Because of the high cost of fuel, railroads such as Union Pacific Corp and CSX Corp have increased the price they charge to haul freight. This change means that A) the demand curve for hauling freight has shifted leftward. B) the supply curve for hauling freight has shifted leftward. C) the demand curve for hauling freight has shifted rightward. D) the supply curve for hauling freight has shifted rightward. E) neither the supply curve nor the demand curve for hauling freight has shifted; the only change is that the price is higher. Answer: B Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 38) Which of the following shifts the supply curve of popcorn leftward? A) a decrease in the price of popcorn B) an increase in the price of popcorn C) a technological development in the production of popcorn D) a decrease in the number of popcorn suppliers E) a decrease in the cost of producing popcorn Answer: D Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

39) In the above figure, the movement from point a to point b reflects A) an increase in the price of pizza. B) an increase in the supply of pizza. C) an increase in the number of producers of pizza. D) a decrease in the cost of the tomato sauce used to produce pizza. E) a decrease in income if pizza is a normal good. Answer: A Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 40) In the above figure, the shift in the supply curve from S to S1 reflects A) an increase in the quantity of pizza supplied. B) a decrease in the quantity of pizza supplied. C) an increase in the supply of pizza. D) a decrease in the supply of pizza. E) None of the above answers is correct. Answer: D Topic: Changes in supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

41) In the above figure, the shift in the supply curve from S to S2 reflects A) an increase in the quantity of pizza supplied. B) a decrease in the quantity of pizza supplied. C) an increase in the supply of pizza. D) a decrease in the supply of pizza. E) a decrease in the supply of pizza AND a simultaneous decrease in the quantity of pizza supplied. Answer: C Topic: Changes in supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 42) In the above figure, the shift in the supply curve from S to S2 might reflect A) a decrease in the cost of the tomato sauce used to produce pizza. B) a decrease in the number of pizza producers. C) an increase in the price of a pizza. D) an increase in income if pizza is a normal good. E) an increase in the price of a good that is a substitute for consumers. Answer: A Topic: Shifts of the supply curve, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 43) In the above figure, an increase in cost of the cheese used to produce pizza A) shifts the supply curve from S to S1. B) shifts the supply curve from S to S2. C) results in a movement from point a to point b. D) results in a movement from point b to point a. E) has no effect. Answer: A Topic: Shifts of the supply curve, cost of resources Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

44) In the above figure, an increase in productivity A) shifts the supply curve from S to S1. B) shifts the supply curve from S to S2. C) results in a movement from point a to point b. D) results in a movement from point b to point a. E) has no effect. Answer: B Topic: Shifts of the supply curve, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

45) The above figure shows the market for laptops. Which of the following causes a movement from A to B? A) a decrease in the number of laptop manufactures and sellers B) an increase in the productivity of the workers manufacturing laptops C) an increase in the cost of hard drives D) an increase in the price of laptops E) a decrease in the price of laptops Answer: D Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

46) The above figure shows the market for laptops. Which of the following causes a movement from B to A? A) an increase in the cost of hard drives B) an increase in the productivity of the workers manufacturing laptops C) a decrease in the price of laptops D) an increase in the price of laptops E) an increase in the number of laptop manufactures and sellers Answer: C Topic: Changes in quantity supplied Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 47) The above figure shows the market for laptops. Which of the following shifts the supply curve from S0 to S2? A) an increase in the cost of hard drives B) an increase in the productivity of the workers manufacturing laptops C) a decrease in the price of laptops D) an increase in the price of laptops E) a decrease in the number of laptop manufactures and sellers Answer: B Topic: Changes in supply, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 48) The above figure shows the market for laptops. Which of the following shifts the supply curve from S0 to S1? A) an increase in the cost of hard drives B) a decrease in the price of laptops C) an increase in the number of laptop manufactures and sellers D) an increase in the price of laptops E) an increase in the productivity of the workers manufacturing laptops Answer: A Topic: Changes in supply, price of a resource Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

49) The above figure illustrates the market for corn. If point "a" represents the original equilibrium and point "b" the new equilibrium, which of the following could have caused the change? A) an increase in consumers' preferences for corn B) an increase in consumers' income if corn is a normal good C) an increase in labor costs of producing corn D) an improvement in the technology of producing corn E) an increase in consumers' income if corn is an inferior good Answer: D Topic: Shifts of the supply curve, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 50) The above figure illustrates the market for corn. If point "a" represents the original equilibrium and point "b" the new equilibrium, which of the following could have caused the change? A) an increase in the number of corn growers B) an increase the price of wheat, a substitute in production for corn C) an increase in the cost of the fertilizer used to grow the corn D) a belief among corn farmers that the price of a bushel of corn will be higher next month E) an increase in income if corn is a normal good Answer: A Topic: Shifts of the supply curve, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 57 Copyright © 2021 Pearson Education, Inc.

51) The above figure illustrates the market for corn. If point "a" represents the original equilibrium and point "b" the new equilibrium, which of the following could have caused the change? A) a decrease in the number of corn growers B) a decrease the price of wheat, a substitute in production for corn C) an increase in the cost of the seed used to grow the corn D) an decrease in buyers' incomes if corn is an inferior good E) an increased belief among buyers that corn is healthy Answer: B Topic: Shifts of the supply curve, price of a substitute in production Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 52) In the figure above, if point "a" represents the original equilibrium and point "b" the new equilibrium, then A) there has been an increase in supply. B) there has been an increase in demand. C) there has been a change in the quantity supplied and no change in supply. D) Both answers B and C are correct. E) Both answers A and B are correct. Answer: A Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 53) Autoworkers negotiate a wage increase. How does this change affect the supply curve of cars? A) It shifts the supply curve leftward. B) It shifts the supply curve rightward. C) It does not shift the supply curve or create a movement along it. D) The supply curve will shift but there is not enough information to tell if the change shifts the supply curve rightward, leftward, or not at all. E) It creates a movement downward along the supply curve. Answer: A Topic: Shifts of the supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

54) The figure shows the market for tires. If the price of tires falls from $90 to $60 per tire, this can be shown as a ________ because all other factors affecting selling plans are ________. A) movement down along S0; held constant B) movement down along S0; allowed to vary C) shift from S0 to S1; allowed to vary D) shift from S1 to S0; held constant E) movement down along S0; unpredictable Answer: A Topic: Law of supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 55) The figure shows the market for tires. A change in the price of tires from $60 to $120 A) is shown as a movement from point B to point A. B) causes a shift from S1 to S0. C) is shown as a movement from point A to point C. D) causes shift from S0 to S1. E) could be caused a a decrease in the price of rubber. Answer: A Topic: Changes in quantity supplied Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

56) The figure shows the market for tires. The effect of an increase in the price of rubber can be shown as a A) shift from S1 to S0 due to a change in supply. B) change from point A to point B. C) shift from S0 to S1 due to a change in supply. D) change from point B to point A. E) change from point B to point C due to a change in the quantity supplied. Answer: C Topic: Changes in supply, price of a resource Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 57) If the supply of iPads increases, then i. the supply curve for iPads has shifted rightward. ii. the price of iPads has decreased. iii. there will be a movement upward along the iPad supply curve. A) i only B) i, ii and iii C) i and ii D) ii and iii E) i and iii Answer: A Topic: Quantity supplied versus supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 58) Which of the following leads to an increase in the quantity supplied but not an increase in supply? A) a decrease in the costs of production B) an increase in the product's price C) an advance in the technology used to produce the good D) an increase in the price of another product that the suppliers can produce E) an increase in the number of firms producing the good or service Answer: B Topic: Quantity supplied versus supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

59) The price of salsa rises. How does the increase in the price of salsa affect the supply of salsa? A) The supply of salsa increases. B) The supply of salsa decreases. C) There is no change to either the supply of salsa or the quantity of salsa supplied. D) There is no change to the supply of salsa, but the quantity of salsa supplied increases. E) There is no change to the supply of salsa, but the quantity of salsa supplied decreases. Answer: D Topic: Quantity supplied versus supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 60) If a higher price for wheat decreases the quantity of corn being produced, which of the following describes what has occurred? A) The supply of wheat increased and the supply of corn decreased. B) The quantity of wheat supplied increased and quantity of corn supplied decreased. C) The supply of wheat increased and the quantity of corn supplied decreased D) The quantity of wheat supplied increased and the supply of corn decreased. E) The supply of wheat decreased and the supply of corn decreased. Answer: D Topic: Quantity supplied versus supply Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 61) "Other things remaining the same, if the price of a good rises, the quantity supplied of that good increases." This sentence describes a A) shift of a supply curve. B) shift of the price curve. C) movement along a supply curve. D) movement along the price curve. E) movement along the quantity curve. Answer: C Topic: Movement along the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

62) The quantity supplied of a good, service, or resource is ________ during a specified period and at a specified price. A) the amount that people are able to sell B) the amount that people are willing to sell C) the amount that people are able and willing to sell D) the amount that people are willing and able to buy E) the amount sold Answer: C Topic: Quantity supplied Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 63) The quantity supplied of a good is A) the same thing as the quantity demanded at each price. B) the amount that the people are willing and able to sell during a given time period at a specified price. C) equal to the difference between the quantity available and the quantity desired by all consumers and producers. D) the amount the firm will sell when it can sell all it wants. E) always larger than the quantity demanded at each price. Answer: B Topic: Quantity supplied Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

64) The graph illustrates the supply of sweaters. Which of the following events will increase the quantity supplied of sweaters? A) a rise in the price of a sweater B) a rise in the wage rate paid to the workers who make sweaters C) a rise in the expected future price of a sweater D) an increase in the number of sellers of sweaters E) a decrease in the number of sweater buyers Answer: A Topic: Quantity supplied Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 65) Which of the following indicates that the law of supply applies to makers of soda? A) An increase in the price of a soda leads to an increase in the demand for soda. B) An increase in the price of a soda leads to an increase in the supply of soda. C) An increase in the price of a soda leads to an increase in the quantity of soda supplied. D) A decrease in the price of a soda leads to an increase in the quantity of soda demanded. E) A decrease in the price of a soda leads to an increase in the supply of soda. Answer: C Topic: Law of supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

66) One reason supply curves have an upward slope is because A) increased supply will require increased technology. B) people will pay a higher price when less is supplied. C) a higher price brings a greater profit, so firms want to sell more of that good. D) to have more of the good supplied requires more firms to open. E) None of the above answers is correct because supply curves have a downward slope. Answer: C Topic: Supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 67) The market supply curve is the ________ of the ________. A) horizontal sum; individual supply curves B) vertical sum; individual supply curves C) horizontal sum; individual supply curves minus the market demand D) vertical sum; individual supply curves minus the market demand E) vertical average; of the individual supply curves Answer: A Topic: Market supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 68) If the costs of producing pizza increase, which will occur? A) The supply of pizza will decrease. B) The quantity of pizzas supplied will increase as sellers try to cover their costs. C) Pizza will cease to be produced and sold. D) The demand curve for pizza will shift leftward when the price of a pizza increases. E) The demand curve for pizza will shift rightward when the price of a pizza increases. Answer: A Topic: Changes in supply, costs Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

69) Wheat is used to produce cereal. When the price of wheat falls, the A) demand for wheat increases. B) supply of wheat decreases. C) supply of cereal increases. D) demand for cereal increases. E) demand for cereal decreases. Answer: C Topic: Changes in supply, costs Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 70) A rise in the price of a substitute in production for a good leads to A) an increase in the supply of that good. B) a decrease in the supply of that good. C) no change in the supply of that good; instead there is a change in the quantity supplied. D) a decrease in the quantity of that good supplied. E) no change in either the supply or the quantity supplied of the good. Answer: B Topic: Changes in supply, price of a substitute in production Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 71) Suppose the price of leather used to produce shoes increases. The higher price of leather ________ the supply of shoes and the supply curve of shoes ________. A) increases; shifts rightward B) increases; shifts leftward C) decreases; shifts rightward D) decreases; shifts leftward E) does not change; does not shift Answer: D Topic: Changes in supply, price of a resource Skill: Level 4: Applying models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

72) An increase in the number of producers of bird seed ________ the supply of bird seed and shifts the supply curve of bird seed ________. A) increases; rightward B) increases; leftward C) decreases; rightward D) decreases; leftward E) does not change; rightward Answer: A Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 73) Which of the following will increase the supply of a product? A) an increase in the price of the product B) an increase in the demand for the product C) an increase in the number of sellers D) a decrease in the demand for the product E) an increase in the price of inputs Answer: C Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

74) The graph illustrates the supply of sweaters. Which of the following events will increase the supply of sweaters? A) a rise in the price of a sweater B) a rise in the wage rate paid to the workers who make sweaters C) a rise in the expected future price of a sweater D) an increase in the number of sellers of sweaters E) an increase in income if sweaters are a normal good Answer: D Topic: Changes in supply, number of sellers Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 75) The graph illustrates the supply of sweaters. As the technology used to produce sweaters improves, the A) supply of sweaters decreases and the demand for sweaters does not change. B) supply of sweaters increases and the demand for sweaters does not change. C) quantity of sweaters supplied increases. D) quantity of sweaters supplied decreases. E) supply of sweaters increases AND the demand for sweaters increases. Answer: B Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

76) An increase in the productivity of producing jeans results in A) the quantity of jeans supplied increasing. B) the supply of jeans increasing. C) buyers demanding more jeans because they are now more efficiently produced. D) buyers demanding fewer jeans because their price will fall, which signals lower quality. E) some change, but the impact on the supply of jeans is impossible to predict. Answer: B Topic: Changes in supply, productivity Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 77) A change in the price of a good ________ its supply curve and ________ a movement along its supply curve. A) shifts; causes B) shifts; does not cause C) does not shift; causes D) does not shift; does not cause E) None of the above because the change in the price might cause either a shift in the supply curve or a movement along the supply curve depending on the size of the change. Answer: C Topic: Shifts of the supply curve versus movement along the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

78) The graph illustrates the supply of sweaters. A fall in the price of sweaters brings A) a movement along the supply curve. B) a decrease in the quantity supplied of sweaters. C) a shift of the supply curve. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Movement along the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

79) The graph illustrates the supply of soda. If the price of soda rises from $0.50 a can to $1.50 a can, the quantity of soda supplied A) increases from 0 cans to 4,000 cans a day. B) decreases from 4,000 cans to 0 cans a day. C) remains unchanged because the supply increases NOT the quantity supplied. D) increases from 0 to 6,000 cans a day. E) remains unchanged because the supply decreases NOT the quantity supplied. Answer: A Topic: Movement along the supply curve Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 80) When the price of rice rises A) the market quantity supplied of rice increases. B) the market supply of rice increases. C) the market quantity of rice demanded decreases. D) Both A and C are true. E) Both A and B are true. Answer: D Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

81) Wheat is used to produce cereal. When the price of wheat falls, the A) demand for wheat increases. B) supply of wheat decreases. C) supply of cereal increases. D) demand for cereal increases. E) demand for cereal decreases. Answer: C Topic: Changes in supply, expectations Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 82) The table below shows the three firms that are suppliers in the frozen yogurt market. Price ($ per serving) 8.00 7.00 6.00

Quantity Supplied (1,000s of servings supplied) YoYo FunFro Yummy 300 300 400 150 200 300 0 100 200

If the price in the market is $6.00 A) only 2 firms supply a total of 300 servings. B) 450 servings are supplied in the market. C) 600 servings are supplied in the market. D) all 3 firms supply a total of 900 servings. E) there will be a shortage of frozen yogurt. Answer: A Topic: Market supply curve Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

4.3 Market Equilibrium 1) Market equilibrium occurs when A) all markets become equal. B) the quantity demanded equals the quantity supplied. C) opposing forces pull demand and supply apart. D) demand and supply move in opposite direction. E) demand and supply change so that they are equal at ALL possible prices. Answer: B Topic: Market equilibrium Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 2) Market equilibrium occurs when A) the quantity demanded equals the quantity supplied. B) the market is changing rapidly. C) other things remain the same. D) buyers get the lowest possible price. E) everyone who wants the good gets the quantity he or she wants. Answer: A Topic: Market equilibrium Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 3) Market equilibrium i. can never occur because there are always people who want a good but cannot afford it. ii. occurs at the intersection of the supply and demand curves. iii. is the point where the price equals the quantity. A) ii only B) iii only C) ii and iii D) i only E) i and ii Answer: A Topic: Market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

4) A surplus of cardboard boxes means that A) at the current price of a cardboard box, the quantity demanded exceeds the quantity supplied. B) at the current price of a cardboard box, the quantity demanded is less than the quantity supplied. C) the current price of a cardboard box is less than the equilibrium price. D) at the current price of a cardboard box, the quantity demanded equals the quantity supplied and the price will fall to restore the equilibrium. E) More information is needed to determine if the price of cardboard boxes is higher than, lower than, or equal to the equilibrium price. Answer: B Topic: Surplus Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 5) When there is a surplus of snowboards, the A) demand for snowboards is greater than the supply of snowboards. B) supply of snowboards is greater than the demand for snowboards. C) quantity of snowboards demanded is greater than the quantity of snowboards supplied. D) quantity of snowboards supplied is greater than the quantity of snowboards demanded. E) price rises to restore the equilibrium. Answer: D Topic: Surplus Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 6) If there is a surplus of tacos, then the A) quantity of tacos demanded equals the quantity of tacos supplied. B) quantity of tacos demanded is greater than the quantity of tacos supplied. C) quantity of tacos demanded is less than the quantity of tacos supplied. D) market is at equilibrium. E) supply curve of tacos will shift leftward to eliminate the surplus. Answer: C Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

7) When a surplus of rice occurs A) the price of rice rises. B) the price of rice falls. C) there is a balance between the forces of supply and demand. D) the quantity demanded is greater than quantity supplied at the current price. E) the demand curve shifts rightward and the supply curve shifts leftward to eliminate the surplus. Answer: B Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 8) Suppose the equilibrium price of oranges is $2.00 per pound. If the actual price is above the equilibrium price, a A) shortage exists and the price falls to restore equilibrium. B) shortage exists and the price rises to restore equilibrium. C) surplus exists and the price falls to restore equilibrium. D) surplus exists and the price rises to restore equilibrium. E) surplus exists but nothing happens until either the demand or the supply changes. Answer: C Topic: Surplus Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 9) Suppose the current price of a pound of steak is $12 per pound and the equilibrium price is $9 per pound. In this case, there is a A) shortage, so the price falls and quantity demanded increases. B) surplus, so the price falls and quantity demanded increases. C) shortage, so the price rises and quantity demanded decreases. D) surplus, so the price rises and quantity demanded increases. E) surplus, so the price falls and quantity supplied increases. Answer: B Topic: Surplus Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

10) As a falling price eliminates a surplus in the jersey market A) the demand curve for jerseys shifts leftward, and the supply curve of jerseys shifts rightward. B) consumers increase the quantity of jerseys they demand. C) producers increase the quantity of jerseys they supply. D) producers decrease the quantity of jerseys they supply, and buyers decrease the quantity of jerseys they demand. E) the demand curve for jerseys shifts rightward, and the supply curve of jerseys shifts leftward. Answer: B Topic: Surplus Skill: Level 5: Critical thinking Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 11) If the price is below the equilibrium price A) there is a surplus. B) there is a shortage. C) the supply curve will shift rightward. D) the supply curve will shift leftward. E) the demand curve will shift leftward. Answer: B Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 12) When there is a shortage of parking spaces at your college, the A) demand for parking spaces is greater than the supply. B) supply of parking spaces is greater than the demand. C) quantity of parking spaces supplied is greater than the quantity of parking spaces demanded. D) quantity of parking spaces demanded is greater than the quantity of parking spaces supplied. E) Both answers A and D are correct. Answer: D Topic: Shortage Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

13) If the price of carrots is below the equilibrium price, the A) quantity demanded of carrots exceeds the quantity supplied and a surplus exists. B) quantity supplied of carrots exceeds the quantity demanded and a surplus exists. C) quantity demanded of carrots exceeds the quantity supplied and a shortage exists. D) quantity supplied of carrots exceeds the quantity demanded and a shortage exists. E) quantity supplied of carrots equals the quantity demanded. Answer: C Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 14) Suppose the current price of a pound of steak is $6 per pound and the equilibrium price is $9 per pound. What takes place? A) There is a shortage, so the price falls and quantity demanded increases. B) There is a surplus, so the price falls and quantity demanded increases. C) There is a shortage, so the price rises and quantity demanded decreases. D) There is a shortage, so the price rises and quantity demanded increases. E) There is a shortage, so the price falls and quantity demanded decreases. Answer: C Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

15) The table above shows the situation in the gasoline market in Tulsa, Oklahoma. If the price of a gallon of gasoline is $2.30 then A) there is a surplus of gasoline in Tulsa. B) there is a shortage of gasoline in Tulsa. C) the gasoline market in Tulsa is in equilibrium. D) Without more information we cannot determine if there is a surplus, a shortage, or an equilibrium in the gasoline market in Tulsa. E) There is neither a surplus nor a shortage, but the market is NOT in equilibrium. Answer: A Topic: Market equilibrium Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 16) The table above shows the situation in the gasoline market in Tulsa, Oklahoma. If the price of a gallon of gasoline is $2.25, then A) there is a surplus of gasoline in Tulsa. B) there is a shortage of gasoline in Tulsa. C) the gasoline market in Tulsa is in equilibrium. D) Without more information we cannot determine if there is a surplus, a shortage, or an equilibrium in the gasoline market in Tulsa. E) There is neither a surplus nor a shortage, but the market is NOT in equilibrium. Answer: C Topic: Surplus Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

17) The table above shows the situation in the gasoline market in Tulsa, Oklahoma. If the price of a gallon of gasoline is $2.20, then A) there is a surplus of gasoline in Tulsa. B) there is a shortage of gasoline in Tulsa. C) the gasoline market in Tulsa is in equilibrium. D) Without more information we cannot determine if there is a surplus, a shortage, or an equilibrium in the gasoline market in Tulsa. E) There is neither a surplus nor a shortage, but the market is NOT in equilibrium. Answer: B Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

18) Using the data in the table above, the equilibrium quantity and equilibrium price for a cellular telephone is A) 50,000 and $100. B) 80,000 and $80. C) 60,000 and $50. D) 40,000 and $20. E) 100,000 and $20. Answer: C Topic: Market equilibrium Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

19) Using the data in the table above, at the price of $80 a phone A) a shortage of 25,000 cellular telephones occurs. B) a surplus of 80,000 cellular telephones occurs. C) a surplus of 25,000 cellular telephones occurs. D) a shortage of 55,000 cellular telephones occurs. E) the market is in equilibrium. Answer: C Topic: Surplus Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

20) Using the data in the table above, the equilibrium quantity and equilibrium price for a stapler is A) 10,000 and $8. B) 90,000 and $8. C) 100,000 and $5. D) 70,000 and $6. E) 60,000 and $5. Answer: D Topic: Market equilibrium Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 21) Using the data in the table above, if the price of a stapler is $8, then there is ________ of staplers, and the quantity of staplers demanded ________ the quantity of staplers supplied. A) a surplus; is greater than B) a surplus; is less than C) a shortage; is greater than D) a shortage; is less than E) neither a surplus nor a shortage; equals Answer: B Topic: Surplus Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 79 Copyright © 2021 Pearson Education, Inc.

22) Using the data in the table above, if the price of a stapler is $5, then there is ________ of staplers and the quantity of staplers demanded ________ the quantity of staplers supplied. A) a surplus; is greater than B) a surplus; is less than C) a shortage; is greater than D) a shortage; is less than E) neither a surplus nor a shortage; equals Answer: C Topic: Shortage Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

23) In the figure above, a price of $35 per dozen roses results in A) a shortage. B) equilibrium. C) a surplus. D) upward pressure on the price of roses. E) an eventual rightward shift of the demand curve and/or leftward shift of the supply curve. Answer: C Topic: Surplus Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

24) In the figure above, a price of $15 per dozen roses results in A) equilibrium. B) a shortage. C) a surplus. D) downward pressure on the price of roses. E) an eventual leftward shift of the demand curve and/or rightward shift of the supply curve. Answer: B Topic: Shortage Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

25) The above figure shows the market for game day t-shirts. If the price of t-shirts is $8, then A) there is a shortage and the price of t-shirts will rise. B) there is a surplus and the price of t-shirts will rise. C) the market is in equilibrium. D) there is a shortage and the price of t-shirts will fall. E) there is a surplus and the price of t-shirts will fall. Answer: A Topic: Surplus, shortage, market equilibrium Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

26) The above figure shows the market for game day t-shirts. If the price of t-shirts is $10, then A) there is a surplus and the price of t-shirts will rise. B) there is a shortage and the price of t-shirts will rise. C) there is a shortage and the price of t-shirts will fall. D) there is a surplus and the price of t-shirts will fall. E) the market is in equilibrium. Answer: E Topic: Surplus, shortage, market equilibrium Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 27) The above figure shows the market for game day t-shirts. If the price of t-shirts is $12, then A) there is a shortage and the price of t-shirts will fall. B) there is a shortage and the price of t-shirts will rise. C) there is a surplus and the price of t-shirts will rise. D) there is a surplus and the price of t-shirts will fall. E) the market is in equilibrium. Answer: D Topic: Surplus, shortage, market equilibrium Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 28) The above figure shows the market for game day t-shirts. If the price of t-shirts is $8, then A) the market is in equilibrium. B) there is a surplus and the price of t-shirts will rise. C) the quantity demanded is greater than quantity supplied. D) there is a shortage and the price of t-shirts will fall. E) there is a surplus and the price of t-shirts will fall. Answer: C Topic: Surplus, shortage, market equilibrium Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

29) Assume a competitive market is in equilibrium. There is an increase in demand, but no change in supply. As a result the equilibrium price ________, and the equilibrium quantity ________. A) rises; increases B) rises; does not change C) falls; does not change D) falls; decreases E) falls; increases Answer: A Topic: Effects of an increase in demand Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 30) If a market begins in equilibrium and then the demand curve shifts leftward, a A) shortage is created, which is eliminated by a fall in price. B) shortage is created, which is eliminated by a rise in price. C) surplus is created, which is eliminated by a fall in price. D) surplus is created, which is eliminated by a rise in price. E) surplus is created, which is eliminated by the supply curve shifting leftward. Answer: C Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 31) When the demand curve shifts rightward and the market moves to a new equilibrium, then the A) supply increases. B) supply decreases. C) quantity supplied increases. D) quantity supplied decreases. E) price falls to restore the equilibrium. Answer: C Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

32) An increase in both the equilibrium price and quantity can be the result of A) a decrease in demand. B) an increase in supply. C) a decrease in supply. D) an increase in demand. E) None of the above answers is correct. Answer: D Topic: Effects of an increase in demand Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 33) Suppose the equilibrium quantity of movie tickets is 1,000. If the demand curve shifts ________, the equilibrium quantity of movie tickets will ________. A) rightward; increase B) rightward; decrease C) leftward; increase D) rightward; not change E) leftward; not change Answer: A Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 34) If consumers buy a large number of plug-in electric cars, the equilibrium price of electricity will ________ and the equilibrium quantity of electricity will ________. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease E) not change; increase Answer: A Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

35) Because of a sharp increase in the price of gasoline, the demand for Sports Utility vehicles (SUVs) has decreased. So, the high price of gasoline leads to a A) leftward shift of the demand curve for SUVs AND the supply curve of SUVs. B) leftward shift of the demand curve for SUVs and no shift in the supply curve of SUVs. C) leftward shift of the demand curve for SUVs and a rightward shift of the supply curve of SUVs. D) leftward shift of the supply curve of SUVs and no shift in the demand curve for SUVs. E) rightward shift of the supply curve of SUVs and no shift in the demand curve for SUVs. Answer: B Topic: Effects of an increase in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 36) If the price of tangerines increases, the price of oranges also rises because A) consumers consider the two goods complements and so sellers decreased the supply of oranges. B) consumers consider the two goods substitutes and demand for oranges increases. C) if the supply of tangerines decreased, then the supply of oranges also must decrease. D) buyers must have expected a higher price for oranges and thus increased their demand for oranges. E) buyers' incomes must have decreased and oranges are an inferior good. Answer: B Topic: Effects of an increase in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 37) Suppose that the equilibrium price and quantity of new houses both increase. Which of the following could be a cause of this change? A) Both the supply and the demand for new houses increased, and the supply increased by more than the demand. B) The demand for new houses increased, and the supply did not change. C) Both the supply and demand for new houses decreased. D) The supply of new houses decreased, and the demand for new houses did not change. E) The supply of new houses increased, and the demand for new houses did not change. Answer: B Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

38) Suppose that the equilibrium price and quantity of new houses both increase. Which of the following could be a cause of this change? A) The wage paid carpenters who build new houses might have risen. B) A technological advance in framing a new house might have occurred. C) The rent for nearby apartments might have fallen. D) More home buyers might have moved into the area. E) The cost of wood framing used to build houses might have fallen. Answer: D Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 39) Suppose that over the next few years the demand for dancing to country and western music decreases. Hence, at country and western dance clubs the equilibrium price of admission ________ and the equilibrium quantity of dancing ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: D Topic: Effects of a decrease in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 40) For consumers, taco chips and salsa are complements. If the price of salsa rises, what is the effect on the equilibrium price and quantity of taco chips? A) The equilibrium price of taco chips falls, and the equilibrium quantity decreases. B) The equilibrium price of taco chips rises, and the equilibrium quantity decreases. C) There is no change in the equilibrium price of taco chips, and the equilibrium quantity increases. D) The equilibrium price of taco chips could rise, fall, or stay the same, and the equilibrium quantity increases. E) The equilibrium price of taco chips rises, and the equilibrium quantity increases. Answer: A Topic: Effects of a decrease in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

41) Computer chips are a normal good. Suppose the economy slips into a recession so that income falls. As a result, the demand for computer chips ________ so that the price of a computer chip ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) decreases; does not change Answer: D Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 42) Bagels and cream cheese are complementary goods. Suppose that the price for flour, which is used to produce bagels, increases. The equilibrium price of CREAM CHEESE ________, and the equilibrium quantity of CREAM CHEESE ________. A) rises; decreases B) rises; increases C) falls; decreases D) does not change; does not change E) falls; increases Answer: C Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 43) Suppose that people decide riding scooters is no longer fun. The equilibrium price of a scooter ________, and the equilibrium quantity of scooters ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: D Topic: Effects of a decrease in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

44) Assume a market is in equilibrium. There is an increase in supply, but no change in demand As a result the equilibrium price ________, and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) rises; does not change D) falls; decreases E) falls; increases Answer: E Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 45) If the supply of solar panels increases A) the price and quantity of solar panels increases. B) the demand for solar panels increases. C) the quantity demanded of solar panels decreases. D) the price of solar panels decreases and the quantity increases. E) None of the above. Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 46) If good weather conditions result in a larger than normal crop of peaches, then the A) equilibrium price of peaches rises, and the equilibrium quantity of peaches increases. B) equilibrium price of peaches falls, and the equilibrium quantity of peaches increases. C) demand curve for peaches shifts leftward. D) increase in the supply of peaches induces a greater demand for peaches, so that the equilibrium price rises and the equilibrium quantity increases. E) equilibrium price of peaches falls, and the equilibrium quantity of peaches decreases. Answer: B Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

47) The initial equilibrium price in the market for Web pages is $200 per page and 1,000 Web pages are created in a month. Many new Web design firms now enter the market. As a result A) the supply of Web pages increases and the price falls. B) the supply curve of Web pages shifts leftward and the price falls. C) the demand for Web pages increases and the price rises. D) the supply of web pages increase and the price falls, which then increases the demand for Web pages and the demand curve shifts rightward. E) the demand for Web pages increases and the price falls. Answer: A Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 48) Suppose the equilibrium price of movie tickets is $10. If the supply curve for movies shifts ________, the equilibrium price will ________. A) rightward; decrease B) leftward; decrease C) rightward; increase D) leftward; not change E) rightward; not change Answer: A Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 49) Which of the following lowers the equilibrium price of a canoe? A) an increase in the supply of canoes B) an increase in the demand for canoes C) an increase in the quantity of canoes supplied D) a decrease in the supply of canoes E) Both answers A and B are correct. Answer: A Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

50) When personal computers were first produced, the price was very high. As time passed, the price of personal computers fell because A) the demand for personal computers decreased. B) the initial price was too high and nobody bought personal computers. C) there were technological advances in the production of personal computers. D) people's incomes increased and personal computers are an inferior good. E) None of the above answers is correct. Answer: C Topic: Effects of an increase in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 51) An increase in the equilibrium price and a decrease in the equilibrium quantity can be the result of A) a decrease in demand. B) an increase in supply. C) a decrease in supply. D) an increase in demand. E) None of the above. Answer: C Topic: Effects of a decrease in supply Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 52) If a freeze destroys oranges before they are harvested, the equilibrium price of an orange ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: B Topic: Effects of a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

53) Suppose that the price of bread rises. This rise could be the result of A) a decrease in the supply of bread. B) an increase in the supply of bread. C) a decrease in the demand for bread. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: A Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 54) If an early frost destroys most of the apple crop, the equilibrium price of an apple ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 55) In Great Britain, raising taxes on gasoline has increased the costs of supplying gasoline. As a result, the equilibrium quantity of gasoline ________, and the equilibrium price of gasoline ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls E) does not change; rises Answer: C Topic: Effects of a decrease in supply Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

56) Suppose that the price of flour used to produce bagels increases. Hence the equilibrium price of a bagel ________, and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; does not change Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 57) Fresh orange juice and frozen orange juice are substitutes in production. The price of fresh orange juice rises. As a result, the equilibrium price of FROZEN orange juice ________, and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: B Topic: Effects of a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

58) A construction boom occurs and many of the new buildings need plywood for their framing. Which of the figures above best illustrates this change? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A or Figure C Answer: A Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

59) Contractors can use plywood or brick to construct walls. Suppose the price of bricks increases. Which of the figures above best illustrates the effect of this change on the market for plywood? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A or Figure C depending on how contractors react to the higher price of bricks. Answer: A Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 60) The number of logging firms increases. Which of the figures above best illustrates this change? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A and Figure D Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 61) New technology for producing plywood is developed. Which of the figures above best illustrates this change? A) Figure A B) Figure B C) Figure C D) Figure D E) Figure A and Figure D Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

62) In an effort to protect endangered species from the effects of logging in America's national forests, the federal government passes a law prohibiting logging in most of the state of Washington. Which of the figures above best illustrates the effect of this new law? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the above because a prohibition cannot be illustrated using demand and supply figures. Answer: C Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

63) Which figure above shows the effect if research is published claiming that eating pizza is healthy? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure A and Figure D Answer: A Topic: Effects of an increase in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

64) Pizza is a normal good. Which figure above shows the effect of a decrease in consumers' incomes? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C Answer: B Topic: Effects of a decrease in demand Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 65) Which figure above shows the effect of a technological advance in the production of pizza? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure A and Figure D Answer: D Topic: Effects of an increase in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 66) Which figure above shows the effect of a decrease in the number of pizza sellers? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C Answer: C Topic: Effects of a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

67) Which figure above shows the effect of an increase in the cost of the tomato sauce used to produce pizza? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C Answer: C Topic: Effects of a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

68) The above figure shows the market for pizza. The market is in equilibrium when people's incomes decrease. If pizza is a normal good, then which point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: E Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

69) The above figure shows the market for pizza. The market is in equilibrium when the cheese used to produce pizza falls in price. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 70) The above figure shows the market for pizza. The market is in equilibrium when the wages paid pizza workers increases. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 71) The above figure shows the market for pizza. The market is in equilibrium when new pizza firms enter the market. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: D Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

72) The above figure shows the market for pizza. The market is in equilibrium when some of the pizza firms go out of business. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 73) The above figure shows the market for pizza. The market is in equilibrium when people learn that eating pizza helps prevent heart disease. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: C Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 74) The above figure shows the market for pizza. The market is in equilibrium. Pizza and tacos are substitutes for consumers. The price of tacos falls. What point represents the most likely new price and quantity? A) A B) B C) C D) D E) E Answer: E Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

75) If both the supply and demand curves shift simultaneously, we can always predict what will happen to A) both the price and the quantity. B) either the price or the quantity, but not both. C) only the price. D) only the quantity. E) neither the price nor the quantity. Answer: B Topic: Effects of changes in both demand and supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 76) A competitive market is in equilibrium. Then there is an increase in demand and an increase in supply. The equilibrium price ________, and the equilibrium quantity ________. A) rises; increases B) perhaps changes but we can't say if it rises, falls, or stays the same; does not change C) falls; increases D) perhaps changes but we can't say if it rises, falls, or stays the same; increases E) falls; perhaps changes but we can't say if it increases, decreases, or stays the same Answer: D Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 77) If the demand and supply both increase equally, then the equilibrium price ________ and the equilibrium quantity ________. A) increases; increases B) increases; does not change C) does not change; increases D) increases; decreases E) decreases; does not change Answer: C Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

78) Kiwis and strawberries are substitutes for consumers. An increase in the price of a kiwi coupled with an increase in the number of strawberry growers ________ the equilibrium price of a pound of strawberries and ________ the equilibrium quantity of strawberries. A) raises; increases B) probably changes, but more information is needed to determine if it rises or falls; increases C) raises; probably changes, but more information is needed to determine if it increases or decreases D) lowers; probably changes, but more information is needed to determine if it increases or decreases E) lowers; increases Answer: B Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 79) A competitive market is in equilibrium. Then there is a decrease in demand and a decrease in supply. The equilibrium price ________, and the equilibrium quantity ________. A) rises; decreases B) perhaps changes but we can't say if it rises, falls, or stays the same; decreases C) falls; increases D) perhaps changes but we can't say if it rises, falls, or stays the same; increases E) rises; increases Answer: B Topic: Effects of a decrease in demand and a decrease in supply. Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 80) If both supply and demand decrease by the same amount, the equilibrium price A) does not change. B) rises. C) falls. D) cannot be predicted. E) None of the answers is correct because the price depends on what happens to the equilibrium quantity. Answer: A Topic: Effects of a decrease in demand and a decrease in supply. Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

81) Both the demand for and supply of cars changes in France. You observe that the quantity of cars does not change but the price rises. Thus, which of the following occurred? A) Demand and supply increased by an equal amount. B) Demand and supply decreased by an equal amount. C) Demand increased and supply decreased by an equal amount. D) Demand decreased and supply increased by an equal amount. E) Demand increased by a larger magnitude than supply decreased. Answer: C Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 82) Suppose that the demand curve for desktop computers shifts rightward and at the same time the supply curve shifts leftward. Which of the following could have caused these shifts? A) Desktop computers are a normal good and incomes increased, while more firms entered the market. B) The price of a laptop computer, a substitute for desktop computers, fell, and the cost of producing desktop computers decreased. C) Consumers purchased more computers because of the Christmas season, and the labor costs of producing desktop computers decreased. D) Desktop computers are a normal good and incomes increased, while the labor costs of producing personal computers increased. E) Desktop computers are a normal good and incomes decreased, while the labor costs of producing personal computers increased. Answer: D Topic: Effects of an increase in demand and a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 83) If the demand curve for desktop computers shifts rightward and at the same time the supply curve shifts leftward, then A) the equilibrium price definitely rises. B) the equilibrium price definitely falls. C) the equilibrium price definitely remains the same. D) More information is needed to determine the effect on the equilibrium price. E) the equilibrium quantity definitely increases. Answer: A Topic: Effects of an increase in demand and a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 103 Copyright © 2021 Pearson Education, Inc.

84) If the demand curve for desktop computers shifts rightward and at the same time the supply curve shifts leftward, then A) the equilibrium quantity definitely increases. B) the equilibrium quantity definitely decreases. C) the equilibrium quantity definitely remains the same. D) More information is needed to determine the effect on the equilibrium quantity. E) the equilibrium price definitely falls. Answer: D Topic: Effects of an increase in demand and a decrease in supply Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 85) The demand for oranges increases while the supply decreases. The equilibrium price of oranges ________, and the equilibrium quantity ________. A) rises; decreases B) falls; perhaps changes but we can't say if it increases, decreases, or stays the same C) falls; increases D) does not change; perhaps changes but we can't say if it increases, decreases, or stays the same E) rises; perhaps changes but we can't say if it increases, decreases, or stays the same Answer: E Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 86) The demand for cat food decreases while the supply increases. The equilibrium price of cat food ________, and the equilibrium quantity ________. A) does not change; increases B) rises; decreases C) falls; perhaps changes but we can't say if it increases, decreases, or stays the same D) rises; perhaps changes but we can't say if it increases, decreases, or stays the same E) falls; increases Answer: C Topic: Effects of a decrease in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

87) Suppose the government imposes a small carbon tax on automakers. But the price of gasoline has doubled due to a Middle East crisis which has reduced oil production. In the market for autos, these changes mean that supply and demand have both changed with the effect on the demand larger than the effect on the supply. The result is that the price of autos will ________ and the number of autos sold will ________. A) rise; perhaps change but we can't say if it increases, decreases, or stays the same B) rise; increase C) rise; decrease D) fall; perhaps change but we can't say if it increases, decreases, or stays the same E) fall; decrease Answer: E Topic: Effects of a decrease in demand and a decrease in supply. Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 88) If both producers and consumers believe that a product's price will rise in the future, then at the present, demand ________ and supply ________. A) increases; increases B) decreases; decreases C) increases; decreases D) decreases; increases E) does not change; does not change Answer: C Topic: Changes in both demand and supply, expected future price Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 89) If both producers and consumers believe that a product's price will rise in the future, then at the present, the equilibrium price A) does not change. B) rises. C) falls. D) might rise, fall, or not change, but the change can never be predicted. E) might rise, fall, or not change depending on whether the effect from the producers is greater than or less than the effect from the consumers. Answer: B Topic: Changes in both demand and supply, expected future price Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

90) The equilibrium price of a good occurs if the A) quantity of the good demanded equals the quantity of the good supplied. B) quantity of the good demanded is greater than the quantity of the good supplied. C) quantity of the good demanded is less than the quantity of the good supplied. D) demand for the good is equal to the supply of the good. E) price of the good seems reasonable to most buyers. Answer: A Topic: Market equilibrium Skill: Level 1: Definition Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 91) If there is a surplus of a good, the quantity demanded is ________ the quantity supplied, and the price will ________. A) less than; rise B) less than; fall C) greater than; rise D) greater than; fall E) equal to; fall Answer: B Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

92) The graph illustrates the market for bottled water. When the price exceeds the equilibrium price, the quantity demanded is ________ the quantity supplied and the price of the good will ________. A) less then; fall B) greater than; rise C) greater than; fall D) less than; rise E) equal to; fall Answer: A Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 93) Which of the following is correct? i. A surplus puts downward pressure on the price of a good. ii. A shortage puts upward pressure on the price of a good. iii. There is no surplus or shortage at equilibrium. A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) only iii Answer: D Topic: Surplus, shortage, market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 107 Copyright © 2021 Pearson Education, Inc.

94) Which of the following is the best explanation for why the price of gasoline increases during the summer months? A) Oil producers have higher costs of production in the summer. B) Sellers have to earn profits during the summer to cover losses in the winter. C) There is increased driving by families going on vacation. D) There is less competition among oil refineries in the summer. E) The number of gas stations open 24 hours a day rises in the summer months and so the price must rise to cover the higher costs. Answer: C Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 95) The number of people looking to buy ceiling fan buyers increases, so there is an increase in the A) quantity of ceiling fans demanded and a surplus of ceiling fans. B) demand for ceiling fans and a rise in the price of a ceiling fan. C) demand for ceiling fans and a surplus of ceiling fans. D) supply of ceiling fans and no change in the price of a ceiling fan. E) demand for ceiling fans and in the supply of ceiling fans. Answer: B Topic: Effects of an increase in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 96) When the demand for a good decreases, its equilibrium price ________ and equilibrium quantity ________. A) falls; decreases B) falls; increases C) rises; decreases D) rises; increases E) falls; does not change Answer: A Topic: Effects of a decrease in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

97) A technological improvement lowers the cost of producing corn. As a result, the price of a pound of corn ________ and the quantity of corn ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) falls; does not change Answer: C Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 98) The technology associated with manufacturing computers has advanced enormously. This change has led to the price of a computer ________ and the quantity ________. A) rising; increasing B) rising; decreasing C) falling; increasing D) falling; decreasing E) falling; not changing Answer: C Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

99) The graph illustrates the market for bottled water. If the producers of bottled water switch to using improved technology, then the A) supply of bottled water decreases. B) quantity demanded of bottled water increases. C) quantity demanded of bottled water does not change. D) price of bottled water rises. E) supply curve shifts leftward. Answer: B Topic: Effects of an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 100) Suppose that the price of lettuce used to produce tacos increases. This change means that the equilibrium price of a taco ________ and the equilibrium quantity ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases E) does not change; decreases Answer: B Topic: Effects of a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

101) Suppose a medical study reveals new benefits to consuming beef and at the same time a bumper corn crop reduces the cost of feeding steers. The equilibrium quantity of beef will A) decrease. B) perhaps increase, decrease, or stay the same, but more information is needed to determine which it does. C) stay the same. D) increase. E) definitely either stay the same or decrease. Answer: D Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 102) Candy makers accurately anticipate the increase in demand for candy for Halloween so that the supply of candy and demand for candy increase the same amount. As a result, the price of candy ________ and the quantity of candy ________. A) rises; does not change B) falls; increases C) does not change; increases D) does not change; does not change E) rises; increases Answer: C Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 103) Suppose improvements in technology cause the supply of natural gas to increase and at the same time the demand for natural gas increases. What are we sure of? A) Both equilibrium price and quantity increase. B) Equilibrium price increases. C) Equilibrium price decreases. D) Equilibrium quantity increases. E) Equilibrium quantity decreases. Answer: D Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

104) The graph illustrates the market for British pounds, the currency of the United Kingdom. As the number of buyers of pounds increases and the number of sellers of pounds increases, the equilibrium price of a pound A) will rise. B) will fall. C) will remain the same. D) might rise, fall, or remain the same depending on whether the effect on buyers is larger than, less than, or the same as the effect on sellers. E) None of the above answers is correct. Answer: D Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

105) The graph illustrates the market for computers. If the number of buyers of computers increases and technology advances, you predict that the A) equilibrium quantity of computers will increase. B) equilibrium quantity of computers will decrease. C) equilibrium price of a computer will rise. D) equilibrium price of a computer will fall. E) equilibrium quantity of computers might increase, decrease, or not change. Answer: A Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 106) Which of the following definitely results in a product's equilibrium price rising? A) an increase in both demand and supply B) a decrease in both demand and supply C) an increase in demand combined with a decrease in supply D) a decrease in demand combined with an increase in supply E) an increase in the supply combined with no change in the demand Answer: C Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

107) During 2008 the supply of gasoline decreased while at the same time the demand for gasoline increased. If the magnitude of the increase in demand was greater than the magnitude of the decrease in supply, then the equilibrium price of gasoline ________ and the equilibrium quantity ________. A) increased; increased B) increased; decreased C) increased; did not change D) decreased; did not change E) did not change; increased Answer: A Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 108) When demand increases and supply decreases by the same amount, the equilibrium quantity ________ and the equilibrium price ________. A) decreases; rises B) decreases; falls C) decreases; does not change D) decreases; might rise, fall, or not change E) does not change; might rise, fall, or not change Answer: C Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

109) The graph illustrates the market for British pounds, the currency of the United Kingdom. As the number of buyers of pounds decreases and the number of sellers of pounds increases, the equilibrium price of a pound A) will rise. B) will fall. C) will remain the same. D) might rise, fall, or remain the same but more information is needed. E) will rise if the magnitude of the effect on the buyers is larger than the magnitude of the effect on the sellers. Answer: B Topic: Effects of a decrease in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 110) An increase in the equilibrium price and a decrease in the equilibrium quantity can be the result of A) a decrease in demand. B) an increase in supply. C) a decrease in supply. D) an increase in demand. E) None of the above is correct. Answer: C Topic: Market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 115 Copyright © 2021 Pearson Education, Inc.

111) Consider the market for frozen yogurt. Assume the market starts at point A. An increase in income causes a movement to point A) D if frozen yogurt is a normal good. B) B if frozen yogurt is a normal good. C) C because the price of resources used to make frozen yogurt will increase. D) D because the price of resources used to make frozen yogurt will increase. E) B because the price of resources used to make frozen yogurt will decrease. Answer: A Topic: Market equilibrium Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Application of knowledge 112) Consider the market for frozen yogurt. Assume the market starts at point A. Which of the following is TRUE? A) If frozen yogurt is a normal good, an increase in income leads to a shift from D1 to D2 and a movement along the supply curve. B) A change in the price of frozen yogurt leads to a shift from D1 to D2. C) If frozen yogurt is a normal good, an increase in income leads to a movement up along D1 from point A to point C. D) An increase in the number of firms supplying frozen yogurt leads to a movement from point A to point D. E) A decrease in the number of firms supplying frozen yogurt leads to a movement from point A to point B. Answer: A Topic: Market equilibrium Skill: Level 4: Applying models Section: Checkpoint 4.3 Status: Old AACSB: Application of knowledge 116 Copyright © 2021 Pearson Education, Inc.

4.4 Integrative Questions 1) Consider the market for bread. If the price of wheat rises, then the A) demand curve for bread shifts leftward. B) supply curve of bread shifts leftward. C) price of bread falls. D) equilibrium quantity of bread increases. E) demand curve for bread shifts rightward. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 2) Consider the market for turkeys. In the United States, because of Thanksgiving in the month of November A) there is a downward movement along the demand curve for turkeys. B) there is an upward movement along the supply curve for turkeys. C) the supply curve of turkeys shifts leftward. D) the demand curve for turkeys shifts leftward. E) neither the demand curve nor the supply curve shift; instead there is a movement along both curves. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 3) Consider the market for feather pillows. If there is an increase in the price of feather dusters, a substitute in production for feather pillows, then A) the price of feather pillows decreases. B) the demand curve for feather pillows shifts leftward. C) the supply curve for feather pillows shifts leftward. D) there is a downward movement along the demand curve for feather pillows. E) the demand curve for feather pillows shifts rightward. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

4) Consider the market for peanut butter. If there is an increase in the price of peanuts A) there is an upward movement along the supply curve for peanut butter. B) the supply curve for peanuts shifts rightward. C) there is a decrease in the supply of peanuts. D) there is a decrease in the supply of peanut butter. E) there is a decrease in the demand for peanut butter. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 5) Peanut butter and jelly are complements for many consumers. Consider the market for peanut butter. If there is an increase in the price of jelly A) there is a movement along the supply curve of peanut butter. B) the price of peanut butter rises. C) the quantity of peanut butter increases. D) there is a shift in the supply curve for jelly. E) the demand curve for peanut butter does not shift; instead there is a movement along it. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 6) Consider the market for wheat. If there is an improvement in harvesting technology A) the supply curve for wheat shifts rightward. B) the demand curve for wheat shifts rightward. C) there is a movement up along the demand curve. D) the equilibrium price rises. E) the demand curve for wheat shifts leftward. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

7) When the price of rice rises A) the market quantity supplied of rice increases. B) the market supply of rice increases. C) the market quantity of rice demanded decreases. D) Both A and C are true. E) Both A and B are true. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 8) Consider the market for camera film. If more people start using digital cameras, which do not require film A) the supply curve of film shifts rightward. B) the demand curve for film shifts leftward. C) there is a movement up along the demand curve for film. D) there is a movement down along the demand curve for film. E) neither the demand curve nor the supply curve for film shifts; instead there is a movement along both. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

9) The above figures show the market for HD televisions. If people's incomes increase and HD televisions are a normal good, which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: A Topic: Changes in demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

10) The above figures show the market for HD televisions. Blu-ray players can be used to play HD movies. If the price of blu-ray players falls, then which figure shows the effect of this change in the market for HD televisions? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: A Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 11) The above figures show the market for HD televisions. If research is published showing that watching HD television shows causes eye damage, then which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: B Topic: Changes in demand, preferences Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 12) The above figures show the market for HD televisions. If cable television providers lower the price of providing HD cable service, which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: A Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

13) The above figures show the market for HD televisions. If the price of the LCD screens used to produce these televisions falls, which figure shows the effect of this change in price? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: C Topic: Changes in supply, price of a resource Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 14) The above figures show the market for HD televisions. If there are severe earthquakes that destroy a significant number of HD television manufacturing plants, which figure shows the effect of the earthquake? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: D Topic: Changes in supply, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 15) The above figures show the market for HD televisions. If more firms start to produce HD televisions, which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: C Topic: Changes in supply, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking

16) The above figures show the market for HD televisions. If the technology used to produce these televisions advances so that productivity increases, which figure shows the effect of this change? A) Figure A B) Figure B C) Figure C D) Figure D E) None of the figures represent this change. Answer: C Topic: Changes in supply, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 17) Consider the market for leather shoes. If producers believe the price of leather shoes will increase next month, today A) the supply curve for leather shoes shifts rightward. B) the supply curve for leather shoes shifts leftward. C) there is a movement along the supply curve for leather shoes. D) the equilibrium price of leather shoes falls. E) the equilibrium quantity of leather shoes increases. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 18) Consider the market for peanut butter. If there is an increase in the price of bread (a complement for peanut butter) along with a drought in peanut growing areas, the A) equilibrium quantity of bread increases. B) equilibrium quantity of peanut butter definitely decreases. C) equilibrium quantity of peanut butter might increase or might decrease. D) equilibrium price of peanut butter definitely rises. E) equilibrium price of peanut butter definitely falls. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

19) Consider the market for peanut butter. If there is a decrease in the price of deli turkey slices (a substitute in consumption for peanut butter) along with a decrease in the price of peanut brittle (a substitute in production for peanut butter), the A) equilibrium price of peanut butter definitely falls. B) equilibrium quantity of peanut definitely decreases. C) equilibrium price of peanut butter might rise or fall. D) equilibrium quantity of peanut butter definitely increases. E) equilibrium price of peanut butter definitely rises. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 20) Millions of people from Mexico have migrated to the United States. This has reduced the supply of labor in Mexico and increased the supply of labor in the United States. Assume that the demand for labor in Mexico and the United States is unchanged. Then wages in the United States ________ and wages in Mexico ________. A) fall; rise B) rise; rise C) rise; do not change D) fall; fall E) do not change; fall Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking 4.5 Essay: Demand 1) What is the law of demand? Answer: The law of demand states that other things remaining the same, if the price of a good rises, the quantity demanded of that good decreases, and if the price of a good falls, the quantity demanded of that good increases. Topic: Law of demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking

2) What leads to a decrease in the quantity demanded of a good or service? Answer: The quantity demanded of a good or service decreases when the price of the product increases. Topic: Law of demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Reflective thinking 3) Explain the difference between a change in demand and a change in quantity demanded. What leads to each of these changes? Answer: A change in demand occurs when consumers will buy more or less of a product at every price; a change in the quantity demanded occurs when the price changes and consumers buy more or less. A change in demand is reflected by a shift of the entire demand curve, while a change in the quantity demanded is reflected by a movement along one demand curve. Only a change in the price of the good brings about a change in the quantity demanded. A change in demand is brought about by a change in any of the other influences on demand, namely, the prices of related goods, income, expectations, the number of buyers, and preferences. Topic: Changes in quantity demanded versus change in demand Skill: Level 1: Definition Section: Checkpoint 4.1 Status: Old AACSB: Written and oral communication 4) List the factors that change demand and shift the demand curve. Tell what happens to demand and the demand curve when there is an increase in the factor. Answer: One factor that changes demand is a change in income. An increase in income increases demand and shifts the demand curve rightward for a normal good. An increase in income decreases demand and shifts the demand curve leftward for an inferior good. A change in the price of a substitute or complement also changes demand. An increase in the price of a substitute increase demand and shifts the demand curve rightward while an increase in the price of a complement decreases demand and shifts the demand curve leftward. Expectations, the number of buyers, and preferences also change demand. If people expect their income to increase, or if they expect its price to be higher in the future, or if the number of buyers increases, or if people's preferences for the good increase, demand increases and the demand curve shifts rightward. Topic: Changes in demand Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Written and oral communication

5) Computers are a complement to computer software. Suppose the price of a computer falls. How does this fall in price affect the demand for computer software and the demand curve for computer software? Answer: The fall in the price of a complement increases the demand for a product. Hence the fall in the price of a computer increases the demand for computer software and shifts the demand curve for computer software rightward. Topic: Changes in demand, price of a complement Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Written and oral communication 6) What is the difference between a normal good and an inferior good. Give an example of each. Answer: A good is a normal good if an increase in incomes leads to an increase in demand for a good. Most goods are normal goods. An example of a normal good is new clothes. A good is an inferior good if an increase in income leads to a decrease in demand for the good. Second-hand clothing that can be purchased at thrift stores is an inferior good. Topic: Normal and inferior goods Skill: Level 2: Using definitions Section: Checkpoint 4.1 Status: Old AACSB: Written and oral communication

7) Suppose Katie, Mark, and Bobby are the only consumers in the market for ice cream. Using the demand schedules in the table above, what is the market demand curve for ice cream? Answer:

Topic: Market demand Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

8) Soft drinks and milk are substitutes for consumers. Draw a graph showing the effect of an increase in the price of milk on the demand for soft drinks. Answer:

Topic: Changes in demand, price of a substitute Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking

9) Soft drinks are a normal good. Draw a graph showing the effect of an increase in income on the demand for soft drinks. Answer:

Topic: Changes in demand, income Skill: Level 3: Using models Section: Checkpoint 4.1 Status: Old AACSB: Analytical thinking 4.6 Essay: Supply 1) What leads to a decrease in the quantity supplied of a good or service? Answer: The quantity supplied of a good or service decreases when the price of the good or service decreases. Topic: Quantity supplied Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

2) What is the difference between quantity supplied and supply? Answer: Quantity supplied is the amount that people are willing to sell during a specific period for a specific price. It deals with one quantity at one price. Supply is the relationship between the quantity supplied and the price of the good. Supply applies to various prices and various quantities. Topic: Changes in quantity supplied versus change in supply Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 3) List the factors that change supply and shift the supply curve. Tell what happens to supply and the supply curve when there is an increase in the factor. Answer: The factors that change supply are productivity, the number of sellers, expectations, prices of resources, and prices of related goods. An increase in productivity, an increase in the price of a complement in production, a decrease in expected future prices, and an increase in the number of sellers all lead to an increase in supply and a rightward shift in the supply curve. An increase in the price of a substitute in production or an increase in the prices of inputs leads to a decrease in supply and a leftward shift in the supply curve. Topic: Changes in supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Written and oral communication 4) What are substitutes in production? Answer: Goods are substitutes in production when one can be produced in place of the other, that is, when the goods are produced using the same resources. Topic: Substitutes in production Skill: Level 1: Definition Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking 5) Suppose that the number of companies selling computer software decreases. How does this change affect the supply of computer software and the supply curve of computer software? Answer: A decrease in the number of sellers decreases the supply. Hence the decrease in the number of companies selling computer software decreases the supply of computer software and shifts the supply curve of computer software leftward. Topic: Changes in supply, number of sellers Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

6) Suppose that the productivity used to produce computers advances. How does this change affect the supply of computers and the supply curve of computers? Answer: An advance in productivity increases the supply of computers. Hence increases in productivity shift the supply curve of computers rightward. Topic: Changes in supply, productivity Skill: Level 3: Using models Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

7) The table above indicates how many thousands of containers of ice cream three different companies are willing to produce at different prices. Does this information reflect the law of supply? Why or why not? Answer: Yes, the information in the table is in accord with the law of supply because for all three companies, as the price rises (falls), the quantity supplied increases (decreases). Topic: Law of supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Reflective thinking

8) The table above shows supply schedules for the two nail salons in town, Nancy's Nails and Fancy Nails. What is the market supply of manicures? Answer:

Topic: Market supply Skill: Level 2: Using definitions Section: Checkpoint 4.2 Status: Old AACSB: Analytical thinking 4.7 Essay: Market Equilibrium 1) When does a shortage occur? Answer: A shortage occurs when the price is below the equilibrium price. When the price is less than the equilibrium price, the quantity demanded is greater than the quantity supplied. Topic: Shortage Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking 2) When does a surplus occur? Answer: A surplus occurs when the price is above the equilibrium price. When the price exceeds the equilibrium price, the quantity supplied is greater than the quantity demanded. Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Reflective thinking

3) At prices above the equilibrium price, what occurs? Answer: If the price exceeds the equilibrium price, there is a surplus because the quantity supplied exceeds the quantity demanded. With a surplus, the law of market forces points out that the price will fall. As the price falls, the quantity supplied decreases and the quantity demanded increases, thus decreasing the size of the surplus. The price will continue to fall as long as there is a surplus, that is, as long as the price exceeds the equilibrium price. Ultimately the price will fall to equal the equilibrium price, at which time the surplus will be eliminated and the price will no longer change. Topic: Surplus Skill: Level 2: Using definitions Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication 4) When the demand for blue jeans increases, what happens next? Answer: If the demand for blue jeans increases, then at all prices buyers are more willing and more able to buy blue jeans. The demand curve for blue jeans shifts rightward. With the curve shifts, at the initial price a shortage of jeans will emerge. The law of market forces drives the price higher. Hence an increase in demand for blue jeans leads to a rise in the price of a pair of blue jeans and an increase in the quantity of blue jeans. Topic: Effects of a change in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication 5) Suppose Ramen noodles, an inexpensive but a quite tasty dish, are an inferior good. Why do grocery stores in college towns, that is, towns with a large fraction of college students, stock a lot of Ramen noodles? Answer: Generally, college students' incomes are relatively low because they cannot hold high paying, full-time jobs. Hence the demand for inferior goods is strong in college towns. Hence the demand curve for Ramen noodles in a college town lies to the right of the demand curve for Ramen noodles in a similar size town not dominated by a college. Thus the equilibrium quantity of Ramen noodles is quite large in a college town and so stores stock a lot of Ramen noodles. Topic: Effects of a change in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication

6) Why does an increase in supply lead to lower prices? Answer: When the supply of a good, such as computers, increases, the supply curve shifts rightward. This shift means sellers are more willing and more able to sell computers at all prices than they were before. When this change occurs, a surplus of computers breaks out. With the surplus, the law of market forces drives the price lower and thereby eliminates the surplus. Topic: Effects of a change in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication 7) Smart phones are becoming less expensive as new technology reduces the cost of production. In a supply and demand model, explain the effects of the technological innovations and their effect on the quantity of smart phones. Answer: Advances in technology increase the supply of smart phones and the supply curve of smart phones shifts rightward. The demand curve does not shift. Rather, on the demand side there is an increase in quantity demanded, or movement along the curve, in response to the falling price. The equilibrium price of a smart phone falls and the equilibrium quantity of smart phones increases. Topic: Effects of a change in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Written and oral communication 8) What is the effect on the price and quantity of a product if both the demand and supply simultaneously increase? Answer: The equilibrium quantity unambiguously increases. The effect on the equilibrium price is ambiguous. The equilibrium price rises if the increase in demand exceeds the increase in supply. The equilibrium price falls if the increase in supply exceeds the increase in demand. The equilibrium price is unchanged if the increase in demand equals the increase in supply. Topic: Effects of an increase in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

9) What is the effect on the price and quantity of a product if the demand decreases and the supply simultaneously increases? Answer: The equilibrium price unambiguously falls. The effect on the equilibrium quantity is ambiguous. The equilibrium quantity decreases if the decrease in demand exceeds the increase in supply. The equilibrium quantity increases if the increase in supply exceeds the decrease in demand. The equilibrium quantity is unchanged if the decrease in demand equals the increase in supply. Topic: Effects of a decrease in demand and an increase in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 10) For consumers, computers are a complement to computer software. Suppose the price of a computer falls. Simultaneously, suppose that the number of companies selling computer software decreases. How do these changes affect the price and quantity of computer software? Answer: The fall in the price of a computer increases the demand for computer software and the demand curve for computer software shifts rightward. A decrease in the number of sellers decreases the supply of computer software and the shifts the supply curve of computer software leftward. The increase in demand and decrease in supply both raise the price, so the price definitely rises. The increase in demand increases the quantity and the decrease in supply decreases the quantity. Hence the net effect on the quantity is ambiguous. Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 11) In early 2019 the price of computer hard disc drives rose. In a demand and supply model, shifts in what curve or curves could have brought about the higher price? Answer: The higher price could have been brought about by an increase in demand, a decrease in supply, or the combination of an increase in demand combined with a decrease in supply. Hence the higher price could have been the result of a rightward shift in the demand curve, a leftward shift in the supply curve, or a combined rightward shift of the demand curve and leftward shift of the supply curve. Topic: Effects of an increase in demand and a decrease in supply Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

12) The above table gives the demand and supply schedules for cat food. If the price is $3.00 per pound of cat food, will there be a shortage, a surplus, or is this price the equilibrium price? If there is a shortage, how much is the shortage? If there is a surplus, how much is the surplus? If $3.00 is the equilibrium price, what is the equilibrium quantity? Answer: At a price of $3.00 per pound of cat food, there is a surplus. The surplus equals 44 tons (the quantity supplied) minus 35 tons (the quantity demanded), or 9 tons of cat food. Topic: Surplus Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 13) The above table gives the demand and supply schedules for cat food. If the price is $1.00 per pound of cat food, will there be a shortage, a surplus, or is this price the equilibrium price? If there is a shortage, how much is the shortage? If there is a surplus, how much is the surplus? If $3.00 is the equilibrium price, what is the equilibrium quantity? Answer: At a price of $1.00 per pound of cat food, there is a shortage. The shortage equals 52 tons (the quantity demanded) minus 15 tons (the quantity supplied), or 37 tons of cat food. Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 14) The above table gives the demand and supply schedules for cat food. What is the equilibrium price and quantity? Answer: The equilibrium price is $2.50 per pound of cat food because that is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity of cat food is 40 tons per year. Topic: Equilibrium price and quantity Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

15) The above table gives the demand and supply schedules for cat food. If the supply increases by 20 tons at every price, what is the new equilibrium price and quantity? Answer: The equilibrium price is $1.50 per pound of cat food because that is the price at which the quantity demanded equals the (new) quantity supplied. The equilibrium quantity of cat food is 46 tons per year. Topic: Effects of a change in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

16) The diagram above illustrates the market for apartments in Victoria, British Columbia. a. If the current rent is $300 per month, is there a shortage or surplus in the apartment market and how much is the shortage or surplus? b. What is the equilibrium rent and quantity of apartments? Answer: a. If the rent is $300 per month, there is a shortage of 30,000 apartments. b. The equilibrium rent is $400 per month and the equilibrium quantity is 40,000 apartments. Topic: Shortage Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

17) In the figure above, if the price is $8 a unit, is there a shortage or surplus and what is the amount of any shortage or surplus? Answer: At a price of $8 there is a surplus because the quantity supplied exceeds the quantity demanded. The amount of the surplus is 4 units per month. Topic: Surplus Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking 18) In the figure above, what is the equilibrium price and quantity? Answer: The equilibrium price is $4 a unit and the equilibrium quantity is 3 units per month. Topic: Equilibrium price and quantity Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

19) Last year a very severe ice storm hit the north counties of New York state, and the states of Vermont and Maine. Electric poles were down and no one had power for days. It was reported that the price of kerosene heaters skyrocketed and the number purchased increased during this time. Using a supply and demand diagram, show the impact of the ice storm on the market for kerosene heaters. Answer:

Topic: Effects of a change in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

20) Consumers can use either natural gas or heating oil to warm their houses. Suppose the price of natural gas increases. Use a demand and supply diagram to show the impact of the higher price of NATURAL GAS on the market for HOME HEATING OIL. Answer:

Topic: Effects of a change in demand Skill: Level 3: Using models Section: Checkpoint 4.3 Status: Old AACSB: Analytical thinking

Foundations of Microeconomics, 9e (Bade) Chapter 5 Elasticities of Demand and Supply 5.1 The Price Elasticity of Demand 1) The price elasticity of demand is a measure of A) the equilibrium price of a product. B) buyers' responsiveness to changes in the price of a product. C) the amount of a product purchased when income increases. D) whether a product is a substitute or a complement. E) how much a change in demand affects the equilibrium price. Answer: B Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 2) The price elasticity of demand measures which of the following? A) the slope of the demand curve B) the rate at which demand changes when price changes C) how responsive the quantity demanded is to changes in price D) the percentage-slope of the demand curve E) None of these correctly defines what price elasticity of demand measures. Answer: C Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 3) The price elasticity of demand measures the extent to which the quantity demanded changes when A) the price of the good changes. B) the price of a related good changes. C) the expected future price of a good changes. D) consumer preferences change. E) both the demand and supply of the good change. Answer: A Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

4) The price elasticity of demand measures the ________ that results from a ________. A) change in quantity demanded; change in price B) change in price; change in the quantity demanded C) percentage change in price; percentage change in the quantity demanded D) percentage change in the quantity demanded; percentage change in price E) percentage change in the quantity demanded; change in price Answer: D Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 5) The elasticity of demand is used to A) determine if consumers will or will not buy a product. B) measure how responsive consumers are to a change in price. C) determine in what direction the demand curve shifts if income changes. D) find the market equilibrium. E) determine if a change in price results in a shortage or a surplus. Answer: B Topic: Price elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 6) To determine the price elasticity of demand, we A) need information on consumers' incomes. B) need to know how much is available. C) compare the percentage change in the quantity demanded to the percentage change in the price. D) compare the change in the quantity to the change in price. E) divide the quantity by the price. Answer: C Topic: Price elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

7) If the price of a good rises, then moving along a demand curve the percentage change in the quantity demanded will be A) positive. B) negative. C) zero. D) either positive, negative, or zero depending on how the demand curve shifted. E) undefined. Answer: B Topic: Percentage change Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 8) If we ignore the negative or positive sign, the midpoint method of calculating a percentage change in price between two points on a demand curve results in A) a smaller percentage change if the price rises than if it falls. B) the same percentage, regardless of whether the price increases or decreases. C) the price elasticity of demand. D) the price elasticity of supply. E) a higher percentage change if the price rises than if it falls. Answer: B Topic: Midpoint formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 9) Suppose the price of a box of cereal rises from $4 to $6. Using the midpoint method, what is the percentage change in price? A) 50 percent B) 40 percent C) 33 percent D) 67 percent E) None of the above answers is correct. Answer: B Topic: Midpoint formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

10) Suppose the price of a DVD rose from $15 to $17 and the quantity demanded decreased from 1,000 per month to 900 per month. Using the midpoint formula, the ________ percent change in price lead to a ________ percent change in the quantity demanded. A) 12.5; 10.5 B) 13.3; 10.0 C) 11.8; 11.1 D) 8.0; 9.5 E) None of the above answers is correct. Answer: A Topic: Midpoint formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 11) Suppose the local university charges $85 per credit hour. If tuition increases from $85 to $93 per credit hour, using the midpoint method, what is the percentage change in price? A) 8.99 percent B) 8.00 percent C) 9.41 percent D) 8.62 percent E) 9.12 percent Answer: A Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 12) Using the midpoint method, if the price of an airline ticket from Orlando to Pittsburgh falls from $275 to $238, the percentage change in price is A) 1442 percent. B) 14.42 percent. C) 15.54 percent. D) 13.45 percent. E) 68.00 percent. Answer: B Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

13) If the demand for a good is elastic, then A) people do not change the quantity they demand when the price of the good changes. B) a change in price leads to a smaller percentage change in the quantity demanded. C) people substantially decrease the quantity of the good they buy if its price increases by a small percentage. D) a change in the quantity demanded is smaller than the change in price. E) the quantity demanded divided by the price exceeds 1.00. Answer: C Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 14) When the percentage change in the quantity demanded exceeds the percentage change in price, then demand is A) inelastic. B) unit elastic. C) elastic. D) irrelevant. E) undefined. Answer: C Topic: Elastic demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 15) If the percentage change in price is 10 percent and the demand is elastic, then the percentage change in the quantity demanded A) is greater than 0 percent but less than 10 percent. B) is larger than 10 percent. C) equals 0 percent. D) equals 10 percent. E) More information is needed to determine the magnitude of the change in the quantity demanded. Answer: B Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

16) If the price of a six-pack of Pepsi falls from $4 to $3 and the quantity purchased increases 80 percent, then demand is A) inelastic. B) elastic. C) unit elastic. D) perfectly inelastic. E) perfectly elastic. Answer: B Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 17) Suppose the Chicago Bears football team raises ticket prices by 13 percent and as a result the quantity of tickets demanded decreases by 21 percent. This response means that the demand for Bears tickets is A) inelastic. B) elastic. C) unit elastic. D) perfectly inelastic. E) perfectly elastic. Answer: B Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 18) If the price elasticity of demand for moose hunting lessons is 4.23, then the demand for moose hunting lessons is A) elastic. B) unit elastic. C) inelastic. D) perfectly unit elastic. E) perfectly elastic. Answer: A Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

19) Suppose the demand for peaches sold from one roadside stand in Georgia is perfectly elastic. As a result, a 7 percent increase in the price charged by the owner of this stand leads to A) zero peaches sold by this stand. B) no change in the quantity demanded at this stand. C) a 7 percent decrease in the quantity demanded at this stand. D) a 7 percent decrease in demand at this stand. E) a virtually infinite increase in the quantity demanded at this stand. Answer: A Topic: Perfectly elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 20) When the percentage change in the quantity demanded is less than the percentage change in price, then demand is A) inelastic. B) unit elastic. C) elastic. D) irrelevant. E) undefined. Answer: A Topic: Inelastic demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 21) Suppose the San Francisco 49ers lower ticket prices by 15 percent and as a result the quantity of tickets demanded increases by 10 percent. This set of results shows that San Francisco 49ers tickets have A) an inelastic demand. B) an elastic demand. C) a unit elastic demand. D) an inelastic supply. E) an elastic supply. Answer: A Topic: Price elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

22) If the percentage change in the quantity demanded is not zero but is less than the percentage change in the price, demand is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: B Topic: Inelastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 23) If the price elasticity of demand for razors is 0.32, the demand for razors is A) elastic. B) unit elastic. C) inelastic. D) perfectly inelastic. E) perfectly elastic. Answer: C Topic: Inelastic demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 24) Perfectly inelastic demand means that consumers A) are willing to buy any quantity of the good at a given price, but none at higher prices. B) decrease their consumption as price rises. C) increase their consumption as price rises. D) will buy a certain quantity, regardless of price. E) will buy a huge, almost infinite amount more, if the price falls just a little. Answer: D Topic: Perfectly inelastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

25) Suppose the demand for rescue services in our national parks is perfectly inelastic. This fact would mean that a 31 percent increase in rescue fees leads to A) a 31 percent decrease in the quantity demanded. B) a 31 percent increase in demand. C) a 31 percent decrease in demand. D) no change in the quantity demanded. E) a decrease in the quantity demanded to 0 rescues. Answer: D Topic: Perfectly inelastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 26) When the percentage change in the quantity demanded equals the percentage change in price, then demand is A) inelastic. B) unit elastic. C) elastic. D) irrelevant. E) undefined. Answer: B Topic: Unit elastic demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 27) If the price elasticity of demand for opera tickets in Orlando is 1.00, then the demand for opera tickets in Orlando is A) unit elastic. B) elastic. C) perfectly inelastic. D) inelastic. E) perfectly elastic. Answer: A Topic: Unit elastic demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

28) Suppose a local photographer increases his prices by 8 percent and quantity demanded decreases by the same percentage. This set of facts indicates that the demand for his services is A) inelastic. B) elastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: C Topic: Unit elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 29) Which of the following does NOT influence the price elasticity of demand? A) the amount by which the demand curve shifts when the price of another good changes B) the number of substitutes available to consumers C) the price of the good relative to total income D) the time period buyers have to respond to a price change E) whether the good is a necessity or a luxury Answer: A Topic: Factors that influence the price elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 30) If a substitute good is easy to find, then demand for a good is A) elastic. B) inelastic. C) unit elastic. D) perfectly inelastic. E) Substitutes don't have any effect on elasticity. Answer: A Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

31) The demand for a good is more elastic if the A) good is a necessity. B) good has few substitutes. C) good is narrowly defined. D) supply of the good is plentiful. E) Both answers B and C are correct. Answer: C Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 32) If a good has many close substitutes, then its demand is most likely A) elastic. B) inelastic. C) unit elastic. D) perfectly inelastic. E) elastic or inelastic depending on whether the price of the good is increasing or decreasing. Answer: A Topic: Elasticity, substitutes Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 33) If a product is narrowly defined, it is likely to A) have many substitutes and therefore its demand is elastic. B) have few substitutes, and therefore its demand is less elastic. C) be unique, and therefore its demand is inelastic. D) be unique and have many substitutes. E) have a larger proportion of income spent on it. Answer: A Topic: Elasticity, substitutes Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

34) Of the following, which good has the most elastic demand? A) food B) breakfast food C) cereal D) Post Raisin Bran E) Post Raisin Brand purchased at a Safeway grocery store Answer: E Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 35) The demand for Dasani bottled water in New York City would be ________. The demand for bottled water in the Sahara Desert would be ________. A) elastic; inelastic B) unit elastic; inelastic C) elastic; unit elastic D) inelastic; elastic E) inelastic; inelastic Answer: A Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Application of knowledge 36) All of the following statements are true EXCEPT A) the demand for food is less elastic than the demand for a Hawaiian vacation. B) the demand for clothing is less elastic than the demand for blue jeans. C) the demand for gasoline is more elastic the longer the time elapsed. D) the smaller the proportion of income spent on a good, the more inelastic demand will be. E) the demand for Nike running shoes is less elastic than the demand for shoes. Answer: E Topic: Price elasticity of demand Skill: Level 5: Critical thinking Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

37) The price elasticity of demand for Red Delicious apples, a certain type of apple, is likely A) elastic. B) inelastic. C) perfectly elastic. D) perfectly inelastic. E) unit elastic. Answer: A Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 38) Which of the following statements is correct? A) The demand for New Balance shoes is more elastic than the demand for shoes in general. B) The demand for salt is very elastic. C) The demand for luxuries is less elastic than the demand for necessities. D) The demand for a narrowly defined good is less elastic than the demand for a more broadly defined good. E) The larger the proportion of income spent on a good, the smaller the elasticity of demand. Answer: A Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 39) One reason why the demand for gasoline is inelastic is because A) substitutes for gas abound. B) substitutes for gas are hard to find. C) gasoline is a luxury item. D) people have a long time to shop around for automobiles that use less gas. E) buses run on diesel fuel rather than gasoline. Answer: B Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

40) The longer the time that has elapsed since the price of a good changed, the A) more elastic the demand for that good. B) steeper the demand curve. C) less elastic the demand for that good. D) smaller the amount of that good bought. E) fewer substitutes available for the good. Answer: A Topic: Elasticity, time since the price changed Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 41) As more time passes, the price elasticity of gasoline A) increases. B) decreases. C) stays the same. D) becomes perfectly inelastic. E) becomes perfectly elastic. Answer: A Topic: Elasticity, time since the price changed Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 42) Demand for a product tends to be more elastic the longer the time period considered because A) sellers have more time to expand production. B) buyers have more time to search for substitutes. C) price increases over time make the price larger relative to buyers' incomes. D) the inverse relationship between the price and the quantity demanded weakens over time. E) buyers get used to the new price. Answer: B Topic: Elasticity, time since the price changed Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

43) The long-run price elasticity of demand for electricity is ________ the short-run price elasticity of demand for electricity. A) greater than B) less than C) equal to D) not comparable to E) unrelated to Answer: A Topic: Elasticity, time since the price changed Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 44) A product's price elasticity of demand is likely to be greater A) if it only has a few substitutes. B) if consumers spend a small proportion of income on the product. C) the less time consumers have to adjust to price changes. D) if the product is a luxury good rather than a necessity. E) Both answers C and D are correct. Answer: D Topic: Elasticity, luxury good Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 45) The demand for luxury suites at basketball games is more elastic if A) these suites are a necessity. B) these suites are a luxury item. C) few close substitutes exist for these suites. D) basketball fans have little time to look for alternative suites. E) poorer fans cannot afford luxury suites. Answer: B Topic: Elasticity, luxury good Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

46) The demand for a necessity generally is A) very elastic. B) infinitely elastic. C) unaffected by income. D) inelastic. E) unit elastic. Answer: D Topic: Elasticity, necessities Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 47) The demand for necessities generally is ________ the demand for luxury goods. A) as elastic as B) more elastic than C) less elastic than D) flatter than E) not comparable to Answer: C Topic: Elasticity, necessities Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 48) If a good is a necessity, it has ________ substitutes and its demand is ________. A) poor; elastic B) poor; inelastic C) many; elastic D) many; inelastic E) many; precisely unit elastic Answer: B Topic: Elasticity, necessities Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

49) You are more sensitive to a change in price if you A) spend a lot of your income on the good. B) spend a small percentage of your income on the good. C) buy very little of the good. D) do not buy the good regularly. E) have a very inelastic demand for the good. Answer: A Topic: Elasticity, fraction of income Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 50) We calculate the price elasticity of demand as the A) ratio of the percentage change in the quantity demanded to the percentage change in price. B) change in quantity divided by the change in price. C) ratio of the percentage change in the price to the percentage change in quantity. D) percentage change in the quantity demanded divided by the percentage change in income. E) equilibrium quantity divided by the equilibrium price. Answer: A Topic: Price elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 51) What is the formula for the price elasticity of demand? The percentage change in the A) quantity demanded divided by the percentage change in the price of a substitute or complement. B) quantity supplied divided by the percentage change in price. C) quantity demanded divided by the percentage change in price. D) quantity demanded divided by the percentage change in income. E) equilibrium quantity demanded divided by the equilibrium price. Answer: C Topic: Price elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

52) Demand is price inelastic if ________ percentage change in the price leads to a ________ percentage change in the quantity demanded. A) a small; large B) a large; small C) any; large D) Both answers A and B are correct. E) None of the above answers is correct. Answer: B Topic: Price elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 53) If a 10 percent price increase generates a 10 percent decrease in quantity demanded, then demand is A) unit elastic. B) elastic. C) perfectly inelastic. D) perfectly elastic. E) inelastic. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 54) If a 10 percent price increase generates a 20 percent decrease in quantity demanded, then demand is A) elastic. B) perfectly inelastic. C) perfectly elastic. D) inelastic. E) unit elastic. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

55) If a 30 percent price increase generates a 20 percent decrease in quantity demanded, then demand is A) inelastic. B) elastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 56) The price of furnace filters increased by 5 percent and the quantity demanded did not change. The price elasticity of demand for furnace filters is A) perfectly inelastic. B) inelastic. C) elastic. D) unit elastic. E) perfectly elastic. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 57) If a 2 percent change in price leads to a ________ percent change in the quantity demanded, then demand is ________. A) 2; elastic B) 1; unit elastic C) 3; inelastic D) 1; inelastic E) 0; perfectly elastic Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

58) If a 2 percent change in price leads to a ________ percent change in the quantity demanded, then demand is ________. A) 2; elastic B) 1; unit elastic C) 3; inelastic D) 4; elastic E) 0; perfectly elastic Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 59) If the price elasticity of demand for a good is 2, then a 10 percent increase in the price of that good ________ the quantity demanded by ________ percent. A) increases; 20 B) decreases; 2 C) decreases; 10 D) decreases; 20 E) increases; 8 Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 60) When the price of tacos rise 4 percent, the quantity demanded decreases 10 percent. What is the price elasticity of demand for tacos? A) 40.0 B) 25.0 C) 0.4 D) 2.5 E) 10.0 Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

61) When we use the midpoint method to compute the price elasticity of demand we use A) the original quantity and the average price. B) the original price and the average quantity. C) the average price and the average quantity. D) either the original or new price, and the average quantity. E) the average price and the original quantity. Answer: C Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 62) Suppose the price of a ticket to an Imagine Dragons concert is $41 and at that price, the quantity of tickets demanded is 17,000 per concert. If Imagine Dragons raises the price to $48 and the quantity demanded decreases to 16,000, the price elasticity of demand for the concert tickets at the midpoint between these two prices is A) 15.73. B) 6.06. C) 1.00. D) 0.39. E) 0.93. Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 63) When the price of a burrito increases from $2 to $4, the quantity demanded decreases from 50 to 40. At the midpoint between these two prices, the price elasticity of demand equals A) 1/3. B) 3. C) 2. D) 1. E) 1/2. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

64) When the price of a taco decreases from $5 to $3, the quantity demanded increases from 600,000 to 1,000,000 copies each month. At the midpoint between these two prices, the price elasticity of demand equals A) 1. B) 3. C) 2. D) 1/3. E) 1/2. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 65) If a 4 percent change in the price of a good leads to a 3 percent change in quantity demanded, the price elasticity of demand equals A) 1.33. B) 0.75. C) 4.00. D) 3.44. E) None of the above answers is correct. Answer: B Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 66) A 10 percent increase in price leads to a 20 percent decrease in the quantity demanded. The price elasticity of demand is equal to A) 0.5. B) 1.0. C) 2.0. D) 20.0. E) 10.0. Answer: C Topic: Price elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

67) A firm can sell 10 units if the price is $100 and can sell 8 units if the price is $125. At the midpoint between these two prices, what is the price elasticity of demand? A) 0.75 B) 1.00 C) 1.25 D) 0.50 E) 0.0 Answer: B Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 68) When the price of a cup of coffee falls from $3.00 to $2.50, the quantity demanded increases from 1,000 per month to 1,150 per month. At the midpoint between these two prices, the price elasticity of demand is A) 0.77. B) 1.30. C) 0.07. D) 3.00. E) 2.50. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 69) During last year the price of regular unleaded gasoline in Oakland, California increased 11.0 percent. If the price elasticity of demand for gasoline was 0.13, the price hike means that the quantity demanded decreased by A) 1.43 percent. B) 8.46 percent. C) 0.16 percent. D) 4.31 percent. E) 6.46 percent. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

70) If the price elasticity of demand for a product is 2.5, then a price increase of 1.5 percent decreases the quantity demanded by A) 1.55 percent. B) 3.50 percent. C) 5.00 percent. D) 3.75 percent. E) 1.00 percent. Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 71) Suppose the University of Oklahoma increases the price of student football tickets for the 2012 season by 30 percent. If the price elasticity of demand for student tickets is 1.22, the price increase leads to A) a 36.6 percent decrease in the quantity demanded. B) a 30 percent decrease in the quantity demanded. C) a 1.22 percent decrease in the quantity demanded. D) 28.78 percent decrease in the quantity demanded. E) no change in the quantity demanded. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

72) Using the data in the table above, when the price of a skirt rises from $20 to $35, what is the price elasticity of demand? A) 0.33 B) 0.25 C) 1.00 D) 1.33 E) 3.00 Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 24 Copyright © 2021 Pearson Education, Inc.

73) Using the data in the table above, the demand for skirts is A) elastic. B) unit elastic. C) inelastic. D) indeterminate. E) perfectly inelastic. Answer: C Topic: Price elasticity of demand Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

74) The data in the table above give two points on the demand curve for pizza. Using the midpoint method, when the price of a pizza falls from $10 to $9, what is the percentage change in price? A) 8.2 percent B) 15.5 percent C) 10.5 percent D) 5.0 percent E) 1.0 percent Answer: C Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

75) The data in the table above give two points on the demand curve for pizza. Using the midpoint method, when the price of a pizza falls from $10 to $9, what is the percentage change in the quantity demanded? A) 22.2 percent B) 10.0 percent C) 15.5 percent D) 5.2 percent E) 25 percent Answer: A Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 76) The data in the table above give two points on the demand curve for pizza. When the price of a pizza falls from $10 to $9, at the midpoint between these two prices what is the price elasticity of demand? A) 0.5 B) 0.6 C) 0.9 D) 2.1 E) 8.6 Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

Price (dollars) 10 9 8 7 6 5 4 3 2 1

Quantity 0 1 2 3 4 5 6 7 8 9

77) Using the table above, what is the price elasticity of demand at the midpoint between the prices of $9 and $7? A) 1/4 B) 1 C) 2 D) 4 E) 6 Answer: D Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 78) Using the table above, what is the price elasticity of demand at the midpoint between the prices of $6 and $4? A) 1 B) 3/2 C) 2/3 D) 2 E) 4 Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

79) Using the table above, the elasticity of demand is equal to 1 at a price of A) $8. B) $6. C) $5. D) $3. E) $1. Answer: C Topic: Price elasticity of demand, linear demand curve Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

80) The figure shows a demand curve. Using the midpoint method, between point A to point B is a ________ change in price and a ________ change in quantity. A) 2.22 percent; 66.7 percent B) $2; 2 unit C) 2.20 percent; 100 percent D) 2.25 percent; 50 percent E) 20 percent; 40 percent Answer: A Topic: Elasticity formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

81) The figure shows a demand curve. The price elasticity of demand at the midpoint between points A and B equals A) 0.033. B) 1.00. C) 2.00. D) 30.0 E) 0.022. Answer: D Topic: Elasticity formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 82) The figure above shows a demand curve. Using the midpoint formula, between point A and point B the percentage change in the quantity demanded is ________ the percentage change in the price, which means that the elasticity of demand is ________. A) equal to; unit elastic B) more than; inelastic C) more than; elastic D) less than; elastic E) less than; inelastic Answer: E Topic: Elasticity formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Application of knowledge 83) Tickets to a Beyonce concert increase from $90 to $110. As a result, tickets sales fall from 100,000 to 80,000. Using the midpoint formula, the percentage change in _______which means that the elasticity of demand is ________. A) quantity demanded is greater than the percent change in price; elastic B) quantity supplied is greater than the percent change in price; elastic C) price is greater than the change in demand; inelastic D) price is greater than the change in supply; inelastic E) quantity demanded equals the percent change in price; unit elastic Answer: A Topic: Elastic, inelastic, and unit elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Application of knowledge

84) Ticket prices to a Kanye West concert increase from $40 to $60. As a result, ticket sales decrease from 50,000 to 40,000. At the midpoint between these two prices, the elasticity of demand for Kanye West tickets equals ________ and demand is ________. A) 1.8; elastic B) 0.55; inelastic C) 0,22; inelastic D) 0.40; inelastic E) 5.0; elastic Answer: B Topic: Elastic, inelastic, and unit elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Application of knowledge 85) Ticket prices to a Kanye West concert increase from $40 to $60. As a result, ticket sales decrease from 50,000 to 40,000. Total revenue changes from ________ and demand is ________. A) $2 million to $2.4 million; elastic B) $40 to $60; elastic C) $2 million to $2.4 million; inelastic D) $2.4 million to $2 million; elastic E) $1.6 million to $3 million; elastic Answer: C Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Application of knowledge

86) In the figure above, the price elasticity of demand at the midpoint between $8 and $7 is equal to A) 2.50. B) 1.63. C) 0.40. D) 0.62. E) 1.00. Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 87) In the figure above, the price elasticity of demand at the midpoint between $7 and $6 is equal to A) 2.50. B) 1.63. C) 0.40. D) 0.62. E) 1.00. Answer: B Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

88) In the figure above, the price elasticity of demand at the midpoint between $6 and $5 is equal to A) 2.50. B) 1.63. C) 1.10. D) 0.91. E) 1.00. Answer: C Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 89) In the mid-1970s, Newsweek magazine reported that the city of Atlanta lowered its city bus fares from 40 cents to 15 cents a passenger. The number of bus riders increased by 15 percent after the fare cut. This set of results indicates that the demand for bus rides in Atlanta at that time was A) unit elastic. B) perfectly inelastic. C) elastic. D) inelastic. E) perfectly elastic. Answer: D Topic: Price elasticity of demand, formula Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 90) When hamburger is $3 per pound, Ms. Rush buys 6 pounds. When hamburger is $2 per pound, Ms. Rush buys 10 pounds. Describe Ms. Rush's demand at the midpoint between these two prices. A) elastic B) unit elastic C) inelastic D) perfectly inelastic E) perfectly elastic Answer: A Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

91) Economists use elasticity to measure the responsiveness of quantity to a change in price rather than the slope of the demand curve because elasticity is A) independent of the units of measurement. B) dependent on the units of measurement. C) easier to calculate. D) harder to calculate. E) always negative whereas the slope is always positive. Answer: A Topic: Slope and elasticity Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 92) Which of the following is correct? i. All linear demand curves have a constant slope and a constant price elasticity of demand. ii. The price elasticity of demand changes while moving along a downward-sloping linear demand curve. iii. The magnitude of the slope of all linear demand curves is equal to the price elasticity of demand. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: B Topic: Price elasticity of demand, linear demand curve Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 93) Moving downward along a linear (straight-line) downward sloping demand curve, the A) slope is constant. B) price is constant. C) quantity is constant. D) elasticity is constant. E) None of the above answers is correct. Answer: A Topic: Price elasticity of demand, linear demand curve Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

94) The figure shows a demand curve. The price elasticity of demand at point C = 1.00. If the price increases from $20 to $25, total revenue will A) decrease because demand is elastic. B) decrease because demand is unit elastic. C) increase because the price has doubled. D) increase because demand is inelastic. E) more information is needed to determine what will happen to total revenue. Answer: A Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Application of knowledge 95) The figure shows a demand curve. The price elasticity at point C equals 1.00. Suppose the price falls from $10 to $5. As a result, total revenue will A) increase because demand is inelastic. B) decrease because demand is unit elastic. C) decrease because demand is inelastic. D) not change because the price change is too small. E) increase because demand is elastic. Answer: C Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Application of knowledge

96) Moving downward along a linear (straight-line) downward-sloping demand curve, the A) price elasticity of demand does not change. B) quantity demanded decreases. C) demand becomes more elastic. D) demand becomes less elastic. E) total revenue never changes. Answer: D Topic: Price elasticity of demand, linear demand curve Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 97) As you move up along a straight-line demand curve A) the price elasticity of demand decreases in size. B) the price elasticity of demand increases in size. C) total revenue always decreases. D) total revenue always increases. E) total revenue never changes. Answer: B Topic: Price elasticity of demand, linear demand curve Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 98) Which of the following statements is correct for the price elasticity of demand along a linear, downward-sloping demand curve? A) The price elasticity of demand is constant because the slope is constant. B) At low prices, demand is elastic but at high prices demand is inelastic. C) At high prices, demand is elastic but at low prices demand is inelastic. D) The price elasticity of demand is not defined for a linear demand curve because the slope is constant. E) None of the above answers is correct. Answer: C Topic: Price elasticity of demand, linear demand curve Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

99) At the midpoint of a linear, downward-sloping demand curve, the price elasticity of demand is A) greater than one. B) equal to one. C) less than one but greater than zero. D) zero. E) infinite. Answer: B Topic: Price elasticity of demand, linear demand curve Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 100) Along a linear (straight-line) downward-sloping demand curve, demand is unit elastic at A) the highest price. B) the lowest price. C) the midpoint. D) all points on the linear demand curve. E) None of the above because linear demand curves are never unit elastic. Answer: C Topic: Price elasticity of demand, linear demand curve Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 101) The price of the good multiplied by the quantity sold is its A) total revenue. B) total cost. C) total spending. D) total income. E) total quantity. Answer: A Topic: Total revenue Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

102) Total revenue equals A) price × quantity sold. B) profit - cost. C) price. D) quantity sold - cost. E) cost × price. Answer: A Topic: Total revenue Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 103) The total revenue test says i. Demand is elastic if a decrease in price results in an increase in total revenue. ii. Total revenue is maximized when demand is elastic. iii. Total revenue is minimized when demand is unit elastic. A) i only B) i and ii C) ii and iii D) i, ii and iii E) ii only Answer: A Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 104) If demand is price inelastic and the price is lowered, which of the following occurs? A) The quantity sold decreases. B) The total expenditure increases and the total revenue decreases. C) The total revenue of the firms selling the product is unchanged. D) The total revenue of the firms selling the product decreases. E) The total expenditure decreases and the total revenue increases. Answer: D Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

105) If demand is inelastic and the price falls, the total revenue A) rises. B) falls. C) remains constant. D) might rise, fall, or remain constant. E) becomes negative. Answer: B Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 106) Total revenue increases if the price of the good A) rises and demand is elastic. B) rises and demand is inelastic. C) rises and demand is unit elastic. D) falls and supply is inelastic. E) falls and demand is unit elastic. Answer: B Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 107) If the supply of a good decreases and it causes total revenue to increase, this shows that the good has an A) inelastic demand. B) elastic demand. C) unit elastic demand. D) inelastic supply. E) elastic supply. Answer: A Topic: Elasticity and total revenue Skill: Level 5: Critical thinking Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

108) You own a small store. Your cashier thinks you should raise prices to increase your total revenue and your customer thinks you should lower prices to increase your total revenue. The cashier thinks the price elasticity of demand is ________ and the customer believes the price elasticity of demand is ________. A) inelastic; elastic B) elastic; inelastic C) elastic; elastic D) inelastic; inelastic E) unit elastic; elastic Answer: A Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 109) Products X, Y, and Z have price elasticities of 3.0, 0.80, and 1.0 respectively. Total revenue decreases if the price of A) product X falls. B) product Y falls. C) product Z falls. D) product X or product Z falls. E) product Y or product Z falls. Answer: B Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 110) If a 2 percent rise in price leads to a 4 percent decrease in quantity demanded, then demand is A) elastic and total revenue decreases. B) elastic and total revenue increases. C) inelastic and total revenue decreases. D) elastic, but we cannot tell what happens to total revenue without more information. E) Total revenue decreases but we cannot tell if the demand is elastic or inelastic without more information. Answer: A Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

111) If the demand for insulin is inelastic, an increase in insulin prices leads to A) less total revenue for insulin makers. B) more total revenue for insulin makers. C) no change in total revenue for insulin makers. D) first a decrease, then an increase in total revenue for insulin makers. E) Total revenue probably changes, but we need more information about the change in total expenditures on insulin to determine if the total revenue rises, falls, or stays the same. Answer: B Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 112) If the price elasticity of demand for gasoline equals 0.3, then an increase in the price of a gallon of gasoline from $3.70 to $3.90 A) decreases total revenue. B) increases total revenue. C) leads to no change in total revenue. D) makes the demand for gasoline elastic. E) Both answers B and D are correct. Answer: B Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 113) If a Pizza Hut raises the price of a slice of pizza from $3.00 to $3.25, the quantity demanded decreases from 1,500 slices per week to 1,300 slices per week. The demand for slices of pizza is ________ and the total revenue received by this Pizza Hut ________. A) elastic; decreases B) inelastic; decreases C) elastic; increases D) inelastic; increases E) unit elastic; does not change Answer: A Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

114) If an Atlanta bakery raises the price of their rye bread by 11 percent and the quantity demanded decreases by 11 percent, then the demand for the rye bread is ________ and the bakery's total revenue ________. A) unit elastic; does not change B) unit elastic; increases C) unit elastic; decreases D) elastic; does not change E) inelastic; does not change Answer: A Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 115) Suppose the Oakland Raiders football team increases their season ticket prices and total revenue from ticket sales falls, but not to zero. This fact means that the demand for Raiders tickets is A) inelastic. B) elastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: B Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 116) After long hair for men became popular, barbers found that their incomes fell. In an attempt to boost their incomes, many barbers raised the price of a haircut and yet their total revenue fell even more. What can explain this result? A) The demand for haircuts by barbers is elastic because of many substitutes. B) The demand for haircuts by barbers became inelastic after the increase in price. C) Haircuts are inferior products. D) The demand for haircuts by barbers is inelastic because most people need haircuts. E) None of the above can explain the phenomenon. Answer: A Topic: Elasticity and total revenue Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

117) Taco Bell raises the price of its tacos. The price elasticity of demand for Taco Bell tacos equals 5.0. What happens to the Taco Bell's total revenue? A) nothing B) It increases. C) It decreases. D) It becomes negative. E) It might change, but more information is needed to determine if it increases, decreases, or does not change. Answer: C Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 118) Pizza Hut lowers the price of its pizza. The price elasticity of demand for Pizza Hut pizza equals 0.3. What happens to the Pizza Hut's total revenue? A) nothing B) It increases. C) It decreases. D) It becomes negative. E) It might change, but more information is needed to determine if it increases, decreases, or does not change. Answer: C Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 119) KFC raises the price of its grilled chicken. The price elasticity of demand for KFC grilled chicken is 0.8. What happens to the KFC's total revenue? A) nothing B) It increases. C) It decreases. D) It becomes negative. E) It might change, but more information is needed to determine if it increases, decreases, or does not change. Answer: B Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

120) A Minnesota snowmobile dealer lowers its prices in February by 16 percent and the quantity demanded increases by 2 percent. Thus the demand for snowmobiles from this dealer is ________ and the dealer's total revenue will ________. A) elastic; increase B) elastic; decrease C) inelastic; increase D) inelastic; decrease E) unit elastic; decrease Answer: D Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

121) In the figure above, what is the total revenue at point A? A) $20 B) $150 C) $170 D) $3,000 E) 150 quantity units Answer: D Topic: Total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

122) In the figure above, what is the price elasticity of demand at the midpoint between points A and B? A) 0.05 B) 0.13 C) 0.43 D) 1.00 E) 2.33 Answer: C Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 123) In the figure above, what happens to total revenue as we move from point A to point B? A) It increases. B) It decreases. C) It remains constant. D) It becomes negative. E) More information about the elasticity of demand is needed to determine if it increases, decreases, or does not change. Answer: B Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

124) In the figure above, what is the price elasticity of demand at the midpoint between $8 and $7? A) 4.0 B) 5.0 C) 0.5 D) 0.4 E) 0.25 Answer: B Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 125) In the figure above, at the midpoint between $8 and $7, demand is A) elastic. B) inelastic. C) unit elastic. D) income elastic. E) perfectly elastic. Answer: A Topic: Total revenue test Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

126) In the figure above, when the price falls from $8 to $7, total revenue A) increases from $120 to $210 so demand is elastic. B) decreases from $210 to $120 so demand is inelastic. C) increases from $120 to $210 so demand is inelastic. D) decreases from $210 to $120 so demand is elastic. E) increases from $120 to $210, but more information is needed to determine whether demand is elastic, inelastic, or unit elastic. Answer: A Topic: Total revenue test Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 127) A firm raises the price it charges. The firm's total revenue decreases. What can we conclude about the price elasticity of demand? A) Demand is elastic. B) Demand is unit elastic. C) Demand is inelastic. D) Demand is perfectly inelastic. E) Not enough information is given to conclude anything about price elasticity of demand. Answer: A Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 128) A firm raises the price it charges. The firm's total revenue does not change. What can we conclude about the price elasticity of demand? A) Demand is elastic. B) Demand is unit elastic. C) Demand is inelastic. D) Demand is perfectly elastic. E) Not enough information is given to conclude anything about price elasticity of demand. Answer: B Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

129) A firm lowers the price it charges. The firm's total revenue decreases. What can we conclude about the price elasticity of demand? A) Demand is elastic. B) Demand is unit elastic. C) Demand is inelastic. D) Demand is perfectly elastic. E) Not enough information is given to conclude anything about price elasticity of demand. Answer: C Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 130) If, when the price falls, total revenue increases, demand is A) elastic. B) inelastic. C) unit elastic. D) perfectly inelastic. E) None of the above answers is correct because total revenue always decreases when the price of the good falls. Answer: A Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 131) The price elasticity of demand for an agricultural product is 0.4. This value means that, when the quantity decreases 1 percent, the price A) falls 4 percent. B) rises 4 percent. C) falls 2.5 percent. D) rises 2.5 percent. E) rises 0.25 percent. Answer: D Topic: Farm revenue and elasticity Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

132) The price elasticity of demand is a measure of the extent to which the quantity demanded of a good changes when ________ and all other influences on buyers' plans remain the same. A) income changes B) the price of a related good changes C) the price of the good changes D) the demand alone changes E) both the demand and the supply simultaneously change Answer: C Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 133) Suppose the price of a movie falls from $9 to $7. Using the midpoint method, what is the percentage change in price? A) 33 percent B) -33 percent C) 25 percent D) -25 percent E) -97 percent Answer: D Topic: Midpoint formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 134) Suppose the price of a tie rises from $45 to $55. Using the midpoint method, what is the percentage change in price? A) 10 percent B) -10 percent C) 20 percent D) -20 percent E) 100 percent Answer: C Topic: Midpoint formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

135) Demand is elastic if A) consumers respond strongly to changes in the product's price. B) a large percentage change in price brings about a small percentage change in quantity demanded. C) a small percentage change in price brings about a small percentage change in quantity demanded. D) the quantity demanded is not responsive to price changes. E) the demand curve is vertical. Answer: A Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 136) During the winter of 2014-2015, the price of fuel oil increased enormously but the quantity demanded decreased only a little. This response indicates that the demand for fuel oil was A) inelastic. B) elastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: A Topic: Inelastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 137) If substitutes for a good are readily available, the demand for that good A) does not change substantially if the price rises. B) does not change substantially if the price falls. C) is inelastic. D) is elastic. E) Both answers A and B are correct. Answer: D Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

138) If the price of a product increases by 5 percent and the quantity demanded decreases by 5 percent, then the elasticity of demand is A) 0. B) 1. C) indeterminate. D) 5. E) 25. Answer: B Topic: Price elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 139) The price of a bag of pretzels rises from $2 to $3 and the quantity demanded decreases from 100 to 60. At the midpoint between these two prices, what is the price elasticity of demand? A) 1.0 B) 1.25 C) 40.0 D) 20.0 E) 0.80 Answer: B Topic: Price elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 140) When a firm raises the price of its product, what happens to its total revenue? A) If demand is elastic, total revenue decreases. B) If demand is unit elastic, total revenue increases. C) If demand is inelastic, total revenue decreases. D) If demand is elastic, total revenue increases. E) If demand is unit elastic, total revenue decreases. Answer: A Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

141) In Tanzania a larger proportion of income is spent on food compared to Canada. As a result, we'd expect the price elasticity of demand for food to be A) greater in Canada. B) greater in Tanzania. C) equal in both countries because food is a necessity. D) unrelated because the prices are different. E) negative in Tanzania and positive in Canada. Answer: B Topic: Elasticity, fraction of income Skill: Level 5: Critical thinking Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 142) The price elasticity of demand for product A is 2.32. The price elasticity of demand for product Z is 0.12. This difference could be due to the fact that A) there are many good substitutes for product A and few substitutes for product Z. B) there are many good substitutes for product Z and few substitutes for product A. C) Product A is a necessity and product Z is a luxury. D) Product Z is a necessity and product A is a luxury. E) Both A and D are correct. Answer: E Topic: Elasticity, substitutes Skill: Level 5: Critical thinking Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 143) Product Z has a price elasticity of demand of 2.5. This means that i. There are few substitutes for product Z. ii. Consumers spend only a small portion of their income on product Z. iii. If the price of product Z increases, the total amount spent on the good will decrease. A) iii only B) i, ii and iii C) i and iii D) ii only E) ii and iii Answer: A Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

5.2 The Price Elasticity of Supply 1) What is measured by the price elasticity of supply? A) The price elasticity of supply measures how responsive producers are to changes in the price of other goods. B) The price elasticity of supply measures how responsive producers are to changes in income. C) The price elasticity of supply measures how responsive producers are to changes in the price of a product. D) The price elasticity of supply is a measure of the slope of the supply curve. E) The price elasticity of supply measures how responsive producers are to changes in the cost of producing a product. Answer: C Topic: Price elasticity of supply Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 2) The price elasticity of supply measures A) the percentage change in supply from a percentage change in demand. B) the extent to which the quantity supplied of a good changes when the price of a good changes, other things remaining the same. C) the slope of the supply curve. D) how the equilibrium price changes in response to a change in the equilibrium quantity supplied. E) Both answers B and C are correct. Answer: B Topic: Price elasticity of supply Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

3) The price elasticity of supply is always a positive value because i. there is a direct relationship between the price and the quantity supplied. ii. as the equilibrium price increases, the equilibrium quantity also always increases. iii. buyers are willing to pay a higher price for larger quantities. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: A Topic: Price elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 4) If the percentage change in the price of a good exceeds the percentage change in the quantity supplied, then the supply is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: B Topic: Price elasticity of supply, formula Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 5) When the percentage change in the quantity supplied equals the percentage change in price, the supply is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: C Topic: Price elasticity of supply, unit elastic Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

6) When the percentage change in the quantity supplied is less than the percentage change in price, the supply is A) elastic. B) inelastic. C) unit elastic. D) perfectly unit elastic. E) perfectly elastic. Answer: B Topic: Price elasticity of supply, inelastic Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

7) The figure above shows the supply curve for a good with A) a perfectly elastic supply. B) a perfectly inelastic supply. C) an elastic supply. D) an inelastic supply. E) a unit elastic supply. Answer: B Topic: Price elasticity of supply Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

8) If a small percentage change in the price brings a very large percentage change in the quantity supplied, then the supply is almost perfectly ________ and the supply curve is almost ________. A) elastic; vertical B) elastic; horizontal C) inelastic; horizontal D) inelastic; vertical E) elastic; 45 degrees Answer: B Topic: Price elasticity of supply, elastic Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

9) The figure above shows the supply curve for a good with A) a perfectly elastic supply. B) a perfectly inelastic supply. C) an elastic supply. D) an inelastic supply. E) a unit elastic supply. Answer: A Topic: Price elasticity of supply, perfectly elastic Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

10) If the supply curve is ________, the elasticity of supply is ________. A) vertical; infinite B) vertical; 0 C) horizontal; 1 D) horizontal; 0 E) a straight, upward sloping line through the origin; 0 Answer: B Topic: Price elasticity of supply, perfectly inelastic Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 11) The fact that there is a very limited amount of land in Hong Kong means the supply of new apartments in Hong Kong is A) inelastic. B) elastic. C) unit elastic. D) perfectly elastic. E) limited by the demand. Answer: A Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 12) The opportunity cost of producing a good rises only slightly as the quantity produced increases. This good has A) an inelastic demand. B) an elastic demand. C) an elastic supply. D) an inelastic supply. E) a perfectly elastic supply. Answer: C Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

13) For a product with a constant or gently increasing opportunity cost of producing additional units, as more is produced, we expect that A) demand is price elastic. B) supply is price elastic. C) demand is price inelastic. D) supply is price inelastic. E) demand is unit elastic. Answer: B Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 14) For which of the following would the supply likely be most inelastic? A) aircraft carrier B) canned soup C) toy airplane D) t-shirt E) bottled water Answer: A Topic: Price elasticity of supply, production possibilities Skill: Level 5: Critical thinking Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 15) Suppose a good can be produced using commonly available resources. The elasticity of supply is A) negative. B) greater than zero but less than 1. C) greater than 1. D) zero. E) More information is needed to make a determination about the size of the elasticity of supply. Answer: C Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

16) If wheat can be produced at a constant opportunity cost, then the supply of wheat is A) elastic. B) inelastic. C) unit elastic. D) perfectly inelastic. E) perfectly elastic. Answer: E Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 17) Which of the following explains why supply is more elastic as more time passes? A) It is difficult or impossible to increase the quantity produced in a short period of time. B) Consumers have more time to search for substitutes. C) Sellers try to take advantage of a high price in the short term. D) The supply curve becomes generally steeper as more time passes. E) There is no explanation for this phenomenon. Answer: A Topic: Factors that influence the price elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 18) One reason why the price elasticity of supply for tablets is greater than one is that A) the cost of producing a tablet is small. B) tablets cannot be stored. C) tablets can be easily stored. D) the demand for tablets is fairly large. E) tablets require relatively advanced technology for their production. Answer: C Topic: Factors that influence the price elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

19) Running shoes are likely to have a ________ elasticity of supply compared to bananas because ________. A) higher; shoes are easier to store compared to bananas B) lower; shoes are easier to store compared to bananas C) lower; as incomes increase people are more likely to buy running shoes D) higher; as incomes increase people are more likely to buy running shoes E) similar; both goods are easily produced Answer: A Topic: Factors that influence the price elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Application of knowledge 20) If the price elasticity of supply for a good is 0.75, then A) the percentage change in the quantity supplied is less than the percentage change in price. B) the supply is elastic. C) an increase in the price boosts the quantity supplied by a larger percentage. D) the supply is inelastic so the demand must also be inelastic. E) None of the above answers is correct. Answer: A Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 21) It is very difficult for Gourmet Chocolatier to find inexpensive and available inputs for the business. Because of this, we predict that Gourmet Chocolatier's supply to be A) inelastic. B) perfectly elastic. C) elastic. D) unit elastic. E) nonexistent. Answer: A Topic: Price elasticity of supply, inelastic Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

22) The price of lumber increased by 10 percent and the quantity supplied increased by 20 percent. The supply of lumber is A) inelastic. B) perfectly elastic. C) perfectly inelastic. D) unit elastic. E) elastic. Answer: E Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 23) Suppose a 20 percent increase in the price of gasoline results in a 25 percent increase in the quantity supplied. This response means that gasoline has A) an elastic supply. B) an inelastic supply. C) a unit elastic supply. D) an inelastic demand. E) an elastic demand. Answer: A Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 24) The price of beef increased by 20 percent and the quantity supplied increased by 10 percent. The supply of beef is A) elastic. B) perfectly elastic. C) perfectly inelastic. D) inelastic. E) unit elastic. Answer: D Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

25) If the price of corn increases by 20 percent and the quantity supplied of corn increases by 30 percent, then supply is A) elastic and the elasticity of supply equals 1.5. B) inelastic and the elasticity of supply equals 1.5. C) elastic and the elasticity of supply equals 0.66. D) inelastic and the elasticity of supply equals 0.66. E) either elastic or inelastic, but more information about the elasticity of demand is needed to determine which. Answer: A Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 26) Suppose the current price of barley is $7 per bushel and at that price 100,000 bushels are grown by a Colorado farmer. If the price of barley rises to $8 and quantity supplied increases to 130,000 bushels, then at the midpoint between these two prices, the price elasticity of supply for barley equals A) 13.33. B) 26.78. C) 1.96. D) 0.51. E) zero. Answer: C Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 27) Jess owns a sandwich shop. The price of a sandwich recently increased from $5 to $7. Jess responded by increasing the quantity of sandwiches she supplied from 70 to 90 per day. Then, at the midpoint between these two prices, Jess's price elasticity of supply is equal to A) 1.33. B) 0.75. C) 3.00. D) 4.00. E) 1.50. Answer: B Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

28) The price of one bedroom apartments in Cheyenne increased from $55,000 to $65,000 and the quantity of apartment for sale increased from 25 to 30. At the midpoint between these two prices, the price elasticity of supply for apartments in Cheyenne is equal to A) 0.916. B) 0.75. C) 1.09. D) 2.18. E) 0.08. Answer: A Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 29) Suppose an increase in demand causes the price to increase from $2 to $4 and the quantity to increase from 1,000 to 1,800. Then, at the midpoint between these two prices, the elasticity of supply equals A) 0.86. B) 1.17. C) 2.74. D) 0.68. E) None of the above answers is correct. Answer: A Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 30) Suppose a decrease in demand causes the price to decrease from $4 to $3 and the quantity to decrease from 1,000 to 700. Then, at the midpoint between these two prices, the elasticity of supply equals A) 0.81. B) 1.24. C) 2.83. D) 0.18. E) None of the above answers is correct. Answer: B Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

31) When the price of a product increases from $35 to $45, the quantity supplied increases from 30 units to 40 units per week. Then, at the midpoint between these two prices, the price elasticity of supply is A) 0.00. B) -1.1. C) 1.14. D) 1.35. E) 0.88. Answer: C Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 32) If the price of a DVD falls from $20 to $12 and the quantity of DVDs supplied decreases from 118,000 per hour to 100,000 per hour, at the midpoint between these two prices the elasticity of supply equals A) 0.33. B) 2.94. C) 3.08. D) 0.23. E) -3.08. Answer: A Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 33) If the price of a good decreases from $9 to $6 and the quantity supplied decreases from 1,500 to 1,300, at the midpoint between these two prices the elasticity of supply equals A) 0.20. B) 2.80. C) 0.36. D) 0.40. E) 3.20. Answer: C Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

34) If the price doubles and the quantity supplied also doubles, the price elasticity of supply for the good is A) -1. B) 1. C) -2. D) 2. E) 100 percent. Answer: B Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 35) If the price elasticity of supply for a good is 10, then supply is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: A Topic: Price elasticity of supply, elastic Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 36) If the quantity supplied and the price change by the same percentage, then supply is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: C Topic: Price elasticity of supply, unit elastic Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

37) Because the price elasticity of supply for jumbo jets is 0.35, the supply of jumbo jets is A) elastic. B) unit elastic. C) inelastic. D) perfectly elastic. E) perfectly inelastic. Answer: C Topic: Price elasticity of supply, inelastic Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 38) If a 20 percent increase in the price of a good does NOT change the quantity supplied, the A) supply is perfectly inelastic. B) supply is unit elastic. C) supply is perfectly elastic. D) supply is elastic. E) None of the above answers is correct. Answer: A Topic: Price elasticity of supply, perfectly inelastic Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 39) The price elasticity of supply is a measure of the extent to which the quantity supplied of a good changes when the A) cost of producing the product increases. B) quantity of the good demanded increases. C) supply increases. D) price changes. E) number of firms supplying the good changes. Answer: D Topic: Price elasticity of supply Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

40) When the percentage change in the quantity supplied is twice the percentage change in price, then supply is A) elastic. B) inelastic. C) unit elastic. D) perfectly inelastic. E) perfectly elastic. Answer: A Topic: Price elasticity of supply, elastic Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 41) The supply of beach front property on St. Simon's Island is A) elastic. B) unit elastic. C) negative. D) inelastic. E) perfectly elastic. Answer: D Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 42) Goods that can be produced at a constant or very gently rising opportunity cost have A) an elastic demand. B) an inelastic demand. C) an inelastic supply. D) an elastic supply. E) a unit elastic demand. Answer: D Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

43) For a product with a rapidly increasing opportunity cost of producing additional units A) demand is price elastic. B) supply is price elastic. C) demand is price inelastic. D) supply is price inelastic. E) the demand curve is vertical. Answer: D Topic: Price elasticity of supply, production possibilities Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 44) The greater the amount of time that passes after a price change, the A) less elastic supply becomes. B) more elastic supply becomes. C) more negative supply becomes. D) steeper the supply curve becomes. E) None of the above answers is correct. Answer: B Topic: Price elasticity of supply, time elapsed after a price change Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 45) Many manufactured goods have an ________ supply if production plans have only a short period to change and as time passes and all production adjustments are made, the supply of the good ________ from the initial response. A) inelastic; increases B) elastic; decreases C) elastic; increases D) inelastic; decreases E) inelastic; does not change Answer: A Topic: Price elasticity of supply, time elapsed after a price change Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

46) When the price of a textbook is $95, the quantity of textbooks supplied is 90 million a year and when the price rises to $105, the quantity of textbooks supplied is 110 million a year. At the midpoint between these two prices, the supply of textbooks is A) elastic. B) perfectly elastic. C) inelastic. D) perfectly inelastic. E) unit elastic. Answer: A Topic: Price elasticity of supply, elastic Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 47) Supply is unit elastic when the A) supply curve is upward sloping. B) price elasticity of supply is positive. C) percentage change in the quantity supplied equals the percentage change in price. D) supply curve is horizontal. E) supply curve is vertical. Answer: C Topic: Price elasticity of supply, unit elastic Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 48) When supply is perfectly inelastic, the supply curve is A) upward sloping but not a straight line. B) vertical. C) downward sloping. D) horizontal. E) a straight line with a 45 degree slope that goes through the origin. Answer: B Topic: Price elasticity of supply, perfectly inelastic Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking

49) The price elasticity of supply equals the percentage change in the A) quantity demanded divided by the percentage change in the price of a substitute or complement. B) quantity supplied divided by the percentage change in price. C) quantity demanded divided by the percentage change in price. D) supply divided by the percentage change in the demand. E) quantity supplied divided by the percentage change in the quantity demanded. Answer: B Topic: Price elasticity of supply, formula Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 50) If a firm supplies 200 units at a price of $50 and 100 units at a price of $40, at the midpoint between these two prices what is the price elasticity of supply? A) 0.33 B) 1.00 C) 3.00 D) 5.00 E) 8.50 Answer: C Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 51) If the quantity supplied increases by 8 percent when the price rises by 2 percent, the price elasticity of supply is A) 10.0. B) 6.0. C) 0.25. D) 16.0. E) 4.0. Answer: E Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

52) If the price of a a good increases by 10 percent and the quantity supplied increases by 5 percent, then the elasticity of supply is A) greater than one and supply is elastic. B) negative and supply is inelastic. C) less than one and supply is elastic. D) less than one and supply is inelastic. E) greater than one and supply is inelastic. Answer: D Topic: Price elasticity of supply, formula Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

53) The figure shows two different supply curves. At the point where they cross, ________ is more likely to represent the short-run supply curve for airline seats, a good that has ________ supply. A) S1; inelastic B) S1; elastic C) S2; elastic D) S2; inelastic E) S2; unit elastic Answer: A Topic: Elasticity of supply Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

54) The figure shows two different supply curves. At the point where they cross, ________ is more likely to represent the long-run supply curve for rice, a good that has ________ supply. A) S2; inelastic B) S2; elastic C) S1; elastic D) S1; inelastic E) S1; unit elastic Answer: B Topic: Elasticity of supply Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 5.3 Cross Elasticity and Income Elasticity 1) The extent to which the demand for a good changes when the price of a substitute or complement changes, other things remaining the same, is measured as the A) income elasticity of demand. B) cross elasticity of demand. C) price elasticity of demand. D) price elasticity of supply. E) cross income elasticity of demand. Answer: B Topic: Cross elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 2) The cross elasticity of demand is a measure of how A) responsive consumers are to changes in the price of a product. B) responsive suppliers are to changes in the price of a product. C) demand for a product changes when the price of a substitute or complement changes. D) total revenue changes when the price of a product changes. E) demand for a product changes when income changes. Answer: C Topic: Cross elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

3) If we are trying to determine if two different products are substitutes, complements, or not related at all, we should find the value of the A) price elasticity of demand for both goods. B) price elasticity of supply for both goods. C) income elasticity of demand for both goods. D) cross elasticity of demand. E) price elasticity of demand AND the price elasticity of supply for both goods. Answer: D Topic: Cross elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 4) If Microsoft wanted to prove to the Justice Department that its Windows software has many substitutes that personal computer owners can use, Microsoft hopes to find A) that the demand for Windows' is inelastic. B) that the demand for Windows is elastic. C) a large positive value for the cross elasticity of Windows and other software. D) a negative income elasticity for Windows. E) a positive income elasticity for Windows. Answer: C Topic: Cross elasticity of demand, substitutes Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 5) What is the formula for the cross elasticity of demand? The percentage change in the A) quantity demanded divided by the percentage change in the price of a substitute or complement. B) quantity supplied divided by the percentage change in price. C) quantity demanded divided by the percentage change in price. D) quantity demanded divided by the percentage change in income. E) equilibrium quantity demanded divided by the equilibrium quantity supplied. Answer: A Topic: Cross elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

6) If a 1 percent increase in the price of X increases the quantity demanded of Y by 2 percent, then X and Y are A) complements and the cross elasticity of demand equals 2. B) substitutes and the cross elasticity of demand equals 1/2. C) substitutes and the cross elasticity of demand equals 2. D) complements and the income elasticity of demand equals 2. E) normal goods and the income elasticity of demand of each equals 2. Answer: C Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 7) The price of coffee rose 40 percent and the quantity of coffee demanded fell by 20 percent. The quantity of doughnuts demanded also fell by 20 percent. From this information, we can conclude that A) the demand for coffee is elastic. B) the demand for coffee is unit elastic. C) coffee is an inferior good. D) the cross elasticity demand between coffee and doughnuts is -0.5. E) the income elasticity of demand for coffee is 2. Answer: D Topic: Cross elasticity of demand, formula Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 8) The cross elasticity of demand for Good A and Good B is -0.7. This means that A) if the price of Good A increases by 10 percent, the quantity demanded of Good B decreases by 7 percent. B) if the price of Good A increases by 10 percent, the quantity demand of Good B increases by 7 percent. C) the goods are substitutes. D) the goods are complements. E) both A and D are correct. Answer: E Topic: Cross elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

9) The income elasticity of demand for electricity is 1.90. Suppose the economy improves and incomes are expected to increase by 10 percent. This means that A) power companies can expect to sell 19 percent more electricity. B) electricity demand is income inelastic. C) consumers will try to find substitutes for electric power. D) consumers will spend 19 percent of their income on electric power. E) electricity is an inferior good. Answer: A Topic: Income elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 10) If the price of a movie rises 3 percent and, as a result, the quantity demanded of streamed videos increases 6 percent, then the cross elasticity of demand is A) 2. B) 1/2. C) -1/2. D) -2. E) 9. Answer: A Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

11) Based on data in the table above, at the price midway between the two prices, what is the cross elasticity of demand for ice cream and cake? A) The cross elasticity is -0.75. B) The cross elasticity is -1.75. C) The cross elasticity is -0.83. D) The cross elasticity is -4.0. E) The cross elasticity is -1.33. Answer: A Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 74 Copyright © 2021 Pearson Education, Inc.

12) Based on the data in the table above, ice cream and cake are ________ goods. A) inferior B) normal C) substitute D) complementary E) Both answers B and D are correct. Answer: D Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 13) Goods are ________ when the income elasticity of demand is positive. A) complements B) elastic C) inferior D) substitutes E) normal Answer: D Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 14) If the price of a Brita water filtration system increases and the quantity demanded of bottled water increases, then these two goods are A) substitutes. B) complements. C) normal goods. D) inferior goods. E) inelastic goods. Answer: A Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

15) The cross elasticity of demand for butter and margarine is likely to be A) positive because they are substitutes. B) positive because they are complements. C) negative because they are substitutes. D) negative because they are complements. E) positive because they are normal goods. Answer: A Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 16) Which of the following is correct? A) The cross elasticity of demand for substitute goods is positive. B) The cross elasticity of demand for substitute goods is negative. C) The cross elasticity of demand equals the percentage change in demand divided by the percentage change in income. D) The income elasticity of demand for a normal good is negative. E) The cross elasticity of demand for normal goods is positive. Answer: A Topic: Cross elasticity of demand, substitutes Skill: Level 1: Definition Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 17) If the cross elasticity of demand between good A and good B is negative, then a decrease in the price of good A results in A) an increase in the demand for good B. B) a decrease in the demand for good B. C) a movement downward along the demand curve for good B. D) an increase in the supply of good B. E) a decrease in the supply of good B. Answer: A Topic: Cross elasticity of demand, substitutes Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

18) Patrick lives near two gas stations, Exxon and Shell. If Exxon decreases the price of gas, we predict that the quantity of gasoline demanded at Shell will A) decrease because Exxon and Shell gas are complements. B) decrease because Exxon and Shell gas are substitutes. C) increase because Exxon and Shell gas are substitutes. D) increase because Exxon and Shell gas are complements. E) not change Exxon and Shell are different brands of gasoline. Answer: B Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 19) The cross elasticity of demand for strawberry jelly and grape jelly is likely to be A) positive because they are substitutes. B) positive because they are complements. C) negative because they are substitutes. D) negative because they are complements. E) negative because they are inferior goods. Answer: A Topic: Cross elasticity of demand, substitutes Skill: Level 5: Critical thinking Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 20) If a lower price for a Pepsi decreases the demand for a Coke, the cross elasticity value for Pepsi and Coke is A) definitely negative. B) definitely equal to zero. C) definitely positive. D) definitely greater than one. E) possibly negative, positive, or zero, but there is not enough information to decide. Answer: C Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

21) If the cross elasticity of demand between Coke and Pepsi is 2.02, then Coke and Pepsi are A) complements. B) substitutes. C) normal goods. D) inferior goods. E) Both answers B and C are correct. Answer: B Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 22) If Pepsi goes on sale and decreases its price by 10 percent, and as a result, the quantity demanded of Coca Cola decreases by 5 percent, then Pepsi and Coke are ________ goods. A) inferior B) normal C) substitute D) complementary E) unrelated Answer: C Topic: Cross elasticity of demand, substitutes Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 23) Tacos and pizza are substitutes. If a 2 percent change in the price of a taco leads to a 4 percent change in the demand for pizza, the cross elasticity of demand equals A) -1/2. B) 1/2. C) 2. D) -2. E) 4. Answer: C Topic: Cross elasticity of demand, substitutes Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

24) Pete feeds his dog 100 percent more Pup-Peronis when Zuke's treats increase in price by 50 percent. For Pete, Pup-Peronis and Zuke's are ________ and the cross-price elasticity of demand is ________. A) complements; -1/2 B) substitutes; 2 C) substitutes; -2 D) complements; 2 E) substitutes; 1/2 Answer: B Topic: Cross elasticity of demand, substitutes Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 25) The cross elasticity between computers and software is A) negative because they are substitutes. B) positive because they are substitutes. C) negative because they are complements. D) positive because they are complements. E) positive because they are normal goods. Answer: C Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 26) If you know the cross elasticity between two goods is negative, then you know the goods are A) substitutes. B) normal goods. C) complements. D) inferior goods. E) inelastic goods. Answer: C Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

27) If the price of a one good increases and the quantity demanded of a different good decreases, then these two goods are A) substitutes. B) normal goods. C) inferior goods. D) inelastic goods. E) complements. Answer: E Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 28) If the cross elasticity of demand is negative, that means the goods A) have elastic demands. B) have inelastic demands. C) are complements. D) are substitutes. E) are inferior. Answer: C Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 29) When two goods are related such that an increase in the price of one good decreases the quantity demanded of the other good, these goods are definitely A) normal goods. B) luxury goods. C) complements. D) substitutes. E) inferior goods. Answer: C Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

30) If a lower price for good X increases the demand for good Y, the cross elasticity value for the two goods is A) negative. B) equal to zero. C) positive and less than one. D) positive and greater than one. E) possibly negative, positive, or zero, but there is not enough information to decide. Answer: A Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 31) If two goods are ________, then an increase in the price of one leads to ________ in the quantity demanded of the other. A) complements; a decrease B) complements; no change C) substitutes; a decrease D) substitutes; no change E) normal; an increase Answer: A Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 32) The cross elasticity of demand for blank DVDs and DVD burners is likely to be A) positive because they are substitutes. B) positive because they are complements. C) negative because they are substitutes. D) negative because they are complements. E) negative because with the advent of digital cameras, film and film cameras are inferior goods. Answer: D Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

33) If the cross elasticity of demand between car insurance and new cars is -0.41, then car insurance and new cars are A) complements. B) substitutes. C) normal goods. D) inferior goods. E) unrelated goods. Answer: A Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 34) If the cross elasticity of demand for DVD players and DVDs equals -2, then the products are A) unrelated. B) complements. C) inferior goods. D) substitutes. E) normal goods. Answer: B Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 35) Tennis balls and tennis rackets are complements. If a 3 percent change in the price of a tennis racket leads to a 9 change in the quantity of tennis balls demanded, the cross elasticity of demand equals A) 3. B) -3. C) 1/3. D) -1/3. E) 9. Answer: B Topic: Cross elasticity of demand, complements Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

36) The income elasticity of demand is a measure of A) how demand for a product changes when the price of a substitute or complement product changes. B) how responsive consumers are to changes in the price of a product. C) how responsive suppliers are to changes in the price of a product. D) the extent to which the demand for a good changes when income changes. E) the extent to which the supply of a good changes when the demand changes as a result of a change in income. Answer: D Topic: Income elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 37) If the income elasticity of demand for a good is 2, then when income rises 10 percent, the quantity demanded A) increases 2 percent. B) increases 20 percent. C) decreases 2 percent. D) decreases 20 percent. E) increases 12 percent. Answer: B Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 38) The income elasticity of demand is A) positive for a normal good. B) zero for an inferior good. C) less than one for an income elastic normal good. D) Only answers A and B are correct. E) Answers A, B, and C are correct. Answer: A Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

39) The income elasticity of demand is ________ if the good is ________ good. A) positive; a normal B) positive; an inferior C) negative; a normal D) less than one; an inferior E) positive; a substitute Answer: A Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 40) Assume that it is predicted that for the years after you graduate from college, the entire economy will experience a long period of prosperity when incomes grow rapidly. What type of industry would be the best for you to find employment if this prediction is correct? An industry that produces a product that is A) income elastic. B) income inelastic. C) inferior. D) a substitute good. E) none of these industries. Answer: A Topic: Income elasticity, normal good Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 41) Which of the following statements is correct? A) The income elasticity of demand for inferior goods is positive. B) The cross elasticity of demand for substitutes is negative. C) The income elasticity of demand for normal goods is positive. D) The cross elasticity of demand for complements is positive. E) The income elasticity of demand for inferior goods is zero. Answer: C Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

42) The income elasticity of demand for skiing trips to Vermont is greater than one. Thus a trip to Vermont for skiing is ________ good. A) a normal B) an inferior C) a unit elastic D) a price elastic E) a price inelastic Answer: A Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 43) People eat at restaurants less often when their incomes fall because of a recession. Eating at restaurants must be A) an inferior good. B) a normal good. C) a complement to other goods. D) a substitute for other goods. E) an inelastic good. Answer: B Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 44) People take fewer trips by airplane when their incomes fall because of a recession. Trips by airplane must be A) a normal good. B) an inferior good. C) a substitute for other goods. D) a complement to other goods. E) an inelastic good. Answer: A Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

45) Sergio's downloads of movies increase by 10 percent when his income increases by 30 percent. Based on this information, we know that for Sergio downloaded movies A) are complements. B) are substitutes. C) are inferior goods. D) have an inelastic demand. E) are normal goods. Answer: E Topic: Income elasticity of demand, normal good Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 46) Alan purchases 10 percent fewer bags of chips when his income decreases by 5 percent. Based on only this information, we know that for Alan A) chips are a normal good. B) chips are a complement to salsa. C) chips are a substitute for pretzels. D) chips are an inferior good. E) the price of chips fell. Answer: A Topic: Income elasticity of demand, normal good Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 47) For a good such as food, the income elasticity is likely A) negative. B) equal to zero. C) positive and less than one. D) positive and greater than one. E) undefined because people always buy the same amount of food. Answer: C Topic: Income elasticity of demand Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

48) For a good such as a large screen UHD television set, the income elasticity would likely be A) negative. B) equal to zero. C) positive and less than one. D) positive and greater than one. E) undefined because large screen, UHD TVs are bought by many consumers. Answer: D Topic: Income elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 49) Assume that it is predicted that for the years after you graduate from college, the entire economy will experience a long period of recession during which people's incomes decrease. What type of industry would be the best for you to find employment if this prediction is correct? An industry that produces a product that A) is income elastic. B) is income inelastic. C) is inferior. D) is a complement. E) none of these industries. Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 50) What is an inferior good? A) a product of low quality that we do not want to purchase B) a product for which demand increases when income increases, and demand decreases when income decreases C) a product for which demand increases when income decreases, and demand decreases when income increases D) a product that is complementary E) a product that is a substitute for another, better good Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 1: Definition Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

51) A product that has a negative income elasticity of demand is ________ good. A) a complementary B) a substitute C) a normal D) an inferior E) a negative Answer: D Topic: Income elasticity, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 52) Goods are ________ when the income elasticity of demand is less than zero. A) substitutes B) complements C) inferior D) elastic E) normal Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 53) If a product is an inferior good, then its income elasticity of demand is A) zero. B) positive. C) negative. D) indeterminate. E) undefined. Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

54) If a good is inferior, then it has an income elasticity of demand that is A) equal to zero. B) greater than zero. C) less than zero. D) greater than one. E) undefined. Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 55) If a 5 percent increase in income brings about a 10 percent decrease in the demand for a good, then the A) good is a normal good. B) good is an inferior good. C) income elasticity of demand is 0.5. D) income elasticity of demand is 2.0. E) income elasticity of demand is 5.0. Answer: B Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 56) If a 10 percent increase in income leads to a 5 percent decrease in the demand for a good, the income elasticity of demand equals ________ and the good is ________ good. A) 1/2; a normal B) -1/2; an inferior C) 2; a normal D) -2; a normal E) -5; an inferior Answer: B Topic: Income elasticity of demand, inferior good Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

57) Joe receives a 20 percent increase in his income from his part time job and as a consequence decreases his consumption of Ramen noodles by 10 percent. Hence to Joe, Ramen noodles are A) a normal good with a price elasticity of demand of 0.5. B) a substitute good with a cross elasticity of 0.5. C) a good with a price elasticity of supply of -0.5. D) an inferior good with an income elasticity of -0.5. E) an inferior good with an income elasticity of -2.0. Answer: D Topic: Income elasticity, inferior good Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 58) If a 5 percent decrease in income leads to a 15 percent decrease in the demand for a good, the income elasticity of demand equals A) -1/3 and the good is an inferior good. B) 1/3 and demand for the good is income elastic. C) 3 and the good is a normal good. D) -3 and the demand for the good is income inelastic. E) 3 and the good is an inferior good. Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 59) When income increases from $20,000 to $30,000 the quantity of inter-city bus trips taken per year decreases from 10 to 8. Hence A) inter-city bus trips are a normal good. B) the income elasticity of demand for inter-city bus trips is -1.8. C) the income elasticity of demand for inter-city bus trips is -0.56. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: C Topic: Income elasticity of demand, inferior good Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

60) The income elasticity of demand for foreign travel A) is likely to be smaller than the income elasticity of demand for food. B) is likely to be larger than the income elasticity of demand for food. C) cannot be compared to the income elasticity of demand for food. D) is likely to be inelastic. E) is likely to be negative. Answer: B Topic: Income elasticity of demand Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 61) The lower the level of income in a country, the A) less income elastic is the demand for food. B) more income elastic is the demand for food. C) more negative the income elasticity of the demand for food. D) Both answers A and C are correct. E) None of the above is correct. Answer: B Topic: Eye on the global economy, income elasticities of demand Skill: Level 4: Applying models Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 62) The measure used to determine whether two products are complements or substitutes is called the A) price elasticity of supply. B) cross elasticity of demand. C) price elasticity of demand. D) income elasticity. E) substitute elasticity of demand. Answer: B Topic: Cross elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

63) If beef and pork are substitutes for consumers, the cross elasticity of demand between the two products must be A) negative. B) positive. C) indeterminate. D) elastic. E) greater than 1. Answer: B Topic: Cross elasticity of demand, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 64) When the price of a pizza is $10, the quantity of soda demanded is 300 drinks. When the price of a pizza is $15, the quantity soda demanded is 100 drinks. At the midpoint between these two prices, the cross elasticity of demand is equal to A) -0.25. B) -0.40. C) -2.50. D) -25.00. E) 4.00. Answer: C Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 65) When the price of going to a movie rises 5 percent, the quantity of DVDs demanded increases 10 percent. The cross elasticity of demand equals A) 10.0. B) 0.50. C) -0.50. D) -2.0. E) 2.0. Answer: E Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

66) If two goods have a cross elasticity of demand of -2, then when the price of one good increases, the demand curve of the other good A) shifts rightward. B) shifts leftward. C) remains unchanged and the supply curve also remains unchanged. D) might shift rightward, leftward, or remain unchanged. E) remains unchanged but the supply curve shifts leftward. Answer: B Topic: Cross elasticity of demand, complements Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 67) The income elasticity of demand is the percentage change in the ________ divided by the percentage change in ________. A) quantity demanded; the price of a substitute or complement B) quantity supplied; price C) quantity demanded; price D) quantity demanded; income E) quantity demanded when income changes; the quantity supplied Answer: D Topic: Income elasticity of demand, formula Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 68) When income increases from $20,000 to $30,000 the number of home delivered pizzas per year increases from 22 to 40. The income elasticity of demand for home delivered pizza equals A) 1.45. B) 0.69. C) 0.58. D) 0.40. E) 2.86. Answer: A Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

69) When income increases by 6 percent, the demand for potatoes decreases by 2 percent. The income elasticity of demand for potatoes equals A) -2.00. B) 3.00. C) -3.00. D) 0.33. E) -0.33. Answer: E Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 70) When income increases from $30,000 a year to $40,000 a year, the quantity demanded of weekend vacations by Sara increases from 2 a year to 5 a year. For Sara, the income elasticity of demand of weekend vacations is ________ and weekend vacations are ________ good. A) 3; a normal B) 4.5; a normal C) 1/3; an inferior D) -4.5; an inferior E) 1/3; a normal Answer: A Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 71) If a product is a normal good, then its income elasticity of demand is A) zero. B) positive. C) negative. D) indeterminate. E) greater than 1. Answer: B Topic: Income elasticity of demand, normal good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

72) The income elasticity of demand for used cars is less than zero. So, used cars are A) an inferior good. B) a normal good. C) an inelastic good. D) a perfectly inelastic good. E) a substitute good. Answer: A Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 73) An inferior good has a ________ elasticity of demand. A) positive income B) negative income C) negative cross D) positive cross E) negative price Answer: B Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 74) Which of the following is most likely to have an income elasticity of demand that exceeds 1? A) tobacco B) alcoholic beverages C) airline travel D) food E) telephone Answer: C Topic: Income elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

75) Which of the following is most likely to have an income elasticity of demand that is less than 1? A) movies B) airline travel C) foreign travel D) food E) restaurant meals Answer: D Topic: Income elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 5.4 Chapter Figures

1) The demand curve shown in the figure above reflects demand that is A) perfectly elastic. B) perfectly inelastic. C) unit elastic. D) elastic but not perfectly elastic. E) inelastic but not perfectly inelastic. Answer: A Topic: Perfectly elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

2) The demand curve shown in the figure above reflects demand that is A) perfectly elastic. B) perfectly inelastic. C) unit elastic. D) elastic but not perfectly elastic. E) inelastic but not perfectly inelastic. Answer: B Topic: Perfectly inelastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

3) The demand curve shown in the figure above is ________ at the midpoint between $95 and $105 per trip. A) perfectly elastic B) perfectly inelastic C) unit elastic D) elastic but not perfectly elastic E) inelastic but not perfectly inelastic Answer: C Topic: Unit elastic demand Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

4) The demand curve shown in the figure above is ________ at the midpoint between $0.90 and $1.10 per pack. A) perfectly elastic B) perfectly inelastic C) unit elastic D) elastic but not perfectly elastic E) inelastic but not perfectly inelastic Answer: E Topic: Inelastic demand Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

5) The demand curve shown in the figure above is ________ at the midpoint between $95 and $105 per unit. A) perfectly elastic B) perfectly inelastic C) unit elastic D) elastic but not perfectly elastic E) inelastic but not perfectly inelastic Answer: D Topic: Elastic demand Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

The figure above shows the demand curve for Starbucks latte. 6) Using the figure above, suppose Starbucks charges $4.50 per cup for its latte. Which of the following is TRUE? i. At this price, the demand for Starbucks latte is elastic. ii. If Starbucks lowers the price of its latte, its revenue will decrease. iii. If Starbucks raises the price of its latte, the demand for it will become less elastic. A) iii only B) i only C) ii only D) i and ii E) i and iii Answer: B Topic: Elastic demand Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

7) In the figure above, at the point where the price is $4 per cup the price elasticity of demand is A) 2. B) 0.5. C) 1. D) 1.5. E) 0. Answer: A Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 8) In the figure above, at the midpoint between $5 and $4, the price elasticity of demand is A) 2. B) 3. C) 0.75. D) 1.5. E) 0.33. Answer: B Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 9) In the figure above, at the midpoint between $3 and $4, the price elasticity of demand is A) 1.4. B) 2. C) 0.71. D) 0.4. E) 1. Answer: A Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

10) Refer to the figure above. Suppose Starbucks charges $3.50 per cup for its latte. Which of the following is TRUE? i. At this price, the demand for Starbucks latte is inelastic. ii. If Starbucks raises the price of its latte, its revenue will increase. iii. If Starbucks lowers the price of its latte, it will increase its revenue. A) iii only B) i only C) ii only D) i and ii E) i and iii Answer: A Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

The figure above shows the demand curve for Starbucks latte. 11) In the figure above, the demand is elastic in the range of prices between A) $3.50 and $4.50 per cup. B) $2.50 and $3.50 per cup. C) $1.00 and $2.00 per cup. D) $2.00 and $4.00 per cup. E) $1.75 and $2.75 per cup. Answer: A Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 12) In the figure above, the demand is unit elastic A) at the point where the price is $3.00 per cup. B) at the point where the price is $2.00 per cup. C) at the point where the price is $4.00 per cup. D) at the point where the price is $2.50 per cup. E) at all points along the demand curve. Answer: A Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 104 Copyright © 2021 Pearson Education, Inc.

13) In the figure above, the demand is inelastic in the range of prices between A) $3.50 and $4.50 per cup. B) $2.50 and $3.50 per cup. C) $1.00 and $2.00 per cup. D) $2.25 and $4.50 per cup. E) $2.75 and $3.75 per cup. Answer: C Topic: Midpoint formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 14) Suppose Starbucks currently charges $3.25 per cup for its latte. If Starbucks lowers the price to $3.00 per cup, based on the demand curve in the figure above, its total revenue will ________ because the demand for Starbucks latte is ________ over this price range. A) increase; elastic B) decrease; elastic C) increase; inelastic D) increase; unit elastic E) not change; unit elastic Answer: A Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 15) Suppose Starbucks currently charges $2.50 per cup for its latte. If Starbucks raises the price to $3.00 per cup, based on the demand curve in the figure above, its total revenue will ________ because the demand for Starbucks latte is ________ over this price range. A) increase; elastic B) decrease; elastic C) increase; inelastic D) increase; unit elastic E) not change; unit elastic Answer: C Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

The figure above shows the supply curve for roses. 16) In the figure above, at the point where the price is $60 per bunch, the price elasticity of supply is A) 1.8. B) 0.56. C) 1. D) 1.5. E) 0. Answer: A Topic: Price elasticity of supply Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

17) In the figure above, at the point where the price is $50 per bunch, the price elasticity of supply is A) 2.14. B) 0.47. C) 1. D) 3. E) 0.33. Answer: A Topic: Price elasticity of supply Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 5.5 Integrative Questions 1) Suppose an increase in supply lowers the price from $10 to $8 and increases the quantity demanded from 100 units to 130 units. At the midpoint between these two prices, the elasticity of demand equals A) 1.17. B) 0.85. C) 0.26. D) 1.56. E) None of the above answers is correct. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 2) Suppose a decrease in supply raises the price from $4.00 to $5.50 and decreases the quantity demanded from 2,000 to 1,500. At the midpoint between these two prices, the elasticity of demand equals A) 2.10. B) 1.11. C) 0.90. D) 0.72. E) None of the above answers is correct. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

3) The total revenue test says that if a price decrease leads to A) an increase in total revenue, demand is income elastic. B) a decrease in total revenue, demand is income inelastic. C) a decrease in total revenue, demand is price inelastic. D) a decrease in total revenue, supply is price inelastic. E) a decrease in total revenue, supply is price elastic. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 4) The total revenue test says that if a price decrease leads to A) an increase in total revenue, supply is elastic. B) a decrease in total revenue, supply is unit elastic. C) a decrease in total revenue, supply is inelastic. D) an increase in total revenue, supply is inelastic. E) None of the above answers is correct. Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 5) If demand is ________, a price cut ________ the total revenue. A) elastic; increases B) unit elastic; decreases C) inelastic; increases D) inelastic; does not change E) normal; decreases Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

6) If you spend a large portion of your income on a good A) supply of that good would be price elastic. B) demand for that good is more elastic than if you spent a smaller portion of your income on the good. C) supply of that good is price inelastic. D) demand for that good is less elastic than if you spent a smaller portion of your income on the good. E) the good must be able to be produced at a constant (or gently rising) opportunity cost. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 7) A ________ curve means that ________. A) horizontal demand; a change in price does not change total revenue B) horizontal demand; the elasticity of demand is less than 1 C) horizontal supply; the elasticity of supply is infinite D) horizontal supply; the elasticity of demand is infinite E) vertical demand; a change in price does not change total revenue Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 8) The cross elasticity of demand A) means that an increase in the demand for one good leads to a decrease in demand for another good. B) measures how a change in the price of one good impacts the demand for another good. C) measures how a change in supply impacts the demand for the good. D) means that an increase in the price of one good leads to an increase in the price of another good. E) measures how a change in income impacts the demand for the good. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

9) Which of the following is TRUE? i. The demand for a good is elastic if when its price changes, the percentage change in the quantity demanded exceeds the percentage change in price. ii. Price elasticity of demand equals the percentage change in price divided by the percentage change in the quantity demanded. iii. If demand is price inelastic, a rise in price leads to a decrease in total revenue. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 10) Which of the following is TRUE? i. The supply of a good is inelastic if when its price changes, the percentage change in the quantity supplied exceeds the percentage change in price. ii. Price elasticity of supply equals the percentage change in the quantity supplied divided by the percentage change in price. iii. If demand is price elastic, a rise in price leads to a decrease in total revenue. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: E Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

11) Which of the following is TRUE? i. The easier it is to find substitutes for a good, the more price elastic the demand for the good is. ii. The demand for a good is more price elastic the smaller the proportion of income spent on it. iii. If demand is price elastic, lowering the price leads to a decrease in total revenue. A) i only B) ii only C) iii only D) i and ii E) i and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 5.6 Essay: The Price Elasticity of Demand 1) "The price elasticity of demand is a measure of how sensitive demanders are to changes in the price of a product." Is this statement true or false? Answer: The assertion is true. ALL elasticities measure the sensitivity, or responsiveness, of some variable to a change in an influence. The price elasticity of demand measures how strongly demanders respond to a change in the price of the good or service. Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 2) What is the price elasticity of demand? In terms of percentage changes, what is its formula? Answer: The price elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price. The formula for the price elasticity of demand is the absolute value of the percentage change in quantity demanded divided by the percentage change in price. Topic: Price elasticity of demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

3) When does a decrease in supply raise the price more: When demand is elastic or when demand is inelastic? When OPEC decreases the supply of oil, the price of gasoline skyrockets. Hence is the demand for gasoline elastic or inelastic? Answer: A decrease in supply raises the price more when demand is inelastic. The skyrocketing price of gasoline indicates that the demand for gasoline is inelastic. Topic: Price elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 4) What does a horizontal demand curve indicate about the price elasticity of demand? Answer: If the demand curve for a good is horizontal, the demand for the good is perfectly elastic. Hence the price elasticity of demand is infinite. Topic: Perfectly elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 5) What are the three cases for the price elasticity of demand? Briefly define each. Answer: Demand can be elastic, inelastic, or unit elastic. Elastic demand occurs when the percentage change in quantity demanded exceeds the percentage change in price. Inelastic demand occurs when the percentage change in quantity demanded is less than the percentage change in price. Unit elasticity occurs when the percentage change in price equals the percentage change in demand. Topic: Elastic, inelastic, and unit elastic demand Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication 6) In a study session, your friend says, "Demand is elastic if the percentage change in the price exceeds the percentage change in quantity demanded." Is your friend correct? Answer: No, your friend is incorrect. Demand is elastic if the percentage change in the price is less than the percentage change in the quantity demanded. Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking

7) If the percentage change in quantity demanded is greater than the percentage change in price, can you determine if the demand is elastic, unit elastic, or inelastic? Explain your answer. Answer: The demand is elastic. The formula for the price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in the price. And, if the elasticity of demand exceeds one, then the demand is elastic. In this case, the percentage change in the quantity demanded is larger than the percentage change in the price, so the elasticity of demand will be greater than one. Hence the demand is elastic. Topic: Elastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication 8) Does the fact that the price elasticity of demand for a good is inelastic violate the law of demand? Answer: No, if the demand is inelastic, when the price falls, the quantity demanded increases, but by a smaller percentage than the percentage fall in price. Thus the negative relationship between the price and the quantity demanded remains, and the demand curve still slopes downward, which is the law of demand. Topic: Inelastic demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication 9) What factors determine the size of the price elasticity of demand? Answer: The factors that determine the size of the elasticity of demand can be classified into the availability of substitutes for the good and the proportion of income spent on the good. The more substitutes for a good, the more elastic its demand. Luxuries have more substitutes than necessities, and so the elasticity of demand for luxuries exceeds that for necessities; narrowly defined goods have more substitutes than broadly defined goods, and so the elasticity of demand for narrowly defined goods exceeds that for broadly defined goods; and, the more time that has elapsed since a price change, the more substitutes consumers can find, and so the elasticity of demand is larger the more time passes. Income also plays a role because the larger the proportion of consumers' incomes spent on a good, the larger is its elasticity of demand. Topic: Factors that influence the price elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication

10) Explain why the number of substitutes influences the price elasticity of demand. Answer: The price elasticity of demand is a measure of how responsive the quantity demanded is to a change in price. If a good has many substitutes, it is easy to switch away from it when its price rises. Hence a rise in price will substantially decrease the quantity demanded. Similarly, when its price falls, consumers can switch into it and away from many other (substitute) products. Hence a fall in price will substantially increase the quantity demanded. Because changes in price have major effects on the quantity demanded, the demand is elastic. Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication 11) "The fewer the number of substitutes for a product, the more elastic the demand for that product." Is the previous statement true or false? Answer: The statement is false. The greater the number of substitutes, the more elastic the demand for that product. Conversely, the fewer the number of substitutes, the less elastic (the more inelastic) the demand for that product. Topic: Elasticity, substitutes Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 12) If a good has only a few, poor substitutes, is its demand elastic or inelastic? Answer: The demand is inelastic. The fewer substitutes for a good, the more inelastic (less elastic) its demand. Topic: Elasticity, substitutes Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 13) Which is larger: The price elasticity of demand for food or the price elasticity of demand for oranges? Why? Answer: The price elasticity of demand for oranges is larger than the price elasticity of demand for food. The elasticity of demand for oranges is larger because there are many more substitutes for oranges (apples, grapefruit, lemons, and so forth) than there are substitutes for food. Topic: Elasticity, substitutes Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

14) Water is considered a necessity. So, is the demand for water elastic or inelastic? Answer: The demand for necessities is inelastic, so the demand for water is inelastic. Topic: Elasticity, necessities Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Reflective thinking 15) Studies have shown that the price elasticity of demand for necessities, such as food, are higher in developing countries and lower in developed countries. What is the reason for this difference in elasticity? Answer: One of the determinants of elasticity is the proportion of income spent on a good or service. The higher the proportion of income spent on a good, the larger the price elasticity of demand for that good. People in developing countries have low incomes and therefore spend a large part of it on food. For example, in Tanzania 62 percent of income is spent on food. On the other hand, in United States only 12 percent of income is spent on food. The price elasticity of demand for food therefore will be larger in developing countries as compared to developed countries. Topic: Elasticity, fraction of income Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication 16) What happens to the price elasticity of demand moving down along a downward-sloping, linear demand curve? Answer: Moving down along a downward-sloping, linear demand curve, the elasticity of demand falls in value. Demand changes from elastic to inelastic at the midpoint of the demand curve and then changes to inelastic as the quantity demanded increases moving along demand curve. Topic: Price elasticity of demand, linear demand curve Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication

17) What effect does a price hike have on the total revenue of the producers? Answer: The effect of a price hike on total revenue depends on the elasticity of demand. If the demand is elastic, then total revenue will decrease because the decrease in the quantity demanded will outweigh the effect of the higher price. If the demand is inelastic, then total revenue will increase. In this case, the decrease in the quantity demanded is proportionally less than the increase in price and so the higher price leads to increased total revenue. Finally, if the demand is unit elastic, then the higher price does not change the total revenue. The percentage decrease in the quantity demanded just equals the percentage increase in the price and so the two effects just offset each other. The total revenue does not change. Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Written and oral communication 18) The demand for oil is inelastic. So, does an increase in the price of oil mean an increase in total revenue or a decrease in total revenue for oil producers? Answer: Because the demand is inelastic, an increase in price increases the total revenue of the oil producers. Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 19) Anna owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand made chocolate. You, the economist, have calculated the elasticity of demand for chocolate in her town to be 2.5. If she wants to increase her total revenue, what advice will you give her? Answer: You should tell her to lower her price. Because demand is elastic, lowering the price will increase the total revenue. Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 20) You are the brand manager of Crest toothpaste and you observe that when you increase the price of Crest, your total revenue increases. How is that possible? Answer: The demand for Crest toothpaste must be inelastic, so that the percentage increase in price is greater than the percentage decrease in quantity demanded, thereby increasing the total revenue. Topic: Elasticity and total revenue Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 116 Copyright © 2021 Pearson Education, Inc.

21) Explain the total revenue test. Answer: The total revenue test estimates whether demand for the good is elastic, unit elastic or inelastic based on what happens to total revenue when the price of a good changes. If price and total revenue move in opposite directions, demand is elastic. If price and total revenue move in the same direction, demand is inelastic. If a price change does not change total revenue, demand is unit elastic. Topic: Total revenue test Skill: Level 1: Definition Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 22) If a decrease in price increases total revenue, what can you determine about the elasticity of demand for the good? Answer: If a decrease in price increases total revenue, the demand for the good is elastic, that is, the elasticity of demand exceeds 1.00. Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 23) "If the price falls and, as a result, the total revenue decreases, demand is elastic." Is the previous assertion correct? Answer: No, the assertion is incorrect. If the demand is elastic, a fall in price increases the quantity demanded enough so that total revenue increases. Topic: Total revenue test Skill: Level 2: Using definitions Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

24) Recently the governor of Vermont proposed that cigarette taxes in Vermont should be increased substantially, from 44 cents a pack to 66 cents a pack. He estimates that Vermont can raise $20 million in revenue from this tax hike. He also pointed out that the neighboring state of New Hampshire was considering an increase in cigarette taxes. a. How can it be that an increase in cigarette taxes will increase tax revenue, because, after all, a higher tax will increase cigarette prices and thereby decrease the quantity demanded? b. If New Hampshire chooses not to increase cigarette taxes, is it likely that Vermont can still raise $20 million in tax revenue? Why or why not? Explain Answer: a. The governor knows that cigarettes have an inelastic demand. If the price of cigarettes increases because of a tax, smokers will not decrease their consumption of cigarettes substantially. The percentage change in the quantity will be less than the percentage change in the price and the total tax revenue will increase. b. If New Hampshire does not increase its taxes, it is less likely that Vermont will be able to raise the $20 million in tax revenue. The reason is because for many people cigarettes from New Hampshire are a good substitute for cigarettes from Vermont. Thus many people from Vermont will buy their cigarettes in New Hampshire, thereby decreasing the total increase in tax revenue in Vermont. Topic: Addiction and elasticity Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 25) Suppose the price of flour increases from $0.80 to $1.00 a pound and the quantity demanded decreases from 100 pounds to 95 pounds. At the midpoint between these two prices, what is the price elasticity of demand for flour? Is the demand for flour elastic or inelastic? Answer: The price elasticity of demand is 0.23. (The price elasticity is calculated from [(100 pounds - 95 pounds) ÷ 97.5 pounds] ÷ [($0.80 - $1.00) ÷ $0.90] = 0.23.) Because the elasticity is less than one, the demand is inelastic. Topic: Elasticity formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

26) If the price of suntan lotion increases from $6 to $8 per bottle and quantity demanded decreases from 900,000 bottles to 845,000 bottles, at the midpoint between these two prices, what is the price elasticity of demand for suntan lotion? Answer: The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in the price). Use the midpoint method to calculate the percentages. Thus the percentage change in the quantity demanded = (900,000 - 845,000) ÷ (872,500) = 6.3 percent and the percentage change in the price is ($8 - $6) ÷ ($7) = 28.6 percent. Therefore the elasticity of demand equals . Topic: Elasticity formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 27) If the price of a magazine increases from $5 to $7 and the quantity demanded of the magazines decreases from 10 million per month to 8 million per month, at the midpoint between these two prices, what is the price elasticity of demand? Show your work. Is the demand elastic, inelastic, or unit elastic? Answer: The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in the price). Use the midpoint method to calculate the percentages. So the percentage change in the quantity demanded is (10 million - 8 million) ÷ (9 million) = 22 percent and the percentage change in the price is ($7 - $5) ÷ ($6) = 33 percent. Therefore the elasticity of demand equals (22 percent) ÷ (33 percent) = 0.67. Demand is inelastic because the price elasticity of demand is less than 1. Topic: Elasticity formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 28) Suppose the price elasticity of demand for bouquets of flowers is 4.0. You are charging $8 per bouquet. If you want to increase the quantity of bouquets you sell by 20 percent, what price should you charge? Answer: The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in price). Using the numbers in the problem gives 4.0 = (20 percent) ÷ (percentage change in price), where 20 percent is the desired increase in the quantity of bouquets demanded. Therefore, rearranging the formula shows that (percentage change in price) = (20 percent) ÷ 4.0 = 5 percent. In order to increase the quantity demanded, the price needs to be decreased, so the price needs to be decreased by 5 percent. Next, 5 percent of $8 is ($8) × (5 percent) = $0.40. Thus the price needs to be decreased to $7.60 per bouquet. Topic: Elasticity formula Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

29) The table above gives the demand schedule for a good. Find the price elasticity of demand at the midpoint between points A and B, between B and C, between C and D, and between D and E. Answer: The price elasticity of demand at the midpoint between points A and B is 1.80. Between points B and C, the elasticity of demand is 1.00. Between points C and D, the elasticity of demand is 0.56. And, between points D and E, the elasticity of demand is 0.27. Topic: Elasticity formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

30) The figure above shows the demand curve for pizza. Using the midpoint method between point A to point B, calculate the a. percentage change in price. b. percentage change in quantity demanded. c. price elasticity of demand at the midpoint between points A and B. Answer: a. Between points A and B, the price falls 40 percent. b. Between points A and B, the quantity increases 10 percent. c. The price elasticity of demand is 0.25. Topic: Elasticity formula Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

31) In the figure above, at which point (a, b, or c) along the linear demand curve illustrated would demand be a. most elastic? b. most inelastic? Answer: a. The demand would be most elastic at point a. b. The demand would be most inelastic at point c. Topic: Price elasticity of demand, linear demand curve Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

32) The table above gives the demand schedule for a good. What is the total revenue at point A? At point B? At point C? At point D? At point E? Answer: The total revenue is the price multiplied by the quantity demanded. Hence at point A, the total revenue is $4,000. At point B it is $4,800. At point C it is $4,800. At point D it is $4,000. And at point E it is $2,400. Topic: Total revenue Skill: Level 3: Using models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

33) The table above gives the demand schedule for museum visits. a. You, as the resident economist, have been given the task of maximizing the museum's total revenue. What admission price should you charge? b. What is the elasticity of demand at the midpoint between $6 and $4? c. Moving along the demand schedule from $10 to $8 to $6 and ultimately to $4, how does the price elasticity of demand change in size? Answer: a. The admission price you should charge is $6. The total number of visits will be 300,000 and total revenue is $6 × 300,000 = $1,800,000. No other price gives you this much total revenue. b. The price elasticity of demand equals [(300 visits - 400 visits) ÷ 350 visits] ÷ [($6 - $4) ÷ $5] = (0.29) ÷ (0.4) = 0.71. c. Moving along the demand schedule to lower prices, the elasticity of demand falls in size. Topic: Elasticity and total revenue Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

34) Steve sells hotdogs from a vending cart downtown. The table above shows his daily total revenues at four different prices. At the midpoint between which two prices is the demand for hotdogs a. elastic? b. unit elastic? c. inelastic? Answer: a. Steve's demand is elastic at the midpoint between $1.50 and $1.75. In this range, when Steve raises his price from $1.50 to $1.75 per hot dog, his total revenue falls, which means that the demand is elastic. b. Steve's demand is unit elastic at the midpoint between $1.25 and $1.50. In this range, when Steve raises his price from $1.25 to $1.50 per hot dog, his total revenue does not change, which means that the demand is unit elastic. c. Steve's demand is inelastic at the midpoint between $1.00 and $1.25. In this range, when Steve raises his price from $1.00 to $1.25 per hot dog, his total revenue rises, which means that the demand is inelastic. Topic: Total revenue test Skill: Level 4: Applying models Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking 35) Suppose bad weather decreases the quantity of wheat by 12 percent. If the price elasticity of demand for wheat is 0.6, how would the crop failure affect the price of wheat? Would the crop decrease benefit or harm wheat farmers? Answer: When the price elasticity of demand is 0.6, a 12 percent decrease in quantity brings about a 20 percent increase in the price. Wheat farmers' total revenue increases since the demand is inelastic because, with inelastic demand and taken as a group, wheat farmers' total revenue increases. However, the benefit is distributed unequally. Those farmers whose crop was destroyed because of the bad weather are harmed whereas those farmers whose crop was spared the bad weather, benefited. Topic: Farm revenue and elasticity Skill: Level 5: Critical thinking Section: Checkpoint 5.1 Status: Old AACSB: Analytical thinking

5.7 Essay: The Price Elasticity of Supply 1) What is the price elasticity of supply? List and briefly define three cases of the price elasticity of supply. Answer: The price elasticity of supply measures how responsive quantity supplied is to a change in the price of the good. Supply can be price elastic, if the percentage change in the quantity supplied exceeds the percentage change in the price, price inelastic, if the percentage change in the quantity supplied is less than the percentage change in the price, or unit elastic, if the percentage change in the quantity supplied equals the percentage change in the price. Topic: Elasticity of supply Skill: Level 1: Definition Section: Checkpoint 5.2 Status: Old AACSB: Written and oral communication 2) If the price elasticity of supply of corn is 3.12, then is the supply of corn elastic or inelastic? Answer: Because the price elasticity of supply exceeds one, the supply of corn is elastic. Topic: Elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 3) List factors that increase the price elasticity of supply. Answer: Factors that increase the price elasticity of supply are: ∙ The good has a constant or very gently rising opportunity cost of production. ∙ More time has passed since the price of the good changed. ∙ The good can be stored. Topic: Factors that influence the price elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Written and oral communication

4) How does elasticity of supply differ for a product that can be stored, compared to a product that cannot be stored? Answer: A product that can be stored can be withheld from the market for a time when the price falls and can be quickly supplied to the market from the inventory when the price rises. Hence the quantity supplied of the product can be quickly and markedly changed and so the supply is elastic. A product that cannot be stored, especially if it is perishable, cannot be withheld from the market when the price falls because it will spoil. In addition, when the price rises it cannot be supplied from the inventory because there is no inventory. Hence the quantity supplied of the product that cannot be stored cannot change much and is therefore less elastic. Topic: Elasticity, storage Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Written and oral communication 5) Natural gas is difficult to store. What implication does this fact have for the elasticity of supply of natural gas? Answer: Because natural gas is difficult to store, the supply of natural gas is inelastic. With few storage facilities, it is very difficult (at least in the short run) to increase the quantity supplied by much even when prices rise substantially. Topic: Elasticity, storage Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 6) Is supply more elastic or less elastic as more time passes after a price change? Explain your answer. Answer: Supply becomes elastic as more time passes after a price change. Consider the case of an increase in price. As more time passes, producers have time to gather more resources, such as building additional factories, and to implement new production techniques. Hence as time passes, the quantity supplied increases. Topic: Elasticity, time since the price changed Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Reflective thinking 7) If the price increases by 20 percent and the quantity supplied increases by 40 percent, what does the elasticity of supply equal? Answer: The price elasticity of supply = (percentage change in the quantity supplied) ÷ (percentage change in price) = (40 percent) ÷ (20 percent) = 2.00. Topic: Price elasticity of supply, formula Skill: Level 2: Using definitions Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 126 Copyright © 2021 Pearson Education, Inc.

8) Suppose the quantity supplied of computers increases from 2 million to 4 million units as the price of a computer increases from $600 to $700. At the midpoint between these two prices, what does the price elasticity of supply equal? Answer: The price elasticity of supply = (percentage change in the quantity supplied) ÷ (percentage change in the price). Use the midpoint method to calculate the percentages. Thus the percentage change in the quantity supplied = (4,000,000 - 2,000,000) ÷ (3,000,000) = 66.7 percent and the percentage change in the price is ($700 - $600) ÷ ($650) = 15.4 percent. Therefore the elasticity of supply equals (66.7 percent) ÷ (15.4 percent) = 4.33. Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

9) The table above gives the supply schedule for a product. What is the price elasticity of supply at the midpoint between points A and B, between B and C, between C and D, and between D and E? Answer: At the midpoint between A and B, the elasticity of supply is 0.82. Between B and C, the elasticity of supply is 0.78. Between C and D, the elasticity of supply is 0.71. Between D and E, the elasticity of supply is 0.60. Topic: Price elasticity of supply, formula Skill: Level 3: Using models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking

10) June makes holiday wreaths and sells them during the holiday season. The figure above shows her supply curve of wreaths per week. Use the midpoint method in this problem. a. Calculate the percentage change in quantity between points A and B. b. Calculate the percentage change in price between points A and B. c. Calculate the price elasticity of supply at the midpoint between points A and B. Answer: a. The percentage change in quantity is 20 percent. b. The percentage change in price is 20 percent. c. The price elasticity of supply is 1.0. Topic: Price elasticity of supply, formula Skill: Level 4: Applying models Section: Checkpoint 5.2 Status: Old AACSB: Analytical thinking 5.8 Essay: Cross Elasticity and Income Elasticity 1) The price elasticity of demand is always positive, as is the price elasticity of supply. Is the cross elasticity of demand always positive? Explain your answer. Answer: No, the cross elasticity of demand is not always positive. The cross elasticity of demand is positive for goods that are substitutes and negative for goods that are complements. Hence the sign of the cross elasticity of demand indicates whether the goods are substitutes or complements. Topic: Cross elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Written and oral communication

2) Explain why the cross elasticity of demand for substitute goods is positive and the cross elasticity of demand for complements is negative. Answer: The formula for the cross elasticity of demand is the percentage change in quantity demanded of good A divided by the percentage change in price of another good, B. Consider the case in which A and B are substitutes. In this case, when the price of B falls, the quantity of A demanded decreases and when the price of B rises, the quantity of A demanded increases. Because the quantity demanded of product A is in the numerator, then the decrease in the quantity of A demanded when the price of the other product falls means, that the cross elasticity will be positive. (There is a negative number in the numerator and also a negative number in the denominator, so the fraction, the cross elasticity, is positive.) For a price increase, there are positive numbers in both the numerator and denominator, so again the fraction is positive. In either case, the result will be a positive number, that is, the cross elasticity of demand is positive. Next, consider the case in which A and B are complements. In this case, an increase in the price of B decreases the quantity demanded of A and a decrease in the price of B increases the quantity demanded of A. Here, the change in quantity in the numerator always has the opposite sign from the change in the price in the denominator, so the resulting cross elasticity of demand will be negative. Topic: Cross elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Written and oral communication 3) If the cross elasticity of demand between two goods is negative, are the goods substitutes or complements? Answer: If the cross elasticity of demand is negative, then the goods are complements. Topic: Cross elasticity of demand, complements Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking 4) If the cross elasticity of demand between peanut butter and milk is -1.11, then are peanut butter and milk substitutes or complements? Answer: Because the cross elasticity of demand is negative, peanut butter and milk are complements. Topic: Cross elasticity of demand, complements Skill: Level 1: Definition Section: Checkpoint 5.3 Status: Old AACSB: Reflective thinking

5) How are the cross elasticity of demand and income elasticity of demand similar and how are they different from the price elasticity of demand? Answer: The cross and income elasticities are similar to the price elasticity of demand because all examine how strongly demanders respond to a change in a relevant factor. The price elasticity of demand examines how strongly demanders respond to a change in the price of the product. The cross elasticity of demand studies how strongly demanders respond to a change in the price of a related product. And the income elasticity of demand examines how strongly demanders respond to a change in income. The formulas for all three elasticities also are similar. All three use percentage changes and all three divide the percentage change in the quantity demanded of the good by the percentage change in the relevant factor. The elasticities also differ. For instance, as outlined above, all three concentrate on a different factor: the good's price (for the price elasticity of demand); the price of a related good (for the cross elasticity of demand); and income (for the income elasticity of demand.) The price elasticity of demand is always positive (because we use the magnitudes of the percentage changes or, equivalently, we take the absolute value of the percentage changes) whereas the cross and income elasticities of demand can be either positive or negative. Topic: Cross elasticity of demand and income elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Written and oral communication 6) If the income elasticity of demand for a Miami Dolphin season ticket is 2.34, then are Dolphin season tickets a normal or an inferior good? Answer: Because the income elasticity of demand is positive, Dolphin season tickets are a normal good. Topic: Income elasticity of demand, normal good Skill: Level 1: Definition Section: Checkpoint 5.3 Status: Old AACSB: Written and oral communication 7) The income elasticity of demand for store brands of soda (that is, non-name brands) is negative. What does this fact indicate about consumers' perceptions about the store brands? Answer: The negative income elasticity indicates that the store brands of soda are considered by many consumers to be an inferior good. Hence as income increases, consumption of these sodas decreases as consumers opt for name brand sodas, such as Pepsi and Coke. Topic: Income elasticity of demand, inferior good Skill: Level 2: Using definitions Section: Checkpoint 5.3 Status: Old AACSB: Written and oral communication

8) When the price of Ford pickup trucks rises from $18,000 to $19,000, the quantity of Chevy trucks demanded increases from 112,000 to 144,000. At the midpoint between these two prices, what does the cross elasticity of demand between Ford and Chevy trucks equal? Answer: In this case, the cross elasticity of demand = (percentage change in the quantity of Chevy trucks demanded) ÷ (percentage change in the price of a Ford truck). Use the midpoint method to calculate the percentages. Thus the percentage change in the quantity of Chevy trucks demanded = (144,000 - 112,000) ÷ (128,000) = 25 percent and the percentage change in the price of a Ford truck is ($19,000 - $18,000) ÷ ($18,500) = 5.4 percent. Thus the cross elasticity of demand equals (25 percent) ÷ (5.4 percent) = 4.625. Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 9) When the price of bananas rises 2 percent, the quantity demanded of peanut butter falls 4 percent. a. What is the cross elasticity of demand between these two goods? b. How are these goods related? c. If the price of bananas rises, how will that affect the demand curve for peanut butter? Answer: a. The cross elasticity of demand equals -2. b. Because the cross elasticity of demand is negative, the cross elasticity indicates that the two goods are complements. c. If the price of bananas rises, the demand for peanut butter decreases and the demand curve for peanut butter shifts leftward. Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 10) Consider two goods: peanut butter and jelly. If the price of jelly increases from $2 a jar to $3 per jar and the quantity demanded of peanut butter decreases from 50 jars to 45 jars, at the midpoint between these two prices what is the cross elasticity of demand? Are the goods substitutes or complements? Answer: The cross elasticity of demand equals -0.275. The value is negative so the goods are complements. Topic: Cross elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

11) A 10 percent increase in income brings about a 15 percent decrease in the demand for a good. What is the income elasticity of demand and is the good a normal good or an inferior good? Answer: The income elasticity of demand is -1.5. The good is an inferior good. Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 12) If income increases from $50,000 to $60,000 while the demand for a good increases from 100 units to 125 units, what is the income elasticity of demand? Is the good a normal good or an inferior good? Answer: The income elasticity equals 1.22. Because the income elasticity of demand is positive, the good is a normal good. Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking 13) The income elasticity of demand for movies in the United States is 3.41. If people's incomes decrease by 1 percent, what is the decrease in the quantity of movies demanded? Answer: The income elasticity of demand = (percentage change in quantity demanded) ÷ (percentage change in income). Using the numbers in the problem gives 3.41 = (percentage change in quantity demanded) ÷ (1 percent). Rearranging the formula shows (percentage change in quantity demanded) = (1 percent) × 3.41 = 3.41 percent. Therefore the quantity of movies demanded decreases by 3.41 percent. Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

14) The table above gives Sharon's demand for ground beef at two different income levels. Use the midpoint method in this problem. a. What is the percentage change in Sharon's income? b. What is the percentage change in the quantity demanded? c. What is Sharon's income elasticity of demand for ground beef? d. Is ground beef a normal or an inferior good for Sharon? Answer: a. The percentage change in Sharon's income is 20 percent. b. The percentage change in the quantity of ground beef demanded is 80 percent. c. Sharon's income elasticity of demand for ground beef is 4.00. d. Because the income elasticity is positive, ground beef is a normal good for Sharon. Topic: Income elasticity of demand, formula Skill: Level 3: Using models Section: Checkpoint 5.3 Status: Old AACSB: Analytical thinking

Foundations of Microeconomics, 9e (Bade) Chapter 6 Efficiency and Fairness of Markets 6.1 Allocation Methods and Efficiency 1) Walmart has a limited number of "Black Friday" (the day-after Thanksgiving Day) special items on sale at prices well below their typical price. Walmart opens at 10 PM on Thanksgiving. Walmart is using a ________ allocation method for these items. A) first-come, first-served B) market price C) contest D) majority rule E) command Answer: A Topic: Allocation methods Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 2) A city must decide to pay for its workers pension plan. If the city puts the decision up for a vote by citizens, resource use will be determined by a ________ method. A) majority rule B) first-come, first-served C) sharing equally D) command E) force Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Application of knowledge

3) Drivers in Atlanta can choose to use toll lanes on I-75. The toll changes during the day depending on congestion and traffic flow. Toll lane resources are determined using the ________ method. A) first-come, first-served B) sharing equally C) contest D) command E) market price Answer: E Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Application of knowledge 4) A university has a speakers series each semester. Students line up early in order to get a limited number of free tickets to hear the speaker's program. The seats are allocated using the ________ method. A) command B) market price C) first-come, first-served D) contest E) sharing equally Answer: C Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking 5) Often people trying to withdraw money from their bank must wait in line, which reflects a ________ allocation method. A) first-come, first-served B) market price C) contest D) majority rule E) command Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

6) University of Colorado reserves 5,000 free tickets to each home football game for students. Students must stand in line to receive their ticket. Football tickets are allocated through which method? A) market price B) sharing equally C) personal characteristics D) first-come, first-served E) force Answer: D Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 7) Auditors working for a large accounting firm are often away from the office. When they are in the office, they are allowed to use any desk that is available. Which method is used to allocate desks? A) lottery B) first-come, first-served C) command D) contest E) sharing equally Answer: B Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 8) When you arrive at Olive Garden with your date, you have to wait 25 minutes for a table. Olive Garden is allocating tables using which method? A) market price B) first-come, first-served C) command D) personal characteristics E) sharing equally Answer: B Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

9) Mandy saved her allowance to buy a 12 pack of cream soda. When Mandy's brother saw the soda, he took four. Sodas were allocated between Mandy and her brother through A) force. B) majority rule. C) first-come, first-served. D) sharing equally. E) personal characteristics. Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 10) Which of the following situations describing a resource allocation method most resembles the force method? A) Seventy percent of Austin's chess club wanted to purchase new chess sets and thirty percent did not. The club purchased the sets. B) Lattes are sold at Starbucks. C) Food from the Weld County Food Bank is distributed to families in need. D) Mandy saved her allowance to buy a 12 pack of cream soda. When Mandy's brother saw the soda, he took four. E) Jose works at Intel. His manager tells him what work needs to be completed each month. Answer: D Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 11) Honda will sell its vehicles to anyone who wants to and can buy one. Honda is using a ________ allocation method. A) first-come, first-served B) market price C) contest D) majority rule E) command Answer: B Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

12) The resource allocation method used for the online auctions on eBay is A) market price. B) lottery. C) contest. D) first-come, first-served. E) sharing equally. Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 13) Lattes at Starbucks are allocated to individuals in society through what type of method? A) lottery B) contest C) sharing equally D) market price E) personal characteristics Answer: D Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 14) Which of the following situations describing a resource allocation method most resembles the market price method? A) Food from the Weld County Food Bank is distributed to families in need. B) Lattes are sold at Starbucks. C) Jose works at Intel. His manager tells him what work needs to be completed each month. D) Matt's mother had the rule that whoever cuts the cake chooses their slice last. E) Seventy percent of Austin's chess club wanted to purchase new chess sets and thirty percent did not. The club purchased the sets. Answer: B Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

15) If a landlord will rent an apartment only to married couples, the landlord is using a ________ allocation method. A) majority rule B) market price C) contest D) personal characteristics E) command Answer: D Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 16) Canned milk was only rationed to babies and small children during World War II. This rationing was an example of allocation by A) market price. B) first-come, first-served. C) sharing equally. D) force. E) personal characteristics. Answer: E Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 17) Although Jack and Vanessa were equally qualified, Jack was promoted to manager instead of Vanessa because the president of the company thought that the other employees would not respect a female manager. The resource, the management position, was allocated in what manner? A) sharing equally B) contest C) personal characteristics D) command E) lottery Answer: C Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

18) Allocating resources by the order of someone in authority is a ________ allocation method. A) first-come, first-served B) market price C) contest D) majority rule E) command Answer: E Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 19) Jose works at Intel. His manager tells him what work needs to be completed each month. Jose's resource, labor, is allocated with which of the following methods? A) command B) majority rule C) force D) personal characteristics E) lottery Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 20) The chair of the Department of Economics at Colorado State University decided that office space is for tenured faculty and that graduate students are required to share cubicles. What method is used to allocate office space? A) lottery B) majority rule C) command D) first-come, first-served E) sharing equally Answer: C Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

21) If you split your dessert with your date, you are using a ________ allocation method. A) first-come, first-served B) sharing equally C) contest D) personal characteristics E) command Answer: B Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 22) When the city of Fresno holds a referendum to determine if taxes will be raised to pay for road repairs, the city is using a ________ allocation method. A) majority rule B) market price C) contest D) personal characteristics E) command Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 23) Seventy percent of Austin's chess club wanted to purchase new chess sets and thirty percent did not. The club purchased the sets. Which method of allocation best describes the choice to purchase the sets? A) force B) sharing equally C) command D) majority rule E) lottery Answer: D Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

24) Which of the following situations describing a resource allocation method most resembles the majority rule method? A) Seventy percent of Austin's chess club wanted to purchase new chess sets and thirty percent did not. The club purchased the sets. B) Lattes are sold at Starbucks. C) Food from the Weld County Food Bank is distributed to families in need. D) Jose works at Intel. His manager tells him what work needs to be completed each month. E) Matt's mother had the rule that whoever cuts the cake chooses their slice last. Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 25) In 2020, tickets to a Presidential Town Hall meeting were distributed to individuals through a random selection of those who registered on a website. The tickets were allocated by which method? A) lottery B) majority rule C) contest D) first-come, first-served E) personal characteristics Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 26) The Ironman Hawaii randomly draws a few hundred slots from thousands of applicants for the race. The method of allocation for the opportunity to participate in the race is ________, and the method of allocation for determining the winner of the race is ________. A) lottery; contest B) contest; lottery C) first-come, first-served; lottery D) lottery; first-come, first-served E) contest; command Answer: A Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

27) The table above shows the production possibilities for an economy. When the economy produces a combination of 900 books and 50 loaves of bread A) production efficiency occurs because resources are not overused. B) allocative efficiency is achieved because both goods are produced. C) production efficiency is not achieved. D) allocative and production efficiency are both achieved. E) production efficiency is not achieved but allocative efficiency might be achieved. Answer: C Topic: Production efficiency Skill: Level 4: Applying models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking 28) Resource use is allocative efficient A) when it is not possible to produce more of one good. B) when we produce goods and services that we value most highly. C) when most resources are fully employed. D) at any point on the PPF. E) at all points either on or within the PPF because all these production points are attainable. Answer: B Topic: Allocative efficiency Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 29) Allocative efficiency refers to A) producing the goods and services most highly valued. B) using the least amount of labor to produce output. C) producing the maximum possible amount of output. D) obtaining the least output with the most inputs. E) producing at any point on the PPF. Answer: A Topic: Allocative efficiency Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 10 Copyright © 2021 Pearson Education, Inc.

30) When allocative efficiency occurs A) an economy produces the goods and services most highly valued. B) marginal benefit exceeds marginal cost by some amount. C) technology must be increasing. D) we can simultaneously produce more of all goods. E) marginal benefit exceeds marginal cost by as much as possible. Answer: A Topic: Allocative efficiency Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 31) To achieve allocative efficiency, an economy A) must produce ON its PPF. B) does not necessarily need to be production efficient. C) must have increases in technology. D) might leave some resources unemployed. E) can produce either on or within its PPF. Answer: A Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 32) If an economy is allocatively efficient, it must be producing A) beyond its production possibilities frontier. B) inside its production possibilities frontier. C) on its production possibilities frontier. D) the goods and services that are the most expensive. E) the goods and services that are the least expensive to produce. Answer: C Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

33) When a society achieves allocative efficiency, it A) is not achieving production efficiency. B) is producing that combination of goods and services that society values most highly. C) might or it might not be producing at a point on society's PPF. D) is producing a combination of goods and services whose marginal cost exceeds their marginal benefit. E) is producing the combination of goods and services for which marginal benefit exceeds marginal cost by as much as possible. Answer: B Topic: Allocative efficiency Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 34) To determine allocative efficiency, the ________ used to determine what is possible to produce and the ________ used to determine the allocatively efficient point. A) PPF is; marginal benefit and marginal cost curves are B) marginal benefit and marginal cost curves are; marginal benefit and marginal cost curves are C) PPF; supply curve D) marginal benefit and marginal cost curves are; PPF E) marginal benefit curve; demand curve Answer: A Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Application of knowledge 35) The tollway authority must decide the efficient allocation of resources to build toll roads. To determine the efficient allocation of resources, the tollway authority must compare A) the PPF to the marginal benefit curve. B) marginal cost to marginal benefit. C) the demand curve to the PPF. D) command method to the market price method. E) the force method to the command method. Answer: B Topic: Allocation of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Application of knowledge

36) Marginal benefit is the benefit that a person receives from consuming A) a good or service until the person has grown tired of it. B) only goods and services that are free. C) one more unit of a good or service. D) all of the possible units of a good or service that can be consumed. E) one more unit of a good and is equal to the cost of producing the unit of the good. Answer: C Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 37) Marginal benefit is the A) total benefit we receive from consuming a good or service. B) additional benefit we receive from consuming one more unit of a good or service. C) minimum amount of other goods or services we are willing to give up. D) opportunities given up to get one more unit of a good or service. E) the benefit we receive from consuming one more unit of a good or service minus the cost of the producing one more unit of the good or service. Answer: B Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 38) The marginal benefit of a taco is measured by A) the price of the taco. B) the amount of another good a person is willing to give up to get one more taco. C) the amount of another good a person must give up to get one more taco. D) a point on the PPF. E) the opportunity cost of producing another taco. Answer: B Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

39) Marginal benefit A) increases as more of a good is consumed. B) decreases as more of a good is consumed. C) is the total benefit from all units consumed. D) is constant as more of a good is consumed. E) is the gain to the producer of producing and selling one more unit of a good. Answer: B Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 40) As more of a good is consumed, the marginal benefit of the good A) increases. B) decreases. C) remains constant. D) is unpredictable. E) first decreases and then increases. Answer: B Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 41) The principle of decreasing marginal benefit explains why the marginal benefit curve A) is upward sloping. B) has an infinite slope. C) is vertical. D) is downward sloping. E) is horizontal. Answer: D Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

42) In general, the marginal benefit curve A) has a positive slope. B) has a negative slope. C) is horizontal. D) is vertical. E) is concave. Answer: B Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 43) The point that each glass of lemonade consumed on a hot day brings lower and lower levels of satisfaction is known as the principle of A) total benefits. B) increasing marginal cost. C) decreasing marginal benefit. D) increasing opportunity cost. E) decreasing marginal price. Answer: C Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 44) The marginal benefit of the first hotdog consumed is ________ the marginal benefit of the fifth hotdog consumed. A) equal to B) less than C) greater than D) the inverse of E) equal to 5 times Answer: C Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

45) Suppose Jennifer derives $100 in marginal benefits from her first skiing trip and $80 from her third trip. Her marginal benefit from her second trip is likely to be A) more than $100. B) between $100 and $80. C) between $79 and $51. D) less than $51. E) some amount that cannot be calculated without additional information. Answer: B Topic: Marginal benefit Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking 46) Marginal benefit curves A) have positive slopes. B) have negative slopes. C) are horizontal lines. D) are vertical lines. E) are upside-down U-shaped curves. Answer: B Topic: Marginal benefit Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 47) Marginal cost equals A) the profitability derived from producing another unit of output. B) all the opportunity cost of producing the amount of output. C) or exceeds the marginal benefit. D) productive efficiency. E) the opportunity cost of producing one more unit of output. Answer: E Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

48) Marginal cost is the opportunity cost of producing A) every unit possible. B) zero units. C) the first unit and only the first unit. D) one more unit of a good or service. E) None of the above answers is correct. Answer: D Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 49) Moving ________ along the marginal cost curve, the ________. A) upward; opportunity cost of one more unit increases B) upward; marginal cost decreases C) downward; marginal cost increases D) upward; opportunity cost of one more unit does not change E) downward; opportunity cost of one more unit does not change Answer: A Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 50) The marginal cost of a good or service A) can be calculated from the marginal benefit of that good or service. B) decreases as more of the good or service is produced. C) can be derived from the production possibilities frontier. D) graphs as a positively sloped curve, so it cannot be derived from the production possibilities frontier, which is downward sloping. E) None of the above answers is correct. Answer: C Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

51) The marginal cost curves slope upward because of the principle of A) decreasing marginal benefits. B) increasing marginal cost. C) increasing marginal benefits. D) decreasing marginal cost. E) decreasing total benefit. Answer: B Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 52) The marginal cost curve is A) downward sloping to reflect the bowed out PPF. B) downward sloping as marginal benefits increase. C) upward sloping because marginal cost falls as more of a good or service is produced. D) upward sloping to reflect the increasing opportunity cost of producing one more unit. E) U-shaped to reflect the bowed out PPF. Answer: D Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 53) As more of a good is consumed, marginal benefit ________ and as more of a good is produced, marginal cost ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: C Topic: Marginal benefit, marginal cost Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

54) Which of the following is necessary for allocative efficiency to be achieved? A) Marginal benefit must be maximized. B) Marginal cost must be minimized. C) Marginal benefit must equal marginal cost. D) The difference between marginal benefit and marginal cost must be maximized. E) Production must be at a point inside the production possibilities frontier. Answer: C Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 55) In order to efficiently allocate goods and services, we have to compare A) total cost to marginal benefit. B) total cost to price. C) marginal benefit to price. D) marginal cost to marginal benefit. E) price to marginal cost. Answer: D Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 56) To achieve allocative efficiency, one must compare the A) marginal cost of a good to its opportunity cost. B) opportunity cost to the attainable point on the production possibilities frontier. C) marginal benefit of a good to its marginal cost. D) marginal cost to the production efficiency cost. E) point of production efficiency to the point of allocative efficiency. Answer: C Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

57) We allocate resources efficiently when A) marginal benefit is equal to marginal cost. B) marginal benefit is greater than marginal cost by any amount. C) marginal cost is greater than marginal benefit. D) total benefit is greater than total cost. E) marginal benefit is greater than marginal cost by as much as possible. Answer: A Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 58) Allocative efficiency is achieved when the marginal benefit of a good A) exceeds the marginal cost regardless of how much the difference is. B) is less than its marginal cost. C) is equal to its marginal cost. D) equals zero. E) exceeds the marginal cost by as much as possible. Answer: C Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 59) Allocative efficiency is achieved when the production is such that A) the marginal benefit exceeds the marginal cost by as much as possible. B) marginal cost equals zero. C) marginal benefit is equal to marginal cost. D) the production point is on the PPF. E) None of the above is true. Answer: C Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

60) All points on the production possibilities frontier A) are production inefficient. B) achieve allocative efficiency. C) are production efficient but only one point achieves allocative efficiency. D) are allocatively efficient but only one point achieves production efficiency. E) are allocatively inefficient. Answer: C Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 61) When the marginal benefit and marginal cost of sodas are equal, then A) the production of sodas might be allocatively efficient but it is definitely production inefficient. B) the allocatively inefficient amount of sodas is being produced. C) more sodas should be produced to reach the allocatively efficient quantity. D) fewer sodas should be produced to reach the allocatively efficient quantity. E) the allocatively efficient amount of sodas is being produced. Answer: E Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking 62) When the marginal cost of producing a bike is greater than the marginal benefit of the bike, for resource use to be allocatively efficient A) more bikes should be produced. B) fewer bikes should be produced. C) no more and no fewer bikes should be produced. D) it must be determined if the production of bikes can be increased. E) people must be educated to demand more bikes. Answer: B Topic: Efficient use of resources Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

63) For resource use to be allocatively efficient, when the marginal benefit of a slice of pizza exceeds the marginal cost A) more slices of pizza should be produced. B) fewer slices of pizza should be produced. C) no more slices of pizza should be produced. D) allocative efficiency is reached ONLY IF the marginal benefit exceeds the marginal cost by as much as possible. E) None of the above answers is correct. Answer: A Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking 64) If the difference between the marginal benefit and the marginal cost of a good is as large as possible A) resources are being used with maximum efficiency. B) resources would create more value producing other goods and hence the production of this good should be decreased. C) more of the good should be produced. D) allocative efficiency has been attained. E) Both answers A and D are correct. Answer: C Topic: Efficient use of resources Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking 65) Any point on the production possibility frontier is A) attainable and might be allocatively inefficient. B) attainable and must be allocatively efficient. C) less production efficient than a point in the interior of the PPF. D) always allocatively efficient but might or might not be production efficient. E) always production efficient and always allocatively efficient. Answer: A Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

66) Which of the following are the rules for finding the point of allocative efficiency? A) Produce on the PPF and then produce where the marginal benefit and marginal cost are as large as possible. B) Produce on the PPF and then produce where marginal benefit equals marginal cost. C) Produce on the PPF and then produce where marginal benefit and marginal cost are constant. D) Produce on the PPF and then produce where the marginal benefit exceeds marginal cost by as much as possible. E) Produce anywhere on the PPF. Answer: B Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 67) Allocative efficiency occurs A) anywhere inside or on the production possibilities frontier. B) when the total cost of production is minimized. C) at all points on the production possibilities frontier. D) at only one point on the production possibilities frontier. E) at the points where the production possibilities frontier crosses the horizontal or vertical axis. Answer: D Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 68) When society produces the combination of goods and services on the PPF that it values the most highly, society has A) achieved only production efficiency and definitely not allocative efficiency. B) achieved only allocative efficiency definitely not production efficiency. C) achieved both production efficiency and allocative efficiency. D) achieved a free lunch. E) perhaps achieved production efficiency and has perhaps achieved allocative efficiency. Answer: C Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

69) To determine how much of a good to produce to achieve allocative efficiency, we A) construct a production possibilities frontier and choose the midpoint. B) construct a production possibilities frontier and choose any point on it. C) must produce on the PPF and at the point where the marginal benefit and marginal cost of the good are equal. D) must produce on the PPF and at the point where the marginal benefit exceeds by any amount the marginal cost of the good. E) must produce on the PPF and at the point where the marginal benefit exceeds by as much as possible the marginal cost of the good. Answer: C Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 70) Suppose the nation is producing at a point on its PPF. If the marginal cost of producing one more computer is greater than the marginal benefit, the nation is producing A) too few computers to be allocatively efficient. B) too many computers to be allocatively efficient. C) the correct number of computers to be allocatively efficient. D) at the point of allocative efficiency. E) More information is needed to determine if the nation is or is not producing at the allocatively efficient point. Answer: B Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

71) The figure above shows Kaley's marginal benefit from swimming with manatees and Scott's marginal cost of providing manatee swimming tours. At 1 manatee swim per week, Kaley's marginal benefit is ________ and Scott's marginal cost is ________. A) $40; $10 B) $40; $40 C) $90; $50 D) None of the above answers is correct. Answer: A Topic: Efficient use of resources Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking 72) The figure above shows Kaley's marginal benefit from swimming with manatees and Scott's marginal cost of providing manatee swimming tours. If Scott offers two swim tours per week, he incurs a marginal cost of A) more than $30. B) $30. C) $20. D) $10. E) $2. Answer: C Topic: Efficient use of resources Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking 25 Copyright © 2021 Pearson Education, Inc.

73) The figure above shows Kaley's marginal benefit from swimming with manatees and Scott's marginal cost of providing manatee swimming tours. For Kaley and Scott, allocative efficiency is achieved at what point? A) A B) B C) C D) D E) Either point A or point D Answer: C Topic: Efficient use of resources Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

74) The figure above shows a nation's production possibilities frontier. If the marginal cost equals the marginal benefit at point A when 4 million pizzas are produced A) allocative efficiency is achieved but production efficiency is not achieved because there are no tacos being produced. B) both allocative and production efficiency are achieved. C) production efficiency is achieved but allocative efficiency is not achieved because there are no tacos being produced. D) production efficiency is achieved but allocative efficiency is not achieved because the number of tacos produced is at its absolute maximum. E) neither allocative nor production efficiency has been achieved. Answer: B Topic: Efficient use of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking 26 Copyright © 2021 Pearson Education, Inc.

75) If a landlord will rent an apartment only to married couples over 30 years old, the landlord is allocating resources using a ________ allocation method. A) majority rule B) market price C) contest D) personal characteristics E) command Answer: D Topic: Allocation of resources Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 76) Allocative efficiency occurs when A) the most highly valued goods and services are produced. B) all citizens have equal access to goods and services. C) the environment is protected at all cost. D) goods and services are free. E) production takes place at any point on the PPF. Answer: A Topic: Efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 77) Marginal benefit equals the A) benefit that a person receives from consuming another unit of a good. B) additional efficiency from producing another unit of a good. C) increase in profit from producing another unit of a good. D) cost of producing another unit of a good. E) total benefit from consuming all the units of the good or service. Answer: A Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking

78) In general, the marginal cost curve A) has a positive slope. B) has a negative slope. C) is horizontal. D) is vertical. E) is U-shaped. Answer: A Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 79) Allocative efficiency is achieved when the marginal benefit of a good A) exceeds the marginal cost by as much as possible. B) exceeds the marginal cost, but not by as much as possible. C) is less than the marginal cost. D) equals the marginal cost. E) equals zero. Answer: D Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Reflective thinking 6.2 Value, Price, and Consumer Surplus 1) Which describes the economic meanings of value and price? A) Value is exchange worth minus marginal benefit and price is the dollars that must be paid. B) Value is the marginal benefit obtained and price is the dollars that must be paid. C) Value refers to the gain the producer gets from the good or service and price refers to the gain the consumer gets from the good or service. D) Value refers to the dollars that must be paid and price refers to the cost of producing the good. E) They are the same and both mean the dollars that must be paid. Answer: B Topic: Value Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

2) The value of a slice of pizza to a consumer is equal to A) its marginal benefit. B) the maximum price the consumer is willing to pay. C) the consumer surplus. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Value Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 3) To an economist, "value" is the same as A) marginal cost. B) consumer surplus. C) the minimum price that people are willing to pay for another unit of the good. D) marginal benefit. E) total surplus. Answer: D Topic: Value Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 4) Which of the following statements is correct? i. The demand curve shows the maximum price people are willing to pay for a given quantity of the good. ii. The maximum price a consumer is willing to pay for an additional unit is the marginal benefit of that unit. iii. Value is what a consumer receives and price is what a consumer pays. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Value Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

5) Value and price can be compared by noting that A) they are the same thing. B) value is always greater than price. C) value is what we must pay while price is what we are willing to pay. D) price is what we must pay and value is what we are willing to pay. E) value is what the seller receives when we buy a good, and price is what we must pay when we buy a good. Answer: D Topic: Value Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 6) The maximum amount of other goods and services that people are willing to give up in order to get one more unit of a good is defined as the good's A) marginal benefit. B) total benefit. C) marginal cost. D) total cost. E) price. Answer: A Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 7) The marginal benefit of each additional unit of a good consumed A) increases as more is consumed. B) is always equal to its marginal cost. C) decreases as more is consumed. D) will maximize consumer surplus. E) is equal to the deadweight loss if the unit of the good is not produced. Answer: C Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

8) The phrase "decreasing marginal benefit" means that A) the more you consume of the product, the less total benefit you derive. B) the marginal cost will be increasing as you consume more of a good. C) each additional unit of a good you consume gives you less additional benefit than the previous unit. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: C Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 9) What must be TRUE for a consumer to buy a good or service? A) The price must be equal to or less than the marginal benefit. B) The total benefit received must equal the total spent to buy the good or service. C) The consumer must be able to obtain some consumer surplus. D) The consumer must not be able to produce the product. E) The price must be equal to or greater than the marginal benefit. Answer: A Topic: Demand curve and marginal benefit curve Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 10) Mark loves ice cream. At any point in time, he will buy an additional ice cream cone if A) the marginal benefit from it exceeds the price. B) the marginal benefit from it is zero. C) his willingness to pay is less than the price. D) there is no deadweight loss produced by his purchase of a cone. E) None of the above answers is correct. Answer: A Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

11) A point on the demand curve shows the A) price and the corresponding quantity demanded. B) marginal benefit from that unit. C) marginal cost to the seller of producing the unit. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Demand curve and marginal benefit curve Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 12) A point on the demand curve shows the A) minimum price that people are willing to pay for another unit of a good. B) dollars' worth of other goods that people must sacrifice to consume another unit of the good. C) maximum price that people are willing to pay for another unit of a good. D) consumer surplus a person gains from consuming a unit of a good. E) marginal benefit minus the consumer surplus from consuming another unit of a good. Answer: C Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 13) The demand curve is also the A) total cost curve. B) total benefit curve. C) marginal cost curve. D) marginal benefit curve. E) marginal deadweight cost curve. Answer: D Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

14) A demand curve can be interpreted as A) a marginal benefit curve. B) a total benefit curve. C) an average benefit curve. D) a marginal cost curve. E) None of the above answers is correct. Answer: A Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 15) Which of the following is TRUE regarding a demand curve? i. The demand curve is also the marginal benefit curve. ii. The demand curve shows the dollars' worth of other goods that people are willing to forgo to consume another unit of the good. iii. The demand curve shows the maximum price that people are willing to pay for another unit of a good. A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) i only Answer: D Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 16) The marginal benefit from buying a particular unit of a good A) is the amount paid for the unit plus the consumer surplus of the unit. B) increases as market price increases. C) is the difference between the amount paid for the unit and the market price of the unit. D) is the difference between the total benefit of the unit and the marginal cost of producing that unit. E) None of the above answers is correct. Answer: A Topic: Total benefit Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

17) Consumers' total benefit from consuming a good is equal to the A) total amount spent on the good. B) consumer surplus on the quantity purchased. C) consumer surplus plus the total amount spent on the good. D) consumer surplus minus the total amount spent on the good. E) total amount spent on the good divided by the number of units purchased. Answer: C Topic: Total benefit Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 18) Samantha was willing to pay $10 for a hamburger because she was hungry but she only paid $2.50. What is the marginal benefit Samantha gained from the hamburger? A) $2.50 B) $7.50 C) $10.00 D) $12.50 E) None of the above answers is correct. Answer: C Topic: Total surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 19) Consumer surplus exists when a A) person buys something with a marginal benefit less than what they paid. B) person buys something with a marginal benefit exactly what they paid. C) person buys something with a marginal benefit more than what they paid. D) producer sells something for more than it is worth. E) person buys something with a marginal cost less than what they paid. Answer: C Topic: Consumer surplus Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

20) Shelby said to her friend, "I just bought a new pair of climbing shoes and I love them so much that I totally would have paid more for them." Shelby was describing the concept of A) consumer surplus. B) producer surplus. C) equilibrium. D) marginal cost. E) total surplus. Answer: A Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 21) Jake just bought a new hockey stick. When he was leaving the shop, he thought that he such a great deal and would have paid $50 more dollars for the stick. Jake received A) producer surplus. B) equilibrium. C) marginal cost. D) total surplus. E) consumer surplus. Answer: E Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 22) Consumer surplus exists when A) it costs less to produce goods than buyers must pay for them. B) consumers value the good more highly than what they must pay to buy it. C) taxes on goods are less than the appropriate amount. D) the marginal benefit of the good is always equal to or less than the price of the good. E) the price of the good is greater than the marginal cost of producing a unit of the good. Answer: B Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

23) The consumer acquires a consumer surplus on a good if the marginal benefit is A) equal to the price. B) greater than the price. C) less than the price. D) zero. E) less than the marginal cost. Answer: B Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 24) Consumer surplus is equal to A) marginal benefit minus price summed over the quantity consumed. B) price minus marginal benefit summed over the quantity consumed. C) marginal benefit summed over the quantity consumed. D) price multiplied by the quantity consumed. E) marginal benefit plus price summed over the quantity consumed. Answer: A Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 25) Which of the following statements is correct? A) Consumer surplus equals the price paid for a good. B) The consumer surplus from a good is always larger than the total benefit from the good. C) An increase in price decreases consumer surplus. D) An increase in price has no effect on consumer surplus. E) The consumer surplus from a good or service must always equal producer surplus. Answer: C Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

26) In a figure, the consumer surplus is equal to the area ________ the ________ curve and ________ the price. A) above; demand; above B) below; supply; below C) below; demand; below D) below; demand; above E) above; supply; below Answer: D Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 27) Consumer surplus is the area A) below the demand curve and above the market price up to the quantity consumed. B) below the supply curve and above the market price up to the quantity produced. C) above the demand curve and below the market price up to the quantity consumed. D) above the supply curve and below the market price up to the quantity produced. E) below the demand curve and above the supply curve up to the equilibrium quantity. Answer: A Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Revised AACSB: Analytical thinking 28) When the market price rises, the consumers' consumer surplus ________. When the market price falls, the consumers' consumer surplus ________. A) decreases; increases B) decreases; decreases C) increases; increases D) increases; decreases E) does not change; increases Answer: A Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

29) In the summer of 2016, the price of gasoline increased greatly. If the demand curve for gasoline did not shift, which of the following occurred? A) Drivers received no consumer surplus after the price increase. B) Consumer surplus increased if drivers drove less. C) Consumer surplus decreased. D) If consumers drove the same amount, they received less total benefit. E) Both the marginal benefit from each gallon of gasoline and the consumer surplus from each gallon of gasoline decreased. Answer: C Topic: Consumer surplus Skill: Level 4: Applying models Section: Checkpoint 6.2 Status: Revised AACSB: Analytical thinking 30) Lauren and Katy each bought a new bike lock for $20. Both Lauren and Katy would have paid $25 for the lock. Katy's consumer surplus equaled A) $10. B) $40. C) $5. D) $20. E) $50. Answer: C Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 31) Lauren and Katy each bought a new bike lock for $20. Both Lauren and Katy would have paid $25 for the lock. The total consumer surplus for Lauren and Katy taken together equaled A) $15. B) $10. C) $40. D) $20. E) $50. Answer: B Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

32) The price of a cowboy hat is $100. Willie is willing to pay $130, Waylon is willing to pay $100, and Merle is willing to pay $85. All of the following statements are true EXCEPT A) Merle's consumer surplus is $15. B) the sum of consumer surplus will be $30. C) Waylon's consumer surplus is $0. D) only Willie and Waylon will purchase the cowboy hat. E) Willie's consumer surplus is $30. Answer: A Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 33) Mary is willing to pay $50 for a Christmas tree, John is willing to pay $45 and Jeff is willing to pay $40. The price of a tree is $40. The total consumer surplus for Mary, John and Jeff taken together is A) $15. B) $135. C) $40. D) $95. E) $120. Answer: A Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 34) Suppose Dan is willing to pay a maximum of $3,000 for a piano, but finds one he can buy for $2,500. Dan's consumer surplus from this piano is A) $5,500. B) $3,000. C) $2,500. D) $500. E) zero because he buys the piano. Answer: D Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

35) John has a marginal benefit of $7 for 1 slice of pizza, $5 for a second slice, $3 for a third slice, $1 for a fourth slice, and $0.50 for a fifth slice. The price of pizza is $1.50 per slice. Which of the following statements is correct? A) John will purchase 3 slices of pizza and have consumer surplus of $10.50. B) John will purchase 4 slices of pizza and have consumer surplus of $12.00. C) John will purchase 2 slices of pizza and have consumer surplus of $1.50. D) John will purchase 3 slices of pizza and have consumer surplus of $4.50. E) John will purchase 2 slices of pizza and have consumer surplus of $3.00. Answer: A Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 36) Which of the following is an example of consumer surplus? A) Jose buys a hamburger for $2 and tells you he would not have paid a penny more. B) John believes the price he paid for his computer was too high. C) Mary buys a paper tablet for $2 and finds the same good at another store for $1.50. D) Sue would have paid $15 for a new compact disc but paid only $10. E) Anne finds a mountain bike for which she is willing to pay a maximum of $550 and the price of the bike is $600. Answer: D Topic: Consumer surplus Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 37) If you are willing to pay no more than $4 for a slice of pizza and the price of a slice of pizza is $4, then A) if you buy it, you would be cheated because you would realize no total benefit from the purchase. B) you buy it but you get no marginal benefit from the purchase. C) you will not buy it. D) you buy it but you get no consumer surplus from the purchase. E) you might buy it depending on how the slice's marginal benefit compares to its price. Answer: D Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

38) If a seller charges a buyer the exact price the buyer is willing to pay, then the buyer would A) not buy the good. B) receive the maximum consumer surplus. C) receive no benefit from the good. D) receive no consumer surplus from that unit of the good. E) suffer a deadweight loss from buying the good. Answer: D Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

39) The figure above shows that for the 8,000th ticket, the marginal benefit is ________ and the consumer surplus is ________. A) $60; $20 B) $40; $60 C) $70; $40 D) $150,000; $40 E) $60; $150,000 Answer: A Topic: Marginal benefit Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Application of knowledge 41 Copyright © 2021 Pearson Education, Inc.

40) The figure above shows that for the 10,000th ticket, marginal benefit equals ________ and consumer surplus equals ________. A) $40; $40 B) $40; zero C) $150,000; $150,000 D) zero; $40 E) $70; $40 Answer: B Topic: Marginal benefit Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Application of knowledge 41) The figure above shows that the total benefit equals ________ which is the total of ________. A) $900,000; consumer surplus plus the amount paid B) $500,000; only the consumer surplus C) $150,000; only the consumer surplus D) $100,000; consumer surplus minus the amount paid E) $400,000; only the amount paid Answer: A Topic: Total surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Application of knowledge

42) In the figure above, for the 3,000th unit, the maximum price a consumer is willing to pay is A) $5. B) $10. C) $15. D) $0. E) $25. Answer: B Topic: Marginal benefit Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 43) In the figure above, at the market price of $15, the consumer surplus equals A) $10,000. B) $30,000. C) $40,000. D) 2,000 units. E) $20,000. Answer: A Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

44) The figure above shows Lauren's demand curve for Barbie dolls and the market price for Barbie dolls. Using the area of the consumer surplus triangle, Lauren's TOTAL consumer surplus from purchasing 3 dolls is A) $5.50. B) $10.00. C) $22.50. D) $45.00. E) 3 dolls. Answer: C Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 45) The figure above shows Lauren's demand curve for Barbie dolls and the market price for Barbie dolls. In order for Lauren to avoid paying more for dolls than they are worth to her, she must not purchase any more than A) 0 dolls. B) 1 doll. C) 3 dolls. D) 5 dolls. E) 4 dolls. Answer: C Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 44 Copyright © 2021 Pearson Education, Inc.

46) In the figure above, suppose that $20 is the market equilibrium price. Which area is the consumer surplus? A) A B) B C) A + B D) B - A E) B ÷ A Answer: A Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 47) In the figure above, suppose that $20 is the market equilibrium price. What is the amount of the consumer surplus? A) $3,375 B) $3,000 C) $375 D) 150 units E) $1,500 Answer: C Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 45 Copyright © 2021 Pearson Education, Inc.

48) The figure above shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's consumer surplus from her 10th soda is A) $0.00. B) $0.50. C) $1.00. D) $1.50. E) $2.50. Answer: B Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 49) The figure above shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's consumer surplus from her 15th soda is A) $0.00. B) $0.50. C) $1.00. D) $1.50. E) $2.50. Answer: A Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

50) The figure above shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's consumer surplus from all 15 sodas is A) $15.00. B) $22.50. C) $11.25. D) $8.00. E) $1.50. Answer: C Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 51) The figure above shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's total benefit from consuming 15 sodas is A) $15.00. B) $26.25. C) $11.25. D) $0. E) None of the above answers is correct. Answer: B Topic: Total benefit Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 52) Value is A) the price we pay for a good. B) the cost of resources used to produce a good. C) objective so that it is determined by market forces, not preferences. D) the marginal benefit we get from consuming another unit of a good or service. E) the difference between the price paid for a good and the marginal cost of producing that unit of the good. Answer: D Topic: Value and price Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

53) A marginal benefit curve A) is the same as a demand curve. B) is the same as a supply curve. C) slopes upwards. D) is a vertical line at the efficient quantity. E) is U-shaped. Answer: A Topic: Demand curve and marginal benefit curve Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 54) In general, as the consumption of a good or service increases, the marginal benefit from consuming that good or service A) increases. B) decreases. C) stays the same. D) at first increases and then decreases. E) at first decreases and then increases. Answer: B Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 55) The difference between the marginal benefit from a new pair of shoes and the price of the new pair of shoes is A) the consumer surplus from that pair of shoes. B) what we get. C) what we have to pay. D) the price when the marginal benefit is maximized. E) the consumer's expenditure on the shoes. Answer: A Topic: Consumer surplus Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

56) Suppose the price of a scooter is $200 and Cora Lee is willing to pay $250. Cora Lee's A) consumer surplus from that scooter is $200. B) consumer surplus from that scooter is $50. C) marginal benefit from that scooter is $100. D) consumer surplus from that scooter is $150. E) consumer surplus from that scooter is $250. Answer: B Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 57) If the price of a pizza is $10 per pizza, the consumer surplus from the first pizza consumed ________ the consumer surplus from the second pizza consumed. A) is greater than B) equals C) is less than D) cannot be compared to E) None of the above answers is correct because more information is needed about the marginal cost of producing the pizzas to answer the question. Answer: A Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 6.3 Cost, Price, and Producer Surplus 1) To a seller, the cost of a good or service is ________, and the price is ________. A) what must be given up to produce the good or service; what is received for the good or service B) what is received for the good or service; what must be given up to produce the good or service C) the producer surplus the seller receives; the consumer surplus the buyer receives D) the producer surplus the buyer receives; the consumer surplus the seller receives E) None of the above answers is correct. Answer: A Topic: Cost and price Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

2) Which of the following describes the economic meanings of cost and price? A) Cost is exchange worth, and price is dollar worth. B) Cost is what must be given up to produce a good, and price is what a seller receives when the good is sold. C) They are the same, and they both mean what is received when a good is sold. D) Cost refers to what the buyers pay for the good, and price refers to what sellers receive when the good is sold. E) Cost refers to the price that buyers must pay to buy the good. Answer: B Topic: Cost and price Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 3) The opportunity cost of producing one more unit of a good or service is the A) marginal cost. B) marginal benefit. C) efficient level of production. D) market outcome. E) price of the good or service. Answer: A Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 4) The cost of producing one more unit of a good or service is equal to its A) marginal benefit. B) producer surplus. C) marginal expenditure. D) consumer surplus. E) marginal cost. Answer: E Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

5) Ben's cost of making an additional rocking chair is $75. A) If he sells it for a $100, his producer surplus is $25. B) His marginal cost is equal to $75. C) The marginal benefit to the consumer from the chair will be $75. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 6) A supply curve is the same as a A) total cost curve. B) marginal cost curve. C) total benefit curve. D) marginal benefit curve. E) deadweight loss curve. Answer: B Topic: Supply curve and marginal cost curve Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 7) The supply curve of a good or service is the same as A) the demand curve. B) the marginal benefit curve. C) the marginal cost curve. D) the total surplus curve. E) None of the above answers is correct. Answer: C Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

8) A point on the supply curve can illustrate the A) price and the corresponding quantity supplied. B) marginal cost of that unit of the good. C) price the consumer is willing to pay. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Supply curve and marginal cost curve Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 9) The supply curve shows the A) marginal benefit of a firm producing another unit of a good. B) dollars' worth of other goods and services we are willing to give up to get another unit of the good. C) minimum price that firms must receive to supply a certain quantity of a good. D) producer surplus of producing the good. E) maximum price that firms will accept in order to supply a certain quantity of a good. Answer: C Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 10) A supply curve shows quantities supplied at various prices. It also shows the A) total profit the firm earns at a given level of output. B) marginal benefit of the good. C) total cost of production. D) marginal cost of production. E) producer surplus, which is equal to the slope of the supply curve. Answer: D Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

11) A supply curve shows the marginal A) benefit consumers receive from consuming a good. B) profit businesses earn from selling a good. C) cost of producing the good. D) price paid for a good. E) benefit sellers receive from selling a good. Answer: C Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 12) The supply curve is upward sloping because of A) increasing marginal cost. B) decreasing marginal benefit. C) decreasing marginal cost. D) increasing marginal benefit. E) increasing total cost. Answer: A Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 13) Which of the following is a correct description of the supply curve? i. The supply curve is also the marginal cost curve. ii. The supply curve shows the dollars' worth of other goods that we must sacrifice to produce another unit of a good. iii. The supply curve shows the additional cost of producing another unit of a good. A) i only B) i and ii C) ii and iii D) i, ii, and iii E) ii only Answer: D Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

14) The figure shows the t-shirt market. For the 16,000th t-shirt, the marginal cost of producing the shirt is ________ and the producer surplus is ________. A) $4; $1 B) $5; $4 C) $4; $5 D) $80,000; $4 E) $4; $80,000 Answer: A Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Application of knowledge

15) The figure shows the t-shirt market. For which shirt does the marginal cost of producing the shirt equal the producer surplus from the shirt? A) the 4,000th shirt B) the 24,000th shirt C) the 12,000th shirt D) the 8,000th shirt E) All of the answers above are correct because the marginal cost of producing a shirt always equals the producer surplus from the shirt. Answer: A Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Application of knowledge 16) The total cost of producing 24,000 t-shirts is ________ which equals the ________. A) $84,000; amount received minus the producer surplus B) $156,000; sum of the amount received plus the producer surplus C) $36,000; producer surplus D) $120,000; amount received E) $5; amount received for the 24,000th t-shirt Answer: A Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Application of knowledge

17) In the above figure, what is the marginal cost of the 4th pizza? A) $0 B) $4 C) $9 D) $36 E) 4 pizzas Answer: C Topic: Supply curve and marginal cost curve Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 18) In the above figure, what is the marginal cost of the 8th pizza? A) $1.50 B) $12 C) $6 D) $96 E) 8 pizzas Answer: B Topic: Supply curve and marginal cost curve Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

19) Producer surplus is the ________ summed over the quantity produced. A) price of the good minus the marginal cost of producing it B) marginal benefit of the good minus its marginal cost C) marginal benefit of the good minus its price D) marginal cost of the good minus the opportunity cost of producing it E) None of the above answers is correct. Answer: A Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 20) Producer surplus definitely exists when the A) price exceeds marginal benefit. B) price exceeds marginal cost. C) marginal cost exceeds the price. D) marginal benefit exceeds the price. E) marginal benefit exceeds the marginal cost. Answer: B Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 21) When the price of a product exceeds the marginal cost of producing it, producers have a A) consumer surplus. B) producer surplus. C) consumer shortage. D) producer shortage. E) deadweight surplus. Answer: B Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

22) If the price is greater than the marginal cost of producing a good, the seller has A) no benefit from the sale. B) a loss. C) some producer surplus from the sale. D) some negative consumer surplus from the sale. E) None of the above answers is correct. Answer: C Topic: Producer surplus Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 23) The producer surplus is found by subtracting the ________ and then adding the difference for all units sold. A) marginal cost from price B) price from marginal cost C) marginal benefit from total benefit D) marginal cost from marginal benefit E) deadweight loss from the price Answer: B Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 24) When the price rises and the supply curve does not shift, the firms' producer surplus ________. When the price falls and the supply curve does not shift, the firms' producer surplus ________. A) increases; decreases B) decreases; increases C) decreases; decreases D) increases; increases E) does not change; does not change Answer: A Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

25) The producer surplus of making and selling 10 chairs is found by A) multiplying the selling price by 10. B) subtracting the marginal cost from the selling price for each chair and summing the differences for all 10 chairs. C) subtracting from the total revenue the cost of producing one chair multiplied by 10. D) adding the marginal cost and the price of all 10 chairs. E) None of the above answers is correct. Answer: B Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 26) Producer surplus A) increases if market price rises and the supply curve does not shift. B) decreases if market price rises and the supply curve does not shift. C) is equal to the maximum price consumers are willing to pay. D) is the same as the marginal cost. E) always must equal consumer surplus. Answer: A Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 27) Hester owns an ice cream shop. It costs her $2 per cone to make 10 ice cream cones. If she sells 10 cones for $4 each, her producer surplus on the 10 cones is equal to A) $2. B) $20. C) $10. D) $40. E) $4. Answer: B Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

28) If a firm produces five chairs with marginal costs of $25, $30, $40, $55, and $75, respectively, and sells them for $80 each, what is the firm's total producer surplus? A) $400 B) $225 C) $175 D) $150 E) $80 Answer: C Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 29) The price of a cowboy hat is $100. Willie can produce a hat at a marginal cost of $130, Waylon can produce at a marginal cost of $100, and Merle can produce at a marginal cost of $85. Which of the following statements is correct? A) The sum of producer surplus is $15. B) All three of these sellers will gain producer surplus from selling a hat. C) The sum of producer surplus is $30. D) Willie's producer surplus is $30. E) The sum of producer surplus is $45. Answer: A Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 30) Graphically, producer surplus is the area under the A) demand curve and above the supply curve, up to the relevant quantity. B) price and above the demand curve, up to the relevant quantity. C) price and above the supply curve, up to the relevant quantity. D) price and above the quantity axis, up to the relevant quantity. E) demand curve and above the price, up to the relevant quantity. Answer: C Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

31) Bill and Krista sell potted plants from a roadside stand. The figure above shows Bill and Krista's marginal cost curve and the market price. If Bill and Krista sell 60 plants per week, their producer surplus from the 60th plant will equal A) $8. B) $480. C) $0. D) $20. E) More information is needed to answer the question. Answer: C Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 32) Bill and Krista sell potted plants from a roadside stand. The figure above shows Bill and Krista's marginal cost curve and the market price. If Bill and Krista sell 60 plants per week at $8 per plant, their producer surplus from all their plants is A) $8. B) $480. C) $240. D) $0. E) More information is needed to answer the question. Answer: C Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 61 Copyright © 2021 Pearson Education, Inc.

33) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The marginal cost of the 10,000th soda is A) $0.00. B) $0.50. C) $1.00. D) more than $0.50 and less than $1.00. E) None of the above answers is correct. Answer: B Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 34) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The marginal cost of the 20,000th soda is A) $0.00. B) $0.50. C) $1.00. D) more than $1.00. E) None of the above answers is correct. Answer: C Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 62 Copyright © 2021 Pearson Education, Inc.

35) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The ________ price that must be offered so that the 10,000th soda is produced is ________. A) minimum; $0.50 B) minimum; $1.00 C) maximum; $0.50 D) maximum; $1.00 E) minimum; more than $0.50 but less than $1.00 Answer: A Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 36) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The producer surplus from the 10,000th soda is A) $0.00. B) $0.50. C) $1.00. D) more than $1.00. E) None of the above answers is correct. Answer: B Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 37) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The producer surplus from the 20,000th soda is A) $0.00. B) $0.50. C) $1.00. D) more than $1.00. E) None of the above answers is correct. Answer: A Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

38) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The producer surplus from all the sodas sold is A) $0.00. B) $15.00. C) $20.00. D) $1.00. E) None of the above answers is correct. Answer: E Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

39) In the figure above, the equilibrium market price is $20. $20 is the A) marginal cost of 150th unit. B) willingness to pay for the 1st unit. C) producer surplus. D) consumer surplus. E) deadweight loss. Answer: A Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

40) In the figure above, the equilibrium market price is $20. Area A is the A) marginal cost of 150th unit. B) willingness to pay for the 150th unit. C) producer surplus. D) consumer surplus. E) marginal benefit of 150th unit. Answer: C Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 41) In the figure above, the equilibrium market price is $20. The producer surplus is shown by the area A) A. B) B. C) A + B. D) A ÷ B. E) A - B. Answer: A Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 42) In the figure above, the equilibrium market price is $20. The producer surplus equals A) $20. B) $1,500. C) $3,000. D) 150. E) $4,500. Answer: B Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

43) Cost A) is what the buyer pays to get the good. B) is always equal to the marginal benefit for every unit of a good produced. C) is what the seller must give up to produce the good. D) is greater than market price, which results in a profit for firms. E) means the same thing as price. Answer: C Topic: Costs Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 44) If a firm is willing to supply the 1,000th unit of a good at a price of $23 or more, we know that $23 is the A) highest price the seller hopes to realize for this output. B) minimum price the seller must receive to produce this unit. C) average price of all the prices the seller could charge. D) price that sets the marginal benefit equal to the price. E) only price for which the seller is willing to sell this unit of the good. Answer: B Topic: Supply and marginal cost Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 45) A supply curve shows the ________ of producing one more unit of a good or service. A) producer surplus B) consumer surplus C) total benefit D) marginal cost E) marginal benefit to the producer Answer: D Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

46) The producer surplus on a unit of a good is A) equal to the marginal benefit from the good minus its price. B) equal to the price of the good minus the marginal cost of producing it. C) always equal to consumer surplus. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: B Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 47) Suppose you're willing to tutor a student for $10 an hour. The student pays you $15 an hour. What is your producer surplus? A) $5 an hour B) $10 an hour C) $15 an hour D) $25 an hour E) More than $25 an hour Answer: A Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 48) In a figure that shows a supply curve and a demand curve, producer surplus is the area A) below the demand curve and above the market price up to the quantity consumed. B) below the supply curve and above the market price up to the quantity produced. C) above the demand curve and below the market price up to the quantity consumed. D) above the supply curve and below the market price up to the quantity produced. E) between the demand curve and the supply curve up to the equilibrium quantity. Answer: D Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Revised AACSB: Analytical thinking

6.4 Are Markets Efficient? 1) In a competitive market with no externalities A) the consumer surplus is equal to zero because of competition. B) buyers cannot control the price, so the consumer surplus is zero. C) at the equilibrium price, marginal benefit exceeds marginal cost. D) at the equilibrium price, marginal benefit equals marginal cost. E) at the equilibrium price, the total amount of consumer surplus equals the total amount of producer surplus. Answer: D Topic: Market efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 2) A competitive market with no externalities is efficient when it is in equilibrium because A) total benefit equals total cost. B) marginal benefit equals marginal cost. C) consumer surplus equals producer surplus. D) the sum of consumer surplus plus producer surplus is minimized. E) the deadweight gain equals its maximum. Answer: B Topic: Market efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 3) If marginal benefit is equal to marginal cost, then the A) producer surplus is equal to the consumer surplus. B) sum of producer surplus and consumer surplus is as large as possible. C) sum of producer surplus and consumer surplus equals zero. D) market has squeezed out total surplus so that it equals zero. E) deadweight loss is more than zero but less than its maximum. Answer: B Topic: Total surplus Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

4) Which of the following occurs when a market is efficient? A) Consumer surplus equals producer surplus. B) Consumer surplus is as large as possible. C) Producer surplus is as large as possible. D) The sum of consumer surplus and producer surplus is maximized. E) The marginal benefit exceeds the marginal cost by as much as possible. Answer: D Topic: Total surplus Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 5) Efficiency occurs in a market when A) the sum of consumer surplus and producer surplus is maximized. B) consumer surplus is equal to producer surplus. C) consumer surplus is less than producer surplus. D) consumer surplus is greater than producer surplus. E) total revenue is maximized. Answer: A Topic: Market efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 6) Efficiency in a market occurs when the production of the good is such that A) marginal benefit exceeds marginal cost. B) marginal benefit equals marginal cost. C) marginal benefit is lower than marginal cost. D) the marginal cost stops increasing. E) marginal benefit exceeds marginal cost by the maximum amount possible. Answer: B Topic: Market efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

7) At the market equilibrium, when efficiency is attained, the marginal benefit ________ the marginal cost. A) is equal to B) is greater than C) is less than D) has no necessary relationship with E) is equal to the marginal deadweight loss which is equal to Answer: A Topic: Market efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 8) If the market for bicycles is efficient, then A) no more bicycles can be produced. B) marginal benefit exceeds marginal cost. C) consumer surplus must be greater than producer surplus. D) it is not possible to produce more bicycles without sacrificing another, more highly valued good. E) consumer surplus must equal producer surplus. Answer: D Topic: Market efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 9) When efficiency is attained, the sum of the total amount of consumer surplus and producer surplus is A) minimized. B) maximized. C) equal to the deadweight loss. D) undefined. E) equal to zero. Answer: B Topic: Market efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

10) When efficiency is attained, the consumer surplus A) must be larger than the producer surplus. B) must be smaller than the producer surplus. C) must equal the producer surplus. D) can be either smaller than or larger than but cannot equal the producer surplus. E) can be smaller than, equal to, or larger than the producer surplus. Answer: E Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 11) If the marginal benefit of a hot dog is greater than its marginal cost, then to increase efficiency A) more hot dogs should be produced. B) fewer hot dogs should be produced. C) nothing should be done if the marginal benefit is greater than the marginal cost by the maximum amount because in this case the efficient quantity of hot dogs is being produced. D) production should be halted. E) More information is needed about the price of a hot dog in order to determine if production should be increased, decreased, or not changed. Answer: A Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 12) If the demand curve is the same as the marginal benefit curve and the supply curve is the same as the marginal cost curve, then the quantity at which they cross is i. the equilibrium quantity. ii. the allocatively efficient quantity. iii. the quantity with no deadweight loss. A) i, ii, and iii. B) only i. C) only ii. D) only i and ii. E) only i and iii. Answer: A Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

13) The figure above shows the t-shirt market. The t-shirt market is efficient at a quantity of ________ t-shirt(s) because this is the quantity where the ________. A) 30,000; marginal cost equals the marginal benefit B) 30,000; total surplus is maximized C) 1; difference between the supply and demand curves is greatest D) 1; the price is the highest E) both A and B are correct. Answer: E Topic: Efficient equilibrium Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Application of knowledge 14) The figure above shows the t-shirt market. The t-shirt market produces an efficient outcome at a quantity equal to A) 30,000 because total surplus is maximized. B) 20,000 because consumer surplus is greater than producer surplus. C) 20,000 because producer surplus is greater than consumer surplus. D) 10,000 because marginal benefit exceeds marginal cost. E) 10,000 because marginal cost exceeds marginal benefit. Answer: A Topic: Efficient equilibrium Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Application of knowledge 72 Copyright © 2021 Pearson Education, Inc.

15) The figure above shows the t-shirt market. Market failure will occur in the t-shirt market if the quantity produced equals A) 20,000 because a deadweight loss occurs due to underproduction. B) 35,000 because a deadweight loss occurs due to overproduction. C) 30,000 because no profit is earned by firms. D) 30,000 because consumer surplus equals zero. E) both A and B are correct. Answer: E Topic: Efficient equilibrium Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Application of knowledge

16) The figure above shows the competitive market for slices of key lime pie. If the production is 40 slices per day, someone is willing to buy another slice of pie for A) more than it costs to produce the slice. B) less than it costs to produce the slice. C) an amount equal to the cost of producing the slice. D) an amount equal to the cost of producing all 40 slices. E) an amount that is not comparable to the cost of producing the slice. Answer: A Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 73 Copyright © 2021 Pearson Education, Inc.

17) The figure above represents the competitive market for slices of key lime pie. If the production is 80 slices per day, the cost of the 80th slice is A) less than anyone is willing to pay for it. B) more than anyone is willing to pay for it. C) equal to what someone is willing to pay for it. D) indeterminant. E) equal to the deadweight loss from the 80th slice. Answer: B Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 18) The figure above represents the competitive market for slices of key lime pie. When 60 slices are produced, the marginal cost A) exceeds the marginal benefit. B) is less than the marginal benefit. C) equals the marginal benefit. D) is not defined. E) equals the deadweight loss on the 60th slice. Answer: C Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 19) The figure above represents the competitive market for slices of key lime pie. When the price equals $3 A) there is a shortage of slices of pie. B) there is a surplus of slices of pie. C) the efficient quantity of slices is being produced. D) the quantity produced is inefficient. E) the deadweight loss is maximized. Answer: C Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

20) The figure above represents the competitive market for slices of key lime pie. When the price is $3, the total consumer surplus equals A) $120. B) $90. C) $60. D) $0. E) None of the above answers is correct. Answer: C Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 21) The figure above represents the competitive market for slices of key lime pie. When the price is $3, the total producer surplus equals A) $0. B) $60. C) $90. D) $120. E) None of the above answers is correct. Answer: C Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

22) The figure above shows the marginal benefit and marginal cost curves for pizza. In the figure, what is the efficient quantity of pizza? A) 0 pizzas B) 10,000 pizzas C) 20,000 pizzas D) 30,000 pizzas E) The efficient quantity cannot be determine without more information. Answer: C Topic: Market efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

23) In the figure above, if the market price is $12, then the total consumer surplus is A) $12. B) $10. C) minimized. D) $240. E) $480. Answer: D Topic: Consumer surplus Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 24) In the figure above, if the market is at equilibrium, then the total consumer surplus equals the area ________ and the total producer surplus equals the area ________. A) A; B B) B; C C) C; B D) A; C E) A + B; C Answer: A Topic: Consumer surplus and producer surplus Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

25) In the figure above, if the market is at equilibrium, the sum of the total consumer surplus and the total producer surplus is A) $240. B) $600. C) $1,000. D) $0. E) $60. Answer: B Topic: Total surplus Skill: Level 5: Critical thinking Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

26) In the figure above, suppose the market is at equilibrium. Then area A is the A) marginal benefit. B) marginal cost. C) amount of the consumer surplus. D) amount of the producer surplus. E) deadweight loss. Answer: C Topic: Consumer surplus Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

27) In the figure above, suppose the market is at equilibrium. Then area B is the A) marginal benefit. B) marginal cost. C) amount of the consumer surplus. D) amount of the producer surplus. E) deadweight loss. Answer: D Topic: Producer surplus Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

28) In the above figure, the market is at its equilibrium. Area A is equal to A) consumer surplus. B) total revenue. C) marginal benefit. D) producer surplus. E) total surplus. Answer: A Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

29) In the above figure, the market is at its equilibrium. Area B is equal to A) consumer surplus. B) total revenue. C) marginal benefit. D) producer surplus. E) total surplus. Answer: D Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 30) In the above figure, the market is at its equilibrium. Area A + area B is equal to A) consumer surplus. B) total revenue. C) total surplus. D) marginal benefit. E) producer surplus. Answer: C Topic: Total surplus Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 31) The concept of "the invisible hand" suggests that A) products are produced out of a seller's sense of charity. B) when the seller is better off, the buyer is worse off. C) sellers exploit consumers with high prices. D) buyers and sellers are self-interested. E) the command system is the only way of efficiently allocating resources. Answer: D Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

32) Adam Smith's Wealth of Nations, written in 1776, describes the market's invisible hand representing the A) King of England's control over the colonies. B) control all governments have in organizing the market. C) efficiency the market achieves without the interference of governments. D) inefficiency of markets when governments do not organize them. E) invisible command system that efficiently allocates resources. Answer: C Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 33) What did Adam Smith identify as the source of the invisible hand in 1776? A) a benevolent central government that decided was best for everyone B) an individual's concern for fellow humans C) an individual's own self-interest D) the stock market E) buyers' and suppliers' concerns to obtain and retain good reputations Answer: C Topic: Invisible hand Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 34) The "invisible hand" refers to the notion that A) competitive markets send resources to their highest valued uses. B) government intervention is necessary to ensure efficiency. C) marginal benefit decreases as more is consumed. D) marginal cost increases as more is produced. E) no matter what allocation method is used, the resulting production is efficient. Answer: A Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

35) The efficiency of competitive markets happens because A) of the benevolence of the butcher, the brewer, and the baker. B) people make environmentally aware purchasing decisions. C) prices adjust to make buying plans and selling plans compatible. D) government organizes and monitors production. E) the U.S. economy uses a command system to allocate resources within the competitive markets. Answer: C Topic: Invisible hand Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 36) The concept of "the invisible hand" suggests that to attain efficiency, the government should A) guide economic activity. B) set prices. C) leave prices and output decisions to the competitive market. D) regulate all production decisions, but not price decisions. E) make sure that a command system is used to allocate resources. Answer: C Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 37) In a competitive market for a private good with no price or quantity regulations, no external cost nor external benefit, low transactions costs, and no taxes or subsidies A) the allocation of resources is planned by the government. B) production is organized by government organizations. C) efficiency can be attained in the market with no government intervention. D) efficiency is usually be achieved by majority rule. E) efficiency is generally obtained by using a command system. Answer: C Topic: Invisible hand Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

38) At a competitive equilibrium, if there are no taxes, subsidies, price regulations, quantity regulations, or externalities A) the marginal benefit is greater than the marginal cost. B) resource use is efficient. C) the marginal benefit is less than the marginal cost. D) both the marginal benefit and the marginal cost of the last unit produced equal zero. E) the marginal benefit is greater than the marginal cost by as much as possible. Answer: B Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 39) At a competitive market equilibrium, if there are no taxes, subsidies, price regulations, quantity regulations, or externalities i. consumer surplus is minimized. ii. marginal cost equals marginal benefit. iii. resources are efficiently used. iv. producer surplus is minimized. A) ii and iii B) i and ii C) i and iv D) i, ii, iii, and iv E) ii only Answer: A Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 40) When technology increases the supply of a good and lower prices increase the quantity demanded A) the economy is reallocating resources to achieve an efficient allocation. B) consumer surplus falls. C) the invisible hand is unnecessary. D) the marginal benefit of the good increases with the quantity produced. E) the economy is no longer efficient because the quantity changes. Answer: A Topic: Invisible hand Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

41) When output is less than the efficient level A) consumers are willing to pay more for another unit than it costs to produce the unit. B) the amount consumers are willing to pay equals the cost of production. C) the cost of production is greater than the price consumers are willing to pay. D) the production costs can't be measured. E) the marginal cost of producing the good must be greater than the marginal benefit from the good. Answer: A Topic: Underproduction Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 42) When there is market failure so that a market produces less than the efficient amount A) consumer surplus definitely is larger than when the efficient quantity is produced. B) the sum of producer surplus and consumer surplus is larger than when the efficient quantity is produced. C) there is a deadweight loss. D) consumers definitely lose and producers definitely gain. E) consumers definitely gain and producers definitely lose. Answer: C Topic: Underproduction Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 43) A quantity less than the equilibrium quantity in a competitive market is inefficient because A) the marginal benefit of another unit is greater than its marginal cost. B) too much of the good is being produced. C) the marginal cost of another unit is greater than its marginal benefit. D) the marginal benefit of another unit is not equal to zero. E) the marginal benefit is not maximized. Answer: A Topic: Underproduction Skill: Level 5: Critical thinking Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

44) Overproduction results in A) external costs. B) external benefits. C) deadweight loss. D) super-efficiency. E) the marginal benefit of the last unit produced being larger than the marginal cost. Answer: C Topic: Overproduction Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 45) What do economists call the loss society experiences when there is market failure and the production of a good is less than the efficient amount? A) tax B) subsidy C) price floor D) deadweight loss E) quantity restriction Answer: D Topic: Deadweight loss Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

46) In the above figure, if the market is in equilibrium, area A + area B + area C equals A) total surplus. B) consumer surplus. C) deadweight loss. D) producer surplus. E) total revenue. Answer: B Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 47) In the above figure, if the market quantity is restricted to 500,000 and the price is allowed to rise to set the quantity demanded equal to the quantity supplied, then the producer surplus is equal to A) area D + area F. B) area C + area E. C) area A + area B + area C. D) area A + area B. E) area B + area D + area F. Answer: E Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

48) In the above figure, if the quantity is restricted to 500,000 and the price is allowed to rise to set the quantity demanded equal to the quantity supplied, then area C + area E is equal to A) deadweight loss. B) consumer surplus. C) total surplus. D) producer surplus. E) total revenue. Answer: A Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

49) In the above figure, if the quantity is equal to 500,000 units, the deadweight loss is equal to A) area C. B) area D + area I. C) area B + area F. D) area G + area H. E) None of the above answers is correct because the deadweight loss is equal to zero. Answer: C Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

50) In the above figure, if the quantity is equal to 2,500,000 units, the deadweight loss is equal to A) area B + area F. B) area D + area I. C) area C. D) area G + area H. E) None of the above answers is correct because the deadweight loss is equal to zero. Answer: B Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 51) In the above figure, if the quantity is equal to 1,500,000 units, the deadweight is equal to A) area A + area B. B) area C. C) area B + area F. D) area G + area H. E) None of the above answers is correct because the deadweight loss is equal to zero. Answer: E Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 52) Which of the following leads to a deadweight loss? i. overproduction ii. underproduction iii. taxes iv. monopoly A) ii only B) iii and iv C) i and ii D) i, ii, iii, and iv E) i, ii, and iii Answer: D Topic: Obstacles to efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

53) Which of the following leads to a deadweight loss? i. competition ii. taxes iii. consumer surplus iv. monopoly A) ii only B) iii and iv C) i and ii D) ii and iv E) i, ii, and iii Answer: D Topic: Obstacles to efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 54) Which of the following government policies ensures market efficiency? A) subsidy B) tax C) price regulations D) quantity regulations E) None of the above answers is correct. Answer: E Topic: Obstacles to efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 55) Obstacles in achieving efficiency in a market include A) public goods. B) the presence of an external cost or benefit. C) competition. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: E Topic: Obstacles to efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

56) If the government imposes a tax on a competitive market with no externalities, then i. resource use is not efficient. ii. there is a deadweight loss. iii. consumer surplus is at its maximum. A) ii only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: B Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 57) What is the impact of a government subsidy to producers? A) Less is produced relative to the efficient level, creating a deadweight loss. B) More is produced relative to the efficient level, creating a deadweight loss. C) Producer surplus is increased, which creates a larger consumer surplus. D) Producers are able to sell the product at a higher price. E) Consumers must pay a higher price for the good. Answer: B Topic: Subsidies Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 58) Subsidies ________ the price paid by the buyer and ________ the price received by the seller. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) do not change; increase Answer: C Topic: Subsidies Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

59) When there is a cost or benefit that affects someone other than the seller and buyer, then there is A) a tax. B) a subsidy. C) a quantity regulation. D) a price regulation. E) an externality. Answer: E Topic: Externalities Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 60) When the cost of producing a product is paid, at least in part, by someone other than the producer, the cost is referred to as A) an external cost. B) an external profit. C) an external benefit. D) an external/internal cost. E) a public cost. Answer: A Topic: External cost Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 61) A cost not borne by the producer but borne by other people is known as ________ cost. A) a marginal B) an internal C) an external D) a nonessential E) a subsidized Answer: C Topic: External cost Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

62) Air pollution is an external cost because it A) is a pollution of the external environment. B) is a cost not borne by the producer of the good. C) benefits no one. D) is not associated with resource use. E) is created only when production occurs. Answer: B Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 63) When a product benefits people other than the buyer of the product, the product is said to have A) an external cost. B) an excludable cost. C) an external benefit. D) an excludable benefit. E) a subsidized benefit. Answer: C Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 64) A benefit that accrues to people other than the buyer of a good is known as ________ benefit. A) an internal B) an external C) a marginal D) a total E) a subsidized Answer: B Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

65) A public good A) is a good that is usually consumed in public, such as a restaurant meal. B) is a good people can consume even if they do not pay for it. C) is a good produced by government. D) results in an efficient allocation of resources. E) is a good for which people are willing to pay a very high price. Answer: B Topic: Public good Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 66) A good or service can be consumed by a person even if he or she didn't pay for it is called ________ good. A) a private B) a public C) a normal D) an inferior E) an external Answer: B Topic: Public good Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 67) When people cannot be excluded from consuming a good, even if they have not paid for the good, competitive markets would A) produce more of the good than society needs. B) allocate more resources than the efficient amount to the production of the good. C) produce the good so that people could enjoy a "free ride." D) produce less than the efficient quantity. E) eliminate the deadweight loss. Answer: D Topic: Public good Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

68) A monopoly is A) the single buyer of some good or service. B) a firm that has control of a market because it is the only seller. C) a firm that creates enormous external costs. D) a firm that faces intense competition. E) a cost of producing a good or service. Answer: B Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 69) If one producer has control over an entire market and underproduces, the producer will A) increase producer surplus by lowering pollution costs. B) increase consumer surplus by lowering producer surplus. C) increase both consumer and producer surplus. D) create a deadweight loss. E) decrease the deadweight loss that would exist if the market were efficient. Answer: D Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 70) Deadweight loss and market failure are created when a market produces A) either more or less than the efficient quantity. B) more than the efficient quantity but not when less than the efficient quantity is produced. C) less than the efficient quantity but not when more than the efficient quantity is produced. D) the efficient quantity. E) None of the above answers is correct because deadweight loss has nothing to do with the efficient quantity. Answer: A Topic: Deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

71) The figure above shows the market for pants. If the efficient quantity is produced A) there will be no consumer surplus. B) the sum of consumer and producer surplus will be maximized. C) a small deadweight loss will result. D) the sum of consumer and producer surplus will be minimized. E) the consumer surplus on all the pants must equal the producer surplus on all the pants. Answer: B Topic: Market efficiency Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 72) The figure above shows the market for pants. If 6 million pairs of pants are produced, the deadweight loss is A) zero. B) the triangle ABE. C) the triangle BCE. D) the triangle ACE. E) the triangle BCE minus the triangle ABE. Answer: A Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

73) The figure above shows the market for pants. If the production of the pants results in an external cost from pollution that is the result of the dye used, then A) 6 million pairs is the efficient quantity. B) fewer than 6 million pairs is the efficient quantity. C) more than 6 million pairs is the efficient quantity. D) None of the above answers is necessarily correct because more information is needed about the size of the external cost. E) None of the above answers is correct because it is impossible to tell whether the external cost results in underproduction or overproduction. Answer: B Topic: External cost Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 74) The figure above shows the market for pants. If the government subsidizes the production of pants so that production expands from 6 million pairs to 7 million pairs A) there would be no deadweight loss. B) the government's policy would have no effect on the sum of consumer surplus and producer surplus. C) a deadweight loss would result. D) the government's policy would increase the sum of consumer surplus and producer surplus. E) production would be even more efficient than if 6 million pairs of pants are produced because more is always better than less. Answer: C Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 75) Scalping tickets means that A) some people who purchased tickets at the box-office price (in the primary market) will sell at a higher price in the resale (secondary) market. B) some people who purchased tickets at the box-office price (in the primary market) will sell at a lower price in the resale (secondary) market. C) the demand in the primary market must exceed the demand in the secondary market. D) demanders in the secondary market are the same as some of the suppliers in the primary market. E) None of the above answers are correct. Answer: A Topic: Market efficiency Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: New AACSB: Reflective thinking 96 Copyright © 2021 Pearson Education, Inc.

76) Scalping tickets (selling tickets for more than the box office price) A) creates consumer surplus in the secondary (resale) market. B) creates a deadweight loss. C) leads to fewer people attending the event. D) reduces the box office price that can be charged. E) raises the box office price that can be charged. Answer: A Topic: Market efficiency Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: New AACSB: Analytical thinking 77) When a market is efficient, the A) sum of consumer surplus and producer surplus is maximized. B) deadweight gain is maximized. C) quantity produced is maximized. D) marginal benefit of the last unit produced exceeds the marginal cost by as much as possible. E) total benefit equals the total cost. Answer: A Topic: Market efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 78) Which of the following occurs when a market is efficient? A) Producers earn the highest income possible. B) Production costs equal total benefit. C) Consumer surplus equals producer surplus. D) Scarce resources are used to produce the goods and services that people value most highly. E) Every consumer has all of the good or service he or she wants. Answer: D Topic: Market efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

79) The concept of "the invisible hand" suggests that markets A) do not produce the efficient quantity. B) are always fair. C) produce the efficient quantity. D) are unfair. E) allocate resources unfairly and inefficiently. Answer: C Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 80) When underproduction occurs A) producers gain more surplus at the expense of consumers. B) marginal cost is greater than marginal benefit. C) consumer surplus increases to a harmful amount. D) there is a deadweight loss that is borne by the entire society. E) the deadweight loss harms only consumers. Answer: D Topic: Underproduction Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 81) When production moves from the efficient quantity to a point of overproduction A) consumer surplus definitely increases. B) the sum of producer surplus and consumer surplus increases. C) there is a deadweight loss. D) consumers definitely lose and producers definitely gain. E) consumers definitely gain and producers definitely lose. Answer: C Topic: Deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

82) Which of the following can result in a market producing an inefficient quantity of a good? i. competition ii. an external cost or an external benefit iii. a tax A) i only B) iii only C) ii only D) ii and iii E) i and iii Answer: D Topic: Obstacles to efficiency Skill: Level 1: Definition Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 83) A country decides to impose a tax to reduce the external cost created by carbon emissions. Prior to the tax, ________ and as a result of the tax ________. A) market failure occurred; the deadweight loss is reduced B) there was no deadweight loss; a market failure occurs because taxes reduce production C) market failure occurred; producer surplus will equal consumer surplus D) producer surplus equals consumer surplus; marginal cost equals marginal benefit E) marginal cost equals marginal benefit; marginal cost will be less than marginal benefit Answer: A Topic: Market failure Skill: Level 5: Critical thinking Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 6.5 Are Markets Fair? 1) Economists conclude that the only way to measure fairness is A) to insure that the rules are fair. B) to insure that the result is fair. C) to insure that BOTH the rules and the result are fair. D) to compare the allocatively efficient quantity to the equilibrium quantity. E) None of the above answers is correct. Answer: E Topic: Fair rules Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning

2) Equal opportunity but unequal results A) occurs only when the economy is not producing at the allocative efficient point on the PPF. B) means that the outcome is definitely not fair. C) can occur under the fair-rules view of fairness. D) cannot occur if all exchange is voluntary. E) occurs only if the state fails to establish and protect private property rights. Answer: C Topic: Fair rules Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning 3) Assume the Nozick rules are being followed in the economy so that the distribution of income is fair. What must be TRUE for this to create an efficient allocation of resources? A) All people are earning equal incomes. B) There are no public goods, monopolies, high transactions costs, or external costs and benefits. C) The costs of administering redistribution equals the benefits the poor receive. D) The government must redistribute income in a fashion that minimizes the "big tradeoff." E) The government must allocate resources using a command mechanism. Answer: B Topic: Fair rules Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning 4) An unequal distribution of income is considered fair according to Robert Nozick if A) marginal cost equals marginal benefit. B) the cost of administering a welfare system is minimized. C) property rights are enforced and voluntary exchange occurs. D) the economy is producing its maximum total output. E) resources are allocated using the command method. Answer: C Topic: Fair rules Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning

5) Which of the following is most closely related to the "fair results" approach to fairness? A) efficient resource use B) having an equal income distribution C) voluntary exchange D) the command system of allocating resources E) price hikes in a natural disaster Answer: B Topic: Fair results Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning 6) Outcomes are fair according to the A) rules view if private property rights are established and trade is voluntary. B) results view if private property rights are established and trade is voluntary. C) rules view if there is not too much inequality. D) results view if there is not a big tradeoff. E) results view if there is equality of opportunity. Answer: A Topic: Fairness Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking 7) The "big tradeoff" refers to A) producing capital goods instead of consumable goods. B) marginal benefit versus marginal cost. C) efficiency and fairness. D) taking an economics course instead of some other course. E) using market prices rather than a command system to allocate resources. Answer: C Topic: Big tradeoff Skill: Level 1: Definition Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

8) The idea of the "big tradeoff" points out the costs of A) using a results approach to fairness when the rules approach is correct. B) transferring income using taxes that decrease efficiency. C) price hikes during natural disasters. D) using a rules approach to fairness when the results approach is correct. E) None of the above answers is correct. Answer: B Topic: Big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking 9) When economists use the term "big tradeoff" when discussing efficiency they are referring to the tradeoff between A) external costs and external benefits. B) marginal cost and marginal benefits. C) producer surplus and consumer surplus. D) efficiency and fairness. E) deadweight loss and producer/consumer surplus. Answer: D Topic: Big tradeoff Skill: Level 1: Definition Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking 10) Which of the following is TRUE for taxes? They A) are always administered fairly. B) are a necessary part of living in an economy with a fair distribution of income. C) are always administered without creating unfairness or inefficiency. D) are an involuntary transfer of private property. E) do not create a big tradeoff problem. Answer: D Topic: Big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

11) Which of the following is part of the cost of income transfers? A) Tax-collecting agencies cost money to administer. B) Taxing incomes encourages people to work harder. C) Income transfers make the results more unfair. D) Income transfers increase the size of the economic pie. E) Income transfers are a similar to allocating resources using a lottery. Answer: A Topic: Big tradeoff Skill: Level 3: Using models Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking 12) As pointed out by the "big tradeoff," government action that redistributes incomes so that everyone has the same income leads to A) fairness according to the "fair rules" approach. B) efficient markets. C) resources being allocated according to a command system. D) a smaller total output. E) lower taxes on the rich than on the poor so that the rich do not lose their incentive to work. Answer: D Topic: Big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking 13) Redistributing income from the rich to the poor creates inefficiency because A) of wasteful expenditures by people receiving welfare grants. B) of the administrative costs to operate the government redistribution agencies. C) the redistribution creates an incentive to produce less output. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: D Topic: Big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

14) Why does redistribution, so that the distribution of income is equal, bring about less total output? A) Incentives to work are reduced. B) No one can determine marginal benefit or marginal cost as a result. C) Those in political power will likely receive a larger income. D) Because the marginal benefit and marginal cost of work have been equally increased. E) The premise of the question is incorrect because an equal distribution of income would increase rather than decrease the total amount produced. Answer: A Topic: Big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking 15) Suppose Kansas had a severe ice storm that caused electrical blackouts. The Fictitious Portable Generator firm of Lawrence had several portable generators that could be used by homeowners to provide electricity. Which of the following would be the fair-rules way to provide them? A) The government confiscates the generators owned by Fictitious and distributes them. B) Fictitious is forced by the state to rent the generators at half the normal rate. C) The state sets up a lottery to determine who rents the available generators at the normal rate. D) Fictitious rents generators at the equilibrium market price. E) Fictitious follows government commands about who gets to use the generators. Answer: D Topic: Fairness in natural disasters Skill: Level 4: Applying models Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning 16) If the government takes over the distribution of some scarce good in a time of a natural disaster and provides the good at no charge to users, what must also be done? A) The government must produce the good itself. B) Some rationing mechanism must be set up to determine who gets the good. C) Everyone hurt in the natural disaster must get one of the goods. D) Because we live in a democracy, the government must use majority rule as the rationing mechanism. E) nothing Answer: B Topic: Fairness in natural disasters Skill: Level 3: Using models Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

17) The "fair rules" view of fairness is based on A) income transfers from the rich to the poor. B) property rights and voluntary exchange. C) utilitarianism. D) the big tradeoff. E) allocating resources using majority rule. Answer: B Topic: Fair rules Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning 18) The idea that unequal incomes are unfair generally uses the ________ principle of fairness. A) big tradeoff B) involuntary exchange C) voluntary exchange D) it's not fair if the result isn't fair E) it's not fair if the rules aren't fair Answer: D Topic: Fair results Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning 19) Which of the following is an example in which "the big tradeoff" can occur? A) The government redistributes income from the rich to the poor. B) Ford increases the price of a pickup truck. C) A basketball player signs a $5 million contract. D) A college lowers tuition. E) The price of personal computers falls year after year. Answer: A Topic: The big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Reflective thinking

20) In 2015 the president of a company decided that all employees (from president to custodians) would all earn the same wage of $60,000 per year. The president's policy followed the ________ approach to fairness. A) fair results B) fair rules C) gouging D) majority rule E) command Answer: A Topic: Fairness Skill: Level 4: Applying models Section: Checkpoint 6.5 Status: Old AACSB: Analytical thinking

6.6 Chapter Figures

The figure above shows the PPF, marginal cost curve, and marginal benefit curve for pizza.

1) In the figure above, production efficiency occurs at ________, and allocative efficiency occurs at ________. A) all points on the PPF; only one point on the PPF B) only one point on the PPF; all points on the PPF C) only one point on the PPF; only one point on the PPF D) all points on the PPF; all points on the PPF E) all points on the PPF; all points above the PPF Answer: A Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking 2) In the figure above, when 2,000 pizzas are produced, the marginal benefit of a pizza ________ its marginal cost, which means ________ pizza is being produced. A) exceeds; too little B) exceeds; too much C) is below; too much D) is below; too little E) equals; the efficient quantity of Answer: A Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking 3) In the figure above, when 6,000 pizzas are produced, the marginal benefit of a pizza ________ its marginal cost, which means ________ pizza is being produced. A) exceeds; too little B) exceeds; too much C) is below; too much D) is below; too little E) equals; the efficient quantity of Answer: C Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

4) In the figure above, when 4,000 pizzas are produced, the marginal benefit of a pizza ________ its marginal cost, which means ________ pizza is being produced. A) exceeds; too little B) exceeds; too much C) is below; too much D) is below; too little E) equals; the efficient quantity of Answer: E Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

The figure above shows the demand curve for pizza and the market price of pizza. 5) In the figure above, how much is the consumer who buys the 5,000th pizza willing to pay for that pizza? A) $15 B) $10 C) $12 D) $22.50 E) $5 Answer: A Topic: Willingness to pay Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

6) In the figure above, how much do the consumers pay in total for the quantity of pizza they buy per day? A) $100,000 B) $150,000 C) $125,000 D) $50,000 E) None of the above answers is correct. Answer: A Topic: Willingness to pay Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 7) In the figure above, what is the consumer surplus per day? A) $100,000 B) $50,000 C) $125,000 D) $150,000 E) zero Answer: B Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 8) In the figure above, the total benefit from pizza is ________ per day. A) $100,000 B) $50,000 C) $125,000 D) $150,000 E) None of the above answers is correct. Answer: D Topic: Total benefit Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

The figure above shows the supply curve for pizza and the market price of pizza. 9) In the figure above, the minimum price that must be offered for the 5,000th pizza a day to be produced is A) $6. B) $10. C) $8. D) $2. E) $4. Answer: A Topic: Minimum supply price Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 10) In the figure above, the cost of producing 10,000 pizzas a day is A) $60,000. B) $100,000. C) $40,000. D) $80,000. E) $50,000. Answer: A Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 112 Copyright © 2021 Pearson Education, Inc.

11) In the figure above, the total revenue from pizza per day is A) $60,000. B) $100,000. C) $40,000. D) $80,000. E) $50,000. Answer: B Topic: Total revenue Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 12) In the figure above, the producer surplus is A) $60,000. B) $100,000. C) $40,000. D) $80,000. E) $50,000. Answer: C Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

The figure above shows the market for pizza. 13) In the figure above, when the market is in equilibrium, marginal benefit ________ marginal cost, so the quantity of pizza produced is ________. A) equals; efficient B) exceeds; efficient C) is below; efficient D) is below; not efficient E) exceeds; not efficient Answer: A Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

14) In the figure above, if pizza production is restricted to 5,000 pizzas a day, then marginal benefit ________ marginal cost, and ________ occurs. A) exceeds; overproduction B) exceeds; underproduction C) is below; overproduction D) is below; underproduction E) exceeds; efficient production Answer: B Topic: Underproduction Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 15) In the figure above, if pizza production increases to 15,000 pizzas a day, then marginal benefit ________ marginal cost, and ________ occurs. A) exceeds; overproduction B) exceeds; underproduction C) is below; overproduction D) is below; underproduction E) exceeds; efficient production Answer: C Topic: Overproduction Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 16) In the figure above, if pizza production is restricted to 5,000 pizzas a day, the deadweight loss is A) $45,000 per day. B) $12,500 per day. C) $22,500 per day. D) $90,000 per day. E) zero. Answer: C Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

17) In the figure above, if pizza production increases to 15,000 pizzas a day, the deadweight loss is A) $45,000 per day. B) $12,500 per day. C) $22,500 per day. D) $90,000 per day. E) zero. Answer: C Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 6.7 Integrative Questions

1) The figure above shows the market for brooms. If the market is efficient A) 0 brooms are produced. B) 600 brooms are produced. C) more than 1,000 brooms are produced. D) between 0 and 600 brooms are produced. E) between 600 and 1,000 brooms are produced. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

2) The figure above shows the market for brooms. If 800 brooms are produced A) consumer surplus is maximized. B) producer surplus is maximized. C) market failure and a deadweight loss occur. D) marginal cost is less than marginal benefit. E) there is no deadweight loss. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 3) The figure above shows the market for brooms. If 800 brooms are produced A) marginal cost exceeds marginal benefit. B) a deadweight loss does not occur because everyone who wants to buy a broom can. C) the "big tradeoff" occurs. D) value exceeds price. E) the "fair results" approach to fairness is definitely not violated. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 4) The figure above shows the market for brooms. If 400 brooms are produced A) consumer surplus is maximized. B) producer surplus is maximized. C) market failure and a deadweight loss occur. D) marginal cost is greater than marginal benefit. E) consumer surplus equals zero. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

5) The figure above shows the market for brooms. Which of the following could lead to the production of fewer than 600 brooms? A) a monopoly B) a deadweight loss C) subsidies D) an external cost E) a big tradeoff Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 6) When society must decrease the production of something in order to produce more of another good or service, society has necessarily achieved A) only production efficiency. B) only allocative efficiency. C) both production efficiency and allocative efficiency. D) a free lunch. E) the maximum opportunity cost. Answer: A Topic: Production efficiency Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking 7) When a society achieves production efficiency, it is A) definitely producing at a point on its PPF. B) perhaps producing at a point on its PPF and perhaps producing at a point inside its PPF. C) definitely producing that combination of goods and services that society values most highly. D) not fully employing all of its available resources to produce goods and services. E) enjoying a free lunch. Answer: A Topic: Production efficiency Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

8) Production efficiency requires that A) the economy be producing on the PPF but the marginal cost of a good does not need to equal its marginal benefit. B) the economy be producing on the PPF and that the marginal cost of a good equals its marginal benefit. C) the marginal cost of a good equals its marginal benefit but the economy does not need to be producing on its PPF. D) the society be producing at the point of allocative efficiency. E) opportunity costs be minimized. Answer: A Topic: Production efficiency Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 9) If an economy is producing on its PPF, then it is definitely achieving A) both production and allocative efficiency. B) only production efficiency, but it definitely is not achieving allocative efficiency. C) only allocative efficiency, but it is definitely not achieving production efficiency. D) neither production nor allocative efficiency. E) only production efficiency. Answer: E Topic: Production efficiency Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking 10) If society can produce more of one good but must forgo some of another good to do so, it is definitely achieving A) both production and allocative efficiency. B) only production efficiency. C) only allocative efficiency. D) neither production nor allocative efficiency. E) None of the above answers is correct because when society must forgo another good to produce more of one good, then society MIGHT be production efficient or it MIGHT be allocatively efficient. Answer: B Topic: Production efficiency Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

11) Which of the following is TRUE? i. Production efficiency occurs only when resources are used to produce the combination of goods that has the greatest value. ii. Allocative efficiency occurs when marginal benefit equals marginal cost. iii. A demand curve is a marginal cost curve. A) only ii B) only i C) only iii D) i and ii E) ii and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 12) Which of the following is TRUE? i. Marginal cost is measured by the maximum price that consumers are willing to pay for another unit of a good or service. ii. Producer surplus equals marginal benefit minus price, summed over the quantity produced. iii. A supply curve is a marginal cost curve. A) only iii B) only i C) only ii D) i and ii E) i and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

13) Which of the following is TRUE? When there are no externalities, public goods, common resources, taxes or subsidies, then i. allocative efficiency occurs when marginal benefit exceeds marginal cost by as much as possible. ii. at a competitive equilibrium, resource allocation is efficient. iii. fair rules require income transfers from the rich to the poor. A) only ii B) only i C) only iii D) i and ii E) i and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 14) To achieve ________, marginal cost ________ marginal benefit. A) production efficiency; must equal B) production efficiency; must be greater than C) allocative efficiency; must be greater than D) allocation efficiency; must be less than E) allocative efficiency; must equal Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 15) When marginal benefit exceeds marginal cost in a market A) only consumer surplus is reduced. B) only producer surplus is reduced. C) consumer surplus and producer surplus are not affected compared to when production is such that marginal cost equals marginal benefit. D) the deadweight loss is negative. E) None of the above answers is correct. Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

16) At a competitive equilibrium with no externalities, taxes, subsidies, public goods, common resources, or high transactions costs, which of the following occurs? i. an efficient outcome ii. definitely a fair outcome when judged by the fair-results approach iii. marginal cost equals marginal benefit iv. producer surplus equals consumer surplus A) i and iii B) i, ii and iii C) ii and iii D) i, ii, iii and iv E) only i Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 17) The price of a shirt is $20. Charlie can produce a shirt at a marginal cost of $10, Mac can produce a shirt for $18, and Dennis can produce a shirt for $22. For a shirt, Deandra has a marginal benefit of $25, Frank has marginal benefit of $20, and Artemis has a marginal benefit of $18. Which of the following statements is correct? A) The sum of consumer surplus is $5 and the sum of producer surplus is $12. B) The sum of consumer surplus is $12. C) Only Frank and Artemis will purchase a shirt. D) Only Dennis will produce a shirt. E) The sum of producer surplus is $10. Answer: A Topic: Consumer surplus and producer surplus Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 18) The fair results approach to fairness A) requires property rights and voluntary exchange. B) supports transferring income from the rich and giving it to the poor. C) requires efficient market outcomes. D) ensures that marginal cost equals marginal benefit. E) never creates a big tradeoff. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Ethical understanding and reasoning 122 Copyright © 2021 Pearson Education, Inc.

19) The fair rules approach to fairness requires A) consumer surplus equals producer surplus. B) income transfers from rich to poor. C) property rights and voluntary exchange. D) that marginal cost equal marginal benefit. E) consumer surplus exceed producer surplus because there are more consumers than producers. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Ethical understanding and reasoning 20) Consumer surplus equals A) producer surplus at a market equilibrium. B) marginal benefit minus price, summed over the quantity consumed. C) price minus marginal cost. D) the deadweight loss if there is underproduction. E) the deadweight loss plus the producer surplus. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 21) Suppose a market produces 5,000 tons of wheat. At this quantity, the marginal cost exceeds the marginal benefit. This outcome could be the result of A) a quantity regulation limiting the amount that can be produced. B) a monopoly. C) a subsidy. D) an external benefit. E) producing a public good. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

6.8 Essay: Allocation Methods and Efficiency 1) What allocation method is the primary method used in the United States? Answer: While all the different allocation methods—first-come, first-serve, majority rule, contest, force, and so forth—are used in various instances, the primary method used in the United States is allocation using market prices. In the United States, for most goods and services, if someone is willing and able to pay the market price for a good or service, the person can acquire the good or service. Topic: Allocation methods Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Written and oral communication 2) "Allocative efficiency in the production of cherries means that consumers can eat all of the cherries they desire." Is this statement true or false? Answer: Allocative efficiency means that we are producing the goods and services society values most highly. It does not mean that consumers can afford all of the cherries that they desire. The allocatively efficient quantity of cherries is the level of production such that the marginal benefit of a pound of cherries equals the marginal cost of a pound of cherries. The marginal cost of any product will be positive, so the marginal cost of a pound of cherries at the allocatively efficient quantity will be positive. Hence for the allocatively efficient quantity of cherries, the marginal benefit of cherries also must be positive. In order for consumers to have all the cherries they desire, the marginal benefit of a pound of cherries must be zero. (If the marginal benefit is positive, consumers desire more cherries.) Therefore the allocatively efficient quantity of cherries is not the quantity at which consumers are able to eat all they desire. Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Written and oral communication 3) "Allocative efficiency requires that the maximum number of people have access to all of the goods and services that our economy produces." Is this statement true or false? Explain your answer. Answer: The statement is false. Allocative efficiency requires that production be such that the marginal benefit equals the marginal cost. Allocative efficiency has nothing to do with requiring that the maximum number of people have access to all the goods and services produced. Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Written and oral communication

4) When less than the efficient amount of a good is produced, how does the marginal benefit of the last unit produced compare to its marginal cost? Answer: When less than the efficient amount of a good is produced, the marginal benefit of the last unit produced exceeds its marginal cost. The fact that the marginal benefit exceeds the marginal cost indicates that producing additional units of the good will move the amount of production closer to the efficient quantity. Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Written and oral communication 5) Why does the marginal benefit curve have a negative slope? Answer: Each successive increase in the consumption of any good or service provides a lower level of satisfaction, or benefit, than the preceding unit of consumption. For a specific example, think of drinking water on a hot day. What is the first glass worth? How about the second and third? The marginal benefit is the benefit from each additional glass of water and, as the example indicates, the marginal benefit decreases as the amount of the good increases. Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Written and oral communication

6) The table above shows the production possibilities frontier for the nation of Isolanda. a. Find the marginal cost of a pound of fish using the above PPF. b. How does the marginal cost of a pound of fish change as more fish are caught? Answer:

a. The table above shows the marginal cost of a pound of fish. Remember that marginal cost is calculated at the mid-point, that is, midway between the two production possibilities. For instance, moving from production point A to production point B has an opportunity cost of 5 pounds of berries. Because this movement gains 1 pound of fish, the marginal cost is 5 pounds of berries. We then attribute this marginal cost to the point midway between points A and B, which is 0.5 pounds of fish. b. As more fish are caught, the marginal cost of a fish increases. Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

7) Draw and describe a marginal benefit curve for slices of pizza where the opportunity cost of consuming a slice of pizza is a taco. Answer:

A marginal benefit curve is drawn as a downward sloping line with the marginal benefit of the slice of pizza on the vertical axis and the quantity of slices of pizza on the horizontal axis. A point on the curve shows the maximum number of tacos that people are willing to give up to get another slice of pizza. Topic: Marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

8) Draw and describe a marginal cost curve for slices of pizza where the opportunity cost of producing a slice of pizza is a taco. Answer:

A marginal cost curve is drawn as an upward sloping line with the marginal cost of pizza on the vertical axis and the quantity of pizza on the horizontal axis. A point on the curve shows the number of tacos that must be given up to get another slice of pizza. Topic: Marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking 9) At the current production point on a nation's production possibilities frontier, the marginal benefit of a slice of pizza is 500 tacos while the marginal cost of producing a slice of pizza is 750 tacos. For the nation to produce at the point of allocative efficiency, what should be done? Answer: The marginal benefit of a slice of pizza is less than its marginal cost. Therefore to produce at the point of allocative efficiency, less pizza and hence more tacos should be produced. Topic: Allocative efficiency Skill: Level 2: Using definitions Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

10) Using the values for the marginal benefit and the marginal cost of a bushel of apples given in the table above, what is the allocatively efficient quantity of apples? Suppose 10 million bushels of apples are produced. Should the quantity be increased or decreased? What if 20 million bushels are produced; should the quantity be increased or decreased? Answer: The allocatively efficient quantity of apples is 15 million bushels because this is the quantity at which the marginal benefit equals the marginal cost. If 10 million bushels of apples are produced, the marginal benefit exceeds the marginal cost, so more apples should be produced. If 20 million bushels of apples are produced, the marginal cost exceeds the marginal benefit and so fewer apples should be produced. Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

11) Suppose a factory can be designed to produce either trucks or cars. The figure above shows the marginal cost and marginal benefit of producing trucks in terms of the forgone cars. a. What is the marginal benefit of the 25th truck? b. What is the marginal cost of the 25th truck? c. Should the 25th truck be produced? Why or why not. d. What is the marginal benefit of the 75th truck? e. What is the marginal cost of the 75th truck? f. Should the 75th truck be produced? Why or why not? g. What is the allocatively efficient quantity of trucks? Answer: a. 3 cars b. 1 car c. This truck should be produced because people value the 25th truck at 3 cars, but it only costs 1 car to make the truck. d. 1 car e. 3 cars f. This truck should not be produced because people value the 75th truck at 1 car, but it costs 3 cars to make the truck. g. 50 trucks is the allocatively efficient quantity of trucks. Topic: Allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Analytical thinking

12) Compare and contrast production efficiency and allocative efficiency. Answer: Production efficiency means that we are operating at a point on the production possibilities frontier and so we cannot produce more of a good or service without producing less of some other good or service. Production efficiency occurs at all points on the PPF. At any point inside the frontier, production is inefficient because we have unemployed resources. Allocative efficiency means that we are producing the goods and services that society values most highly and so allocative efficiency implies that we are operating on the frontier. But not every point on the production possibilities frontier is the combination of goods and services valued most highly by society. Allocative efficiency only occurs at a single point on the PPF. To insure that allocative efficiency exists, we must compare the marginal benefit of a good with its marginal cost. When production is such that the marginal benefit equals the marginal cost, then we are producing the allocatively efficient level of output. Topic: Production and allocative efficiency Skill: Level 3: Using models Section: Checkpoint 6.1 Status: Old AACSB: Written and oral communication 6.9 Essay: Value, Price, and Consumer Surplus 1) Is the marginal benefit someone enjoys from a good or service the same as the price he or she pays? Explain your answer. Answer: Generally the marginal benefit of a good or service is different than the price that is paid. The marginal benefit is the maximum amount a consumer is willing to pay for a good or service. Typically the consumer can buy the good or service for a price less than the maximum. Indeed, the difference between the marginal benefit (the maximum price the consumer is willing to pay) and the price actually paid is the consumer surplus.) However, it might be the case that the price precisely equals the marginal benefit, that is, equals the maximum the consumer is willing to pay. In this case alone, the marginal benefit equals the price. And in this case, the amount of the consumer surplus equals zero. Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Written and oral communication

2) Why is the demand curve the same as the marginal benefit curve? Answer: The demand curve for a good tells us for any quantity of the good, the dollar's worth of other goods and services that we are willing to forgo in order to get one more unit of the good in question. The marginal benefit of a good is the additional benefit from each unit of a good consumed. The additional benefit is measured by the amount of other goods and services we are willing to forgo to get one more unit of the good in question. Hence the demand curve is the same as the marginal benefit curve because the demand curve shows precisely what the marginal benefit curve measures. Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Written and oral communication 3) The demand curve is the same as another curve. Which curve is the same as the demand curve? Why are the curves the same? Answer: The demand curve is the same as the marginal benefit curve. For any quantity, the demand curve shows the dollar value of other goods and services the consumer is willing to forgo to get another unit of the good. (This amount is the maximum price the consumer is willing to pay and equals the price from the demand curve vertically above each quantity.) But the amount of other goods and services the consumer is willing to forgo is the marginal benefit of the good. Hence along the demand curve the price associated with each quantity of the good is the same as the marginal benefit of that quantity. (So that, for instance, the price associated with the 3rd quantity is the same as the marginal benefit of the 3rd unit.) Therefore the demand curve is the same as the marginal benefit curve. Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Written and oral communication 4) What are the two ways demand curves can be interpreted? Answer: Demand curves can be used to find either: 1) the quantity demanded at a given price. In this view, the curve is a demand curve; 2) the maximum price people are willing to pay for a given quantity. In this view the curve is a marginal benefit curve. Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking

5) "A demand curve is the same as a marginal cost curve." Is this statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. A demand curve is a marginal benefit curve not a marginal cost curve. A demand curve is a marginal benefit curve because it can be used to find the maximum price people are willing to pay for a given quantity, that is, the marginal benefit of the given quantity. Topic: Demand curve and marginal benefit curve Skill: Level 2: Using definitions Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 6) What is consumer surplus? Answer: Consumer surplus equals the difference between the marginal benefit of the good and the price paid for it summed over the quantity consumed. The total consumer surplus in a market equals the area under the demand curve and above the price. Topic: Consumer surplus Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 7) What must be TRUE for a consumer to enjoy a consumer surplus from a unit of a good? Answer: The marginal benefit to the consumer of the unit of the good must be greater than the price of the good. Topic: Consumer surplus Skill: Level 1: Definition Section: Checkpoint 6.2 Status: Old AACSB: Reflective thinking 8) If the demand for a good does not change, how will an increase in the price of that good affect the consumer surplus from it? Answer: The consumer surplus equals the difference between the marginal benefit of the good and its price summed over the quantity consumed. If the demand for a good does not change, then the marginal benefit of that good does not change. Hence an increase in the price decreases the consumer surplus from that good because 1) it decreases the quantity purchased, and 2) it decreases the consumer surplus on each particular unit that is purchased. Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Written and oral communication

9) The figure shows the demand curve for hotel rooms at a local resort. a. If the hotel charges $120 per night, how many rooms will they rent? b. If there are only 40 rooms available, how much are customers willing to pay for a room? c. If 60 rooms are available, how much are customers willing to pay? d. What do the dollars in your answer to part (c) represent? Answer: a. At $120 a night, the hotel will rent 20 rooms. b. If 40 rooms are available, customers are willing to pay $90 per room. c. If 60 rooms are available, customers are willing to pay $60 per room. d. The $60 represents the dollars' worth of other goods and services that customers are willing to forgo to get one more night in a hotel room. Topic: Demand curve and marginal benefit curve Skill: Level 4: Applying models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking 10) Jenn is willing to pay $75 for a purse and the purse's price is $60. What is Jenn's consumer surplus on this purse? Answer: The consumer surplus equals the difference between the marginal benefit of the good and the price actually paid. Jenn is willing to pay $75 for the purse, so its marginal benefit to her is $75. However, she only must pay $60, so Jenn has a consumer surplus of $75 - $60 = $15. Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

11) Jason needs help getting ready for the next test in his economics course and would like to hire Maria, an economics tutor to help him. Jason is willing to pay $30 for the first hour of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth. The equilibrium price for tutoring is $15 per hour. For how many hours of tutoring will Jason hire Maria? Why this amount of hours? What is Jason's consumer surplus, if any, from the tutoring? What is Maria's consumer surplus from the tutoring? Answer: Jason will hire Maria for 4 hours of tutoring. At $15 per hour, the marginal benefit to Jason of the first 4 hours exceeds the price. But the marginal benefit from the fifth hour is less than the price and so Jason will not hire Maria for 5 hours. Jason's total consumer surplus is $30, the sum of $15 from the first hour plus $10 from the second plus $5 from the third plus $0 from the fourth. Maria has no consumer surplus in this market because she is the producer not the consumer. Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

12) The figure above shows the demand curve for pizza. a. What is the marginal benefit of the 20th pizza? b. What is the maximum price the consumer is willing to pay for the 20th pizza? c. If the price of a pizza is $6, what is the consumer surplus of the 20th pizza? d. If the price of a pizza is $10, what is the consumer surplus on all the pizzas consumed? e. If the price of a pizza is $6, what is the consumer surplus on all the pizzas consumed? Answer: a. The marginal benefit of the 20th pizza is $10. b. The maximum price the consumer is willing to pay for the 20th pizza is $10. c. If the price of a pizza is $6, the consumer surplus of the 20th pizza is $4. d. If the price of a pizza is $10, the consumer surplus is $40. e. If the price of a pizza is $6, the consumer surplus is $160. Topic: Consumer surplus Skill: Level 4: Applying models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

13) The figure above shows Cindy's demand for CDs per year. a. What is Cindy's consumer surplus on all the CDs consumed if the price of a CD is $12? b. What is Cindy's consumer surplus on all the CDs consumed if the price of a CD is $9? c. What happens to Cindy's consumer surplus when the price of a CD falls? Answer: a. Her consumer surplus when the price of a CD is $12 equals $15, the area of the triangle under the demand curve and above the price. b. Her consumer surplus when the price of a CD is $9 equals $60, the area of the triangle under the demand curve and above the price. c. As the price of a CD falls, Cindy's consumer surplus increases. This result reflects the observation that consumers are better off when prices are lower. Topic: Consumer surplus Skill: Level 4: Applying models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

14) The diagram above depicts the demand for, and market price of, buckets of raw oysters in Orlando. a. What is the consumer surplus of the person who buys the 100th bucket of oysters? b. What is the consumer surplus of the person who buys the 200th bucket of oysters? c. What is the consumer surplus of the person who buys the 300th bucket of oysters? d. What is the TOTAL consumer surplus from all the oysters consumed in the market? Answer: a. The consumer surplus of the person who buys the 100th bucket of oysters is $6. b. The consumer surplus of the person who buys the 200th bucket of oysters is $3. c. The consumer surplus of the person who buys the 300th bucket of oysters is $0. d. The TOTAL consumer surplus in the market is $1,350. Topic: Consumer surplus Skill: Level 3: Using models Section: Checkpoint 6.2 Status: Old AACSB: Analytical thinking

6.10 Essay: Cost, Price, and Producer Surplus 1) Explain the difference between the words "value," "price," and "cost." Answer: Value refers to the marginal benefit of consuming one more unit of a good and is illustrated by the demand curve. Price is determined in the market by the forces of supply and demand. Price is what the supplier receives for selling a good and is what the buyer pays when purchasing a good. Cost refers to what must be given up to produce a good. The marginal cost of producing one more unit of a good is illustrated by the supply curve. Topic: Value, price, and cost Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Written and oral communication 2) The supply curve is the same as another curve. What other curve is the same as the supply curve? Why are the curves the same? Answer: The supply curve is the same as the marginal cost curve. The marginal cost is the cost of producing one more unit of a good. For any quantity, the supply curve shows the minimum price for which a producer is willing to produce another unit of the good. (This price is equal to the price on the supply curve vertically above each quantity.) A producer is willing to produce a unit of the good if the price covers all costs of the producing that unit, that is, if the price equals the cost of producing the unit. The cost of producing the unit is the marginal cost. Hence along the supply curve, the price associated with each quantity is equal to the marginal cost of each quantity. Therefore the supply curve is the same as the marginal cost curve. Topic: Supply curve and marginal cost curve Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Written and oral communication 3) What is producer surplus? Answer: Producer surplus equals the difference between the price of the good and the marginal cost of producing it, summed over the quantity produced. Topic: Producer surplus Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking

4) What must be TRUE for a producer to obtain a producer surplus from the sale of a unit of a good? Answer: The price must be greater than the marginal cost of producing the good. Topic: Producer surplus Skill: Level 1: Definition Section: Checkpoint 6.3 Status: Old AACSB: Reflective thinking 5) If the price of a visit to Sea World exceeds the marginal cost of the visit by $13, a producer surplus exists for Sea World." Is this statement true or false? Answer: The statement is true. Anytime the price exceeds the marginal cost, there is a producer surplus. In this case, the producer surplus is $13 dollars. Topic: Producer surplus Skill: Level 2: Using definitions Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking 6) Maria helps tutor students taking economics. The equilibrium price for tutoring is $15 per hour. Maria has determined her opportunity cost per hour to be $6 for the first, $9 for the second, $12 for the third, $15 for the fourth, and $18 for the fifth. How many hours will Maria tutor? Why this amount of hours? What, if any, is Maria's producer surplus? Answer: Maria will tutor for 4 hours. For all of the first 4 hours of tutoring, Maria's marginal cost of tutoring is less than or equal to the price she receives from tutoring. Maria will not tutor the fifth hour because for this hour her marginal cost exceeds the price. Maria makes a producer of surplus of $18, the sum of $9 on the first hour plus $6 on the second hour plus $3 on the third hour plus $0 on the fourth hour. Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

7) The figure above shows the supply curve for pizzas. a. What is the marginal cost of the 20th pizza? b. What is the minimum supply price of the 20th pizza? c. If the price is $6 per pizza, what is the producer surplus on the 20th pizza? d. If the price is $6 per pizza, what is the producer surplus for the total quantity of pizzas produced? e. If the price is $8 per pizza, what is the producer surplus for the total quantity of pizzas produced? f. If the price is $10 per pizza, what is the producer surplus for the total quantity of pizzas produced? Answer: a. The marginal cost of the 20th pizza is $6. b. The minimum supply price of the 20th pizza is $6. c. If the price is $6 per pizza, the producer surplus on the 20th pizza is zero. d. If the price is $6 per pizza, the producer surplus is $20. e. If the price is $8 per pizza, the producer surplus is $80. f. If the price is $10 per pizza, the producer surplus is $180. Topic: Producer surplus Skill: Level 3: Using models Section: Checkpoint 6.3 Status: Old AACSB: Analytical thinking

6.11 Essay: Are Markets Efficient? 1) Why is a competitive market efficient? Answer: Efficiency is attained when production is such that the marginal benefit equals the marginal cost. When a competitive market is at equilibrium, the quantity demanded equals the quantity supplied, that is, the demand and supply curves cross. But the marginal benefit curve is the same as the demand curve and the marginal cost curve is the same as the supply curve. Thus equilibrium occurs at the point where the marginal benefit curve crosses the marginal cost curve. As a result, so the marginal benefit equals the marginal cost and hence the market is efficient. Topic: Efficiency of a competitive market Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking 2) Briefly describe the concept of the "invisible hand." Answer: The invisible hand suggests that a competitive market attains allocative efficiency simply by the forces of supply and demand, with no government involvement needed to organize the resources, or set the efficient price and quantity. Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking 3) Explain how the invisible hand delivers an efficient market outcome. Answer: The invisible hand concepts claims that people, acting in their own self-interest, send resources to be used at their highest value. As a result, resources are efficiently used to produce the output of goods and services that people most highly value. With this outcome, producer and consumer surplus are maximized. Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Written and oral communication 4) What is the "invisible hand"? Answer: The invisible hand is a concept articulated by Adam Smith that suggests that competitive markets are efficient. Smith discussed how self-interested buyers and sellers, without government involvement, interact with one another to bring about market efficiency. In Smith's words, market participants are "led by an invisible hand to promote an end (efficiency) which was no part of his intention." Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Written and oral communication 142 Copyright © 2021 Pearson Education, Inc.

5) When economists refer to "the invisible hand," what do they mean? Answer: In his book, Wealth of Nations, Adam Smith wrote that a participant in a competitive market is "led by an invisible hand to promote an end which was no part of his intention." Market participants act in their own self-interest, attempting to maximize their own well-being, yet, in the process, the result is an efficient use of resources. This result occurs because the market forces of supply and demand invisibly guide resources to their highest valued uses. Topic: Invisible hand Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Written and oral communication 6) "If there is an inefficient level of nursing care in South America, a deadweight loss exists." Is this statement true or false? Answer: The statement is true. Anytime there is an inefficient level of production, a deadweight loss exists. Topic: Deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 6.4 Status: Old AACSB: Reflective thinking

7) What are some of the potential obstacles that can lead to market failure by preventing a market from reaching the efficient outcome? Briefly define each obstacle. Answer: The obstacles basically fall into two camps: Obstacles that occur because the government does not intervene in the market and obstacles that occur because the government does intervene in the market. In the first group are the issues of externalities, public goods and common resources, and monopoly. An externality occurs when a cost or benefit from production falls upon someone other than the producer or when a cost or benefit from consumption falls upon someone other than the demander. A public good is a good or service that can be consumed simultaneously by everyone even if they didn't pay for the good or service. Public goods create the free rider problem, in which people consume the good without paying for it. A common resource is a resource that no one owns but everyone can use. A common resource is over-used. Finally, a monopoly occurs when a single producer controls the market by being the only producer. In the case of an externality, public good, or monopoly, government intervention has the possibility of increasing the market's efficiency. The second set of obstacles occurs when a market is otherwise efficient but nonetheless the government intervenes in the market. The second group is comprised of price and quantity regulations, as well as taxes and subsidies. Some price regulations make prices higher than a certain price illegal; others make prices lower than a certain price illegal. Both prevent the market from reaching its (efficient) equilibrium. Taxes increase the price paid by the buyer and decrease the price received by the seller. Subsidies have the opposite effect, decreasing the price paid by the buyer and increasing the price received by the seller. One last reason for a market to be inefficient that does not involve the government is high transactions costs. In this case it might be too expensive to operate a market. Topic: Obstacles to efficiency Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Written and oral communication

8) Jason hires Maria to tutor him in economics. Jason is willing to pay $30 for the first hour of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth. Maria has an opportunity cost per hour of $6 for the first, $9 for the second, $12 for the third, $15 for the fourth, and $18 for the fifth. What will be the equilibrium quantity of hours tutored and the equilibrium price? Explain why this quantity and price is the equilibrium. What is Jason's consumer surplus and what is Maria's producer surplus? Answer: The equilibrium quantity will be 4 hours of tutoring and the equilibrium price will be $15 per hour. The equilibrium quantity will be 4 hours of tutoring because for any of these first 4 hours, the marginal benefit (to Jason) exceeds or is equal to the marginal cost (to Maria). The price will be $15 per hour because that is the maximum price Jason is willing to pay for the fourth hour of tutoring and $15 is the minimum price Maria will accept for the fourth hour of tutoring. Jason's total consumer surplus is $30, the sum of $15 from the first hour plus $10 from the second plus $5 from the third plus $0 from the fourth. Maria makes a producer surplus of $18, the sum of $9 on the first hour plus $6 on the second hour plus $3 on the third hour plus $0 on the fourth hour. Topic: Efficiency of a competitive market Skill: Level 3: Using models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

9) The figure above shows the market for pizza. a. If the price of a slice of pizza is $3, what is the consumer surplus of the 50th slice? b. If the price of a slice of pizza is $3, what is the producer surplus of the 50th slice c. What is the efficient quantity? What is the equilibrium quantity? What is the deadweight loss when the equilibrium quantity is produced? Answer: a. Consumer surplus is the distance between the demand curve and the price of $3 when 50 slices are consumed. That difference is $4, the marginal benefit, minus $3 or $1. b. Producer surplus is the distance between the supply curve and the market price when 50 slices are produced. That difference is $3 minus $2, the marginal cost, or $1. c. The efficient quantity is 100 slices because that is the quantity for which the marginal benefit equals the marginal cost. The equilibrium quantity is 100 slices, because that is the quantity for which the quantity demanded equals the quantity supplied. There is no deadweight loss at the equilibrium quantity because it is the same as the efficient quantity. Topic: Efficiency of a competitive market Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

10) Jason wants to hire Maria to tutor him in economics. Jason is willing to pay $30 for the first hour of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth. Maria has an opportunity cost per hour of $6 for the first, $9 for the second, $12 for the third, $15 for the fourth, and $18 for the fifth. The initial equilibrium price for tutoring is $15 an hour and hence Maria tutors Jason for 4 hours. Now, Maria realizes that she is the only economics tutor because all the other tutors have graduated. Because she is the only tutor, she has a monopoly and, as a monopolist, Maria decides to charge a price of $25 instead of $15 an hour. a. At the price of $25 an hour, how many hours will Maria tutor Jason? b. At the initial equilibrium price of $15 an hour, what was Jason's total consumer surplus and Maria's total producer surplus? c. At the price of $25 an hour, how many hours will Jason hire Maria to tutor him? What is Jason's total consumer surplus and Maria's total producer surplus? d. How does the sum of Jason's consumer surplus plus Maria's producer surplus compare at the initial equilibrium price of $15 an hour (part b) and at the new price of $25 an hour (part c)? Comment on any difference. Answer: a. Maria will tutor Jason for 2 hours. b. At the initial price of $15, Jason's total consumer surplus was $30, the sum of $15 from the first hour plus $10 from the second plus $5 from the third plus $0 from the fourth. Maria made a producer surplus of $18, the sum of $9 on the first hour plus $6 on the second hour plus $3 on the third hour plus $0 on the fourth hour. c. At the new price of $25 an hour, Jason will hire Maria for 1 hour. Jason's total consumer surplus is $5, the consumer surplus from the first hour. Maria makes a producer surplus of $35, the sum of $19 on the first hour plus $16 on the second hour. d. When the price was $15 an hour, the sum of the consumer and producer surpluses was $48. When the price is $25, the sum of the consumer and producer surpluses is $40. The $8 difference between the initial situation and the situation in which Maria is a monopolist is the deadweight loss. Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

11) The figure above shows the market for hot dogs. a. What is the maximum price consumers are willing to pay for the 25th hot dog? b. What is the efficient quantity? c. Suppose that the production was limited to 25 hot dogs. In the figure, indicate the amount of the deadweight loss.

Answer: a. Consumers are willing to pay a maximum of $4 for the 25th hot dog. b. The efficient quantity of hot dogs is 75 hot dogs because that is the quantity for which the marginal benefit equals the marginal cost.

c. The deadweight loss is indicated in the figure above. Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

12) The figure above shows the supply and demand curves for pizza. If the market is at its competitive equilibrium, what area in the graph above represents: a. consumer surplus? b. producer surplus? Answer: a. AFB b. BFC Topic: Efficiency of a competitive market Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

13) The figure above shows the supply and demand for pizza. a. What is the efficient level of output? b. If 70,000 pizzas are produced, what area represents the deadweight loss? c. Why does the deadweight loss in part (b) occur? d. If 20,000 pizzas are produced, what area represents the deadweight loss? e. Why does the deadweight loss in part (d) occur? Answer: a. 40,000 pizzas is the efficient quantity. b. If 70,000 pizzas are produced, the deadweight loss is area C. c. The deadweight loss occurs because we are producing some pizzas, specifically pizzas 40,001 through 70,000, for which the marginal cost is greater than the marginal benefit. d. If 20,000 pizzas are produced, the deadweight loss is area B. e. The deadweight loss occurs because we are not producing some pizzas, namely pizzas 20,001 through 40,000, for which the marginal benefit is greater than the marginal cost. Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 6.4 Status: Old AACSB: Analytical thinking

6.12 Essay: Are Markets Fair? 1) What are the two views of fairness? How does each view redistribution of income from the rich to the poor? Answer: One view is that "it's not fair if the result isn't fair." This view requires that income should be redistributed from the rich to the poor in order to create a fair result. Another view is that "it's not fair if the rules aren't fair." This view requires that private property may be transferred only under voluntary exchange, so redistribution of income is not fair unless it is voluntary. Topic: Fairness Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning 2) How can a person argue that health care services in America are provided efficiently, but not fairly? Answer: The assertion that the health market is efficient implies that competitive market forces determine the level and quality of health care. Where the demand for and supply of health care intersects, the marginal benefit and marginal cost of health care are equal. This equality means that the people who are demanding health care are willing and able to pay the price, which is equal to the marginal cost of providing health care. However, at that market price there are many people who cannot afford health care. These people, probably the poor and uninsured, are left to go to clinics, crowd emergency rooms, or else do without basic health care needs because of their lack of ability to pay the market price. This outcome could easily violate the "it's not fair if the result isn't fair" view of fairness. Thus observers who assert that the U.S. health care system might be efficient but isn't fair are using the "results" view of fairness. Topic: Fair results Skill: Level 4: Applying models Section: Checkpoint 6.5 Status: Old AACSB: Written and oral communication 3) Often politicians assert that a price, such as the price of gasoline or the rent for an apartment, is too high and that it is unfair for these prices to be so high. If these products are traded in competitive markets, what fairness rule are politicians using? Why? Answer: The fairness rule is one of "It's not fair if the results aren't fair." The claim that the prices are too high to be fair is a claim that buyers are being unfairly harmed by having to pay such high prices. The assertion that people are harmed because the price is too high is looking at the results of the process because if the price had been lower, the assertion of unfairness would not have been made. Topic: Fair results Skill: Level 4: Applying models Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning 152 Copyright © 2021 Pearson Education, Inc.

4) What approach to fairness argues in favor of government policies that redistribute income so that there is more equality of income? Answer: The general approach to fairness that argues in favor of government redistribution is a "fair results approach," that is, an approach that argues "it isn't fair unless the results are fair." In this view, more (perhaps even complete) equality of income is the fairest income distribution. So this view asserts that government policies to redistribute income are necessary for fairness. Topic: Fair results Skill: Level 2: Using definitions Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning 5) What is the "big tradeoff"? Answer: The "big tradeoff" is the tradeoff between efficiency and fairness. The idea is that if the government redistributes income so that it is more equally shared, output decreases so that it is less than the efficient amount. Output shrinks because such redistribution blunts people's incentives to work. Hence redistributing income so that everyone has the same amount of income might end up insuring that everyone's incomes are smaller than if less redistribution is pursued. Topic: The big tradeoff Skill: Level 1: Definition Section: Checkpoint 6.5 Status: Old AACSB: Written and oral communication 6) Why do societies face a tradeoff between the size of the economic pie and the degree of equality with which it is shared? Answer: A person's share of the economic pie is determined by his or her income. To increase the degree of equality, income must be redistributed away from richer people and towards poorer people. Income is transferred from the rich to the poor by means of taxes. Taxes discourage work and saving. Because people work less, the nation's output decreases. When saving decreases, so does investment in capital, which also decreases the nation's output. Thus taxes that redistribute income in order to make for a more equal income distribution decrease the nation's output, that is, shrink the economic pie. Topic: The big tradeoff Skill: Level 4: Applying models Section: Checkpoint 6.5 Status: Old AACSB: Written and oral communication

7) Why does the problem of the big tradeoff arise when the government engages in the process of redistributing income using taxes and transfers? Answer: There are two reasons why the big tradeoff problem arises. First, in the process of transferring income from the people who have to those who do not have, an administrative cost is incurred by society. The result is that $1 taxed is not $1 transferred. Hence the effort to make incomes more equal decreases the average income. Second, taxing people's income is a disincentive to work, while taxing people's savings is a disincentive to accumulate capital. As a result, people work less and save less, both of which decrease the amount of goods and services produced and decrease people's income. Hence once again the effort to make incomes more equal decreases the average income. Topic: The big tradeoff Skill: Level 3: Using models Section: Checkpoint 6.5 Status: Old AACSB: Written and oral communication 8) Bill Gates is a founder of Microsoft and one of the world's richest individuals. Suppose Microsoft sells more software and Mr. Gates acquires another billion dollars in wealth. Simultaneously, suppose a burglar whose income is well below average broke into Bill Gates' house and stole a million dollars' worth of antiques. Using the "it's not fair if the rules aren't fair" approach to fairness, is Mr. Gates' acquisition of additional wealth fair? Is the (poor) thief's acquisition fair? Answer: In order for Mr. Gates to become richer, Microsoft had to convince consumers to buy their products. The consumers' choices were voluntary. That is, the consumer engaged in a voluntary transaction with Microsoft and, as a result, Mr. Gates gained wealth. (And the consumers gained the software.) Because the exchange was voluntary, it is a fair exchange according to the "it's not fair if the rules aren't fair" approach. The burglar, however, did not engage in a voluntary transaction with Mr. Gates. Mr. Gates suffered an involuntary transaction with the burglar. Involuntary transactions violate the symmetry principle and hence the thievery is not fair according to the "rules" approach. Notice that the fairness has nothing to do with the incomes of Mr. Gates and the burglar; instead, fairness hinges on whether the transaction was voluntary. Topic: Fair rules Skill: Level 4: Applying models Section: Checkpoint 6.5 Status: Old AACSB: Written and oral communication 9) According to the "fair rules" view of fairness, are taxes fair? Explain. Answer: Taxes are unfair according to the fair rules view because they are an involuntary transfer of private property. While most economists and most people support fair taxation, there is little agreement on what constitutes a fair tax. Topic: Fair rules Skill: Level 3: Using models Section: Checkpoint 6.5 Status: Old AACSB: Ethical understanding and reasoning 154 Copyright © 2021 Pearson Education, Inc.

Foundations of Microeconomics, 9e (Bade) Chapter 7 Government Actions in Markets 7.1 Price Ceilings 1) A price ceiling A) is an illegal price. B) is the price that exists in a black market. C) is the maximum price that can legally be charged. D) Both answer A and B are correct. E) Both answers B and C are correct. Answer: C Topic: Price ceiling Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 2) A price ceiling is A) a maximum legal price. B) a minimum legal price. C) an equilibrium price. D) a market-determined price. E) the highest price at which the quantity demanded equals the quantity supplied. Answer: A Topic: Price ceiling Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 3) If a price ceiling is set above the equilibrium price, then A) there will be a surplus of the good. B) there will be a shortage of the good. C) there will be neither a shortage nor a surplus of the good. D) the price ceiling will generate revenue for the government. E) the price ceiling affects suppliers but not demanders. Answer: C Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

4) A price ceiling in the market for gasoline that is below the equilibrium price will lead to A) the quantity demanded of gasoline exceeding the quantity supplied. B) an increase in the demand for gasoline. C) a decrease in the supply of gasoline. D) the quantity supplied of gasoline exceeding the quantity demanded. E) no change in the market since the price ceiling is below the equilibrium price. Answer: A Topic: Price ceiling Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 5) When a price ceiling below the equilibrium price is imposed on a good, production of the good A) increases. B) decreases. C) does not change. D) is frozen at the pre-ceiling level. E) either increases or decreases depending on whether the supply of the good increases or decreases when the price ceiling is imposed. Answer: B Topic: Price ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 6) A price ceiling in the market for fuel oil that is below the equilibrium price will A) lead to the quantity supplied of fuel oil exceeding the quantity demanded. B) lead to the quantity demanded of fuel oil exceeding the quantity supplied. C) decrease the demand for fuel oil. D) increase the supply of fuel oil. E) have no effect in the market for fuel oil. Answer: B Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

7) The demand and supply schedules for pizza are in the table above. A price ceiling of $4 per slice results in A) a surplus of 20 slices of pizza. B) a shortage of 20 slices of pizza. C) a shortage of 40 slices of pizza. D) a shortage of 60 slices of pizza. E) neither a shortage nor a surplus. Answer: B Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Revised AACSB: Analytical thinking 8) The demand and supply schedules for pizza are in the table above. A price ceiling of $8 per slice results in A) a surplus of 20 slices of pizza. B) a shortage of 20 slices of pizza. C) a shortage of 40 slices of pizza. D) a shortage of 60 slices of pizza. E) neither a shortage nor a surplus. Answer: E Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Revised AACSB: Analytical thinking

9) The demand and supply schedules for pizza are in the table above. If the government sets a maximum legal price of $4 per slice of pizza, then A) there is a shortage of 20 slices of pizza. B) this maximum price is an example of a price floor. C) this maximum price is an example of a price ceiling. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: D Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Revised AACSB: Analytical thinking

10) The figure shows the market for apartments in Rivercity. If the government imposes a rent ceiling of $1,900 which of the following will occur? i. There will be increased search activity. ii. A shortage of apartments will occur. iii. A deadweight loss will occur. A) i, ii and iii B) i only C) ii and iii only D) i and ii only E) ii only Answer: A Topic: Price ceiling Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Revised AACSB: Analytical thinking 4 Copyright © 2021 Pearson Education, Inc.

11) The graph shows the market for apartments in Rivercity. Prior to the rent ceiling, ________ apartments are rented at ________. After a rent ceiling of $1,900 is imposed, ________ are rented. A) 3,000; $1,900; 3,000. B) 4,000; $2,050; 3,000. C) 4,000; $2,050; 4,000. D) 3,000; $1,900; 4,000. E) 3,000; $2,050; 3,000, Answer: B Topic: Price ceiling Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Revised AACSB: Analytical thinking 12) The graph shows the market for apartments in Rivercity. As a result of the rent ceiling of $1,900, ________ are rented and people are willing to incur search costs of ________. A) 3,000; more than $200 B) 3,000; less than $200 C) 4,000; zero D) 4,000; more than $200 E) None of the above answers are correct. Answer: A Topic: Rent ceiling Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Revised AACSB: Analytical thinking

13) The figure above illustrates the bagel market. Which of the following statements is correct? A) With a price ceiling of $1.00 per bagel, the quantity demanded is equal to the quantity supplied. B) With a price ceiling of $3.00 per bagel, the quantity demanded is greater than the quantity supplied. C) With a price ceiling of $1.00 per bagel, there is a shortage of bagels. D) Answers A and B are correct. E) Answers B and C are correct. Answer: C Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 14) The figure above illustrates the bagel market. Which of the following statements is correct? A) With a price ceiling of $1.00 per bagel, the price of a bagel is $1. B) With a price ceiling of $3.00 per bagel, the price of a bagel is $2. C) With no government intervention, the equilibrium price of a bagel is $2. D) Only answers A and B are correct. E) Answers A, B, and C are correct. Answer: E Topic: Price ceiling Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

15) In a housing market with no rent ceilings, the equilibrium rent is that for which the quantity of apartments demanded A) equals the quantity supplied. B) is greater than the quantity supplied. C) is less than the quantity supplied. D) might be greater than, equal to, or less than the quantity supplied depending on whether the supply curve is upward sloping, horizontal, or vertical. E) None of the above answers is correct because without rent ceilings there is no equilibrium rent. Answer: A Topic: Rent ceiling Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 16) A rent ceiling set below the equilibrium rent A) ensures the availability of enough low-rent apartments in a city. B) results in all renters and potential renters being better off. C) creates a situation in which the quantity demanded of housing is greater than quantity supplied. D) ensures that landlords earn a reasonable rate of profit on apartments. E) eliminates discrimination by landlords. Answer: C Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 17) A rent ceiling set below the equilibrium rent decreases the quantity of housing supplied because A) landlords of previously barely profitable apartments refuse to rent them. B) the supply of housing increases. C) fewer tenants will search for housing. D) demand for housing will increase. E) the supply curve of housing immediately shifts leftward. Answer: A Topic: Rent ceiling, shortages Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

18) A housing shortage results when A) a tax is imposed on housing. B) a rent ceiling below the equilibrium rent is imposed. C) a rent ceiling above the equilibrium rent is imposed. D) rents rise. E) a rent floor below the equilibrium rent is imposed. Answer: B Topic: Rent ceiling, shortages Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 19) Suppose the equilibrium rent in Denver is $1,050. A rent ceiling of $755 per month leads to A) a surplus of apartments in Denver. B) a shortage of apartments in Denver. C) no change in the Denver apartment market. D) fair prices in the Denver market. E) compared to the situation at the equilibrium rent, a decrease in the quantity of apartments demanded and an increase in the quantity of apartments supplied. Answer: B Topic: Rent ceiling, shortages Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 20) Suppose the equilibrium rent in Boston is $1,500. A rent ceiling of $1,600 per month leads to A) a surplus of apartments in Boston. B) a shortage of apartments in Boston. C) no change in the Boston apartment market. D) fair prices in the Boston apartment market. E) compared to the situation at the equilibrium rent, a decrease in the quantity of apartments demanded and an increase in the quantity of apartments supplied. Answer: C Topic: Rent ceiling, shortages Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

21) With a rent ceiling set below the equilibrium rent i. all renters are able to rent apartments at a lower rent. ii. there is a shortage of apartments. iii. the quantity of apartments supplied does not change because buildings cannot be moved. A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: B Topic: Rent ceiling, shortages Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 22) Which of the following is an impact of a rent ceiling set below the equilibrium rent? A) Renters find apartments to rent more rapidly because the rent ceiling is lower. B) Landlords' incentives to provide apartments decrease. C) The supply of apartments increases as soon as the rent ceiling is imposed. D) A surplus of housing occurs. E) Search for apartments decreases because renters need no longer search for the apartment with the lowest rent. Answer: B Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 23) If a rent ceiling is below the equilibrium rent, some allocation scheme must be used. The allocation methods include all of the following EXCEPT A) charging the equilibrium rent. B) refusing to rent to individuals on the basis of sex, race, or some other attribute. C) requiring a payment, such as key money, in addition to the rent. D) the creation of a black market. E) increased search activity. Answer: A Topic: Rent ceiling, allocation Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

24) Which of the following results from a price ceiling? i. increased search activity ii. surplus iii. black market A) i only B) i and iii C) ii and iii D) i, ii, and iii E) ii only Answer: B Topic: Price ceiling, search and black market Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 25) An illegal market in which the price exceeds a legally imposed price ceiling is called a A) shortage market. B) surplus market. C) black market. D) fair market. E) subsidized market. Answer: C Topic: Price ceiling, black market Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 26) A black market A) is legal only when it is associated with government price ceilings. B) is defined as the deadweight loss associated with taxes. C) benefits no one. D) is a potential outcome of a price ceiling. E) is always legal. Answer: D Topic: Price ceiling, black market Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

27) A price ceiling A) creates market efficiency by making a good cheaper. B) helps all producers by increasing the price of the good. C) can create a black market for the good. D) reduces search activity. E) benefits all people who want to buy the good. Answer: C Topic: Price ceiling, black market Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 28) A rent ceiling below the equilibrium rent A) increases the quantity of housing supplied. B) is an example of a price floor. C) has no effect on the housing market because the ceiling is below the equilibrium. D) can create a black market. E) limits search because people need no longer search for cheap apartments. Answer: D Topic: Rent ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 29) A black market for housing exists because of a rent ceiling. The rent for housing in the black market is A) the same as the equilibrium rent. B) lower than the ceiling rent. C) somewhere between the ceiling rent and the maximum rent a tenant is willing to pay. D) somewhere between zero and the equilibrium rent. E) not defined because the market is not legal. Answer: C Topic: Rent ceiling, black market Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

30) Black markets can occur when price ceilings are imposed in a market. Which of the following explains why sellers participate in a black market? A) Sellers are able to sell the product for a higher than legal price. B) There are more buyers in the black market than in the legal market. C) The demand is perfectly elastic in a black market. D) The demand is perfectly inelastic in a black market. E) The surplus in the legal market means that many sellers can sell their product in the black market. Answer: A Topic: Rent ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 31) When a rent ceiling law is passed in a city, which of the following occurs? A) The total price of renting an apartment decreases to all renters. B) The quantity of apartments supplied does not change. C) Some landlords and renters use methods such as "key money" to get around the rent ceiling law. D) Renters have no trouble finding a nice, reasonably priced apartment to rent. E) Generally the number of renters in the city increases because people move to the city to take advantage of the low-rent apartments. Answer: C Topic: Rent ceiling, black market Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 32) One of the consequences of a rent ceiling set below the equilibrium rent is A) decreased search activity. B) increased search activity. C) the establishment of landlord unions. D) surpluses of apartments. E) the elimination of the deadweight loss that would otherwise exist in the housing market. Answer: B Topic: Rent ceiling, search Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

33) The opportunity cost of an apartment in a rent controlled market is equal to A) the rent charged for the apartment. B) the opportunity cost of searching for the apartment. C) the rent charged for the apartment plus the opportunity cost of searching for the apartment. D) nothing because of the surplus of apartments when there are rent controls. E) the rent charged for the apartment minus the opportunity cost of searching for the apartment. Answer: C Topic: Rent ceiling, search Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 34) A rent ceiling in a housing market A) makes all rents lower than the ceiling illegal to charge. B) is set above the equilibrium rent in order to have an effect. C) increases the time people spend searching for housing. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: C Topic: Rent ceiling, search Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 35) In a housing market with a rent ceiling below the equilibrium rent, apartment seekers spend more time searching for an apartment than they would in a housing market without a rent ceiling. Why does this difference exist? A) In the market with the rent ceiling, renters are searching for the best buy in apartments. B) In the market with the rent ceiling, there is a wide variety in the quality of apartments for rent. C) In the market with the rent ceiling, the quantity of housing demanded is greater than quantity supplied at the ceiling price. D) The premise of the question is incorrect because people spend less time searching with a rent ceiling since they no longer need to look for a low-priced apartment. E) The premise of the question is incorrect because there is no difference in the search time between a market with a rent ceiling and one without a ceiling. Answer: C Topic: Rent ceiling, search Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

36) In a market with a rent ceiling set below the equilibrium rent, the producer and consumer surplus A) both increase. B) both decrease, but generally not to zero. C) do not change. D) are eliminated. E) are both totally converted into deadweight loss. Answer: B Topic: Rent ceiling, efficiency Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 37) Which of the following decrease the deadweight loss from a rent ceiling set below the equilibrium rent? i. lowering the ceiling ii. dedicating more resources to enforcement of the ceiling iii. raising the ceiling A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: C Topic: Rent ceiling, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 38) People who benefit from a rent ceiling include A) all landlords. B) taxpayers. C) tenants who have a rent-controlled apartment. D) potential tenants, that is, people looking for apartments. E) all landlords and some tenants. Answer: C Topic: Rent ceiling, efficiency Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

39) When a rent ceiling below the equilibrium rent is put in place, the outcome is A) efficient because marginal benefit equals marginal cost. B) inefficient because marginal benefit equals marginal cost. C) inefficient because marginal benefit is greater than marginal cost. D) inefficient because marginal benefit is less than marginal cost. E) efficient because marginal benefit is greater than marginal cost. Answer: C Topic: Rent ceiling, efficiency Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 40) Assuming that the rent ceiling is strictly enforced so that there is no black market, which of the following statements about a housing market with a rent ceiling set below the equilibrium rent is correct? A) The rent for housing equals the ceiling rent or higher. B) There is excess supply of housing. C) The rent ceiling increases the amount of producers' surplus. D) The rent ceiling creates a deadweight loss. E) The rent ceiling enforces efficiency upon the housing market. Answer: D Topic: Rent ceiling, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 41) The deadweight loss in a housing market with a rent ceiling set below the equilibrium rent is the A) loss to those who cannot find apartments and the gain to landlords who charge black market rents. B) loss to those who cannot find apartments and the loss to landlords who cannot offer housing at the lower rent ceiling. C) loss to landlords and the gain to tenants who pay a fairer rent. D) loss to tenants and the gain to landlords who have the incentive to offer more apartments for rent. E) gain to landlords and to tenants because now a fairer rent is charged. Answer: B Topic: Rent ceiling, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

42) Rent ceilings set below the equilibrium rent i. create a deadweight loss. ii. increase search activity. iii. result in a surplus of apartments. A) i only B) ii only C) i and iii D) i and ii E) i, ii, and iii Answer: D Topic: Rent ceiling, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 43) The deadweight loss from a rent ceiling below the equilibrium rent is smallest when the supply of housing is A) perfectly elastic. B) elastic but not perfectly elastic. C) unit elastic. D) inelastic but not perfectly inelastic. E) perfectly inelastic. Answer: E Topic: Rent ceiling, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

44) The above figure shows the market for 1 bedroom town homes in San Diego. If a rent ceiling is set at $1,000 per month then there is a A) surplus equal to 150,000 town homes. B) shortage equal to 100,000 town homes. C) surplus equal to 100,000 town homes. D) shortage equal to 150,000 town homes. E) shortage equal to 250,000 town homes. Answer: D Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 45) The above figure shows the market for 1 bedroom town homes in San Diego. If a rent ceiling is set at $1,000 per month, what is TRUE? A) The quantity of town homes demanded decreases to 100,000. B) Black market rents might be as high as $1,300 per month. C) The quantity of town homes supplied increases to 250,000. D) More town homes are rented after the rent ceiling that before. E) The quantity demanded of town homes is less than the quantity supplied. Answer: B Topic: Rent ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

46) The above figure shows the market for 1 bedroom town homes in San Diego. If a rent ceiling is set at $1,000 per month, what is the maximum rent someone is willing to pay in the black market? A) $1,300 per month B) $1,000 per month C) $900 per month D) $1,100 per month E) $1,400 per month Answer: A Topic: Rent ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

47) The above figure shows the market for winter jackets. In an effort to keep the nation warm, the president places a price ceiling of $100 in the market for winter jackets. As a result, there is a A) shortage equal to 150,000 jackets. B) surplus equal to 150,000 jackets. C) surplus equal to 300,000 jackets. D) shortage equal to 250,000 jackets. E) shortage equal to 100,000 jackets. Answer: A Topic: Price ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

48) The above figure shows the market for winter jackets. In an effort to keep the nation warm, the president places a price ceiling of $100 in the market for winter jackets. Which of the following statements is TRUE? A) After taking account of the resources lost in search, consumer surplus increases when the price ceiling is in place. B) There will be a surplus of jackets. C) Because the price of a jacket is lowered, consumers end up buying more jackets with the price ceiling than without it. D) Producer surplus decreases if there is a price ceiling. E) The quantity supplied of jackets is greater that quantity demanded when there is a price ceiling. Answer: D Topic: Price ceiling, efficiency Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 49) The above figure shows the market for winter jackets. In an effort to keep the nation warm, the president places a price ceiling of $100 in the market for winter jackets. What would be the maximum price someone would pay in the black market? A) $100 per jacket B) $120 per jacket C) $130 per jacket D) $90 per jacket E) $140 per jacket Answer: C Topic: Price ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

50) The above figure shows the market for winter jackets. In an effort to keep the nation warm, the president places a price ceiling of $100 in the market for winter jackets. When the price ceiling is in place and taking account of the resources lost in search, consumer surplus ________ and producer surplus ________ compared to the equilibrium before the price ceiling was imposed. A) decreases; increases B) decreases; decreases C) increases; increases D) increases; decreases E) does not change; increases Answer: B Topic: Price ceiling, efficiency Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

51) The above figure shows a housing market with a rent ceiling equal to $1,000. In this figure, after taking account of the resources lost in search, what area is equal to the consumer surplus? A) area A B) area B C) area C D) area D E) area E Answer: A Topic: Rent ceiling, efficiency Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 20 Copyright © 2021 Pearson Education, Inc.

52) The above figure shows a housing market with a rent ceiling equal to $1,000. In this figure, what area is equal to the producer surplus? A) area A B) area B C) area C D) area D E) area E Answer: D Topic: Rent ceiling, efficiency Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 53) The above figure shows a housing market with a rent ceiling equal to $1,000. In this figure, what area is equal to the deadweight loss? A) area A B) area B C) area C D) area D E) area E Answer: C Topic: Rent ceiling, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 54) The above figure shows a housing market with a rent ceiling equal to $1,000. In this figure, what area is equal to the resources lost due to search? A) area A B) area B C) area C D) area D E) area E Answer: B Topic: Rent ceiling, search Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

55) The above figure shows the market for DVDs. The government decides that all citizens deserve to watch affordable DVDs so a price ceiling of $12 per DVD is placed on DVDs. After this price ceiling is in effect and taking account of the resources lost in search, consumer surplus equals A) $900,000. B) $400,000. C) $200,000. D) $180,000. E) $100,000. Answer: E Topic: Price ceiling, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 56) The above figure shows the market for DVDs. The government decides that all citizens deserve to watch affordable DVDs so a price ceiling of $12 per DVD is placed on DVDs. After this price ceiling is in effect, producer surplus equals A) $900,000. B) $400,000. C) $200,000. D) $100,000. E) $1,800,000. Answer: D Topic: Price ceiling, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 22 Copyright © 2021 Pearson Education, Inc.

57) The above figure shows the market for DVDs. The government decides that all citizens deserve to watch affordable DVDs so a price ceiling of $12 per DVD is placed on DVDs. After this price ceiling is in effect, deadweight loss equals A) $1,600,000. B) $200,000. C) $800,000. D) $1,800,000. E) $400,000. Answer: C Topic: Price ceiling, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 58) In a housing market with a rent ceiling set below the equilibrium rent, as time passes the supply of apartments A) decreases. B) increases. C) does not change. D) becomes fixed by the government. E) increases while the demand for apartments decreases. Answer: A Topic: Rent ceiling, change in supply over time Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 59) New York City, which has had a rent ceiling law for more than seventy years, has many abandoned apartment buildings throughout the city. Which of the following explains this? A) Few workers with jobs in the city want to live in there because of pollution. B) No building permits for new apartment buildings have been issued for over fifty years. C) Once any building gets so old, it is abandoned. D) Landlords have no incentive to finance maintenance and remodeling of apartment buildings. E) Rent ceilings make the construction of new buildings so profitable that old buildings are simply abandoned. Answer: D Topic: Rent ceiling, change in supply over time Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Revised AACSB: Reflective thinking

60) Which of the following is an example of the unfairness of rent ceilings? A) Voluntary exchange is encouraged by rent ceilings. B) Racial discrimination in renting is discouraged by rent ceilings. C) Newcomers have a more difficult time finding apartments. D) Rich people do not get apartments in these markets. E) Too many people rent apartments. Answer: C Topic: Rent ceiling, unfairness Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Ethical understanding and reasoning 61) Suppose the city of Chicago imposes a rent ceiling that fixes rents at $400 below the equilibrium rent. With this plan A) the quantity of apartments demanded will increase. B) the quantity of apartments supplied will increase. C) young people and poor people will have an easier time finding apartments. D) the deadweight loss in Chicago's apartment market will be eliminated. E) there will be a surplus of apartments offered for rent. Answer: A Topic: Rent ceiling, unfairness Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 62) Rent ceilings A) create a deadweight loss. B) increase maintenance by landlords. C) benefit people who live in apartments where the rent is controlled by the ceiling. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: D Topic: Rent ceiling, unfairness Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Revised AACSB: Reflective thinking

63) Rent ceilings are difficult to abolish because A) they create such large profits for landlords. B) current renters offer political support for ceilings. C) the government doesn't like to give up the tax revenues associated with ceilings. D) they result in an efficient use of resources. E) landlords lobby to keep them in place. Answer: B Topic: Rent ceiling, unfairness Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 64) A price ceiling is a government regulation that makes it illegal to charge a price A) below the equilibrium price. B) above the equilibrium price. C) for a good or service. D) above some specified level. E) below some specified level. Answer: D Topic: Price ceiling Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 65) When a price ceiling is set below the equilibrium price, the quantity supplied ________ the quantity demanded and ________ exists. A) is less than; a surplus B) is less than; a shortage C) is greater than; a surplus D) is greater than; a shortage E) equals; an equilibrium Answer: B Topic: Price ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

66) The graph shows the market for holiday condos in West Palm Beach. The equilibrium rent is ________ a week. A) any amount less than $1,550 B) any amount greater than $1,550 C) $1,550 D) $4,000 E) None of the above answers is correct. Answer: C Topic: Rent ceiling Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 67) In a housing market with a rent ceiling set below the equilibrium rent A) some people seeking an apartment to rent will not be able to find one. B) the total cost of renting an apartment will decrease for all those seeking housing. C) some landlords will not be able to find renters to fill available apartments. D) search will decrease because renters no longer need to search for less expensive apartments. E) None of the above answers are correct because to have an impact, the rent ceiling must be set ABOVE the equilibrium rent. Answer: A Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

68) The graph shows the market for ski chalets in Aspen. The Aspen Tourist Board asks the local government to impose a rent ceiling on ski chalets. If the rent ceiling is set at $1,900 a week, then there is A) a shortage of 3,000 chalets a week. B) a surplus of 3,000 chalets a week. C) neither a shortage nor surplus of chalets. D) a shortage of 6,000 chalets a week. E) a surplus of 6,000 chalets a week. Answer: A Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 69) A rent ceiling on housing creates a problem of allocating the available housing units because A) the demand for housing decreases and the demand curve shifts leftward. B) the supply of housing increases and the supply curve shifts rightward. C) a shortage of apartments occurs. D) a surplus of apartments occurs. E) it eliminates search, which is one of the major ways housing units are allocated. Answer: C Topic: Rent ceiling, allocation Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

70) Suppose that the government imposes a price ceiling on gasoline that is below the equilibrium price. The black market for gasoline is ________ market in which the price ________ ceiling price. A) a legal; exceeds the B) an illegal; exceeds the C) a legal; is less than the D) an illegal; is less than the E) an illegal; equals Answer: B Topic: Price ceiling, black market Skill: Level 1: Definition Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking 71) If a rent ceiling is imposed that is less than the equilibrium rent, which of the following outcomes is most likely to occur? A) reduced search activity B) black market activity C) a building boom D) a housing surplus E) None of the above answers is correct because to have an impact, the rent ceiling must be above the equilibrium rent. Answer: B Topic: Rent ceiling, black market Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

72) The graph shows the market for ski chalets in Aspen. If a rent ceiling is set at $1,900 a week, then the maximum amount charged in the black market is ________ a week. A) $1,900 B) $2,050 C) $2,125 D) $225 E) $150 Answer: C Topic: Rent ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

73) The graph shows the market for holiday condos in West Palm Beach. If a rent ceiling is set at $1,700 a week, the quantity of holiday condos rented A) is 2,000 a week. B) is 4,000 a week. C) is 5,000 a week. D) is some amount, but more information is needed to determine the amount. E) depends on the black market. Answer: B Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 74) Rent ceilings A) increase search activity. B) result in surpluses. C) create efficiency. D) benefit producers. E) have no effect if they are set below the equilibrium rent. Answer: A Topic: Rent ceiling, search Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

75) A rent ceiling creates a deadweight loss A) if it is set below the equilibrium rent. B) if it is set equal to the equilibrium rent. C) if it set above the equilibrium rent. D) if it decreases the taxes the government collects in the housing market. E) never, because if it did create a deadweight loss, the government would not impose it. Answer: A Topic: Price ceiling, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 76) If a price ceiling is introduced in the market for milk below the market equilibrium price, then the producer surplus made by dairy farmers A) will increase. B) will decrease. C) will not change. D) might increase or decrease depending on whether the demand for milk increases or decreases. E) might increase or decrease depending on whether the supply of milk decreases or increases. Answer: B Topic: Price ceiling, efficiency Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

77) The graph shows the market for rental housing in Little Rock. The market for apartments is efficient when A) the quantity of apartments demanded is 12,000 a month. B) the rent ceiling is set at $300 a month. C) there is no rent ceiling. D) the quantity of apartments supplied is 6,000 a month. E) the rent charged is less than $450. Answer: C Topic: Rent ceiling, efficiency Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 78) Rent ceilings A) eliminate the problem of scarcity. B) allocate resources efficiently. C) ensure that housing goes to the poorer people. D) benefit renters living in apartments with the rent ceilings. E) benefit all landlords because the landlords know what rent to charge their renters. Answer: D Topic: Rent ceiling, unfairness Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Reflective thinking

79) A rent ceiling is A) fair, because it helps all renters. B) fair, because it insures that low-income families can rent apartments. C) fair, because it helps all landlords. D) unfair. E) fair, because it helps more renters than it harms. Answer: D Topic: Rent ceiling, unfairness Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Ethical understanding and reasoning 7.2 Price Floors 1) A price floor is A) the highest possible legal price that can be charged for a good or service. B) usually equal to the equilibrium price established before the government imposed the price floor. C) the lowest legal price at which a good or service can be traded. D) a legal price of zero that can be charged for a good or service. E) almost always equal to the price ceiling. Answer: C Topic: Price floor Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 2) A price floor makes prices A) below the price floor illegal. B) above the price floor illegal. C) below the equilibrium price illegal. D) above the equilibrium price illegal. E) None of the above answers is correct. Answer: A Topic: Price floor Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

3) Which of the following is an example of a price floor? A) a law passed in a city to lower apartment rents by setting the maximum price that can be charged for rent B) an equilibrium price C) a minimum wage law D) a law setting the highest price that can legally be charged for a gallon of gasoline E) None of the above answers give examples of a price floor. Answer: C Topic: Price floor Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 4) A price floor set above the equilibrium price A) creates a surplus. B) creates a shortage. C) creates excess demand. D) balances supply and demand. E) has no effect. Answer: A Topic: Price floor, surplus Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 5) A price floor A) changes the equilibrium price if it is imposed in black markets. B) changes the price and quantity if it is set below the equilibrium price. C) changes the price and quantity if it is set above the equilibrium price. D) does not create a black market if it is set above the equilibrium price. E) changes the price and quantity only if it equals the equilibrium price. Answer: C Topic: Price floor, surplus Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

6) Suppose the equilibrium price of a gallon of milk is $4. If the government imposes a price floor of $5 per gallon of milk, the A) quantity supplied of milk falls short of the quantity demanded. B) quantity supplied of milk exceeds the quantity demanded. C) supply increases. D) demand decreases. E) price of milk remains $4 per gallon. Answer: B Topic: Price floor, surplus Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 7) Suppose the equilibrium price of a gallon of milk is $4. If the government imposes a price floor of $5 per gallon of milk A) the quantity supplied of milk exceeds the quantity demanded. B) the quantity supplied of milk falls short of the quantity demanded. C) the supply increases. D) the market will not be affected. E) there will be a shortage of milk. Answer: A Topic: Price floor Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 8) In the labor market, as wages rise, households A) decrease the quantity of labor supplied. B) increase the quantity of labor supplied. C) decrease the quantity of labor demanded. D) increase the quantity of labor demanded. E) increase the supply of labor. Answer: B Topic: Labor market Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

9) A stated goal of a minimum wage is to A) increase government tax revenue. B) stabilize production costs. C) boost the incomes of low-wage earners. D) decrease business profits. E) increase business profits by making the labor market more efficient. Answer: C Topic: Minimum wage Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 10) In a competitive labor market, a minimum wage law set above the equilibrium wage rate A) creates a shortage of labor. B) causes equality between the quantity of labor supplied and the quantity demanded. C) creates a surplus of labor. D) lowers the wage rate paid to workers. E) has no impact. Answer: C Topic: Minimum wage, employment Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 11) Why do some workers lose their job when the minimum wage is increased? A) The increase in labor costs decreases the supply of the product, thereby raising the price of the good so that the equilibrium quantity decreases to zero. B) The increase in the minimum wage decreases the quantity of labor demanded. C) The demand for labor is perfectly inelastic. D) The supply of labor decreases. E) The demand for labor is perfectly elastic. Answer: B Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

12) A minimum wage increases unemployment by A) increasing the quantity of labor demanded. B) decreasing the quantity of labor demanded. C) shifting only the labor supply curve rightward. D) shifting only the labor demand curve leftward. E) shifting the labor supply curve rightward AND shifting the labor demand curve leftward. Answer: B Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 13) Suppose the current equilibrium wage rate for housekeepers is $8.60 per hour. An increase in the minimum wage to $8.50 per hour leads to A) a surplus of housekeepers. B) a shortage of housekeepers. C) no change in the market for housekeepers. D) an increase in the quantity of housekeepers supplied. E) unemployment of housekeepers. Answer: C Topic: Minimum wage, employment Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Revised AACSB: Analytical thinking 14) Suppose the equilibrium wage rate for apricot pickers is $7.00 per hour and at that wage rate the equilibrium quantity of apricot pickers employed is 14,000. If the minimum wage is set at $7.50 per hour, then the A) quantity of apricot pickers employed increases. B) quantity of apricot pickers employed decreases. C) quantity of apricot pickers employed does not change. D) wage rate for apricot pickers decreases. E) quantity of apricot pickers demanded does not change, and the quantity of apricot pickers supplied does not change. Answer: B Topic: Minimum wage, employment Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

15) Suppose the current equilibrium wage rate for landscapers is $7.65 in Little Rock; $8.50 in St. Louis and $9.95 in Raleigh. An increase in the minimum wage to $8.50 per hour results in unemployment of landscapers in A) Little Rock and St. Louis. B) only Raleigh. C) Little Rock, St. Louis, and Raleigh. D) only Little Rock. E) St. Louis and Raleigh. Answer: D Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Revised AACSB: Analytical thinking 16) Suppose the equilibrium wage rate for apricot pickers is $9.00 per hour in California and at that wage rate the equilibrium quantity of apricot pickers is 14,000. If the minimum wage is set at $7.50 per hour, then the A) quantity of apricot pickers employed increases. B) quantity of apricot pickers employed decreases. C) quantity of apricot pickers employed does not change. D) wage rate for apricot pickers increases. E) some apricot pickers are unemployed. Answer: C Topic: Minimum wage, employment Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

17) The labor demand and labor supply schedules are given in the table above. If a minimum wage of $11 per hour is imposed A) a surplus of 300 workers occurs. B) there is no shortage or surplus of workers. C) 900 workers are employed. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: A Topic: Minimum wage, employment Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 18) The labor demand and labor supply schedules are given in the table above. If a minimum wage of $9 per hour is imposed A) a surplus of 300 workers occurs. B) a shortage of 300 workers occurs. C) there is no surplus or shortage of workers. D) the quantity demanded is 1,000 workers. E) there is unemployment of 700 workers. Answer: C Topic: Minimum wage, employment Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

19) The graph shows the market for labor. If the government imposes a minimum wage of $15 per hour, which of the following will occur? i. 50,000 workers will be hired. ii. 100,000 people will be unemployed. iii. A deadweight loss will occur. A) i and iii B) i only C) i and ii D) i, ii and iii E) ii only Answer: A Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

20) The graph shows the market for labor. Prior to the minimum wage law of $15 per hour, ________ workers are hired at ________ per hour. After the law, ________ workers are hired. A) 150,000; $15; 150,000 B) 150,000; $9; 50,000 C) 150,000; $9; 150,000 D) 150,000; $15; 250,000 E) 150,000; $9; 250,000 Answer: B Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 21) The figure shows the labor market. As a result of the minimum wage law of $15 per hour, ________ workers are hired and exactly ________ people are unemployed. A) 50,000; 100,000 B) 150,000; 50,000 C) 50,000; 200,000 D) 50,000; 0 E) 250,000; 0 Answer: C Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

22) The figure shows the labor market for fast food workers. A minimum wage of ________ per hour will create unemployment of ________ workers. A) $9; 150,000 B) $15; 150,000 C) $6; 75,000 D) $15; 100,000 E) $15; 250,000 Answer: B Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 23) The figure shows the market for fast food workers. If the government imposes a minimum wage of $15 per hour, ________ workers will be fired and the remaining jobs will be allocated by ________. A) 100,000; increased job search activity and illegal hiring B) 150,000; increased job search activity and illegal hiring C) 50,000; increased job search activity and illegal hiring D) 50,000; decreased job search activity and a black market E) 150,000; a black market. Answer: C Topic: Minimum wage, efficiency Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 42 Copyright © 2021 Pearson Education, Inc.

24) When the government imposes a minimum wage law A) an inefficient outcome occurs and total surplus shrinks. B) an efficient outcome occurs because more people get jobs. C) an efficient outcome occurs because people earn higher wages. D) an efficient outcome occurs because only the most efficient workers find jobs. E) an inefficient outcome occurs and producer surplus increases. Answer: A Topic: Minimum wage, efficiency Skill: Level 5: Critical thinking Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

25) The figure shows the market for fast food workers. As a result of a minimum wage of $16 per hour, a deadweight loss equal to the area ________ occurs. Resources lost to job search are shown by area ________. A) A; B B) E; B C) C; A D) C; B E) C; D Answer: D Topic: Minimum wage, efficiency Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Revised AACSB: Application of knowledge

26) The figure above shows the labor market in a region. For a minimum wage to change the wage rate and amount of employment, it must be A) left to the forces of supply and demand. B) set above $6 an hour. C) set equal to $6 an hour. D) set below $6 an hour. E) set at $12 per hour. Answer: B Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 27) The figure above shows the labor market in a region. If a minimum wage of $8 an hour is imposed, then there are ________ unemployed workers. A) 20,000 B) 40,000 C) 60,000 D) 80,000 E) zero Answer: B Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

28) The figure above shows the labor market in a region. If a minimum wage of $8 an hour is imposed, then the quantity of labor supplied is ________ and the quantity of labor demanded is ________. A) 60,000; 60,000 B) 80,000; 40,000 C) 40,000; 60,000 D) 60,000; 40,000 E) 40,000; 40,000 Answer: B Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 29) The figure above shows the labor market in a region. In which of the following cases would the amount of unemployment be the largest? A) when the market is at its equilibrium, with no minimum wage B) when a minimum wage of $4 an hour is imposed C) when a minimum wage of $6 an hour is imposed D) when a minimum wage of $8 an hour is imposed E) None of the above because the market will adjust so that there is no unemployment. Answer: D Topic: Minimum wage, unemployment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 30) One result of the minimum wage is A) a black market for labor that pays more than the minimum wage. B) a black market for labor that pays less than the minimum wage. C) decreased job search activity. D) a decrease in unemployment among poor and unskilled workers. E) an increase in employment among poor and unskilled workers. Answer: B Topic: Minimum wage, black market Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

31) One result of a minimum wage is A) illegal hiring of people at wages below the minimum wage. B) more people with jobs. C) a change in the equilibrium wage. D) lower costs paid by firms. E) fewer people searching for work because they realize that firms have decreased the number of people hired. Answer: A Topic: Minimum wage, black market Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 32) A minimum wage law A) lowers the wage rate of workers who are able to get a job. B) increases employment. C) increases the time spent searching by workers who cannot find a job. D) creates efficiency in the labor market. E) must be set below the equilibrium wage rate in order to have an impact. Answer: C Topic: Minimum wage, search Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 33) An increase in the minimum wage to $15 per hour would lead to A) an increase in search activity for many workers. B) a decrease in search activity for many workers. C) a decrease in unemployment. D) no change in unemployment. E) no change in employment. Answer: A Topic: Minimum wage, search Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

34) Suppose the marginal benefit the owner of a cherry orchard derives from hiring Lauren to pick cherries is $11 per hour. If the wage rate that Lauren earns is $10 per hour, then the orchard owner's surplus from Lauren's labor is ________ per hour. A) $10 B) $21 C) $1 D) $11 E) $0 Answer: C Topic: Demand for labor, surplus Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Revised AACSB: Analytical thinking 35) An efficient allocation of labor occurs when the A) marginal benefit to workers exceeds the marginal benefit to firms. B) marginal benefit to firms exceeds the marginal benefit to workers. C) marginal cost to workers is equal to the marginal benefit to firms. D) marginal cost and marginal benefit of both workers and the firms are equal to zero. E) marginal benefit of workers exceeds the marginal cost to firms by as much as possible. Answer: C Topic: Minimum wage, efficiency Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 36) If the minimum wage is set above the equilibrium wage, after taking into account the resources lost in job search, the firms' surplus ________ and the workers' surplus ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; decreases Answer: D Topic: Minimum wage, efficiency Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

37) A minimum wage set above the equilibrium wage A) decreases the deadweight loss in the market. B) decreases the workers' surplus because workers must spend resources looking for jobs. C) increases the firm's surplus. D) increases the market's efficiency. E) has no effect on the market. Answer: B Topic: Minimum wage, efficiency Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 38) A minimum wage that is above the equilibrium wage rate A) increases efficiency within the labor market. B) increases the quantity of labor demanded. C) creates a deadweight loss. D) has no effect on the labor market because it is set above the equilibrium wage rate. E) None of the above answers is correct. Answer: C Topic: Minimum wage, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 39) A minimum wage A) increases all workers' surplus because the wage rate increases. B) increases consumer surplus because the price of the good decreases. C) decreases the firms' surplus because fewer workers are hired at the higher wage. D) increases the firms' surplus and the workers' surplus because it increases the efficiency of the labor market. E) None of the above answers is correct. Answer: C Topic: Minimum wage, deadweight loss Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

40) Who loses and who gains from the minimum wage? A) Losers are all workers and gainers are all firms. B) Losers are all firms and gainers are all workers. C) Losers are all firms and some workers, while gainers are other workers. D) Gainers are some firms and all workers, while losers are some firms. E) Gainers are some firms and some workers, while losers are other firms and other workers. Answer: C Topic: Minimum wage, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 41) The people who immediately benefit from a minimum wage are A) employers who now pay the minimum wage. B) those people who enter the labor force to search for minimum wage jobs. C) the workers who retain their jobs after enactment of the minimum wage. D) everyone, both demanders and suppliers, because the minimum wage benefits everyone. E) all workers. Answer: C Topic: Minimum wage, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

42) In the figure above, if the wage rate is $6 per hour, then the A) firms' surplus is the area d + e + f. B) workers' surplus is the area a + b + c. C) deadweight loss equals zero. D) Only answers A and C are correct. E) Answers A, B, and C are correct. Answer: E Topic: Minimum wage, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 43) In the figure above, if the minimum wage rate is $8 per hour, then after taking account of resources lost in job search, the workers' surplus is the area ________ and the firms' surplus is the area ________. A) e; c B) d; b C) a; f D) f; a E) a + b + c + d + e; f Answer: C Topic: Minimum wage, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

44) In the figure above, if the minimum wage is $8 per hour, then A) resources used in job-search activity increase compared to the situation before the minimum wage. B) it is legal to hire workers for a wage below the minimum wage because otherwise unemployment would result. C) the deadweight loss is minimized. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: A Topic: Minimum wage, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

45) The above figure shows a labor market with a minimum wage of $8 an hour. How many people are employed when the minimum wage is in place? A) 40,000 B) 60,000 C) 80,000 D) fewer than 40,000 E) more than 80,000 Answer: A Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

46) The above figure shows a labor market. Before the minimum wage of $8 an hour is imposed, employment equals ________ workers; after the minimum wage of $8 an hour is imposed, employment equals ________ workers. A) 80,000; 40,000 B) 40,000; 80,000 C) 60,000; 40,000 D) 60,000; 80,000 E) 80,000; 60,000 Answer: C Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 47) The above figure shows a labor market with a minimum wage of $8 an hour. The value of the resources workers are willing to use in their job search equals the distance between point ________ and point ________. A) a; d B) a; b C) b; c D) a; c E) c; d Answer: B Topic: Minimum wage, search Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 48) The above figure shows a labor market with a minimum wage of $8 an hour. The deadweight loss equals the A) area abc. B) distance ab. C) distance ad. D) area bad. E) area acd. Answer: A Topic: Minimum wage, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

49) The above figure shows the market for finish carpenters in Bozeman. If there is a minimum wage set at $18, then there will be A) unemployment of 200,000 workers. B) a surplus of 200,000 workers. C) unemployment of 400,000 workers. D) a surplus of 400,000 workers. E) no unemployment of workers and no surplus of workers. Answer: A Topic: Minimum wage, unemployment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Revised AACSB: Analytical thinking 50) The above figure shows the market for finish carpenters in Bozeman. If there is a minimum wage set at $18, what is TRUE? A) The lowest wage for which someone is willing to work is $18 an hour. B) The quantity of jobs increases to 400,000. C) The lowest wage for which someone is willing to work is $20 an hour. D) 200,000 workers are employed. E) The quantity of jobs demanded is more than the quantity supplied. Answer: D Topic: Minimum wage, unemployment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Revised AACSB: Analytical thinking

51) The above figure shows the market for finish carpenters in Bozeman. If there is a minimum wage set at $18, which of the following statements is TRUE? A) Firms' surplus increases with the minimum wage. B) Workers who retain their jobs have their wages rise. C) The market is efficient. D) The quantity supplied of workers is less that quantity demanded. E) Unemployment decreases because firms employ their workers more carefully. Answer: B Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 52) The above figure shows the market for finish carpenters in Bozeman. There is a minimum wage set at $18. Compared to the initial equilibrium without the minimum wage, once the minimum wage is in place, the workers' total surplus ________ and the firms' total surplus ________. A) decreases; increases B) increases; increases C) increases; decreases D) does not change; increases E) decreases; decreases Answer: E Topic: Minimum wage, efficiency Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

53) The above figure shows a labor market with minimum wage equal to $16. In this figure, what area equals the firms' surplus? A) area A B) area B C) area C D) area D E) area E Answer: A Topic: Minimum wage, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 54) The above figure shows a labor market with minimum wage equal to $16. In this figure, after taking account of search costs, what area equals the workers' surplus? A) area A B) area B C) area C D) area D E) area E Answer: D Topic: Minimum wage, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

55) The above figure shows a labor market with minimum wage equal to $16. In this figure, what area equals the deadweight loss? A) area A B) area B C) area C D) area D E) area E Answer: C Topic: Minimum wage, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 56) The above figure shows a labor market with minimum wage equal to $16. In this figure, what area equals the resources lost because of job search? A) area A B) area B C) area C D) area D E) area E Answer: B Topic: Minimum wage, search Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

57) The above figure shows the market for biologists. The government decides to set a minimum wage for biologists of $18 per hour. After this minimum wage is in effect, the firms' surplus equals A) $800. B) $900. C) $1,800. D) $400. E) $200. Answer: D Topic: Minimum wage, deadweight loss Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 58) The above figure shows the market for biologists. The government decides to set a minimum wage for biologists of $18 per hour. After this minimum wage is in effect, and taking account of the resources lost in job search, workers' surplus equals A) $800. B) $900. C) $400. D) $1,800. E) $200. Answer: C Topic: Minimum wage, deadweight loss Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 57 Copyright © 2021 Pearson Education, Inc.

59) The above figure shows the market for biologists. The government decides to set a minimum wage for biologists of $18 per hour. After this minimum wage is in effect, the deadweight loss equals A) $400. B) $200. C) $800. D) $1,600. E) $100. Answer: B Topic: Minimum wage, deadweight loss Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 60) The above figure shows the market for biologists. The government decides to set a minimum wage for biologists of $18 per hour. After this minimum wage is in effect, unemployment equals ________ workers. A) 100 B) 300 C) 400 D) 500 E) 200 Answer: E Topic: Minimum wage, unemployment Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 61) A price floor is considered A) "fair" based only on the fair results view. B) "fair" based only on the fair rules view. C) "unfair" based on both the fair results and fair rules views. D) "unfair" based only on the fair results view. E) "fair" based on the fair results view and on the fair rules view. Answer: C Topic: Price floor, fairness Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Ethical understanding and reasoning

62) Is the minimum wage fair? A) Yes, because all workers benefit because they are paid more. B) No, because it enhances the prospects of voluntary exchange. C) No, because workers who lose their jobs are made worse off. D) Yes, because firms must pay a wage closer to a living wage. E) Yes, because workers need the extra income. Answer: C Topic: Minimum wage, unfairness Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Ethical understanding and reasoning 63) The "fair results" view of fairness says that a minimum wage law set above the equilibrium wage rate is unfair because the minimum wage A) does not apply to all workers. B) boosts the income of highly skilled workers. C) benefits only those workers who are able to find and keep a job. D) benefits nobody. E) cannot be enforced. Answer: C Topic: Minimum wage, unfairness Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Ethical understanding and reasoning 64) Labor unions ________ increases in the minimum wage because an increase in the minimum wage ________ the demand for union labor. A) support; increases B) support; decreases C) oppose; increases D) oppose; decreases E) support; has no effect on Answer: A Topic: Minimum wage, support Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

65) Labor unions support the minimum wage because A) the increased unemployment is good for labor. B) the value associated with the deadweight loss goes to labor unions. C) labor unions prefer to operate in black markets. D) it puts upward pressure on all wages. E) union members are usually paid the minimum wage. Answer: D Topic: Minimum wage, support Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 66) A price floor A) is the highest price at which it is legal to trade a particular good, service, or factor of production. B) is the lowest price at which it is legal to trade a particular good, service, or factor of production. C) is an illegal price to charge. D) is the equilibrium price when the stock market crashes. E) is the lowest price for which the quantity demanded equals the quantity supplied. Answer: B Topic: Price floor Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 67) A price floor is a price A) below which a seller cannot legally sell. B) above which a seller cannot legally sell. C) that creates a shortage of the good if it is set above the equilibrium price. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: A Topic: Price floor Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

68) The graph shows the labor market for farm workers in an undeveloped nation. The lower the wage rate, the ________ is the quantity of farm workers that firms demand and the ________ is the quantity of farm workers that households are willing to supply. A) greater; smaller B) greater; greater C) smaller; greater D) smaller; smaller E) None of the above answers is correct because both the demand and supply curves will shift in response to the change in the wage rate. Answer: A Topic: Labor market Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Revised AACSB: Analytical thinking 69) To be effective in raising people's wages, a minimum wage must be set A) above the equilibrium wage rate. B) below the equilibrium wage rate. C) equal to the equilibrium wage rate. D) below $7. E) either above or below the equilibrium wage depending on whether the supply curve of labor shifts rightward or leftward in response to the minimum wage. Answer: A Topic: Minimum wage Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 61 Copyright © 2021 Pearson Education, Inc.

70) A minimum wage set above the equilibrium wage rate A) increases the quantity of labor services supplied. B) decreases the quantity of labor services supplied. C) has no effect on the quantity of labor services supplied. D) shifts the labor supply curve rightward. E) shifts the labor supply curve leftward. Answer: A Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 71) A minimum wage set above the equilibrium wage will ________ the quantity of labor demanded and ________ the quantity of labor supplied. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) not change; not change Answer: C Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 72) Suppose the current equilibrium wage rate for lifeguards in Houston is $7.85 an hour. A minimum wage law that creates a price floor of $8.50 an hour leads to A) a surplus of lifeguards in Houston. B) a shortage of lifeguards in Houston. C) no changes in the lifeguard market. D) a change in the quantity of lifeguards supplied but no change in the quantity of lifeguards demanded. E) an increase in the number of lifeguards employed. Answer: A Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

73) The graph shows the labor market for teenagers in Cape Coast, a city in Ghana. If the government sets a minimum wage of $6 an hour, the number of teenagers employed is A) 7,000. B) 5,000. C) 4,000. D) 3,000. E) less than 3,000. Answer: D Topic: Minimum wage, employment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Revised AACSB: Analytical thinking 74) If the minimum wage is above the equilibrium wage rate, then an increase in the minimum wage ________ employment and ________ unemployment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; increases Answer: C Topic: Minimum wage, employment Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

75) The graph shows the labor market for teenagers in Manta, a city in Ecuador. If the government sets a minimum wage of $5 an hour, ________ apple pickers are unemployed. A) 6,000 B) 8,000 C) 10,000 D) 14,000 E) more than 14,000 Answer: B Topic: Minimum wage, unemployment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Revised AACSB: Analytical thinking 76) If a minimum wage is introduced that is above the equilibrium wage rate A) the quantity of labor demanded increases. B) job search activity increases. C) the supply of labor increases and the supply of labor curve shifts rightward. D) unemployment decreases because more workers accept jobs at the higher minimum wage rate. E) the quantity of labor supplied decreases because of the increase in unemployment. Answer: B Topic: Minimum wage, search Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

77) The graph shows the labor market for teenagers in Atlanta. If the government sets a minimum wage of $6 an hour, then the maximum amount that a teenager would be willing to spend on job search is ________ an hour. A) $2 B) $4 C) $5 D) $6 E) $3 Answer: B Topic: Minimum wage, search Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 78) The minimum wage is set above the equilibrium wage rate. Does the minimum wage create inefficiency? A) yes B) no C) only if the supply of labor is perfectly inelastic D) only if the supply of labor is perfectly elastic E) only if employment exceeds the efficient amount Answer: A Topic: Minimum wage, efficiency Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

79) A minimum wage set above the equilibrium wage rate creates A) efficiency because it increases most workers' wages. B) efficiency because few workers lose their jobs. C) efficiency because workers can earn a living wage. D) inefficiency and a deadweight loss. E) inefficiency because it creates excessive employment. Answer: D Topic: Minimum wage, efficiency Skill: Level 1: Definition Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking

80) The graph shows the labor market for fast-food workers in Sioux City. If the government sets a minimum wage of $7 an hour, then the labor market is ________, and marginal benefit ________ marginal cost. A) inefficient; is less than B) inefficient; equals C) efficient; equals D) inefficient; is greater than E) inefficient; cannot be compared to Answer: D Topic: Minimum wage, efficiency Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

81) When the minimum wage is raised, the ________ union labor ________. A) demand for; increases B) demand for; decreases C) supply of; increases D) supply of; decreases E) demand for; does not change Answer: A Topic: Minimum wage, support Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Reflective thinking 7.3 Production Quotas 1) A production quota A) is a government regulation limiting the maximum amount that can be supplied. B) increases market efficiency. C) reduces the deadweight loss in a market. D) results in lower prices in the market. E) helps consumers but not producers. Answer: A Topic: Production quota Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Application of knowledge 2) To have an effective production quota, the government must set the quota so it is ________ the equilibrium quantity. i. less than ii. equal to iii. more than A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: A Topic: Production quota Skill: Level 2: Using definitions Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

3) Which of the following is TRUE regarding production quotas in the dairy market? i. Compared to an unregulated market, output will decrease. ii. The dairy market will suffer a deadweight loss. iii. Market efficiency is improved in the dairy market because farmers' profit increases. A) ii only B) i, ii and iii C) i and iii D) iii only E) i and ii only Answer: E Topic: Production quota Skill: Level 2: Using definitions Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking 4) An effective production quota ________ producers and ________ a deadweight loss. A) has no effect on; does not create B) benefits; creates C) harms; creates D) benefits; does not create E) harms; does not create Answer: B Topic: Production quota Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking 5) An effective production quota ________ inefficiency and ________ unfair. A) has no effect on; is not B) creates; is C) creates; is not D) does not create; is E) does not create; is not Answer: B Topic: Production quota Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Reflective thinking

6) The figure shows the market for milk. As a result of the production quota, the market price A) increases from $3 to $5 per gallon. B) increases from $2 to $5 per gallon. C) decreases from $5 to $2 per gallon. D) decreases from $5 to $3 per gallon. E) will be unchanged because the quota will be ineffective. Answer: A Topic: Production quota Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking 7) The figure shows the market for milk. As a result of the production quota A) consumer surplus shrinks by area ABE. B) a deadweight loss of area ABE occurs. C) a deadweight loss of area ABC occurs. D) the price increases from $1 to $5. E) the quantity produced increases from 20 thousand to 40 thousand gallons. Answer: B Topic: Production quota Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

8) The figure shows the market for milk. As a result of the production quota, the consumer surplus shrinks by area ________ and a deadweight loss of area ________ occurs. A) ABE; ABE B) ABC; ABE C) ABC; ACE D) ACE; ABE E) ABE; ACE Answer: B Topic: Production quota Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking 9) The figure shows the market for milk. As a result of the production quota, which of the following are TRUE? i. Quantity produced decreases from 40 thousand to 20 thousand gallons. ii. Price increases from $3 to $5 per gallon. iii. A deadweight loss of ABE occurs. A) i, ii and iii B) i only C) i and ii only D) ii and iii only E) ii only Answer: A Topic: Production quota Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 10) The figure shows the market for milk. As a result of the production quota, the price of a gallon of milk ________ and the quantity of milk produced ________. A) does not change; does not change B) changes from $3 to $5 per gallon; does not change C) does not change; changes from 40 thousand to 20 thousand gallons D) changes from $5 to $3 per gallon; changes from 20 thousand to 40 thousand gallons. E) changes from $3 to $5 per gallon; changes from 40 thousand to 20 thousand gallons Answer: E Topic: Production quota Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

7.4 Chapter Figures

The figure above shows the supply and demand curves in the market for rental housing. A rent ceiling is set at $400 per month. 1) In the figure above, with the rent ceiling the quantity of housing supplied is ________ units, the quantity demanded is ________ units, and the quantity rented is ________ units. A) 3,000; 6,000; 3,000 B) 3,000; 6,000; 6,000 C) 3,000; 6,000; 4,000 D) 3,000; 3,000; 3,000 E) 4,000; 4,000; 4,000 Answer: A Topic: Rent ceiling Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

2) In the figure above, with the rent ceiling A) there is a shortage of 3,000 units. B) there is a surplus of 3,000 units. C) there is a surplus of 2,000 units. D) there is a shortage of 1,000 units. E) the market is in equilibrium. Answer: A Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 3) In the figure above, with the rent ceiling ________ units of housing are available, and black market rents might be as high as ________ a month. A) 3,000; $625 B) 6,000; $400 C) 3,000; $550 D) 4,000; $550 E) 4,000; $625 Answer: A Topic: Rent ceiling, black market Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

The figure above shows the supply and demand curves in the market for rental housing. A rent ceiling is set at $400 per month. 4) As shown in the figure above, the rent ceiling A) decreases consumer surplus. B) increases producer surplus. C) decreases deadweight loss. D) increases the quantity of housing rented. E) is efficient. Answer: A Topic: Rent ceiling, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 5) As shown in the figure above, the rent ceiling ________ consumer surplus and ________ producer surplus. A) decreases; decreases B) decreases; increases C) increases; increases D) increases; decreases E) decreases; does not change Answer: A Topic: Rent ceiling, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 73 Copyright © 2021 Pearson Education, Inc.

The figure above shows supply and demand in the market for labor. The government introduces a minimum wage of $7 per hour. 6) In the figure above, the number of workers employed is ________, and the wage paid is ________. A) 3,000; $7 per hour B) 7,000; $7 per hour C) 5,000; $5 per hour D) 5,000; $7 per hour E) 3,000; $5 per hour Answer: A Topic: Minimum wage, employment Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

7) In the figure above, the number of unemployed workers is A) 4,000. B) 3,000. C) 2,000. D) 5,000. E) zero. Answer: A Topic: Minimum wage, unemployment Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 8) The figure above shows that the lowest wage rate for which someone is willing to work is A) $3 an hour. B) $5 an hour. C) $6 an hour. D) $7 an hour. E) $4 an hour. Answer: A Topic: Minimum wage Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 9) In the figure above, the deadweight loss is A) $4,000 an hour. B) $2,000 an hour. C) $1,000 an hour. D) $5,000 an hour. E) zero. Answer: A Topic: Minimum wage, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

10) The figure above shows that the value of the resources used in job-search activity can be as large as ________ per hour. A) $12,000 B) $8,000 C) $6,000 D) $4,000 E) $2,000 Answer: A Topic: Minimum wage, search Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

The figure above shows the market for sugar beets. The government intervenes in this market and sets a price floor at $35 a ton. 11) In the figure above, the quantity of sugar beets produced is ________ million tons per year, and the quantity bought by consumers is ________ million tons per year. A) 30; 20 B) 20; 30 C) 25; 20 D) 20; 25 E) 25; 25 Answer: A Topic: Price support Skill: Level 2: Using definitions Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking 76 Copyright © 2021 Pearson Education, Inc.

12) The figure above shows that to make the price floor work, the government buys ________ million tons of sugar beets. A) 10 B) 20 C) 30 D) 5 E) 15 Answer: A Topic: Price support, subsidy Skill: Level 2: Using definitions Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking 13) The figure above shows that the government provides a subsidy to the farmers of ________ million. A) $350 B) $1,050 C) $50 D) $100 E) $700 Answer: A Topic: Price support, subsidy Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking 14) The figure above shows that the government subsidy accounts for ________ percent of the farmers' revenue. A) 33 B) 67 C) 50 D) 100 E) 25 Answer: A Topic: Price support, subsidy Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

15) The figure above shows that the deadweight loss from the government's policy is A) about $350 million. B) about $25 million. C) about $50 million. D) about $100 million. E) zero. Answer: C Topic: Price support, deadweight loss Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking 7.5 Integrative Questions 1) The shortage created by a rent ceiling below the equilibrium rent is smallest when the demand for housing is ________ and the supply of housing is ________. A) elastic; elastic B) elastic; inelastic C) inelastic; elastic D) inelastic; inelastic E) unit elastic; unit elastic Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 2) The shortage created by a price ceiling will likely be A) smaller if the good is a necessity. B) larger if the good is addictive. C) smaller if the good is a luxury. D) unaffected by the time that has elapsed since the price ceiling is implemented. E) None of the above answers is correct. Answer: A Topic: Price ceiling, shortages Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytical thinking

3) The unemployment caused by minimum wage would be larger if A) both labor demand and labor supply are more elastic. B) both labor demand and labor supply are more inelastic. C) minimum wage is set equal to the equilibrium wage rate. D) minimum wage is set below the equilibrium wage rate. E) both labor demand and labor supply are perfectly inelastic. Answer: A Topic: Minimum wage, unemployment Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytical thinking 4) The surplus created by a price floor will likely be A) smaller if the good is a necessity. B) larger if the good is addictive. C) smaller if the good is a luxury. D) unaffected by the time that has elapsed since the price ceiling is implemented. E) None of the above answers is correct. Answer: A Topic: Price floor, surplus Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytical thinking 5) A regulation that sets the highest price at which it is legal to trade a good is a A) production quota. B) price floor. C) price support. D) price ceiling. E) subsidy. Answer: D Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

6) A regulation that sets the lowest price at which it is legal to trade a good is a A) search ceiling. B) price floor. C) production ceiling. D) price ceiling. E) subsidy. Answer: B Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking 7) If the government imposes an effective ________, output decreases and ________ increases. A) price support; consumer surplus B) price floor; consumer surplus C) production quota; producer surplus D) price floor; marginal benefit to consumers E) price ceiling; efficiency Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 8) If the government imposes an effective ________, a deadweight loss ________. A) price floor; does not occur B) price ceiling; does not occur C) price ceiling; occurs D) production quota; does not occur E) Both answers C and D are correct. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

9) Producers favor a ________ because ________. A) price ceiling; the equilibrium price increases B) price support; the deadweight loss is minimized C) price ceiling; total revenue increases D) production quota; producer surplus increases E) price ceiling; consumer surplus increases Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 10) In order to have an impact, a ________ must be set below the equilibrium price, and when this occurs, ________. A) price ceiling; consumer surplus increases B) price floor; consumer surplus decreases C) price ceiling; producer surplus decreases D) price support; total revenue increases E) price support; consumer surplus increases Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 11) Which of the following describes a difference between a price support and a price ceiling? A) A price support creates a deadweight loss while a price ceiling does not. B) A price ceiling is a regulated price while a price support is a regulated quantity. C) A price support decreases the quantity while a price ceiling does not. D) A price ceiling increases the price above the equilibrium price while a price support does not. E) A price support attempts to raise the price above the equilibrium price while a price ceiling does not. Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

12) Both production quotas and a price floor can A) create a deadweight loss. B) decrease output below the equilibrium quantity. C) decrease the price below the equilibrium price. D) increase consumer surplus. E) have no effect on producer surplus. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 13) Which of the following is TRUE? i. A price ceiling set above the equilibrium price has no effects. ii. A price ceiling set below the equilibrium price creates a surplus. iii. A price floor set above the equilibrium price has no effects. A) only i B) only ii C) only iii D) i and ii E) ii and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 14) Assume a market is producing efficiently. Which type of government intervention in this market might create a deadweight loss? i. a price ceiling ii. a price floor iii. a production quota A) i only B) i and ii C) iii only D) ii and iii E) i, ii, and iii Answer: E Topic: Efficiency Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Analytical thinking

15) Which of the following is TRUE? i. A price ceiling is inefficient but fair. ii. A price floor is inefficient and unfair. iii. A production quota increases the quantity produced. A) only i B) only ii C) only iii D) i and ii E) ii and iii Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 16) Which of the following is TRUE? i. A price ceiling set below the equilibrium price decreases search activity. ii. A minimum wage is an example of a price ceiling. iii. A production quota decreases the quantity consumed. A) only i B) only ii C) only iii D) i and iii E) ii and iii Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 17) Which of the following is TRUE? i. A production quota is inefficient. ii. A price floor set above the equilibrium price creates a surplus. iii. A price ceiling set above the equilibrium price creates a black market. A) only i B) only ii C) only iii D) i and ii E) ii and iii Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 83 Copyright © 2021 Pearson Education, Inc.

18) Which of the following can create a deadweight loss? i. production quotas ii. price floor iii. price ceiling A) i only B) i and iii C) ii and iii D) i, ii and iii E) i and ii Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 19) Following a major natural disaster that destroys housing, a rent ceiling ________ be an effective policy to increase the quantity of more affordable housing for displaced residents because it would ________. A) would not; discourage rebuilding and result in a shortage B) would not; cause the quantity supplied to exceed the quantity demanded C) would; cause increased search activity D) would; create a black market that would result in a lower rent E) would; encourage a greater quantity supplied Answer: A Topic: Price ceiling Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytical thinking 20) If an apartment owner charged ________ than a specified rent for housing, the government ________ impose a rent ceiling. A) more; can B) more; cannot C) less; can D) less; cannot E) less; might Answer: A Topic: Price ceiling Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

21) If a rent ceiling is set ________ the equilibrium price, the effect can result in a housing ________. A) below; surplus B) below; shortage C) above; shortage D) above; surplus E) equal to; surplus Answer: B Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 22) If a rent ceiling is set below the equilibrium price, thus creating a ________, housing may be allocated by increasing search activity or creating a ________. A) shortage; black market B) shortage; free market C) surplus; black market D) surplus; open market E) surplus; free market Answer: A Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 23) A rent ceiling controls the rent portion of the cost of housing but not the search cost. So when the search cost is ________ the rent, some people end up paying a ________ opportunity cost for housing than they would if there were no rent ceiling. A) added to; lower B) subtracted from; higher C) subtracted from; lower D) added to; higher E) equal to; lower Answer: D Topic: Price ceiling Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

24) If the quantity of housing demanded ________ the quantity of housing supplied, scarce housing resources are allocated efficiently because the marginal cost of the housing ________ the marginal benefit. A) is more than; equals B) is less than; equals C) equals; is more than D) equals; is less than E) equals; equals Answer: E Topic: Price ceiling, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 25) When a rent ceiling is ________, consumer surplus and producer surplus shrink, a deadweight loss ________, and resources are lost in search activity and evading the rent ceiling law. A) inefficient; arises B) inefficient; disappears C) efficient; arises D) efficient; disappears E) nonexistent; arises Answer: A Topic: Price ceiling, efficiency Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 26) When a minimum wage is introduced ________ the equilibrium wage rate, the quantity of labor demanded ________ and the quantity of labor supplied ________, thus creating unemployment. A) above; increases; decreases B) below; increases; decreases C) above; decreases; increases D) above; decreases; decreases E) below; decreases; decreases Answer: C Topic: Price floor Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

27) When a minimum wage is ________, the firms' surplus and workers' surplus shrink, a deadweight loss ________, and resources are lost in job search. A) inefficient; arises B) inefficient; disappears C) efficient; arises D) efficient; disappears E) nonexistent; arises Answer: A Topic: Price floor, inefficiency Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 28) Nonunion labor is a substitute for union labor, so when the minimum wage ________, the demand for union labor ________. A) rises; decreases B) decreases; increases C) decreases; decreases D) rises; increases E) rises; remains the same Answer: D Topic: Price floor Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking 29) Import restriction in advanced economies deny developing economies access to the food market of the advanced economies. The result is ________ price and ________ farm production in the developing economies. A) lower; larger B) lower; smaller C) higher; smaller D) higher; larger E) stable; smaller Answer: B Topic: Price support Skill: Level 4: Applying models Section: Checkpoint 7.3 Status: Old AACSB: Analytical thinking

7.6 Essay: Price Ceilings 1) In the housing market, if a rent ceiling of $600.00 is imposed when the equilibrium rent is $500.00, why will nothing change? Answer: A rent ceiling is the maximum legal rent. Generally, the government imposes the ceiling when the equilibrium rent is considered too high. If, however, the rent ceiling ($600.00) is above the equilibrium rent ($500.00), people are ALREADY paying a rent lower than legal maximum. As a result, nothing changes and so this price ceiling is ineffective. Topic: Rent ceiling Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 2) What are the effects of a rent ceiling set below the equilibrium rent? Answer: A rent ceiling is the maximum legal rent. If the rent ceiling is set below the equilibrium rent, the rent ceiling creates a shortage of apartments. Consumer and producer surplus are both reduced. Hopeful renters face must engage in increased search activity. In order to rent an apartment, renters and landlords might engage in black market activity that effectively raises the rent. Topic: Rent ceiling Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Written and oral communication 3) In the 1980s, one of the most common sights in the socialist countries, such as the former Soviet Union and North Korea, were long lines for bread, sugar, and other necessities. These countries had price ceilings on these necessities. Some of the socialist nations, such as the former Soviet Union, have moved to a market economy by lifting the price ceilings, while others, such as North Korea, have retained their price ceilings. What prediction do you make about the presence (or absence) of long lines today in the former Soviet Union and North Korea? Explain your answer. Answer: The long lines have disappeared in the former Soviet Union but are still present in North Korea. The socialist countries had price ceilings on necessities that were below the equilibrium price. These ceilings created shortages, thus the long lines. In the countries that have lifted the price ceilings, the price has risen toward the equilibrium price, thereby eliminating the shortages and long lines. In the nations that have retained the price ceilings, the shortages and hence the long lines have persisted. Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Written and oral communication

4) Explain why in cities such as New York City that have rent ceiling laws, so many people who work in the city commute from outside the city. Answer: Rent ceilings decrease the quantity supplied of housing. So many people who work in the city and would like to live in the city cannot find housing. As a result, they must live outside the city and commute to work. Topic: Rent ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Written and oral communication 5) Suppose that apartments rent for $1,300 a month in San Francisco, California and $850 a month in Los Angeles, California. If the state of California passes a state-wide rent ceiling for apartments of $1,100 a month, what occurs in the two cities? Answer: The rent ceiling is below the equilibrium rent in San Francisco. A shortage of apartments occurs as the quantity of apartments demanded increases and the quantity supplied decreases. The shortage becomes even larger as time passes because, with the rent ceiling, landlords have no incentive to maintain existing apartments or to build new ones. A black market for apartments will emerge, with bribery and "key money" becoming common. In Los Angeles, the outcome differs. The rent ceiling is above the equilibrium rent and has no impact on the quantity demanded or the quantity supplied. If, however, Los Angeles grows so that the demand for housing increases enough, the time may come when the rent ceiling is below the equilibrium rent in Los Angeles, in which case the Los Angeles apartment market also would be marked by a shortage and black market. Topic: Rent ceiling, shortages Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Written and oral communication 6) Why do rent ceilings lead to shortages and black markets? Answer: Rent ceilings that are set below the market equilibrium price for apartments lead to shortages for two reasons. First, the lower price increase the quantity of apartments demanded. Second, the quantity of apartments supplied decreases and, over time, the supply decreases even more because of the lower rent. When the quantity demanded exceeds the quantity supplied, a shortage is created. Faced with the inability to obtain the product they want, in this case, housing, people use bribes and other inducements in the black market to increase their chances of moving up the waiting list that emerges in the rent-controlled apartment market. Not everyone participates in the black market, but rent ceilings will favor those people willing to engage in illegal transactions. Topic: Rent ceiling, black market Skill: Level 2: Using definitions Section: Checkpoint 7.1 Status: Old AACSB: Written and oral communication

7) The table above gives the demand and supply schedules for the housing market in a small town. If a rent ceiling of $600 a month is imposed, what is the quantity demanded, the quantity supplied, and the shortage of housing? Answer: The quantity demanded is 350 units, the quantity supplied is 150 units, and the shortage is 200 units. Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

8) The figure above illustrates the current market for apartments in Washington, D.C. a. If the local government imposes a price ceiling of $1,500 per month, is there a shortage? If so, how much? If not, why not? b. If the local government imposes a price ceiling of $900 per month, is there a shortage? If so, how much? If not, why not? Answer: a. There is not a shortage. The equilibrium rent is $1,200 a month. Because the rent ceiling is above the equilibrium rent, it has no effect. b. There is a shortage. At a rent of $900 per month, the quantity of units demanded is 100,000 and the quantity of units supplied is 60,000. Hence there is a shortage of 40,000 units. Topic: Rent ceiling, shortages Skill: Level 3: Using models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking

9) The above figure shows the market for a prescription drug. What is the equilibrium price of the drug? How many doses are purchased? Suppose the government imposes a price ceiling of $1.50 a dose. How many doses are purchased after the price ceiling is imposed? Answer: The equilibrium price is $2.50 per dose. The number of doses purchased is the equilibrium quantity, 8,000 doses per day. After the price ceiling is imposed, the number of doses purchased is 4,000 per day, which is equal to the quantity of doses supplied at the price of $1.50 per dose. Topic: Price ceiling, shortages Skill: Level 4: Applying models Section: Checkpoint 7.1 Status: Old AACSB: Analytical thinking 7.7 Essay: Price Floors 1) Explain why a price floor set below the equilibrium price is ineffective. Answer: Price floors are legal minimums; it is legal to charge the floor price, or higher. If the equilibrium price falls in the legal range, that is, the equilibrium price is above the price floor so that the price floor is below the equilibrium price, then the price floor has no effect on the market because the market price does not change. Topic: Price floor Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication

2) Compare and contrast a price ceiling and a price floor. Answer: A price ceiling is the maximum legal price that may be charged. A price floor is the minimum legal price that may be charged. For a price ceiling or a price floor to have an effect, they must make the equilibrium price illegal. So, an effective price ceiling is set below the equilibrium price while an effective price floor is set above the equilibrium price. A price ceiling creates a shortage of the good while a price floor creates a surplus. Both create inefficiency because the marginal benefit of the last unit consumed no longer equals the marginal cost of the last unit produced. Topic: Price ceiling and price floor Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication 3) Will an increase in the minimum wage create more unemployment if the supply and demand for labor are highly elastic or highly inelastic? Answer: An increase in the minimum wage creates less unemployment when the supply and demand for labor are highly inelastic. If the supply and demand for labor are highly elastic, an increase in the minimum wage leads to more unemployment because the quantity of labor supplied increases significantly and the quantity of labor demanded decreases significantly. If they are inelastic, an increase in the minimum wage leads to only a small decrease in the quantity of labor demanded and only a small increase in the quantity of labor supplied, so that the resulting unemployment is not very large. Topic: Minimum wage, unemployment Skill: Level 5: Critical thinking Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication 4) Why would an increase in the minimum wage to $15 per hour lead to more unemployment for teenage and low-skilled workers? Answer: Many teenage and low-skilled workers earn far less than $15 per hour. Hence a price floor in the labor market that "guaranteed" a wage of $15 per hour, that is, a minimum wage of $15 per hour, would have a double-edged effect. First, the quantity of labor supplied would increase because more people would be willing and able to work for the higher wage. Indeed, some high school students would drop out of school in order to obtain work if they thought they would be paid $15 an hour. Second, many businesses would be unwilling and unable to pay $15 per hour and would therefore lay off many teenage and low-skilled workers. In other words, the quantity of labor supplied increases and the quantity of labor demanded decreases. The resulting surplus of labor means a higher unemployment rate for the very people the minimum wage is designed to help. Topic: Minimum wage, unemployment Skill: Level 2: Using definitions Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication 93 Copyright © 2021 Pearson Education, Inc.

5) Explain why low-skilled workers find that their employment opportunities are less with a minimum wage. Answer: A minimum wage set above the equilibrium wage rate decreases the quantity of labor demanded, so employment decreases with a minimum wage. This effect is particularly strong in the market for low-skilled labor, because it is low-skilled labor that is paid low wage rates. Thus it is low-skilled workers for whom the decrease in employment is severe. Topic: Minimum wage, unemployment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication 6) How does the elasticity of demand for labor affect the deadweight loss from an increase in the minimum wage? Why? Answer: The more elastic the demand for labor, the greater the deadweight loss from increasing the minimum wage. Essentially, the more elastic the demand for labor, the larger the decrease in the quantity of labor demanded when the minimum wage rate rises. As a result, the larger the decrease in employment and hence the greater is the deadweight loss. Topic: Minimum wage, unemployment Skill: Level 5: Critical thinking Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication 7) Discuss the inefficiencies created by a price floor. Answer: A price floor prevents the efficient allocation of resources. If a price floor is set above the equilibrium price, the quantity of the good or service supplied increases and the quantity demanded decreases, so that a surplus results. The minimum wage is a price floor. If the minimum wage is set above the equilibrium wage rate, the surplus of labor means increased unemployment. Similar to all price floors, the minimum wage creates inefficiency. The minimum wage leads to inefficiency because at the minimum wage, marginal benefit to a firm from hiring another worker exceeds the marginal cost to a worker from working. Topic: Price floor, inefficiency Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication

8) Who are minimum wages designed to help? Do they succeed? What is their effect on society? Answer: Minimum wages are designed to improve the incomes of low-wage earners. They do successfully raise the wages of those fortunate enough to find jobs at the minimum wage; however they reduce the chance of finding a job by decreasing the quantity of labor demanded. The low-wage earners who cannot find a job with a minimum wage in place are harmed. Minimum wages harm society because they create a deadweight loss. In addition to the deadweight loss, minimum wages also: ∙ increase the amount of time it takes to find a job (search activity). ∙ encourage illegal hiring at wages below the minimum wage rate. ∙ block voluntary exchange at the equilibrium wage. Topic: Minimum wage, support Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication 9) We know that the minimum wage causes unemployment. So, why does the government impose one? Answer: The main reason for the minimum wage is because its supporters outnumber its opponents. Some supporters, such as labor unions, have a self-interested motivation for seeing a high minimum wage. A high minimum wage increases the cost of low-skilled labor, which is a substitute for high-skilled union labor. Hence firms decrease the quantity of low-skilled labor they demand and increase their demand for union labor, thereby increasing the employment and wages of union labor. Other supporters point to the fact that the minimum wage helps raise the incomes of low-skilled workers who retain jobs. Also, if the demand and supply of low-skilled workers is inelastic, the resulting unemployment will be low and so supporters might believe that helping some low-skilled workers is worth harming others. Topic: Minimum wage, support Skill: Level 4: Applying models Section: Checkpoint 7.2 Status: Old AACSB: Written and oral communication

10) The table above gives the supply and demand schedules for scooters. Because of increased injuries sustained by children riding scooters, Citizens Against Scooter Accidents successfully lobbies the government to impose a price floor of $80.00 on scooters. a. What is the quantity demanded and supplied after the price floor has been imposed? b. Is there any shortage or surplus at this price floor? If so, how much? c. If the price floor is raised to $110.00, what is the quantity demanded and supplied? d. At a price floor of $110.00, is there any shortage or surplus? If so, how much? Answer: a. The quantity demanded and supplied is 100 scooters at $90, the equilibrium price. Because the price floor, which is the legal minimum price, is below the equilibrium price, it has no effect. The price stays at the equilibrium price of $90 per scooter and the quantity remains at the equilibrium quantity of 100 scooters. b. There is no surplus or shortage at a price floor of $90 per scooter. c. The quantity demanded at $110 is 80 scooters and quantity supplied is 140. d. There is a surplus. The surplus equals the quantity supplied, 140 scooters, minus the quantity demanded, 80 scooters, or a 60 scooters per week surplus. Topic: Price floor, surplus Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

11) The figure above illustrates the current market for fast-food workers in Baltimore. a. Without any government intervention, what is the equilibrium wage rate and amount of employment? b. If the city government imposes a minimum wage of $3 an hour, what is the amount of employment? Does the minimum wage create any unemployment? Why or why not? c. If the city government imposes a minimum wage of $6 an hour, what is the amount of employment? Does the minimum wage create any unemployment? Why or why not? Answer: a. The equilibrium wage rate is $4 an hour and the equilibrium amount of employment is 8,000 workers. b. Employment remains 8,000 workers. The minimum wage does not create any unemployment. The $3 per hour minimum wage does not bring about any unemployment because it is below the equilibrium wage rate. c. Employment decreases to 4,000 workers, the quantity of labor demanded at a wage rate of $6 per hour. At the wage rate of $6 per hour, the quantity of labor supplied is 12,000 workers and the quantity of labor demanded is 4,000 workers. Hence there are 8,000 workers unemployed. The minimum wage of $6 an hour creates unemployment because it is higher than the equilibrium wage rate. As a result, the quantity of labor supplied increases and the quantity of labor demanded decreases, leading to a situation of excess supply, or unemployment. Topic: Minimum wage, employment and unemployment Skill: Level 3: Using models Section: Checkpoint 7.2 Status: Old AACSB: Analytical thinking

7.8 Essay: Production Quotas 1) What is a production quota in an agricultural market? Explain its impact on a market. Answer: A production quota is a regulation that limits the amount that be supplied. For a production quota to have an effect, the quota amount must be less than the equilibrium quantity. A production quota increases the price of the product, thereby leading to a decrease in the quantity consumed by private consumers. The producers benefit because their producer surplus increases. However, a deadweight loss is created. Topic: Production quota Skill: Level 1: Definition Section: Checkpoint 7.3 Status: Old AACSB: Written and oral communication 2) Who gains from a production quota? Who loses? Explain how the size of the gain compares to the size of the loss. Answer: Producers gain from a production quota because the price of the good or service increases. As a result, the producer surplus increases. Consumers lose from a production quota because the price the good or service increases. As a result, the consumer surplus decreases. Because a production quota creates a deadweight loss, it is the case that the decrease in consumer surplus exceeds the increase in producer surplus. Topic: Production quota Skill: Level 3: Using models Section: Checkpoint 7.3 Status: Old AACSB: Written and oral communication 3) Suppose that producers are richer than consumers. Is a production quota fair? Explain your answer. Answer: A production quota is unfair. It is unfair under the fair rules approach to fairness because a production quota prevents voluntary exchange. And, if producers are richer than consumers, it is unfair under a fair results approach because the price support further enriches the (already rich) producers while decreasing the income of the (already poor) consumers. So in this case a production quota redistributes income from the poor to the rich. Topic: Production quota Skill: Level 5: Critical thinking Section: Checkpoint 7.3 Status: Old AACSB: Ethical understanding and reasoning

Foundations of Microeconomics, 9e (Bade) Chapter 8 Taxes 8.1 Taxes on Buyers and Sellers 1) Tax incidence is the A) burden buyers have to absorb from a tax on goods and services. B) burden sellers have to absorb from a tax on goods and services. C) lost revenue the government endures from goods and services that are not taxed. D) division of the burden of a tax between the buyer and the seller. E) deadweight loss created by a tax. Answer: D Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 2) Tax incidence is the A) dollar amount of a tax, expressed as a percentage of the purchase price. B) dollar amount of a tax per unit sold. C) division of a tax burden between the buyer and seller. D) amount of revenue collected by government on a specific good. E) deadweight loss from the tax. Answer: C Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 3) Which of the following is TRUE regarding tax incidence? i. The elasticities of supply and demand determine tax incidence. ii. When the government taxes the seller, the firm always pays most of the tax. iii. When the government taxes the buyer, the consumer always pays most of the tax. A) i only B) i and ii C) i and iii D) ii and iii E) i, ii and iii Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 1 Copyright © 2021 Pearson Education, Inc.

4) The incidence of a tax refers to A) the division of the burden of a tax between buyers and sellers. B) the deadweight loss that a tax generates. C) the inefficiency of a tax. D) the revenue collected by government because of a tax. E) the division of the burden of a tax between the public and the government. Answer: A Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 5) If a $10 sales tax is imposed on a good and the equilibrium price increases by $10, the tax is A) split between buyers and sellers but not evenly. B) paid fully by sellers. C) paid fully by buyers. D) split evenly between buyers and sellers. E) perhaps split between buyers and sellers but it is impossible to determine the incidence without further information. Answer: C Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 6) Sales taxes are usually collected from sellers, who view the tax as A) resulting from a leftward of the demand curve. B) an additional cost of selling the good. C) an addition to the demand for the product. D) an addition to profit. E) the same as a rightward shift of the demand curve. Answer: B Topic: Tax incidence Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

7) Imposing a sales tax on sellers of a product has an effect that is similar to which of the following? A) a decrease in consumers' preferences for the good B) an increase in the costs of production C) an increase in demand for the good D) a decrease in people's willingness to work E) anything that decreases the demand and shifts the demand curve leftward Answer: B Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 8) A sales tax imposed on sellers of a good A) decreases the demand and shifts the demand curve rightward. B) decreases the supply and shifts the supply curve leftward. C) decreases both the demand and the supply and shifts both the demand and supply curves leftward. D) decreases the supply and shifts the supply curve rightward. E) has no effect on either the demand or the supply. Answer: B Topic: Tax incidence Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 9) Suppose the government imposes a $1 per gallon per gallon tax on sellers of gasoline. As a result, the A) supply curve shifts leftward. B) supply curve shifts rightward. C) demand curve shifts leftward. D) demand curve shifts rightward. E) demand and supply curves both shift leftward. Answer: A Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

10) If a good has a tax levied on it, sellers respond to the price that excludes the tax and not the price with the tax because A) the tax is handed over to the state directly by buyers. B) sellers do not get to keep the tax revenue. C) the demand for the good has decreased. D) the quantity supplied of the good increases. E) demanders pay none of the tax. Answer: B Topic: Tax incidence, price wedge Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 11) Neither the demand nor the supply of gasoline is perfectly elastic or inelastic. When the government increases the federal tax on gasoline, the effect on buyers is that the price they pay A) rises. B) falls. C) does not change. D) rises if the demand is inelastic and falls if the demand is elastic. E) rises if the supply is inelastic and falls if the supply is elastic. Answer: A Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 12) The demand curve for pizza is downward sloping and the supply curve is upward sloping. If the government imposes a $2 tax on a pizza, ________ the tax. A) only consumers pay B) only producers pay C) both producers and consumers pay part of D) neither producers nor consumers pay part of E) the government pays Answer: C Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

13) Neither the demand nor the supply of automobiles is perfectly elastic or inelastic. If the government imposes a $1,000 tax on automobiles, then the price of an automobile buyers pay A) increases by $1,000. B) increases by less than $1,000. C) increases by more than $1,000. D) decreases by $1,000. E) does not change. Answer: B Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 14) Neither the demand nor the supply of sugar is perfectly elastic or inelastic. If the government imposes a 5 percent tax on sugar, the A) price of sugar buyers pay falls by 5 percent. B) price of sugar buyers pay increases by less then 5 percent. C) price of sugar buyers pay does not change. D) quantity of sugar increases. E) price of sugar buyers pay rises by 5 percent. Answer: B Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 15) Giving in to the demand of protestors, suppose the French government reduces the tax on gasoline by 15 percent. Neither the demand for gasoline nor the supply of gasoline is perfectly elastic or inelastic. As a result of the tax cut, the price for a gallon of gasoline paid by buyers A) falls by 15 percent. B) rises by 15 percent. C) falls by less than 15 percent. D) rises by less than 15 percent. E) falls by more than 15 percent. Answer: C Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

16) Neither the demand for gasoline nor the supply of gasoline is perfectly elastic or inelastic. If the federal government eliminated the 18.4 cents per gallon gasoline tax, the price paid by buyers would A) decrease by less than 18.4 cents. B) decrease by 18.4 cents. C) decrease by more than 18.4 cents. D) stay the same. E) increase by 18.4 cents. Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 17) To calculate the revenue government receives when a tax is imposed on a good, multiply the A) pre-tax equilibrium price by the pre-tax quantity. B) after-tax equilibrium price by the after-tax quantity. C) tax by the pre-tax quantity. D) tax by the after-tax quantity. E) after-tax equilibrium price by the after-tax quantity and then subtract the pre-tax equilibrium price multiplied by the pre-tax quantity. Answer: D Topic: Tax incidence, government revenue Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 18) The imposition of a tax on a good enables the government to A) raise the price received by sellers of the goods that have been taxed. B) lower the price paid by buyers for the goods that have been taxed. C) create a more efficient economic system. D) take part of consumer and producer surplus as tax revenue when the good is purchased. E) decrease the deadweight loss in this market. Answer: D Topic: Tax incidence, government revenue Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

19) In the figure above, suppose that the government imposes a tax of $4 per pizza. Then, the A) buyers and sellers equally share the incidence of the tax. B) shaded area is the deadweight loss from the tax. C) shaded area is the tax revenue from the tax. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 20) In the figure above, suppose that the government imposes a tax of $4 per pizza. Then, the tax revenue collected by the government equals A) $240. B) $320. C) $160. D) $120. E) $4. Answer: A Topic: Tax incidence, government revenue Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

21) The above figure shows the market for gourmet ice cream. In effort to reduce obesity, government places a $2 tax per gallon on suppliers in this market, shifting the supply curve from S0 to S1. The quantity of ice cream consumed before the tax is ________ gallons and the quantity consumed after the tax is ________ gallons. A) 300,000; 200,000 B) 200,000; 250,000 C) 250,000; 200,000 D) 200,000; 300,000 E) 200,000; 200,000 Answer: C Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 22) The above figure shows the market for gourmet ice cream. In effort to reduce obesity, government places a $2 tax per gallon on suppliers in this market, shifting the supply curve from S0 to S1. The total tax revenue is equal to A) $400,000. B) $800,000. C) $500,000. D) $200,000. E) More information is needed to determine the total tax revenue. Answer: A Topic: Tax incidence, government revenue Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 8 Copyright © 2021 Pearson Education, Inc.

23) The above figure shows the market for gourmet ice cream. In effort to reduce obesity, government places a $2 tax per gallon on suppliers in this market, shifting the supply curve from S0 to S1. The tax incidence is A) split equally between consumers and producers, each paying $1 per gallon. B) split equally between consumers and producers, each paying $2 per gallon. C) such that consumers pay $2 per gallon and producers pay $1 per gallon. D) such that consumers pay $1 per gallon and producers pay $2 per gallon. E) such that producers pay all of the tax. Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

24) The above figure shows the market for buckets of golf balls at the driving range. A new leisure time tax is placed on suppliers in this market, shifting the supply curve from S0 to S1. The amount of this tax is ________ per bucket of golf balls. A) $4 B) $2 C) $2.50 D) $1 E) $3 Answer: E Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 9 Copyright © 2021 Pearson Education, Inc.

25) The above figure shows the market for buckets of golf balls at the driving range. A new leisure time tax is placed on suppliers in this market, shifting the supply curve from S0 to S1. The tax incidence is A) split equally between buyers and sellers, each paying $1 per bucket. B) split equally between buyers and sellers, each paying $2 per bucket. C) such that buyers pay $2 per bucket and sellers pay $1 per bucket. D) such that buyers pay $1 per bucket and sellers pay $2 per bucket. E) such that sellers pay all of the tax. Answer: D Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 26) The above figure shows the market for buckets of golf balls at the driving range. A new leisure time tax is placed on suppliers in this market, shifting the supply curve from S0 to S1. The total tax revenue is equal to A) $1,800. B) $600. C) $1,200. D) $900. E) $5,600. Answer: C Topic: Tax incidence, government revenue Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 27) The above figure shows the market for buckets of golf balls at the driving range. A new leisure time tax is placed on suppliers in this market, shifting the supply curve from S0 to S1. The quantity of buckets without the tax is ________ and the quantity with the tax is ________. A) 400; 600 B) 600; 400 C) 400; 400 D) 800; 500 E) 600; 500 Answer: B Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

28) The figure above shows the market for tires. The figure shows that the government has imposed a tax of ________ per tire. A) $10 B) $30 C) $40 D) $60 E) None of the above answers is correct. Answer: B Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 29) The figure above shows the market for tires. The figure shows that the government has imposed a tax of ________ per tire and that ________ pay most of the tax. A) $30; buyers B) $40; buyers C) $30; sellers D) $60; sellers E) $60; buyers Answer: C Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

30) The figure above shows the market for tires. The government has imposed a tax on tires, and the buyers pay ________ of the tax. A) $10 B) $20 C) $50 D) $60 E) $30 Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 31) The figure above shows the market for tires. The government has imposed a tax on tires, and the sellers pay ________ of the tax. A) $10 B) $20 C) $50 D) $60 E) $30 Answer: B Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 32) The figure above shows the market for tires. According to the figure, the government collects ________ per month in total tax revenue. A) $600 million B) $1,200 million C) $2,000 million D) $900 million E) None of the above answers is correct. Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

33) The figure above shows the market for tires. According to the figure, the price elasticity of demand is ________ the price elasticity of supply. A) greater than B) equal to C) less than D) not comparable to E) More information is needed to determine if the price elasticity of demand is greater than, equal to, less than, or comparable to the price elasticity of supply. Answer: A Topic: Tax incidence and the elasticity of supply Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 34) For a given supply elasticity, the more inelastic the demand for a good, the larger the share of the tax paid by the A) buyers. B) sellers. C) participants other than the buyers and sellers. D) government. E) None of the above answers is correct. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 35) If a tax is placed on suppliers of a good, then the incidence of the tax A) falls more on the sellers if demand is elastic. B) falls more on the sellers if demand is inelastic. C) is usually split equally between the buyers and the sellers. D) usually falls more on the sellers than the buyers. E) usually falls more on the buyers than the sellers. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

36) Suppose that the elasticity of demand for insulin is 0.1, the elasticity of demand for oranges is 1.2, and the elasticity of supply for insulin and oranges is 0.4. If the government imposes a 10 percent tax on both insulin and oranges, the percentage decrease in the quantity of oranges is ________ the percentage decrease in the quantity of insulin. A) larger than B) smaller than C) equals to D) not comparable to E) More information is needed to determine how the decrease in the quantity of oranges compares to the decrease in the quantity of insulin. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 37) The demand for insulin is quite inelastic. The demand for Pepsi is quite elastic. Suppose the elasticity of supply for insulin is the same as the elasticity of supply for Pepsi. If a $0.20 tax was imposed on each of these goods (holding everything else constant), which consumers would pay more of the tax? A) the Pepsi consumers B) the insulin consumers C) There would be no difference in the amount of tax paid by the consumers. D) More information is needed to determine which consumers pay more of the tax. E) The premise of the question is wrong because the elasticity of demand and the incidence of a tax are not related. Answer: B Topic: Tax incidence and the elasticity of demand Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 38) The demand for gasoline is inelastic and the supply of gasoline is elastic. Therefore A) sellers bear most of the incidence of a tax on gasoline. B) buyers bear most of the incidence of a tax on gasoline. C) the government bears most of the incidence of a tax on gasoline. D) the incidence of a tax on gasoline depends if the tax is imposed on sellers or on buyers. E) None of the above answers is correct. Answer: B Topic: Tax incidence and the elasticity of demand Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 14 Copyright © 2021 Pearson Education, Inc.

39) The buyers pay all of a tax when the demand is A) perfectly elastic. B) more elastic than the supply. C) more inelastic than the supply. D) unit elastic. E) perfectly inelastic. Answer: E Topic: Tax incidence and the elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 40) If the demand curve for a good is horizontal, a tax is levied on this product is A) split between the buyers and the sellers but not evenly so that either the buyer or the seller pays more. B) split evenly between the buyers and the sellers. C) paid entirely by buyers. D) paid entirely by sellers. E) not paid by either the buyers or the sellers. Answer: D Topic: Tax incidence and the elasticity of demand Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 41) Suppose the demand for specialty car license plates is perfectly inelastic and the supply curve for specialty license plates is upward sloping. A tax is imposed on specialty license plates. Which of the following is TRUE? A) Drivers pay the smallest share of the tax. B) Drivers pay none of the tax. C) Drivers pay all of the tax. D) The government pays all of the tax. E) The government collects nothing in tax revenues. Answer: C Topic: Tax incidence and the elasticity of demand Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

42) Suppose the elasticity of demand for a product is 0 and elasticity of supply is 1. If the government imposes a tax on the product, then A) buyers and sellers pay exactly the same share of the tax. B) buyers pay all of the tax. C) sellers pay all of the tax. D) buyers pay a smaller share of the tax than do sellers, but both buyers and sellers pay some of the tax. E) because the elasticity of demand is zero, the government collects no revenue from this tax. Answer: B Topic: Tax incidence and the elasticity of demand Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 43) Suppose the demand for peaches from South Carolina is perfectly elastic. If the supply curve is upward sloping and a tax is imposed on peaches from South Carolina, then A) peach sellers pay all of the tax. B) peach buyers pay all of the tax. C) peach buyers and sellers evenly split the tax. D) the government does not collect any revenue from the tax. E) the tax does not change the equilibrium quantity of peaches. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 44) If buyers pay more of a tax than do the sellers A) demand is more elastic than supply. B) the amount of tax revenue collected by the government is almost zero. C) supply is more elastic than demand. D) the equilibrium price paid by buyers rises by less than half the amount of the tax. E) None of the above answers is correct. Answer: C Topic: Tax incidence and the elasticity of demand Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

45) Cigarettes are highly addictive and therefore have a very low elasticity of demand. A $2.00 increase in the national sales tax on cigarettes would likely cause the price paid by buyers of cigarettes to A) increase by more than $1.00 but less than $2.00. B) increase by $2.00. C) increase by more than $2.00. D) increase by less than $1.00. E) remain unchanged. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 5: Critical thinking Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 46) A $2.00 increase in a tax on a good definitely will cause the price paid by buyers to increase by $2.00 if A) demand is perfectly inelastic. B) demand is perfectly elastic. C) demand is unit elastic. D) demand is inelastic, but not perfectly inelastic. E) demand is elastic, but not perfectly elastic. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Revised AACSB: Analytical thinking 47) If the supply of automobiles becomes more inelastic, then a tax on automobiles is A) paid more by the buyers after the change than before. B) paid more by the sellers after the change than before. C) always split evenly between the buyers and the sellers. D) paid more by the government after the change than before. E) always paid entirely by the buyers. Answer: B Topic: Tax incidence and the elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

48) For a given elasticity of demand, the less elastic the supply, the A) larger the deadweight loss from a tax. B) larger the share of a tax paid by the sellers. C) greater the burden on the government from a tax. D) greater is the excess burden from a tax. E) larger the share of a tax paid by the buyers. Answer: B Topic: Tax incidence and the elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 49) Sellers bear the entire incidence of a tax on a good. This outcome can occur if A) supply is perfectly inelastic. B) the good is an inferior good. C) demand is perfectly inelastic. D) the demand curve is downward sloping and the supply curve is upward sloping. E) supply is perfectly elastic. Answer: A Topic: Tax incidence and the elasticity of supply Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 50) Why do sellers pay all of a tax when supply is perfectly inelastic? A) because a perfectly inelastic supply means that the demand is elastic B) because the government requires firms to collect the tax C) because a perfectly inelastic supply means that the quantity supplied is quite sensitive to a change in price D) because a perfectly inelastic supply means that suppliers will produce the same amount regardless of the price E) because in this case the price of the good that suppliers receive and keep does not change Answer: D Topic: Tax incidence and the elasticity of supply Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

51) Suppose the elasticity of supply of land is 0 and elasticity of demand is 2. If the government imposes a 10 percent tax on land, then A) buyers and sellers each pay 5 percent of the tax. B) buyers pay all of the tax. C) sellers pay all of the tax. D) sellers pay a smaller share of the tax than do buyers but both buyers and sellers pay some of the tax. E) buyers pay 1/2 of the tax. Answer: C Topic: Tax incidence and the elasticity of supply Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 52) The supply of sand is perfectly inelastic and the demand curve for sand is downward sloping. Hence, if a tax on sand is imposed A) sand buyers pay the entire tax. B) sand sellers pay the entire tax. C) the tax is split evenly between the buyers and sellers. D) the government pays the entire tax. E) the government collects no tax revenue because the supply is perfectly inelastic. Answer: B Topic: Tax incidence and the elasticity of supply Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 53) Suppose the supply of apartments in Minneapolis is perfectly elastic. The effect of a $100 per month tax on all apartments is that A) landlords pay none of the tax and there is a surplus of apartments. B) landlords pay all of the tax and suffer all of the deadweight loss. C) landlords pay all of the tax and no changes take place in the quantity of apartments supplied. D) renters pay all of the tax. E) the government collects no tax revenue because the supply is perfectly elastic. Answer: D Topic: Tax incidence and the elasticity of supply Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

54) If the government eliminates a tax on a good with a perfectly elastic supply, who benefits most? A) buyers B) sellers C) buyers if the demand is also perfectly elastic, otherwise sellers D) buyers if the demand is unit elastic, otherwise sellers E) Buyers and sellers benefit equally. Answer: A Topic: Tax incidence and the elasticity of supply Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 55) If the elasticity of demand for a product equals 3 and the supply is perfectly elastic, then if a tax is imposed on this product A) the buyer pays all the tax. B) the seller pays all the tax. C) the buyer pays 3/4 of the tax. D) the seller pays 3/4 of the tax. E) the buyer pays 4/3 of the tax. Answer: A Topic: Tax incidence and the elasticity of supply Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 56) The loss to society resulting from a tax includes the A) deadweight loss. B) consumer surplus paid to the government in the form of tax revenue. C) producer surplus paid to the government in the form of tax revenue. D) deadweight loss plus the consumer surplus and producer surplus paid to the government as tax revenue. E) deadweight loss minus the tax revenue collected by the government. Answer: A Topic: Taxes, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

57) The inefficiency of a sales tax on a good is ultimately the result of the A) low tax revenue earned by the government relative to the cost of collection. B) wedge between what buyers pay for the good and what sellers receive for the good. C) buyers being unable to avoid paying the tax. D) sellers being unable to avoid paying the tax. E) increase in the consumer surplus that is more than offset by the decrease in the producer surplus. Answer: B Topic: Taxes, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 58) A tax A) places a wedge between the price paid by the buyers and the price received by the sellers. B) reduces consumer surplus and producer surplus. C) decreases government spending. D) Both answers A and B are correct. E) None of the above answers is correct. Answer: D Topic: Taxes, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 59) When a tax is imposed on a good, at the after-tax equilibrium the marginal benefit of the last unit produced ________ the marginal cost. A) equals B) is greater than C) is less than D) can be calculated but is not comparable to E) The premise of the question is incorrect because after a tax is imposed, it becomes impossible to determine the marginal benefit and the marginal cost. Answer: B Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

60) When a tax is imposed on a good or a service, the marginal benefit of the last unit bought ________ the marginal cost of the last unit. A) is equal to B) is greater than C) is less than D) None of the above answers is correct because there is no consistent relationship between the marginal benefit of the last unit and its marginal cost. E) is not able to be compared to Answer: B Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 61) If neither the demand nor supply of a good is perfectly elastic or inelastic, a tax on the good ________ consumer surplus and ________ producer surplus. A) decreases; decreases B) increases; increases C) decreases; increases D) increases; decreases E) decreases; does not change Answer: A Topic: Taxes, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 62) If the demand curve is downward sloping and the supply curve is upward sloping, then when a product is taxed A) part of the initial consumer surplus goes to the government as revenue. B) part of the initial consumer surplus becomes a deadweight loss. C) the producer surplus never changes because consumers pay taxes, not producers. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Taxes, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Revised AACSB: Reflective thinking

63) The size of the deadweight loss, or excess burden, of a tax depends on the A) amount of producer surplus but not the amount of consumer surplus because it is the producers who send the tax revenues to the government. B) strength of demand. C) strength of supply. D) elasticities of demand and supply. E) number of demanders and the number of suppliers. Answer: D Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 64) When a tax is imposed on a good or service, the A) revenue gained by the government is the excess burden. B) deadweight loss that arises from a tax is the excess burden. C) share of the tax paid by the buyer is the excess burden. D) share of the tax paid by the seller is the excess burden. E) amount the government collects as tax revenue is the deadweight loss from the tax. Answer: B Topic: Deadweight loss, excess burden Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 65) The excess burden of a tax refers to the fact that A) the benefits from a tax exceed the tax revenue. B) the deadweight loss from a tax exceeds the remaining consumer surplus. C) marginal cost is greater than marginal benefit after the tax. D) a tax creates a deadweight loss. E) taxes are split between buyers and sellers. Answer: D Topic: Deadweight loss, excess burden Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

66) The deadweight loss from a tax A) is the tax revenue the government collects when people die. B) is the split of a tax between the amount paid and the amount collected. C) equals the amount collected as revenue from the tax. D) is called the excess burden of the tax. E) equals the amount collected as revenue from the tax plus the excess burden of the tax. Answer: D Topic: Deadweight loss, excess burden Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 67) The deadweight loss of a tax A) is the transfer of income from households to the government. B) determines the incidence of a tax. C) is part of the total burden of a tax. D) is greater than the total burden of a tax. E) equals the tax revenue collected by the government. Answer: C Topic: Deadweight loss, excess burden Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 68) Suppose the elasticity of demand for Mexican food is 3.00 and the elasticity of supply is 1.20. If the government imposes a sales tax on Mexican food, which of the following occurs? i. Less Mexican food is purchased by buyers. ii. Less Mexican food is produced by sellers. iii. The government receives the excess burden as revenue. iv. Both the consumer surplus and the producer surplus decrease. A) i and ii B) iii only C) i, ii, and iv D) iv only E) i, ii, iii, and iv Answer: C Topic: Deadweight loss, excess burden Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

69) The above figure shows the demand curves in four different markets. If each of the markets has an identical upward sloping supply curve and the same tax is levied on suppliers, which market would produce the smallest amount of deadweight loss? A) A B) B C) C D) D E) C and D Answer: C Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

70) The above figure shows the demand curves in four different markets. If each of the markets has an identical upward sloping supply curve and the same tax is levied on suppliers, which market would produce the largest amount of deadweight loss? A) A B) B C) C D) D E) C and D Answer: D Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

71) The above figure shows the supply curves in four different markets. If each of the markets has an identical downward sloping demand curve and the same tax is levied on suppliers, which market would produce the smallest amount of deadweight loss? A) A B) B C) C D) D E) A and D Answer: A Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

72) The above figure shows the supply curves in four different markets. If each of the markets has an identical downward sloping demand curve and the same tax is levied on suppliers, which market would produce the largest amount of deadweight loss? A) A B) B C) C D) D E) A and D Answer: D Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 73) Tax incidence refers to A) how government taxes are spent by the government. B) the incidences of tax revolts by the taxpayers. C) the amount of a tax minus its burden. D) the division of the burden of a tax between the buyer and the seller. E) tax revenue minus excess burden. Answer: D Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 74) If a $1 sales tax is imposed on the sale of a CD, and neither the demand nor the supply is perfectly elastic or perfectly inelastic, then the price of a CD paid by consumers will A) increase by $1 and fewer CDs will be bought. B) increase by less than $1 and fewer CDs will be bought. C) not change and the same number of CDs will be bought. D) increase by $1 and the same number of CDs will be bought. E) increase by more than $1 and fewer CDs will be bought. Answer: B Topic: Tax incidence Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

75) Neither the supply of nor demand for a good is perfectly elastic or perfectly inelastic. So, imposing a tax on the good results in a ________ in the price paid by buyers and ________ in the equilibrium quantity. A) rise; an increase B) rise; a decrease C) fall; an increase D) fall; a decrease E) a rise; no change Answer: B Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

76) The graph shows the market for textbooks. If the government introduces a tax of $20 a textbook, then the price paid by buyers A) increases by $20. B) increases to $80 a textbook. C) decreases to $60 a textbook. D) is $70 a textbook. E) does not change because the demand for textbooks is perfectly elastic. Answer: B Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

77) Neither the supply of nor demand for a good is perfectly elastic or perfectly inelastic. So, imposing a tax on the good results in a ________ in the price received and kept by sellers and a ________ in the price paid by buyers. A) rise; rise B) rise; fall C) fall; rise D) fall; fall E) no change; rise Answer: C Topic: Tax incidence, price wedge Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 78) Suppose the demand for barley is perfectly elastic. The supply curve of barley is upward sloping. If a tax is imposed on barley A) barley sellers pay the entire tax. B) barley buyers pay the entire tax. C) the government pays the entire tax. D) the tax is split evenly between barley buyers and sellers. E) who pays the tax depends on whether the government imposes the tax on barley sellers or on barley buyers. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

79) The demand for apple pies is perfectly elastic. If the government taxes apple pies at $1 a pie, then A) the seller pays the entire tax. B) the buyer pays the entire tax. C) the seller and the buyer split the tax evenly. D) the seller and the buyer split the tax but the seller pays more. E) who pays the tax depends on whether the government imposes the tax on pie buyers or on pie sellers. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

80) At harvest time the supply of wheat is perfectly inelastic. If the government taxes wheat at $1 a bushel, then A) the seller pays the entire tax. B) the buyer pays the entire tax. C) the seller and the buyer split the tax evenly. D) the seller and the buyer split the tax but the seller pays more. E) no one pays the tax because the wheat must be harvested or it will go to waste. Answer: A Topic: Tax incidence and the elasticity of supply Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 81) To determine who bears the greater share of a tax, we compare the A) number of buyers to the number of sellers. B) elasticity of supply to the elasticity of demand. C) size of the tax to the price of the good. D) government tax revenue to the revenue collected by the suppliers. E) pre-tax quantity to the post-tax quantity. Answer: B Topic: Tax incidence and the elasticity of demand and supply Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

82) The supply of oil is more elastic than the demand for oil. If oil is taxed $10 per barrel, how will the tax be divided between the buyer and seller? A) The seller will pay more of the tax than the buyer pays. B) The buyer will pay more of the tax than the seller pays. C) The seller and buyer will split the tax evenly. D) The seller will pay the entire tax. E) The buyer will pay the entire tax. Answer: B Topic: Tax incidence and the elasticity of demand and supply Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 83) The buyer will pay the entire tax levied on a good when the demand for the good is ________ or when the supply of the good is ________. A) perfectly elastic; perfectly inelastic B) perfectly elastic; perfectly elastic C) perfectly inelastic; perfectly inelastic D) perfectly inelastic; perfectly elastic E) unit elastic; unit elastic Answer: D Topic: Tax incidence and the elasticity of demand and supply Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 84) A sales tax imposed on tires ________ consumer surplus and ________ producer surplus. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: D Topic: Taxes, deadweight loss Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

85) If a tax is placed on tires, then i. the equilibrium quantity of tires will decrease. ii. a deadweight loss will be created. iii. the producer surplus will decrease. A) i only B) ii only C) i and iii D) i and ii E) i, ii, and iii Answer: E Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 86) The deadweight loss from a tax is called the A) marginal benefit of the tax. B) marginal cost of the tax. C) excess burden of the tax. D) net gain from taxation. E) net loss from taxation. Answer: C Topic: Deadweight loss, excess burden Skill: Level 1: Definition Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

87) The graph shows the market for cell phones. The government imposes a sales tax on cell phones at $10 a cell phone. The excess burden of the sales tax on cell phones is A) $20,000. B) $15,000. C) $35,000. D) $7,500. E) $30,000. Answer: B Topic: Deadweight loss, excess burden Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 88) A sales tax creates a deadweight loss because A) there is some paper work opportunity cost of sellers paying the sales tax. B) demand and supply both decrease. C) less is produced and consumed. D) citizens value government goods less than private goods. E) the government spends the tax revenue it collects. Answer: C Topic: Taxes, deadweight loss Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

89) The graph shows the market for mattresses. As a result of a tax imposed by the government, the price buyers pay changes from ________ and the equilibrium quantity changes from ________ mattresses. A) $300 to $325; 5,000 to 4,000 B) $295 to $325; 5,000 to 4,000 C) $325 to $300; 4,000 to 5,000 D) $325 to $295; 4,000 to 5,000 E) $295 to $300; 4,000 to 5,000 Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Application of knowledge 90) The graph shows the market for mattresses. The government imposes a tax on mattresses. The amount of the tax is ________ which causes the price buyers pay to ________ with ________ bearing more of the tax. A) $30; rise to $325;buyers B) $25; fall to $295; buyers C) $30; rise to $300; buyers D) $5; fall to $295; firms E) $25; rise to $325; firms Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Application of knowledge

91) The figure shows the market for mattresses. As a result of the government's tax on mattresses, consumer surplus ________, producer surplus ________ and the government collects tax revenue of ________. A) shrinks; shrinks; $150,000 B) shrinks; shrinks; $120,000 C) grows; shrinks; $120,000 D) shrinks; grows; $150,000 E) grows; grows; $30 per mattress sold Answer: B Topic: Tax incidence, government revenue Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Application of knowledge 92) The figure shows the market for mattresses. If the government imposes a tax on mattresses, the figure shows that A) firms will pay more of the tax because they have less elastic supply. B) firms and buyers will bear equal tax burdens. C) buyers will pay most of the tax because they have less elastic demand. D) the excess burden of the tax falls mainly on firms. E) inefficiency does not occur because buyers and sellers split the tax. Answer: C Topic: Tax incidence and the elasticity of demand and supply Skill: Level 5: Critical thinking Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 93) The figure shows the market for mattresses. If the government had imposed the tax on the buyers instead of on the sellers, the A) outcome would have been the same. B) deadweight loss would have been smaller. C) deadweight loss would have been larger. D) equilibrium price would have risen a smaller amount. E) equilibrium quantity would have fallen by a smaller amount. Answer: A Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Application of knowledge

94) The figure shows a market with perfectly inelastic demand. As a result of a tax imposed by the government A) the price buyers pay increases by $1 and the equilibrium falls to 900 units. B) sellers bear all of the tax and there is a deadweight loss of area ACD. C) sellers bear all of the tax and there is no deadweight loss. D) buyers bear all of the tax and there is a deadweight loss of area ABC. E) buyers bear all of the tax and there is no deadweight loss. Answer: E Topic: Tax incidence Skill: Level 5: Critical thinking Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 95) The figure shows a market with perfectly inelastic demand. Which of the following is TRUE regarding the figure? i. The tax decreases the equilibrium quantity from 1,000 to 900 units. ii. The tax increases the price buyers pay from $10 to $11. iii. The tax creates a deadweight loss of area ABC. A) ii only B) i and ii only C) i only D) i and iii only E) ii and iii only Answer: A Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Application of knowledge 38 Copyright © 2021 Pearson Education, Inc.

96) Suppose that in a market, supply is perfectly elastic while demand is perfectly inelastic. If the government imposes a tax of $10 per unit A) the price buyers pay increases by less than $10 per unit with firms and buyers splitting the tax. B) the price buyers pay is unaffected by the tax. C) the market quantity is unaffected by the tax. D) at the new equilibrium, marginal cost equals marginal benefit and there is no deadweight loss. E) both C and D are correct. Answer: E Topic: Tax incidence and the elasticity of demand and supply Skill: Level 5: Critical thinking Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 8.2 Income Tax and Social Security Tax 1) If we look at the percentage of total tax revenue collected by different taxes in the United States, we see that A) personal income taxes are the largest. B) Social Security taxes are the largest. C) excise taxes, while not the largest, are second only to Social Security taxes. D) sales taxes are the smallest. E) corporate income taxes are by far the largest. Answer: A Topic: Eye on the U.S. economy, taxes in the United States today Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 2) Which of the following types of taxes generates the most revenue for governments in the United States? A) Social Security tax B) personal income tax C) property tax D) sales tax E) excise tax Answer: B Topic: Eye on the U.S. economy, taxes in the United States today Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

3) For the United States, which tax is the single biggest source of tax revenue? A) Social Security tax B) sales tax C) property tax D) personal income tax E) corporation income tax Answer: D Topic: Eye on the U.S. economy, taxes in the United States today Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 4) Taxes on corporate profit are a type of ________ tax. A) sales B) property C) income D) regressive E) selling Answer: C Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 5) If there is an income tax levied on labor income, the labor demand curve ________ and the labor supply curve ________. A) shifts rightward; does not shift B) shifts leftward; does not shift C) does not shift; shifts rightward D) does not shift; shifts leftward E) shifts leftward; shifts leftward Answer: D Topic: Tax on labor income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

6) What happens to the acceptable wage rate at each level of employment once an income tax is levied on labor income? A) Nothing, it remains the same. B) It increases by the amount of the tax that must be paid. C) Workers and employers split the tax, so the acceptable wage increases by half the tax. D) Because workers have to work more to make up for the tax, the acceptable wage rate falls by some amount that cannot be determined. E) Because workers have to work more to make up for the tax, the acceptable wage rate falls by the precise amount of the tax that must be paid. Answer: B Topic: Tax on labor income Skill: Level 2: Using definitions Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 7) Suppose the government imposes a tax on labor income. Which of the following describe the effect of the tax in the labor market? i. If the demand for labor is more elastic than the supply, workers will bear more of the tax. ii. Employment is not affected because workers need jobs. iii. The tax creates a deadweight loss. A) i and iii only B) i, ii and iii C) ii only D) iii only E) ii and iii Answer: A Topic: Tax on labor income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

8) Suppose that before any tax on labor income, the equilibrium wage in a market is $10 per hour. Once the government imposes a $3 per hour tax on labor income, the equilibrium wage rises to $11 per hour. What does that reveal about the elasticities of supply and demand for labor? A) Supply is more elastic than demand. B) Demand is more elastic than supply. C) Supply and demand are equally elastic. D) Both the supply and demand are inelastic. E) Nothing because more information is needed to learn about the elasticities. Answer: B Topic: Tax on labor income, incidence Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 9) Taxes on labor income ________ a deadweight loss and ________ the supply of labor. A) create; decrease B) do not create; increase C) create; increase D) do not create; decrease E) create; do not change Answer: A Topic: Tax on labor income, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

10) The figure above shows the labor supply and labor demand curves for personal trainers in the state of Florida. The initial equilibrium hourly wage is $10. Suppose the state of Florida institutes an income tax on labor income of $6 an hour in order to buy voting machines for the next election. With the tax in place, the labor supply curve will A) remain at LS. B) shift to LS1. C) shift to LS2. D) change so that it becomes the same as LD. E) None of the above answers is correct. Answer: B Topic: Tax on labor income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

11) The figure above shows the labor supply and labor demand curves for personal trainers in the state of Florida. The initial equilibrium hourly wage is $10. Suppose the state of Florida institutes an income tax on labor income of $6 an hour in order to buy voting machines for the next election. How much of the tax is paid by employers? A) $0 B) $2 C) $4 D) $6 E) $600 Answer: C Topic: Tax on labor income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 12) The figure above shows the labor supply and labor demand curves for personal trainers in the state of Florida. The initial equilibrium hourly wage is $10. Suppose the state of Florida institutes an income tax on labor income of $6 an hour in order to buy voting machines for the next election. How much of the tax is paid by employees? A) $0 B) $2 C) $4 D) $6 E) $600 Answer: B Topic: Tax on labor income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 13) The figure above shows the labor supply and labor demand curves for personal trainers in the state of Florida. The initial equilibrium hourly wage is $10. Suppose the state of Florida institutes an income tax on labor income of $6 an hour in order to buy voting machines for the next election. The deadweight loss from this tax equals the region A) abe. B) bce. C) cef. D) efg. E) cdf. Answer: B Topic: Tax on labor income, deadweight loss Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 44 Copyright © 2021 Pearson Education, Inc.

14) The above figure shows the labor market for land surveyors. Dave is a land surveyor. What is the tax incidence for this income tax? A) Though the employer pays some of the tax, Dave pays more of the income tax than his employer. B) Dave pays the same amount of the income tax as his employer. C) While Dave pays some of tax, Dave pays less of the income tax than his employer. D) Dave does not pay any tax. E) Dave's employer does not pay any tax. Answer: C Topic: Tax on labor income, incidence Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 15) The above figure shows the labor market for land surveyors. Dave is a land surveyor. What is the total income tax Dave pays each year? A) $1,500 B) $4,500 C) $3,000 D) $40,500 E) $45,000 Answer: B Topic: Tax on labor income Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 45 Copyright © 2021 Pearson Education, Inc.

16) The above figure shows the labor market for land surveyors. Dave is a land surveyor. If there was no income tax, Dave would work ________ hours per year and the wage rate would be ________ per hour. A) 2,000; $28 B) 1,500; $28 C) 1,500; $27 D) 2,000; $30 E) 1,500; $30 Answer: A Topic: Tax on labor income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 17) The above figure shows the labor market for land surveyors. Dave is a land surveyor. With the income tax, Dave works ________ hours per year and his after-tax wage rate is ________ per hour. A) 2,000; $28 B) 1,500; $28 C) 2,000; $30 D) 1,500; $30 E) 1,500; $27 Answer: E Topic: Tax on labor income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

18) The above figure shows the labor market for land surveyors. The total amount collected as taxes equals A) area B + area C + area E + area F. B) area D + area G. C) area D + area F. D) area B + area C. E) area A. Answer: A Topic: Tax on labor income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 19) Because the supply of capital is highly elastic, taxing the income from capital results in i. firms that demand capital paying the greater share of the tax. ii. a decrease in the equilibrium quantity of capital. iii. a deadweight loss. A) i only B) ii only C) i and iii D) ii and iii E) i, ii, and iii Answer: E Topic: Tax on capital income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 47 Copyright © 2021 Pearson Education, Inc.

20) If the supply of capital is perfectly ________ end up paying the tax on capital income. A) elastic, lenders B) elastic, firms that demand capital C) inelastic, lenders D) inelastic, firms that demand capital E) unit elastic, firms that demand capital Answer: B Topic: Tax on capital income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 21) If the supply of capital is perfectly elastic, a tax on capital income results in A) a deadweight loss and lenders pay all of the tax. B) a deadweight loss and borrowers (firms) pay all of the tax. C) no deadweight loss and borrowers (firms) and lenders split the tax. D) no deadweight loss and lenders pay all of the tax. E) no deadweight loss and borrowers (firms) pay all of the tax. Answer: B Topic: Tax on capital income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 22) As a result of the tax on capital income, labor productivity A) increases. B) decreases. C) fluctuates. D) does not change. E) might change but whether it increases, decreases, or does not change depends on the magnitude of the tax. Answer: B Topic: Tax on capital income Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

23) The government in Country A decides to impose a tax on capital income. As a result, Country A experiences a ________ in its capital stock, a ________ in the interest rate and a deadweight loss ________. A) decline; rise; occurs B) decline; rise; does not occur C) rise; decrease; occurs D) rise; decrease; does not occur E) decline; decline; occurs Answer: A Topic: Tax on capital income Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Application of knowledge 24) The elasticity of supply of capital is larger than the elasticity of supply of land, so a tax on capital income has ________ deadweight loss and a ________ effect on the equilibrium quantity than does an equal tax on land. A) a larger; larger B) a larger; smaller C) a smaller; larger D) a smaller; smaller E) no; smaller Answer: A Topic: Tax on capital income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

25) The above figure shows the market for capital. Without a tax on capital income, the interest rate is ________ and firms use ________ million of capital. A) 4 percent; $1,000 B) 3 percent; $2,000 C) 4 percent; $2,000 D) 2 percent; $1,000 E) 2 percent; $2,000 Answer: E Topic: Tax on capital income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 26) The above figure shows the market for capital. With the tax on capital income, the interest rate is ________ and firms use ________ million of capital. A) 2 percent; $2,000 B) 3 percent; $2,000 C) 6 percent; $1,000 D) 4 percent; $1,000 E) 2 percent; $1,000 Answer: D Topic: Tax on capital income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

27) The above figure shows the market for capital. With the tax on capital income, the deadweight loss is equal to A) area A + area B + area C. B) area C + area D + area G. C) area C. D) area B + area F. E) area D. Answer: C Topic: Tax on capital income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 28) The above figure shows the market for capital. With the tax on capital income, the total tax paid is equal to A) area C. B) area B. C) area A + area B + area C. D) area C + area D + area G. E) area B + area F. Answer: B Topic: Tax on capital income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 29) Which resource has the least elastic supply? A) labor B) capital C) land D) money E) taxes Answer: C Topic: Tax on land and unique resources Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

30) The supply of unique resources (like land) is ________. If the government imposes a 20 percent tax on land income, ________. A) perfectly inelastic; landowners pay all of the tax B) perfectly elastic; landowners pay all of the tax C) perfectly inelastic; landowners pay none of the tax D) perfectly elastic; the tax generates an efficient outcome E) perfectly inelastic; the tax generates an inefficient outcome Answer: A Topic: Tax on land and unique resources Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Application of knowledge 31) A tax imposed on a resource's income is paid by BOTH the resource's owners and the resource's employers, EXCEPT for a tax A) on labor income. B) on the income of capital. C) on land rent. D) that is imposed on employers. E) that is imposed on employees. Answer: C Topic: Tax on land and unique resources Skill: Level 2: Using definitions Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 32) If highly paid entertainers prefer to perform and would do so even if their pay were much lower, a tax of half of the entertainers' incomes would do which of the following? A) decrease the amount of entertaining done by moving along a given labor supply curve B) decrease the entertainers' supply of performances C) collect no taxes at all D) not change the quantity supplied of performances E) increase the entertainers' supply of performances as they work more to make up the income they lose in taxes Answer: D Topic: Tax on land and unique resources Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

33) Because the supply of land is perfectly inelastic, a tax on land income A) is paid entirely by the suppliers. B) is paid entirely by the demanders. C) is shared equally between the suppliers and the demanders. D) is shared, but not equally, between the suppliers and the demanders. E) creates a deadweight loss. Answer: A Topic: Tax on land and unique resources Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 34) A tax on the income from land or other resource with a perfectly inelastic supply A) is efficient because it does not decrease the equilibrium quantity. B) has no deadweight loss. C) is paid entirely by the owner. D) Only answers A and B are correct. E) Answers A, B, and C are correct. Answer: E Topic: Tax on land and unique resources Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 35) Because the supply of land is perfectly inelastic, when governments tax land, the tax A) creates a deadweight loss because the supply is fixed. B) decreases both the demand for and the supply of land. C) creates no deadweight loss because the equilibrium quantity is the same as without the tax. D) increases the supply of land because the landlord pays all of the tax. E) decreases the supply of land because the landlord pays all of the tax. Answer: C Topic: Tax on land and unique resources Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

36) From the standpoint of efficiency, imposing a tax on the income from what type of resource is best because it creates the least inefficiency? A) a resource with a perfectly elastic supply B) a resource with a perfectly elastic demand C) a resource that earns a high reward D) a resource with a fixed supply E) a resource that earns a low reward Answer: D Topic: Tax on land and unique resources Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 37) If the Social Security tax imposed on employers increases, then A) firms' demand for labor increases. B) workers' supply of labor increases. C) firms' demand for labor decreases. D) firms' demand for labor does not change. E) the equilibrium quantity of employment increases. Answer: C Topic: Social Security tax Skill: Level 2: Using definitions Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 38) Suppose the government increases the Social Security tax imposed on employers by 25 percent. This tax leads to A) an increase in the supply of labor. B) a decrease in the supply of labor. C) a decrease in the demand for labor. D) no change in the demand for labor. E) a decrease in the supply of labor and an increase in the demand for labor. Answer: C Topic: Social Security tax Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

39) Suppose the supply of labor is more inelastic than the demand for labor. Then, a Social Security tax imposed on employers A) shifts the demand curve for labor leftward. B) lowers the wage rate received by workers. C) leads to the workers paying more of the tax than the employers. D) Only answers B and C are correct. E) Answers A, B, and C are correct. Answer: E Topic: Social Security tax Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 40) Consider a Social Security tax on workers versus a Social Security tax on employers. In comparing the outcomes of each type of tax, we see that A) workers receive a higher take-home wage when the tax is imposed on employers than when the tax is imposed on workers. B) workers receive the same take-home wage when the tax is imposed on workers and when the tax is imposed on employers. C) employers pay a lower total wage when the tax is imposed on workers. D) employment decreases by more when the tax is imposed on employers than when the tax is imposed on workers. E) employment decreases by more when the tax is imposed on workers than when the tax is imposed on employers. Answer: B Topic: Social Security tax Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

41) If Congress wanted to change the Social Security tax so that firms paid most of the tax, they would need to A) change the tax laws so that all of the Social Security tax was imposed on firms. B) change the tax laws so that all of the Social Security tax was imposed on workers. C) change the tax laws so that more than 50 percent of the Social Security tax was imposed on firms. D) change the tax laws so that more than 50 percent of the Social Security tax was imposed on workers. E) None of the above because the incidence of the Social Security tax does not depend on the tax laws but instead depends on the elasticities of the demand for labor and the supply of labor. Answer: E Topic: Social Security tax Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 42) Suppose the federal government reduced the Social Security tax on workers by 2 percentage points. This will likely cause A) an increase in the quantity of workers employed and a decrease in deadweight loss. B) an increase in the quantity of workers employed and an increase in deadweight loss. C) a decrease in the quantity of workers employed and a decrease in deadweight loss. D) a decrease in the quantity of workers employed and an increase in deadweight loss. E) no change in the quantity of workers employed since the demand for labor is more elastic than the supply of labor. Answer: A Topic: Social Security tax Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 43) A tax on labor income A) increases the quantity employed because the demand for labor increases. B) decreases the quantity employed because the supply of labor decreases. C) increases the quantity employed because the supply of labor increases. D) decreases the quantity employed because the demand for labor increases. E) does not change the quantity employed because people must have jobs in order to earn any income. Answer: B Topic: Tax on labor income Skill: Level 2: Using definitions Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

44) The incidence of an income tax on labor income is generally that the tax is A) paid by only workers. B) paid by only employers. C) shared equally between workers and employers. D) shared but not necessarily equally between workers and employers. E) funded by the deadweight loss. Answer: D Topic: Tax on labor income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

45) In the labor market shown in the graph, the government introduces a 10 percent income tax. The employer pays ________ cents of the tax and the employee pays ________ cents of the tax. A) 45; 50 B) 95; 0 C) 0; 95 D) 50; 45 E) 42.5; 42.5 Answer: D Topic: Tax on labor income, incidence Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

46) When governments tax capital income, the equilibrium quantity of capital A) increases because of the international mobility of capital. B) does not change because the supply of capital is perfectly elastic. C) decreases. D) does not change because the supply of capital is perfectly inelastic. E) might increase or decrease depending on whether the demand for capital is inelastic or elastic. Answer: C Topic: Tax on capital income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 47) If the supply of capital is perfectly elastic, the incidence of a tax on capital income is A) paid entirely by the suppliers of capital. B) paid entirely by firms that demand capital. C) shared equally between firms that demand capital and the suppliers of capital. D) shared but not equally between firms that demand capital and the suppliers of capital. E) unknown. Answer: B Topic: Tax on capital income, tax incidence Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 48) A tax on income from land in Montana is borne entirely by landowners because the A) demand for land is perfectly inelastic. B) supply of land is perfectly inelastic. C) supply of land is perfectly elastic. D) demand for land is perfectly elastic. E) deadweight loss from the tax would otherwise be infinite. Answer: B Topic: Tax on land and unique resources Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

49) When a Social Security tax is imposed on workers, employment ________ and when a Social Security tax is imposed on employers, employment ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) decreases; does not change Answer: D Topic: Social Security tax on employers Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 50) Congress requires that firms and workers make the same Social Security contributions. The goal of the law is for ________ of the tax. The law results in ________ of the tax because the demand for labor is more elastic than the supply of labor. A) workers and firms to pay equal amounts; workers paying more B) workers to pay less; workers paying more C) workers to pay more; workers paying more D) employers to pay more; employers paying more E) employers to pay more; employers paying less Answer: A Topic: Social Security tax Skill: Level 5: Critical thinking Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 8.3 Fairness and the Big Tradeoff 1) Consider the two principles of fair taxation, the benefits principle and the ability-to-pay principle. A) Both state that people should pay taxes according to the benefits they receive from public services. B) Both state that people should pay taxes according to how easily they can bear the burden. C) Both are based on horizontal equity. D) Both present conflicting ideas on the fairness of taxes. E) Both are based on vertical equity. Answer: D Topic: Fairness Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Ethical understanding and reasoning

2) If Sam pays $2,000 in taxes on an income of $20,000 and $2,800 in taxes on an income of $30,000, the tax rate is A) regressive. B) proportional. C) progressive. D) vertically fair. E) not enough information is given to determine the answer. Answer: A Topic: Regressive tax Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 3) The percentage of an additional dollar that is paid in tax is called A) the average tax rate. B) the marginal tax rate. C) a proportional tax. D) a progressive tax. E) a regressive tax. Answer: B Topic: Marginal tax rate Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 4) The marginal tax rate equals 100 × A) (total tax ÷ change in income). B) (change in tax ÷ total income). C) (total tax ÷ total income). D) (change in tax ÷ change in income). E) (average tax rate × total income). Answer: D Topic: Marginal tax rate Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

5) The sales tax in Dutchess County, New York, is 7.5 percent. This sales tax is A) fair because everyone pays the same tax. B) proportional. C) regressive. D) progressive. E) an example of the benefit principle of taxation. Answer: C Topic: Regressive tax Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 6) The marginal tax rate is the A) average amount paid as taxes. B) percentage of total income that is paid in tax. C) percentage of an additional dollar of income paid in tax. D) total amount of tax paid as a percentage of total income earned. E) same as the average tax rate for a progressive tax. Answer: C Topic: Marginal tax rate Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 7) Which of the following is correct? A) If your income is $20,000 and you are paying $2,000 in taxes, your marginal tax rate is 10 percent. B) If your income is $20,000 and you are paying $2,000 in income taxes, the income tax you are paying is progressive. C) If you paid $0.39 as tax from an additional dollar you earned, your marginal tax rate is 39 percent. D) If your marginal tax rate falls as your income increases, the tax is progressive. E) If your income is $20,000 and you are paying $2,000 in income taxes, the income tax you are paying is proportional. Answer: C Topic: Marginal tax rate Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

8) ________ tax rate equals ________. A) A marginal; the percentage of total income that is paid in tax B) A progressive; the percentage of an additional dollar of income that is paid in tax C) An average; the percentage of total income that is paid in tax D) A regressive; the percentage of an additional dollar of income that is paid in tax E) A proportional; the percentage of total income that is paid in tax Answer: C Topic: Average tax rate Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 9) The average tax rate is the A) percentage of an additional dollar of income paid in tax. B) percentage of income paid in tax. C) total amount of taxes paid by an individual. D) average of the rates at which income and taxes increase. E) same as the marginal tax rate for a progressive tax. Answer: B Topic: Average tax rate Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 10) Ann pays $3,850 in taxes on an income of $38,500. Therefore her A) marginal tax rate must be 10 percent. B) taxes must be progressive in nature. C) average tax rate must be 10 percent. D) personal exemption is 10 percent. E) proportional tax rate is undefined. Answer: C Topic: Average tax rate Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

11) The average tax rate equals A) (total tax ÷ change in income) × 100. B) (change in tax ÷ total income) × 100. C) (total tax ÷ total income) × 100. D) (change in tax ÷ change in income) × 100. E) (marginal tax are × total income) × 100. Answer: C Topic: Average tax rate Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 12) The average tax rate A) can be calculated by summing all the marginal tax rates up to the level of income for which the average is being calculated. B) is the marginal tax rate divided by the total tax. C) is the percentage of income paid as taxes. D) equals income divided by amount of taxes paid. E) equals the marginal tax rate multiplied by total taxable income. Answer: C Topic: Average tax rate Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 13) If the average tax rate increases as income increases, the tax is A) progressive. B) proportional. C) regressive. D) an excise tax. E) a decreasing marginal-rate tax. Answer: A Topic: Progressive tax Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

14) If the average tax rate increases as income increases, then the A) tax is regressive tax. B) tax is a progressive tax. C) tax is a proportional tax. D) income is tax exempt so that no tax needs to be paid on it. E) marginal tax rate must be falling as income increases. Answer: B Topic: Progressive tax Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 15) If the average tax rate increases as income increases, the tax is a A) progressive tax. B) regressive tax. C) proportional tax. D) marginal tax. E) production-efficient tax. Answer: A Topic: Progressive tax Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 16) If the average tax rate remains constant as income changes, the tax is A) progressive. B) proportional. C) regressive. D) definitely fair. E) impossible to determine with the information given. Answer: B Topic: Proportional tax Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

17) A tax that has the same average rate at all levels is A) a proportional tax. B) a regressive tax. C) a marginal tax. D) a sales tax. E) an efficient-price tax. Answer: A Topic: Proportional tax Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 18) When each taxpayer pays the same average tax rate regardless of the taxpayer's income, the tax is A) a regressive tax. B) a progressive tax. C) an estate tax. D) a proportional tax. E) an efficient-price tax. Answer: D Topic: Proportional tax Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 19) If the average tax rate ________ as income increases, then the tax is a ________ tax. A) does not change; proportional B) does not change; regressive C) decreases; progressive D) decreases; proportional E) increases; regressive Answer: A Topic: Proportional tax Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

20) With a proportional tax, as income increases the amount of tax paid A) eventually phases out to zero. B) rises as a percentage of income. C) falls as a percentage income. D) remains constant as a percentage of income. E) first rises and then falls as a percentage of income. Answer: D Topic: Proportional tax Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 21) If the average tax rate falls as income increases, the tax is A) progressive. B) proportional. C) regressive. D) vertically unfair. E) impossible to determine with the information given. Answer: C Topic: Regressive tax Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 22) A tax for which the average tax rate decreases as income increases is defined as A) a proportional tax. B) a regressive tax. C) a progressive tax. D) a sales tax. E) an efficient-quantity tax. Answer: B Topic: Regressive tax Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

23) Suppose everybody paid the same total amount of tax regardless of their income. This type of tax system would be A) regressive. B) proportional. C) progressive. D) marginal. E) efficient. Answer: A Topic: Regressive tax Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 24) Assume that the government passes a tax so that every individual must pay $100. This tax is a A) progressive tax. B) proportional tax. C) regressive tax. D) marginal tax. E) type of tax that is impossible to determine without more information. Answer: C Topic: Regressive tax Skill: Level 4: Applying models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 25) If Sam pays $2,000 in taxes on an income of $20,000 and $2,800 in taxes on an income of $30,000, the tax rate is A) regressive. B) proportional. C) progressive. D) vertically fair. E) not enough information is given to determine the answer. Answer: A Topic: Regressive tax Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

26) The benefits principle of fair taxation means that people A) pay taxes according to the level of benefits they receive. B) pay taxes according to their ability to pay. C) with the same ability pay the same taxes. D) with a greater ability to pay, pay more taxes. E) Answers B, C, and D are correct. Answer: A Topic: Benefits principle Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Ethical understanding and reasoning 27) The proposition that people should pay taxes equal to the benefits they receive from public services is known as the A) ability-to-pay principle. B) progressive tax principle. C) fairness principle. D) benefits principle. E) "he or she who gets, pays" principle. Answer: D Topic: Benefits principle Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 28) The benefits principle of fair taxation A) can be used to justify the progressive income tax. B) can be used to justify high fuel taxes to pay for public schools. C) is the proposition that people should pay taxes equal to the benefits they receive. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: C Topic: Benefits principle Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Ethical understanding and reasoning

29) The benefits principle of tax fairness argues that A) everyone receives equal benefits from public services so taxes should be the same for all. B) highly paid people should pay lower taxes because they work harder. C) taxes should be related to the amount of income earned. D) people should pay taxes equal to the benefits from public services received. E) the benefits people get from the government should not be related to their taxes. Answer: D Topic: Benefits principle Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 30) The benefits principle of fairness of taxes is the proposition that A) taxes should only be used to correct market failures. B) people should pay taxes according to how easily they can bear the burden. C) tax systems can only be fair if all people agree on them. D) people should pay taxes equal to their benefit from public services. E) the incidence of taxes should be equal across households. Answer: D Topic: Benefits principle Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 31) Which of the following is an example of a tax following the benefits principle? i. sales taxes on gasoline used to fund road maintenance projects ii. federal income tax used to fund food stamps for poorer households iii. property taxes used to finance public education A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: A Topic: Benefits principle Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

32) The argument that those who use the highways the most should pay most of the cost of providing them, is an example of A) the benefits principle of fair taxes. B) the ability-to-pay principle of fair taxes. C) a progressive tax system. D) a proportional tax system. E) the "fairest incidence of tax benefits" principle. Answer: A Topic: Benefits principle Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 33) Which of the following taxes best illustrate the benefits principle of tax fairness? A) Roads and highways are built and maintained through a tax on gasoline. B) The local library is funded through property taxes levied on all homeowners. C) The WIC program provides food to low income mothers and is funded through the federal income tax. D) A sales tax on food pays for local police and fire protection. E) City parks are maintained through local excise taxes. Answer: A Topic: Benefits principle Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 34) Which of the following taxes best illustrate the benefits principle of tax fairness? A) A property tax that is proportional to the value of a home is used to fund K-12 education. B) The local library is funded through property taxes levied on all homeowners. C) The WIC program provides food to low income mothers and is funded through the federal income tax. D) A sales tax on food pays for local police and fire protection. E) The local youth sports leagues are financed by fees collected from participants by the city. Answer: E Topic: Benefits principle Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

35) Using fuel taxes to pay for maintaining public highways is an example of A) the benefits principle of fair taxation. B) horizontal equity approach to taxation. C) vertical equity approach to taxation. D) the ability-to-pay principle of taxation. E) the excess burden from taxes. Answer: A Topic: Benefits principle Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 36) The idea that taxpayers with the same ability to pay a tax should pay the same taxes is called A) progressive taxes. B) regressive taxes. C) horizontal equity. D) vertical equity. E) fair-incidence principle. Answer: C Topic: Ability-to-pay principle Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 37) The ability-to-pay principle of tax fairness is equivalent to which of the following? A) collecting taxes from those who benefit the most from provision of public services B) collecting more taxes from people who can more easily bear the burden C) a regressive income tax structure D) a proportional income tax structure E) concern about only horizontal equity and no concern about vertical equity Answer: B Topic: Ability-to-pay principle Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

38) Which of the following taxes best illustrates the ability-to-pay principle? A) sales tax B) state property tax C) federal income tax D) cigarette tax E) marriage tax Answer: C Topic: Ability-to-pay principle Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 39) Which of the following taxes best illustrate the ability-to-pay principle of tax fairness? A) Roads and highways are built and maintained through a tax on gasoline. B) The local library is funded through a flat $10 tax levied on all homeowners. C) A sales tax on food pays for local police and fire protection. D) The WIC program provides food to low income mothers and is funded through the progressive federal income tax. E) State parks are maintained through the state lottery. Answer: D Topic: Ability-to-pay principle Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 40) Which of the following taxes best illustrate the ability-to-pay principle of tax fairness? A) Tuition at public universities is lower for in-state residents than for out-of-state residents. B) The library is funded through a flat $10 tax levied on all homeowners. C) A property tax that is proportional to the value of a home is used to fund K-12 education. D) Free cholesterol check clinics are funded through a $0.20 tax on all prescriptions. E) A sales tax on food pays for local police and fire protection. Answer: C Topic: Ability-to-pay principle Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

41) The 2010 health care reform that expanded public health care coverage for low income individuals by increasing taxes on high income earners. Taking more tax revenue from high income earners reflects A) the benefits principle because high income earners can more easily bear the burden of taxes. B) the ability-to-pay principle because high income earners can more easily bear the burden of taxes. C) the ability-to-pay principle because high income earners use more public health care services. D) the benefits principle because high income earners use more public health care services. E) a regressive tax system since high income earners will pay a greater dollar amount in taxes. Answer: B Topic: Ability-to-pay principle Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking 42) When it comes to taxes, horizontal equity means that A) people with lower incomes bear a smaller tax burden. B) people with the same incomes pay the same amount of taxes. C) progressive taxes must be imposed. D) regressive taxes must be imposed. E) only proportional taxes are fair. Answer: B Topic: Horizontal equity Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 43) The assertion that people with the same ability to pay taxes should pay the same amount in taxes best represents the idea of A) horizontal equity. B) vertical equity. C) the benefits principle of tax fairness. D) fairness principle of taxation. E) benefits paid principle of taxation. Answer: A Topic: Horizontal equity Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

44) If taxes are collected on the basis of ability-to-pay and there are two taxpayers with the same income who also are identical in all other respects, which of the following is correct? A) Vertical equity is impossible between these two taxpayers. B) Vertical equity exists. C) Horizontal equity exists. D) The tax must be proportional. E) The fair-incidence principle is potentially being violated. Answer: C Topic: Horizontal equity Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 45) Suppose that Anthony and Melissa both earn $30,000 and are otherwise the same. If they both pay 10 percent of their income as taxes, then A) the income tax is regressive. B) the benefits principle of fairness has been achieved. C) horizontal equity has been achieved. D) proportional equity has been achieved. E) vertical equity has been achieved. Answer: C Topic: Horizontal equity Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 46) Vertical equity is the idea that A) taxpayers with a greater ability to pay should bear a greater share of the taxes. B) people should pay taxes equal to the benefits they receive from public benefits. C) as income rises, taxes should be efficient, not equitable. D) the marriage tax is equitable. E) taxes must be fairest to people with the largest incomes. Answer: A Topic: Vertical equity Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

47) Progressive taxes can be justified as fair based on which of the following? A) horizontal equity B) vertical equity C) benefits received D) index of fairness principle E) None of the above answers is correct. Answer: B Topic: Vertical equity Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Ethical understanding and reasoning 48) The assertion that LeBron James and Beyonce should pay more taxes than Average Joe best represents the idea of A) horizontal equity. B) vertical equity. C) the benefits principle of tax fairness. D) fairness principle of taxation. E) benefits paid principle of taxation. Answer: B Topic: Vertical equity Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 49) Trying to achieve vertical equity by using a progressive income tax structure can create problems with which of the following? A) horizontal equity B) vertical equity C) benefits received D) tax incidence E) regressive equality Answer: A Topic: Marriage tax problem Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

50) Which of the following taxes best illustrates the benefits principle of taxation? A) sales tax on clothing used to fund food stamps B) state income tax used to fund state universities C) Medicare tax imposed on all workers used to fund medical care for the elderly D) gasoline tax used to fund road repairs E) federal income tax used to fund NASA spending Answer: D Topic: Benefits principle Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 51) The proposition that people should pay taxes according to how easily they can bear the burden is known as the ________ principle. A) regressive tax B) benefits C) ability-to-pay D) fairness E) incidence of fairness Answer: C Topic: Ability-to-pay principle Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 52) The government once imposed a luxury tax on very expensive jewelry. This tax followed the ________ principle. A) benefits B) ability-to-pay C) vertical equity D) horizontal equity E) fair-tax incidence Answer: B Topic: Ability-to-pay principle Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

53) The proposition that taxpayers with the same ability to pay should pay the same taxes is called A) the benefits principle. B) the ability-to-pay imperative. C) vertical equity. D) horizontal equity. E) the fair-tax incidence principle. Answer: D Topic: Horizontal equity Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 54) Vertical equity implies that i. tax rates should be equal for all tax payers. ii. people with higher income should pay more in taxes. iii. people with higher incomes should pay a lower average tax rate. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: B Topic: Vertical equity Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 55) Joan's income is $60,000 and she pays $6,000 in taxes. Juan's income is $40,000 and he pays $7,000 in taxes. This situation violates A) the benefits principle. B) the big tradeoff. C) vertical equity. D) horizontal equity. E) the fair-tax incidence principle. Answer: C Topic: Vertical equity Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

56) Compared to taxes on labor income, taxes on capital income generate ________ deadweight loss and are paid by people who generally have the ________ ability to pay. A) a larger; most B) a larger; least C) a smaller; most D) a smaller; least E) no; least Answer: A Topic: Tax on capital income Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 57) Consider the table showing tax rates for a country: Taxable income $0-$10,000 $10,001 - $40,000 $40,001 or more

Marginal tax rate 7% 12% 25%

The table shows a country with a A) progressive tax rate based on vertical equity. B) progressive tax rate based on horizontal equity. C) regressive tax rate based on vertical equity. D) regressive tax rate based on the ability-to-pay principle. E) a flat average tax rate of 15 percent. Answer: A Topic: Progressive, regressive, proportional taxes Skill: Level 5: Critical thinking Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 58) A flat tax can be ________ efficient than a progressive tax rate because the flat tax ________ the incentive to work, save and invest. A) less; does not affect B) more; increases C) less; increases D) more; decreases E) less; decreases Answer: B Topic: Flat tax Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking 78 Copyright © 2021 Pearson Education, Inc.

8.4 Chapter Figures

The figure above shows the market for MP3 players, where S is the supply curve and D is the demand curve before any tax. The government imposes a $10 per unit tax on buyers of MP3 players. 1) Based on the figure above, after the tax is imposed, the price (including the tax) paid by the buyer is ________ per MP3 player. A) $105 B) $100 C) $95 D) $110 E) $90 Answer: A Topic: Tax incidence, price wedge Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

2) Based on the figure above, after the tax is imposed, the price received by the seller is ________ per MP3 player. A) $105 B) $100 C) $95 D) $110 E) $90 Answer: C Topic: Tax incidence, price wedge Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 3) Based on the figure above, the tax ________ the price paid by the buyer by ________ per MP3 player. A) raises; $5 B) lowers; $5 C) raises; $10 D) lowers; $10 E) raises; $7.50 Answer: A Topic: Tax incidence, price wedge Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 4) Based on the figure above, the tax ________ the price received by the seller by ________ per MP3 player. A) raises; $5 B) lowers; $5 C) raises; $10 D) lowers; $10 E) lowers; $2.50 Answer: B Topic: Tax incidence, price wedge Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

5) Based on the figure above, after the tax is imposed, the government collects tax revenue of ________ a week. A) $20,000 B) $10,000 C) $50,000 D) $60,000 E) $40,000 Answer: A Topic: Tax incidence, government revenue Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 6) Based on the figure above, the burden of the tax A) is split equally between the buyer and the seller. B) falls mostly on buyers. C) falls mostly on sellers. D) falls entirely on buyers. E) falls entirely on sellers. Answer: A Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

The figure above shows the market for MP3 players, where S is the supply curve and D is the demand curve before any tax is imposed. The government imposes a $10 per unit tax on sellers of MP3 players. 7) Based on the figure above, after the tax is imposed, the price paid by the buyer is ________ per MP3 player. A) $105 B) $100 C) $95 D) $110 E) $90 Answer: A Topic: Tax incidence, price wedge Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

8) Based on the figure above, after the tax is imposed, the price received (and kept) by the seller is ________ per MP3 player. A) $95 B) $105 C) $100 D) $110 E) $90 Answer: A Topic: Tax incidence, price wedge Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 9) Based on the figure above, the tax ________ the price paid by the buyer by ________ per MP3 player. A) raises; $5 B) lowers; $5 C) raises; $10 D) lowers; $10 E) raises; $7.50 Answer: A Topic: Tax incidence, price wedge Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 10) Based on the figure above, the tax ________ the price received (and kept) by the seller by ________ per MP3 player. A) lowers; $5 B) raises; $5 C) raises; $10 D) lowers; $10 E) lowers; $2.50 Answer: A Topic: Tax incidence, price wedge Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

11) Based on the figure above, after the tax is imposed, the government collects tax revenue of ________ a week. A) $20,000 B) $10,000 C) $50,000 D) $60,000 E) $40,000 Answer: A Topic: Tax incidence, government revenue Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 12) Based on the figure above, the burden of the tax A) is split equally between the buyer and the seller. B) falls mostly on buyers. C) falls mostly on sellers. D) falls entirely on buyers. E) falls entirely on sellers. Answer: A Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

The figure above shows the market for MP3 players, where S is the supply curve and D is the demand curve before any tax is imposed. The government imposes a $10 per unit tax on sellers of MP3 players. 13) In the figure above, at the market equilibrium with the tax, marginal benefit ________ marginal cost, and the quantity of MP3 players sold is ________. A) exceeds; inefficient B) is below; inefficient C) is below; efficient D) exceeds; efficient E) equals; efficient Answer: A Topic: Taxes, inefficiency Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

14) Based on the figure above, the deadweight loss from the tax is A) $15,000 per week. B) $20,000 per week. C) $35,000 per week. D) $17,500 per week. E) zero. Answer: A Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 15) Based on the figure above, after the tax is imposed, the consumer surplus A) decreases by $17,500. B) increases by $17,500. C) decreases by $7,500. D) increases by $7,500. E) does not change. Answer: A Topic: Taxes, deadweight loss Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

The figure above shows the demand (D) and supply (S) curves for insulin before any tax is imposed. The government imposes a $0.20 a dose tax on sellers of insulin. 16) Based on the figure above, after the tax is imposed, the price paid by the buyer is ________, and the price received (and kept) by the seller is ________. A) $2.20; $2.00 B) $2.00; $2.20 C) $2.00; $2.00 D) $2.20; $2.20 E) $2.00; $1.80 Answer: A Topic: Tax incidence, price wedge Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 17) Based on the figure above, at the market equilibrium with the tax, marginal benefit ________ marginal cost, and the quantity of insulin sold is ________. A) equals; efficient B) exceeds; inefficient C) is below; inefficient D) is below; efficient E) exceeds; efficient Answer: A Topic: Taxes, inefficiency Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 87 Copyright © 2021 Pearson Education, Inc.

8.5 Integrative Questions 1) The phrase "tax incidence" refers to A) how easy it is to evade the tax. B) how taxes redistribute income. C) the degree of progressiveness or regressiveness of the tax. D) who actually bears the burden of paying the tax. E) how much the government collects in revenue from a tax. Answer: D Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking 2) If the demand curve for hamburgers is downward sloping and the supply curve for hamburgers is upward sloping, then a tax imposed on hamburgers ________ the price paid by buyers and ________ the price received by sellers. A) raises; raises B) raises; lowers C) lowers; raises D) lowers; lowers E) does not change; does not change Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Analytical thinking 3) We can see the inefficiencies created by a sales tax because A) a deadweight loss occurs. B) the tax creates an excess burden. C) at the quantity produced, marginal benefit equals marginal cost. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

4) If neither the demand nor the supply for goods or labor is perfectly inelastic, then a sales tax on a good ________ a deadweight loss and an income tax ________ a deadweight loss. A) creates; creates B) creates; does not create C) does not create; create D) does not create; does not create E) might create; might create Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 5) Which of the following is TRUE? i. A tax on buyers has the same effect as the same sized tax on sellers. ii. The more elastic the demand, the larger is the share of the tax paid by the buyers. iii. The U.S. income tax is regressive. A) only i B) only ii C) only iii D) ii and iii E) i and ii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 6) Which of the following is TRUE? i. If supply is perfectly inelastic, the tax creates no deadweight loss. ii. The elasticities of supply and demand, not Congress, determine who pays the income tax. iii. A tax is progressive if the average tax rate falls with income. A) only i B) only ii C) only iii D) ii and iii E) i and ii Answer: E Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

7) Which of the following is TRUE? i. If demand is perfectly elastic, the tax creates no deadweight loss. ii. The more elastic the supply of a factor of production, the greater is the deadweight loss from an income tax. iii. A tax is regressive if the average tax rate rises with income. A) only i B) only ii C) only iii D) ii and iii E) i and ii Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 8) A sales tax on cigarettes would likely decrease the quantity demanded by a smaller amount A) for smokers who view cigarettes as a necessity. B) for smokers who are not addicted. C) for smokers with smaller incomes. D) the longer the time elapsed. E) for smokers who view cigarettes as a luxury. Answer: A Topic: Tax incidence and the elasticity of demand Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytical thinking

9) The figure above shows the impact of an income tax. The deadweight loss created by the income tax equals area A) bce. B) fed. C) acf. D) feba. E) The question errs because an income tax does not create a deadweight loss. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking 10) The figure above shows the impact of an income tax. The revenue collected by the government equals area A) bce. B) feba. C) fed. D) acf. E) None of the above answers is correct. Answer: E Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking

11) The imposition of ________ shifts the labor demand curve downward. A) a sales tax B) an income tax C) a Social Security tax on workers D) a Social Security tax on employers E) Both answers C and D are correct. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 12) ________ tax is progressive if the ________. A) An income; average tax rate is constant as income increases B) An income; average tax rate increases with income C) Any; average tax rate is constant as income increases D) Any; average tax rate decreases as income increases E) A Social Security; tax is imposed on employers rather than workers Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 13) To levy a tax based on the benefits principle to pay for a bridge, the government A) would impose an income tax instead of a Social Security tax on workers. B) would impose a Social Security tax on workers instead of an income tax. C) needs to know each person's benefit from the bridge. D) needs to be able to calculate the deadweight loss of a tax. E) cannot impose the tax on anyone who uses the bridge. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

14) Which of the following taxes guarantees vertical equity? i. income tax ii. Social Security tax on workers iii. Social Security tax on employers A) i only B) i and ii C) ii and iii D) iii only E) None of the above taxes guarantees vertical equity. Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 15) Regardless of whether a tax is imposed on buyers or sellers, it has the same effects: In general, the price paid by the buyers ________ and the price received by the sellers ________. A) rises; falls B) rises; rises C) falls; rises D) falls; remains the same E) rises; remains the same Answer: A Topic: Tax incidence Skill: Level 5: Critical thinking Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking 16) A tax on labor income ________ the wage rate paid by employers, ________ the wage rate received by employees, and ________ a deadweight loss. A) rise; fall; creates B) rise; rise; creates C) rise; rise; does not create D) fall; fall; does not create E) fall; fall; creates Answer: A Topic: Tax on labor income Skill: Level 5: Critical thinking Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

17) Most of a tax hike will be paid by workers if the demand for labor is ________ and the supply of labor is ________. A) elastic; inelastic B) elastic; elastic C) inelastic; inelastic D) inelastic; stable E) elastic; stable Answer: A Topic: Tax on labor income Skill: Level 5: Critical thinking Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking 18) For a given elasticity of supply, the more ________ the demand for the good, the share of the tax paid by the buyers is ________. A) inelastic; larger B) inelastic; smaller C) elastic; larger D) elastic; smaller E) elastic; the same Answer: A Topic: Taxes Skill: Level 5: Critical thinking Section: Checkpoint 8.2 Status: Old AACSB: Application of knowledge 19) If a $2.00 tax per dose of insulin raises the price paid by the buyers by $2.00, then the demand for insulin is perfectly ________ and the buyers pay ________ the tax. A) inelastic; all B) inelastic; some of C) inelastic; none of D) elastic; all E) elastic; none of Answer: A Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Application of knowledge

20) The demand curve for blue marker pens horizontal so the demand is perfectly ________. A tax of 50 cents lowers the price received by the seller by 50 cents and the seller pays ________ the tax. A) elastic; all B) inelastic; all C) inelastic; some of D) inelastic; none of E) elastic; none of Answer: A Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Application of knowledge 21) If a tax of 5 cents a tomato lowers the price received by tomato sellers by 5 cents a tomato, then the supply of tomatoes is perfectly ________ and the seller pays ________ the tax. A) inelastic; all B) elastic; all C) inelastic; some of D) inelastic; none of E) elastic; none of Answer: A Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Application of knowledge 22) The supply curve of sand is horizontal so the supply of sand is perfectly ________. A tax of 1 cent a pound increases the price by 1 cent a pound and the buyer pays ________ the tax. The tax is therefore ________. A) elastic; all; inefficient B) elastic; none; inefficient C) elastic; all; efficient D) inelastic; all; inefficient E) inelastic; none; efficient Answer: A Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Application of knowledge

8.6 Essay: Taxes on Buyers and Sellers 1) When a tax is imposed on a good, the resulting rise in the equilibrium price is usually less than the amount of the tax itself. Why doesn't the equilibrium price rise by the full amount of the tax? Answer: Because firms collect taxes from consumers and send them to the government, the taxes drive a wedge between the price or dollar amount firms receive from consumers and the price or dollar amount they get to keep for selling the good. Firms would like to raise the price by the full amount of the tax. In this case, the amount firms receive would stay the same and so the firms would continue to supply the same quantity of the product. But as the price rises, the quantity demanded decreases. Hence, IF the price rose by the full amount of the tax, the quantity supplied would not change and the quantity demanded would decrease. There would be a surplus of the product. The surplus forces the price downward, thereby making the rise in price less than the full amount of the tax. As a result, in the equilibrium the price generally does not rise by the full amount of the tax. Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Written and oral communication 2) How does the elasticity of demand affect the incidence of a tax? Answer: For a given elasticity of supply, the more elastic the demand, the smaller the share of a tax that falls on the buyer and hence the larger the share of a tax that falls on the seller. Topic: Tax incidence Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 3) Explain under what conditions a sales tax on a specific good would be paid entirely by buyers. Answer: Buyers pay all of a tax when the demand for the product is perfectly inelastic or when the supply is perfectly elastic. Topic: Tax incidence and the elasticity of demand Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

4) Which would be a better source of tax revenue for the government, a good with elastic or a good with an inelastic demand? Explain your reasoning. Answer: Inelastic goods are better sources of tax revenue because, as price rises, the equilibrium quantity does not decrease by as much as that of a good with elastic demand. The government's tax revenue, which depends on the equilibrium quantity of the good, is larger when a good with an inelastic demand is taxed. Topic: Tax incidence and the elasticity of demand Skill: Level 5: Critical thinking Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 5) Suppose the demand for saline solution is perfectly inelastic for contact lens wearers. If the government imposes a tax on saline solution, what occurs? Be sure to tell what happens to the price paid by the buyers and discuss the incidence of the tax. Answer: If demand is perfectly inelastic, then no matter what the price, buyers will not decrease their quantity demanded when the price rises. Hence the tax incidence will fall fully on the consumers. So, in the case of saline solution, the price paid by the buyers will rise by the full amount of the tax and buyers pay the entire amount of the tax. Topic: Tax incidence and the elasticity of demand Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 6) Suppose the government decides to tax salt. The demand for salt is inelastic and the supply is quite elastic. Who bears most of the tax incidence and pays most of this tax? Answer: Buyers of salt pay most of the tax because their demand for salt is inelastic. Topic: Tax incidence and the elasticity of demand Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 7) Consider the market for dining at Mexican restaurants. Suppose the price elasticity of demand for Mexican food is 1.23 and the price elasticity of supply is 0.47. If the government imposes a tax on Mexican food, do buyers or sellers pay most of the tax? Why? Answer: Sellers pay most of the tax because supply is inelastic while demand is elastic. There are many substitutes for the good, so unless sellers are willing to pay most of the tax, buyers spend their money on other types of food. Topic: Tax incidence and the elasticity of supply Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking

8) Is the deadweight loss from a sales tax on a product larger the more inelastic the demand for the good? Answer: No, the deadweight loss from a sales tax is SMALLER the more inelastic the demand for the good. Topic: Taxes, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 8.1 Status: Old AACSB: Reflective thinking 9) In the Village of Punjab, Sheryl owns a well, which is the only source of drinking water. The supply of water is perfectly inelastic at a quantity of 1,000 gallons of water per day. At a price of $2.00 per gallon, the quantity demanded per day is 1,000 gallons. The government imposes a $0.50 per gallon tax. a. After the tax is imposed, what is the price paid by the villagers? What is the price received by Sheryl? b. How much revenue does the government collect? c. What fraction of the tax does Sheryl pay? What fraction is paid by the villagers? Answer: a. Because the supply is perfectly inelastic, no matter what price Sheryl receives, she supplies 1,000 gallons of water per day. Because she supplied 1,000 gallons of water per day, the price paid by the villagers remains equal to $2.00, the price at which 1,000 gallons per day is the quantity demanded. Sheryl receives $1.50, the $2.00 paid by the villagers minus the $0.50 sent to the government as the tax. b. The government receives $500 in tax revenue. c. Sheryl pays 100 percent of the tax because the price she receives falls by the full amount of the tax. The villagers pay none of the tax because the price they pay does not change. Topic: Tax incidence and the elasticity of supply Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

10) The figure above illustrates the market for antifreeze. Suppose the government decides to impose an $8 sales tax on every gallon of antifreeze sold. a. In the figure, illustrate the effect the tax has on the market for antifreeze. b. What is the equilibrium price of a gallon of antifreeze before the tax? What is the price paid by buyers after the tax? c. What is the equilibrium quantity of antifreeze before the tax? What is the equilibrium quantity after the tax? d. What is the revenue collected by the government from this tax? e. Do buyers or sellers bear the largest burden of the tax? f. Illustrate the deadweight loss created by the tax.

Answer:

a. The tax shifts the supply curve, as illustrated above. b. Before the tax, the price was $4 per gallon. After the tax, buyers pay $10 per gallon. c. Before the tax the equilibrium quantity was 8,000 gallons of antifreeze. After the tax, the quantity is 4,000 gallons of antifreeze. d. The government collects $32,000 in tax revenue per week. e. Buyers bear the largest incidence of the tax because the price they pay rises by $6, from $4 per gallon to $10 per gallon. f. The deadweight loss is equal to the area of the darkened triangle in the figure. Topic: Tax incidence Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

11) The figure above shows the market for gasoline. The government has imposed a tax on gasoline. a. What is the amount of the tax per gallon of gasoline? b. How much tax revenue will government collect from this tax? c. How much of the tax is paid by buyers? How much is paid by sellers? Which is more elastic, the supply or demand for gasoline? Answer: a. The tax is $1.50 per gallon, the amount by which the supply curve has been shifted upward. b. The government collects in tax revenue 6,000 gallons per day times $1.50 tax per gallon or $9,000. c. Buyers pay $1 of the tax, as the price they pay rises from $1.50 to $2.50 per gallon. Sellers pay $0.50 of the tax, as the price they receive falls from $1.50 to $1.00 per gallon. The supply is more elastic because sellers pay a smaller fraction of the tax than do buyers. Topic: Tax incidence Skill: Level 4: Applying models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

12) The figure above shows the market for a life-saving drug. Suppose the government imposes a $150 tax per dose on the drug. Show and describe the impact on the market. Who pays this tax? Answer:

The tax decreases the supply and shifts the supply curve leftward. As shown in the figure, the vertical difference between the old supply curve and the new one is the amount of the tax, $150 per dose. The price of the drug rises from $150 per dose before the tax to $300 per dose after the tax. The quantity remains constant, at 8,000 does per month. Because demand is perfectly inelastic, the price rose by the full amount of the tax so buyers pay the entire tax. Topic: Tax incidence and the elasticity of demand Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

13) The figure above shows the market for tickets to the Super Bowl the day of the game. Suppose the government imposes an entertainment tax of $100 per ticket. a. What is the equilibrium price of a Super Bowl ticket before the tax? What is the price paid by buyers after the tax? What is the price received by sellers after the tax? b. What is the equilibrium quantity of tickets before the tax? What is the equilibrium quantity after the tax? c. Do buyers or sellers bear most of the incidence of the tax? Answer: a. The equilibrium price before the tax is $200 for a ticket. After the tax, buyers still pay $200 per ticket. Sellers, however, receive only $100 (= $200 price paid by a buyer minus the $100 tax) per ticket. b. Before the tax, the equilibrium quantity was 80,000 tickets. After the tax the quantity is still 80,000 tickets. c. Sellers bear the entire tax incidence because they pay all the tax and buyers pay none of the tax. In other words, the price that a buyer pays does not change-it remains equal to $200. Hence buyers pay none of the tax. However, the price received by sellers falls from $200 per ticket to $100. Hence sellers pay the full amount of the $100 tax, which was to be expected because the supply of tickets is perfectly inelastic. Topic: Tax incidence and the elasticity of supply Skill: Level 3: Using models Section: Checkpoint 8.1 Status: Old AACSB: Analytical thinking

8.7 Essay: Income Taxes and Social Security Taxes 1) "In the United States, more tax revenue is collected through Social Security taxes than through property taxes." Is the previous statement correct or incorrect? Answer: The statement is correct. Social Security taxes are second only to the personal income tax in the amount of tax revenue collected. Topic: Eye on the U.S. economy, taxes in the United States today Skill: Level 2: Using definitions Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 2) If income tax rates on labor income are decreased, what is the effect on the labor supply and the labor supply curve? What is the effect on the equilibrium quantity of labor hired? Answer: The decrease in the income tax on labor increases the supply of labor and shift the labor supply curve rightward. The equilibrium quantity of labor increases. Topic: Tax on labor income Skill: Level 2: Using definitions Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 3) Describe the effects of an increase in the tax on labor income. Answer: An increase in the income tax imposed on labor income results in a decrease in the supply of labor and a leftward shift of the labor supply curve. The wage rate paid by the employer rises and the wage rate received by the employee falls. There is a decrease in the quantity of labor hired. The decrease in the quantity and the tax wedge between the wage paid and the wage received create a deadweight loss for society. Topic: Tax on labor income Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Written and oral communication 4) If the supply of land is perfectly inelastic, what is the deadweight loss from a tax on land? Answer: If the supply of land is perfectly inelastic, a tax imposed on land does not decrease the equilibrium quantity of land. As a result, there is no deadweight loss from a tax imposed on land. Topic: Tax on land and unique resources Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking

5) What is the difference in the tax incidence between imposing the Social Security tax on workers and imposing the same tax on employers? Answer: There is no difference; the tax incidence is the same, which means that regardless of upon whom the tax is imposed, workers and employers wind up paying the same fractions of the tax. Topic: Tax incidence Skill: Level 1: Definition Section: Checkpoint 8.2 Status: Old AACSB: Reflective thinking 6) In a labor market before any taxes are imposed, the equilibrium wage rate is $10.00 an hour and 10,000 people are employed. The government imposes a 20 percent income tax on workers' incomes. What is the wage rate that workers need to receive so that they can earn $10.00 per hour after the tax is paid? Suppose that after the tax is imposed, the wage rate rises to $12.00 an hour and that only 8,000 workers are employed. How is the tax incidence split between workers and firms? Answer: In order to receive a wage of $10.00 an hour after taxes are paid, workers need to receive a wage rate $12.50 an hour. From the $12.50, workers would pay ($12.50) × (0.20) = $2.50 in taxes, leaving them with $10.00. With a wage rate of $12.00, workers pay taxes of ($12.00) × (0.20) = $2.40. Workers take home $12.00 - $2.40 = $9.60 per hour. The workers' after-tax wage has fallen from $10.00 an hour to $9.60 an hour, so workers pay $0.40 of the tax. Firms had been paying $10.00 per hour and after the tax is imposed pay $12.00 per hour, so firms pay $2.00 of the tax. Topic: Tax on labor income Skill: Level 3: Using models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

7) The figure above shows a labor market in which an income tax has been imposed. a. How many hours of labor were employed before the tax was imposed? b. How many hours of labor are employed after the tax? c. What was the wage rate employers paid and that workers received before the tax? d. What is the wage rate employers pay and that workers receive after the tax? e. What accounts for the difference between what employers pay and what workers receive? Answer: a. 40 hours of labor were employed before the tax. b. 37 hours of labor are employed after the tax. c. Employers paid $10.75 and workers received $10.75. d. Employers pay $12 and workers receive $10. e. The difference is the result of the $2 tax. Topic: Tax on labor income Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

8) The figure above shows the capital market. a. Before the government takes any action, what is the interest rate and quantity of capital? b. Suppose the government imposes a tax of 25 percent on the income from capital. After the tax, what is the equilibrium interest rate and quantity of capital? What is the after-tax interest rate? c. In the figure, darken the area that equals the deadweight loss from the tax. Answer:

a. The interest rate before the tax is 6 percent and the quantity of capital is $30 billion. b. The tax shifts the supply curve as shown. The equilibrium interest rate is 8 percent and the quantity of capital is $20 billion. The after-tax interest rate equals 6 percent. c. The deadweight loss is the dark triangle. Topic: Tax on capital income Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

9) Suppose we acquire the technology necessary to colonize the moon and 3 billion acres are made available to the general population. The figure above represents the supply and demand for land on the moon. a. Suppose the government imposes a $1,000 dollar per acre tax on land income. What is the before-tax rent and what is the after-tax rent? b. How much is the deadweight loss associated with this tax? Answer: a. The before-tax rent is $3,000 per acre per year. The after-tax rent is $2,000 per acre per year. b. The deadweight loss is zero. Because the equilibrium quantity does not change as a result of the tax, no deadweight loss or excess burden is created. Topic: Tax on land and unique resources Skill: Level 4: Applying models Section: Checkpoint 8.2 Status: Old AACSB: Analytical thinking

8.8 Essay: Fairness and the Big Tradeoff 1) What are the two conflicting principles of fairness that apply to a tax system? Briefly explain each. Answer: The two principles are: the benefits principle and the ability-to-pay principle. The benefits principle states that people should pay taxes equal to the amount of benefit they receive from public services. It would be difficult to implement this principle because it is hard to measure each person's marginal benefit from government-provided goods. The ability-to-pay principle states that people should pay taxes based on how easily they can bear the burden of taxes. This principle implies that rich people should pay a greater share of taxes but does not necessarily mean that taxes should be progressive, proportional, or regressive. Topic: Tax fairness Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Written and oral communication 2) "The only fair tax is a progressive tax." Comment on this assertion. Answer: There are many more sides to fairness besides whether the tax is progressive. One approach to fairness, the benefit principle, would deny that the progressivity of the tax has anything to do with fairness. The benefit principle asserts that people who benefit the most from public services should pay the most in taxes, and so whether the tax is progressive has nothing to do with fairness. The ability-to-pay fairness principle asserts that people for whom the burden of paying a tax is less should pay more, which does suggest that richer people should pay more in taxes. However, the ability-to-pay principle does not necessarily endorse a progressive tax. The ability-to-pay principle simply requires that richer people pay more in total taxes, which can occur with a regressive tax or a proportional tax. Topic: Tax fairness Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Written and oral communication 3) What are the similarities and differences between horizontal and vertical equity? Answer: Both horizontal and vertical equity involve the ability-to-pay principle. Horizontal equity compares people in similar situations to see if they are paying the same amount in taxes. Vertical equity requires that people with a greater ability to pay should share a greater tax burden. Topic: Horizontal and vertical equity Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Written and oral communication

4) What is the difference between vertical equity and horizontal equity? Answer: Vertical equity is the requirement that taxpayers with a greater ability to pay bear a greater portion of the taxes. However, this principle does not tell precisely how much more the rich should pay in taxes; it just asserts that they should pay more. Horizontal equity requires that taxpayers with the same ability to pay, pay the same taxes. This is also difficult to implement because while incomes for two people might be the same, the two people might have widely different financial obligations. Topic: Horizontal and vertical equity Skill: Level 1: Definition Section: Checkpoint 8.3 Status: Old AACSB: Written and oral communication 5) Ali earns $20,000 and pays $2,000 in taxes; Maria earns $40,000 and pays $4,000 in taxes. Is this tax progressive, regressive, or proportional? Answer: The tax is proportional. Both taxpayers pay 10 percent of their income as taxes. Topic: Personal income tax Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking 6) "For the U.S. personal income tax, the average tax rate is greater than the marginal tax rate." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The U.S. personal income tax has marginal tax rates that increase with income, so that the marginal tax rate for a high-income taxpayer exceeds the marginal tax rate for a low-income taxpayer. As a result, the marginal tax rate exceeds the average tax rate. Topic: Personal income tax Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking 7) What is the marginal tax rate? Average tax rate? Can these rates ever differ? Answer: The marginal tax rate is the percentage of an additional dollar that is paid in tax. The average tax rate is the percentage of income that is paid in tax. The marginal tax rate is often different from the average tax. Indeed, for the U.S. personal income tax, the marginal tax rate always exceeds the average tax rate. Topic: Marginal tax rate and average tax rate Skill: Level 2: Using definitions Section: Checkpoint 8.3 Status: Old AACSB: Reflective thinking

8) Why are sales taxes, which require that everyone pay the same percentage tax, considered regressive taxes? Answer: Suppose a city implements a 6 percent tax on food. Both a millionaire and a middle class person will spend approximately the same amount on food, say $400 a month. Thus each pays approximately the same total amount of tax, in this case, $24 per month. But, the amount paid as tax is a much smaller fraction of the millionaire's income than of the middle class person's income, so therefore the tax is regressive because the average tax rate is decreasing with income. Topic: Regressive tax Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Written and oral communication

9) The table above gives the taxable income and the amount of tax paid. a. Is this income tax progressive, regressive, or proportional? b. If the taxable income is $25,000, what is the average tax rate? c. If taxable income increases from $25,000 to $30,000, what is the marginal tax rate? Answer: a. The income tax is progressive. b. If taxable income is $25,000, the average tax rate is 6 percent. c. If taxable income increases from $25,000 to $30,000, the marginal tax rate is 10 percent. Topic: Progressive tax Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

10) Adam, Aaron, and Fatima earn, respectively, $30,000, $50,000 and $100,000 per year. The amount of state income taxes they pay on their income depends on which state they choose to live in. The table above shows how much they would pay in taxes in each state. a. Is the tax in State A progressive, regressive or proportional? b. Is the tax in State B progressive, regressive or proportional? c. Is the tax in State C progressive, regressive or proportional? Answer: a. Taxes in State A are proportional, because all three pay 10 percent of their income in taxes. b. Taxes in State B are progressive, because Adam's tax rate is 10 percent, Aaron's tax rate is 15 percent, and Fatima's tax rate is 20 percent. c. Taxes in State C are regressive, because Adam's tax rate is 10 percent, Aaron's tax rate is 8 percent, and Fatima's tax rate is 7 percent. Topic: Progressive, regressive, proportional taxes Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking 11) If the marginal tax rate is 20 percent, and Pearl earns an extra $100, how much must Pearl pay in additional taxes? Answer: With a marginal tax rate of 20 percent, Pearl must pay (0.20) × ($100) = $20 in additional taxes. Topic: Marginal tax rate Skill: Level 3: Using models Section: Checkpoint 8.3 Status: Old AACSB: Analytical thinking

Foundations of Microeconomics, 9e (Bade) Chapter 9 Global Markets in Action 9.1 How Global Markets Work 1) Goods and services that the United States buys from other nations are called A) exports. B) imports. C) bartered goods. D) exchanges. E) world goods. Answer: B Topic: International trade Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 2) Imports are defined as the goods and services that we A) produce and consume in the United States. B) sell to other countries. C) buy from other countries. D) partially produce in both the United States and another country. E) produce abroad using U.S. owned factories and then consume in the United States. Answer: C Topic: International trade Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 3) Goods and services that the United States sells to other nations are called A) exports. B) imports. C) bartered goods. D) exchanges. E) world goods. Answer: A Topic: International trade Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

4) If you buy a television produced in Japan, a A) good was exported by Japan and imported by the United States. B) good was imported by Japan and by the United States. C) service was imported by Japan and exported by the United States. D) service was exported by Japan and imported by the United States. E) good was exported by Japan and by the United States. Answer: A Topic: International trade Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Revised AACSB: Reflective thinking 5) The United States exports A) goods only. B) services only. C) manufactured goods only. D) goods and services. E) only agricultural products and high-tech goods. Answer: D Topic: Patterns of trade Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 6) All of the following statements about the United States are true EXCEPT A) The largest imports are services like royalties, license fees, and financial services, and the largest exports are goods like crude oil, automobiles, and clothing. B) The United States is the world's largest international trader. C) The United States imports more than it exports. D) Services account for a larger portion of U.S. exports than U.S. imports. E) Imports are a larger percentage of total expenditure than exports are a percentage of total production. Answer: A Topic: Patterns of trade Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

7) The fundamental force that generates international trade is A) the need for more goods and services. B) absolute advantage. C) the sea rule. D) comparative advantage. E) the existence of tariffs. Answer: D Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 8) The fundamental force that drives trade between nations is A) the government. B) NAFTA. C) absolute advantage. D) comparative advantage. E) legal treaties. Answer: D Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 9) One of the major reasons why the United States exports jet airplanes is because Boeing faces ________ opportunity cost compared with firms in other nations in the production of such aircraft. A) a higher B) an unrelated C) a lower D) a nonexistent E) an identical Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

10) A nation has a comparative advantage in a good when it has a A) lower absolute cost of producing the good. B) higher opportunity cost of producing the good. C) lower opportunity cost of producing the good. D) higher absolute cost of producing the good. E) tariff in place protecting the producers of the good. Answer: C Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 11) The United States buys shoes from China and China buys wheat from the United States. This trade can be explained by A) comparative advantage. B) absolute advantage. C) the law of supply. D) the law of demand. E) the price elasticity of demand. Answer: A Topic: International trade Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Application of knowledge 12) Consider the market for Good X in the country Xenon. Which of the following statements regarding international trade in Good X is correct? A) If Xenon imports Good X, the WORLD PRICE of X must be lower than Xenon's pre-trade price of Good X. B) If Xenon exports Good X, the WORLD PRICE of X must be lower than Xenon's pre-trade price of Good X. C) If Xenon has a comparative advantage in Good X, it will import more of Good X after trade. D) If Xenon has a comparative advantage in Good X, Xenon will produce less of Good X after trade. E) If Xenon imports Good X, the WORLD PRICE of Good X must fall. Answer: A Topic: International trade Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Application of knowledge

13) How can a domestic producer determine whether or not it has a comparative advantage in the production of a good or service? A) It cannot. B) by comparing the price it receives in the domestic market to the prices of other domestic producers C) by comparing the price it receives in the domestic market to the world price D) by comparing the quantity it produces in the domestic market to the quantity produced in the world E) by comparing the total domestic quantity to the total world quantity Answer: C Topic: Comparative advantage Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Revised AACSB: Reflective thinking 14) A country exports the goods A) for which its domestic prices are very high compared to the world prices. B) that the economy can produce the most of. C) that the economy can produce at relatively lowest opportunity cost. D) that it cannot sell domestically. E) in which it has a comparative disadvantage. Answer: C Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 15) If a nation can produce a good or service at the lowest opportunity cost, then it A) can sell the product at a lower price than other nations. B) does not want to export the good because the low cost means it makes only a low profit. C) is best for the nation to not trade the good internationally. D) will definitely import the good because it can beat other countries' prices. E) might export or import the good, depending on whether or not it has a comparative advantage in the production of the good. Answer: A Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

16) The country with a comparative advantage in the production of a good has a A) lower opportunity cost of production. B) higher opportunity cost of production. C) horizontal production possibilities frontier. D) vertical production possibilities frontier. E) linear production possibilities frontier. Answer: A Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 17) The United States imports t-shirts because A) it is a dangerous job to produce them. B) foreign nations have a lower opportunity cost of production. C) the United States has a lower opportunity cost of production. D) foreign economies have an absolute advantage in their production. E) the United States must import goods and services from other countries so that they can develop economically. Answer: B Topic: Comparative advantage Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 18) If the United States starts to import a good that had previously been produced in the United States, the market price of the good in the United States A) rises. B) falls. C) remains constant. D) either remains constant or rises, depending on how whether the supply of the good stays the same or increases. E) There is not enough information to answer the question because we need to know if the market price in the United States had been above or below the world market price before trade began. Answer: B Topic: Imports Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

19) If the United States imports purses, then the quantity of purses produced in the United States will ________ and the quantity of purses purchased by consumers in the United States will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) not change; increase Answer: C Topic: Imports Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 20) Most t-shirts bought by Americans are made in Asia. As a result of free trade, the production of t-shirts in America A) has increased. B) has stayed the same. C) has decreased. D) has been taken over by the government. E) might change, but more information about what else the United States imports is needed to determine if U.S. production increased, decreased, or did not change. Answer: C Topic: Imports Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 21) The United States imports t-shirts from Asia. As a result, U.S. consumers pay ________ otherwise and Asian producers receive ________ otherwise. A) a higher price than; a higher price than B) a higher price than; a lower price than C) a lower price than; a higher price than D) a lower price than; a lower price than E) the same price as; the same price as Answer: C Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

22) If the world price of a good is below the no-trade domestic price, a country A) will benefit from exporting the good. B) will benefit from importing the good. C) cannot benefit from trade. D) has a comparative advantage in the production of that good. E) will not engage in trade for that good. Answer: B Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 23) Suevania opens its doors to trade with Barvania. Barvania has a comparative advantage in the production of machinery. Hence, once trade occurs Suevania's consumers will buy ________ machinery and pay ________ before. A) more; a higher price than B) more; a lower price than C) less; a higher price than D) less; a lower price than E) the same amount of; the same price as Answer: B Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 24) If a nation imports a good that before had been only domestically produced, what happens to the quantity consumed of the good and why? A) The quantity consumed increases because the market price decreases. B) The quantity consumed decreases because the market price increases. C) The quantity consumed remains constant because the price is unchanged. D) The quantity consumed increases because the nation produces more of the good. E) The quantity consumed decreases because the market price decreases. Answer: A Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Revised AACSB: Analytical thinking

25) A country will export a good if it A) can sell the good to a foreigner at a higher price than the no-trade domestic price. B) can sell the good to a foreigner at a lower price than the no-trade domestic price. C) can dump the good on the world market. D) has a high opportunity cost of production. E) is impossible to import the good. Answer: A Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 26) A country exports a good if A) it has a high opportunity cost of production. B) the world price of the good is below the country's no-trade equilibrium price. C) the world price of the good is above the country's no-trade equilibrium price. D) the quantity demanded of the good in the country is greater than the quantity supplied at the world price. E) it cannot import the good. Answer: C Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 27) A nation will export a good if its A) no-trade, domestic price is equal to the world price. B) no-trade, domestic price is less than the world price C) no-trade, domestic price is greater than the world price. D) no-trade, domestic quantity is less than the world quantity. E) no-trade, domestic quantity is greater than the world quantity. Answer: B Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

28) As a result of importing a good, domestic consumers ________ the quantity consumed and the price of the good ________. A) increase; rises B) increase; falls C) decrease; rises D) decrease; falls E) increase; does not change Answer: B Topic: Imports Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 29) As a result of importing a good, domestic producers ________ the quantity produced and the price of the good ________. A) increase; rises B) increase; falls C) decrease; rises D) decrease; falls E) decrease; does not change Answer: D Topic: Imports Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

30) The above figure shows the U.S. market for flip-flops. When there is no international trade, the U.S. price is ________ per flip-flop and the U.S. quantity is ________ flip-flops. A) $12; 300,000 B) $14; 500,000 C) $12; 700,000 D) $14; 300,000 E) $14; 700,000 Answer: B Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 31) The above figure shows the U.S. market for flip-flops. With international trade, the price in the United States is ________ and the United States ________ flip-flops. A) $12; imports B) $12; does not trade C) $12; exports D) $14; imports E) $14; does not trade Answer: A Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

32) The above figure shows the U.S. market for flip-flops. With international trade, the United States imports ________ flip-flops. A) 300,000 B) 500,000 C) 700,000 D) 0 because the United States exports flip-flops E) 400,000 Answer: E Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 33) The above figure shows the U.S. market for flip-flops. With international trade, U.S. consumers buy ________ flip-flops and U.S. producers produce ________ flip-flops. A) 500,000; 500,000 B) 300,000; 700,000 C) 500,000; 300,000 D) 700,000; 300,000 E) 700,000; 500,000 Answer: D Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 34) The above figure shows the U.S. market for flip-flops. With no international trade, the price in the United States for flip-flops is ________. With international trade, the price in the United States for flip-flops is ________. A) $12; $14 B) $500; $300 C) $14; $12 D) $700; $300 E) $500; $700 Answer: C Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

35) With no international trade, the U.S. price of wheat is lower than the world price of wheat. This indicates that the United States ________ a comparative advantage in the production of wheat and with international trade, the United States will ________ wheat. A) has; export B) has; not trade C) has; import D) does not have; export E) might have; export Answer: A Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 36) Once international trade occurs, a country with a comparative advantage in the production of a good will ________ production of the good and ________. A) decrease; import the good B) increase; export the good C) not change; import the good D) increase; import the good E) decrease; export the good Answer: B Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 37) Airlines in other countries buy airplanes from Boeing because A) it is illegal to produce airplanes in many other countries. B) Boeing's prices are less than what the airlines would pay for planes built in their own country. C) trade treaties require such purchases. D) these nations must buy something from the United States. E) None of the above answers is correct. Answer: B Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

38) When a country exports a good because the world price is higher than the no-trade domestic price, domestic purchases of the good ________ and domestic production of the good ________. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases E) do not change; increases Answer: C Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

39) The table above has the domestic demand and domestic supply schedules for a good. According to the table, the domestic price of the good is A) $4. B) $6. C) $8. D) $10. E) $2. Answer: B Topic: Trade Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Revised AACSB: Analytical thinking

40) The table above has the domestic demand and domestic supply schedules for a good. If the world price of the good is $10 and international trade occurs, then according to the table A) domestic production is higher before trade than after trade. B) the country imports 16 units a day. C) the country imports 6 units a day. D) the country exports 6 units a day. E) the country exports 22 units a day. Answer: D Topic: Trade Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 41) According to the above table, the country will import the good if the world price is less than ________ and will export the good if the world price is more than ________. A) $4; $4 B) $6; $6 C) $8; $4 D) $10; $10 E) $4; $8 Answer: B Topic: Trade Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

42) The figure above shows the U.S. demand and U.S. supply curves for cherries. In the absence of international trade, cherry farmers would receive ________ per pound of cherries. A) $0.50 B) $1.50 C) $2.50 D) $2.00 E) $1.00 Answer: B Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 43) The figure above shows the U.S. demand and U.S. supply curves for cherries. In the absence of international trade, how many pounds of cherries would U.S. farmers produce? A) 200,000 pounds B) 400,000 pounds C) 600,000 pounds D) 800,000 pounds E) 0 pounds Answer: B Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

44) The figure above shows the U.S. demand and U.S. supply curves for cherries. Suppose the world price of cherries is $2 per pound. At this price, U.S. consumption of cherries will equal A) 200,000 pounds. B) 400,000 pounds. C) 600,000 pounds. D) 800,000 pounds. E) 0 pounds. Answer: A Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 45) The figure above shows the U.S. demand and U.S. supply curves for cherries. At a world price of $2 per pound once international trade occurs, the production of cherries in the United States will equal A) 200,000 pounds. B) 400,000 pounds. C) 600,000 pounds. D) 800,000 pounds. E) 0 pounds. Answer: C Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 46) The figure above shows the U.S. demand and U.S. supply curves for cherries. At a world price of $2 per pound once international trade occurs, the total exports of cherries from the United States to other nations equals A) 200,000 pounds. B) 400,000 pounds. C) 600,000 pounds. D) 800,000 pounds. E) 0 pounds. Answer: B Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

47) The figure above shows the U.S. demand and U.S. supply curves for cherries. At a world price of $2 per pound once international trade occurs, the total imports of cherries to the United States from other nations equals A) 200,000 pounds. B) 400,000 pounds. C) 600,000 pounds. D) 800,000 pounds. E) 0 pounds. Answer: E Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

48) The above figure shows the U.S. market for wheat. When there is no international trade, the U.S. price of wheat is ________ per ton and the U.S. equilibrium quantity is ________ tons. A) $14; 300,000 B) $14; 500,000 C) $16; 500,000 D) $16; 300,000 E) $16; 700,000 Answer: B Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

49) The above figure shows the U.S. market for wheat. With international trade, the price of wheat in the United States is ________ per ton and the United States ________ wheat. A) $16; exports B) $14; exports C) $14; imports D) $16; imports E) $14; does not trade Answer: A Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 50) The above figure shows the U.S. market for wheat. With international trade, the United States exports ________ of wheat. A) 300,000 tons B) 500,000 tons C) 700,000 tons D) 400,000 tons E) None of the above answers is correct because the United States imports wheat. Answer: D Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 51) The above figure shows the U.S. market for wheat. With international trade, U.S. consumers buy ________ tons of wheat and U.S. producers produce ________ tons of wheat. A) 700,000; 300,000 B) 500,000; 500,000 C) 300,000; 500,000 D) 300,000; 700,000 E) 500,000; 700,000 Answer: D Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

52) The above figure shows the U.S. market for wheat. With no international trade, the price of wheat in the United States is ________ per ton. With international trade, the price of wheat in the United States is ________ per ton. A) $16; $14 B) $500; $300 C) $14; $16 D) $700; $300 E) $500; $700 Answer: C Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 53) Goods and services that we buy from firms in other countries are called our A) imports. B) exports. C) inputs. D) raw materials. E) obligations. Answer: A Topic: International trade Skill: Level 1: Definition Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 54) If the United States exports planes to Brazil and imports ethanol from Brazil, the price received by U.S. producers of planes ________, and the price received by Brazilian producers of ethanol ________. A) does not change; does not change B) rises; rises C) rises; falls D) falls; rises E) falls; falls Answer: B Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

55) When Italy buys Boeing jets, the price Italy pays is ________ if it produced its own jets and the price Boeing receives is ________ than it could receive from an additional U.S. buyer. A) lower than; lower B) higher than; higher C) lower than; higher D) higher than; lower E) the same as; higher Answer: C Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 56) A nation will import a good if its no-trade, domestic A) price is equal to the world price. B) price is less than the world price. C) price is greater than the world price. D) quantity is less than the world quantity. E) quantity is greater than the world quantity. Answer: C Topic: Trade Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 57) When a good is imported, the domestic production of it ________ and the domestic consumption of it ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: C Topic: Trade Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

58) The United States exports a good if its no-trade U.S. price is ________ its world price. With international trade, U.S. production of the good ________ compared to the level of no-trade production. A) higher than; does not change B) higher than; increases C) lower than; increases D) the same as; increases E) the same as; does not change Answer: C Topic: Trade Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking

59) The graph shows the market for running shoes in the United States. With no international trade, the price of running shoes in the United States is ________ and ________ pairs are produced and bought. A) $100; 2 million B) $100; 1 million C) $40; 1 million D) $40; 2 million E) $40; 4 million Answer: A Topic: International trade Skill: Level 4: Applying models Section: Checkpoint 9.1 Status: Old AACSB: Application of knowledge

60) The graph shows the market for running shoes in the United States. If the world price is $40 per pair of running shoes, then with international trade, the price of running shoes in the United States is ________ and ________ pairs are imported. A) $40; 3 million B) $40; 2 million C) $100; 1 million D) $100; 2 million E) $60; 3 million Answer: A Topic: International trade Skill: Level 4: Applying models Section: Checkpoint 9.1 Status: Revised AACSB: Application of knowledge 61) The graph shoes the market for running shoes in the United States. If the world price is $40 per pair of running shoes, as a result of international trade, which of the following occur? i. The price of running shoes in the United States falls by $60 per pair. ii. The United States imports 3 million pairs of running shoes. iii. The United States produces 1 million pairs of running shoes. A) i, ii and iii B) i only C) i and ii only D) i and iii only E) ii and iii only Answer: A Topic: International trade Skill: Level 4: Applying models Section: Checkpoint 9.1 Status: Revised AACSB: Application of knowledge

62) The graph shows the market for car batteries in the United States. If the world price of a battery is $40, then prior to international trade, the quantity of car batteries produced in the United States equals ________ and with trade, production in the United States equals ________. A) 1.0 million; 1.0 million B) 1.0 million; 1.5 million C) 0.5 million; 1.0 million D) 1.5 million; 1.0 million E) 1.0 million; 0.5 million Answer: E Topic: International trade Skill: Level 4: Applying models Section: Checkpoint 9.1 Status: Revised AACSB: Application of knowledge 63) The figure shows the market for car batteries in the United States. If the world price of a battery is $40, then prior to international trade, the price of batteries in the United States is ________. After trade, the price of car batteries in the United States equals ________. A) $100; $40 and the quantity consumed increases B) $100; $100 and the quantity produced increases C) $100; $50 and the United States exports 0.5 million batteries D) $50; $100 and the United States exports 1.0 million batteries E) $100; $100 and the United States imports 1.0 million batteries Answer: A Topic: International trade Skill: Level 4: Applying models Section: Checkpoint 9.1 Status: Revised AACSB: Application of knowledge

9.2 Winners, Losers, and Net Gains from Trades 1) International trade benefits A) only the exporter. B) only the importer. C) both the exporter and the importer. D) neither the exporter nor the importer. E) the exporter at all times and sometimes also the importer. Answer: C Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking 2) Who gains from international trade? A) only the exporting nation B) only the importing nation C) both the importing and the exporting nations D) neither the importing nor the exporting nations E) The gains depends on which nation gets to keep the total revenue from the sale. Answer: C Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking 3) Most t-shirts bought by Americans are made in Asia. U.S. consumers of t-shirts buy these tshirts because A) they pay a higher price for t-shirts made in Asia than they would for similar shirts made in the United States. B) they pay a lower price for t-shirts made in Asia than they would for similar shirts made in the United States. C) they must buy some goods or services produced in Asia. D) by so doing they are helping preserve U.S. jobs producing t-shirts. E) they know that the United States has a comparative advantage in wearing t-shirts. Answer: B Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

4) After a nation starts importing a good from overseas, the domestic price of the good A) falls. B) stays the same. C) rises. D) might change, but more information about what the country exports is needed to determine if the price rises, falls, or does not change. E) might change, but more information about what else the country imports is needed to determine if the price rises, falls, or does not change. Answer: A Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking 5) When a nation starts importing a good or service, domestic employment in that industry A) decreases. B) stays the same. C) increases. D) might change, but more information about what else the country imports is needed to determine if employment increases, decreases, or does not change. E) might change, but more information about what the country exports is needed to determine if employment increases, decreases, or does not change. Answer: A Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking 6) When a nation imports a good or service, the nation's consumer surplus ________, its producer surplus ________, and its total surplus ________. A) increases; decreases; increases B) increases; decreases; decreases C) increases; increases; increases D) decreases; decreases; decreases E) decreases; decreases; increases Answer: A Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

7) When a nation imports a good, its ________ surplus decreases and its ________ surplus increases. A) consumer; producer B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: D Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 8) When a nation imports a good, its ________ surplus decreases and its ________ surplus increases. A) consumer; producer B) consumer; consumer C) producer; producer D) producer; total E) total; consumer Answer: D Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 9) When a nation imports a good, its ________ surplus increases and its ________ surplus increases. A) consumer; producer B) consumer; consumer C) producer; producer D) producer; total E) total; consumer Answer: E Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

10) When a nation imports a good, its consumer surplus ________, and its producer surplus ________. A) increases; increases B) decreases; decreases C) increases; decreases D) decreases; increases E) does not change; increases Answer: C Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 11) When a nation starts importing a good or service, the domestic production of the good or service A) decreases. B) stays the same. C) increases. D) might change, but more information about what the country exports is needed to determine if production increases, decreases, or does not change. E) might change, but more information about what else the country imports is needed to determine if production increases, decreases, or does not change. Answer: A Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 12) If Country A opens up their corn market to trade with the rest of the world and the global price of corn is lower than the equilibrium price of corn in Country A, then Country A will ________ corn, which will ________ consumer surplus, ________ producer surplus, and ________ total surplus. A) import; increase; decrease; increase B) import; decrease; increase; increase C) export; increase; decrease; increase D) export; decrease; increase; increase E) export; decrease; increase; decrease Answer: A Topic: Gains from imports Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

13) The above figure shows the U.S. market for chocolate. With no international trade, consumer surplus is equal to A) area A + area B + area C + area D. B) area A. C) area B + area C + area D. D) area C + area D. E) area E. Answer: B Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 14) The above figure shows the U.S. market for chocolate. With international trade, consumer surplus is equal to A) area A + area B + area C + area D. B) area A. C) area B + area C + area D. D) area C + area D. E) area E. Answer: A Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

15) The above figure shows the U.S. market for chocolate. With no international trade, producer surplus is equal to A) area A + area B + area C + area D. B) area B + area C + area D + area E. C) area B + area C + area D. D) area C + area D. E) area E. Answer: E Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 16) The above figure shows the U.S. market for chocolate. With international trade, the gain in total surplus is equal to A) area B. B) area A + area B + area C + area D. C) area B + area C + area D + area E. D) area C + area D. E) area B + area C + area D. Answer: D Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 17) The above figure shows the U.S. market for chocolate. With no international trade, consumer surplus is equal to ________ and producer surplus is equal to ________. A) area A + area B + area C + area D; area E B) area B + area C + area D; area A + area E C) area A; area E D) area C + area D; area B + area E E) area E; area A + area B + area C + area D Answer: C Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

18) The above figure shows the U.S. market for chocolate. With international trade, ________ is the transfer of surplus from producers to consumers. A) area B +area C + area D B) area B C) area C + area D D) area A E) area E Answer: B Topic: Gains from imports Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 19) When a nation exports a good or service in which it has a comparative advantage, employment in that industry A) decreases. B) stays the same. C) increases. D) might change, but more information about what else the country exports is needed to determine if employment increases, decreases, or does not change. E) might change, but more information about what the country imports is needed to determine if employment increases, decreases, or does not change. Answer: C Topic: Gains from exports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking 20) When a nation exports a good or service in which it has a comparative advantage, production of the good or service A) decreases. B) stays the same. C) increases. D) might change, but more information about what the country imports is needed to determine if production increases, decreases, or does not change. E) might change, but more information about what else the country exports is needed to determine if production increases, decreases, or does not change. Answer: C Topic: Gains from exports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

21) When a nation exports a good or service, employment in that industry A) decreases. B) stays the same. C) increases. D) might change, but more information about what else the country exports is needed to determine if employment increases, decreases, or does not change. E) might change, but more information about what the country imports is needed to determine if employment increases, decreases, or does not change. Answer: C Topic: Gains from exports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking 22) When a nation exports a good, its consumer surplus ________, and its producer surplus ________. A) increases; increases B) decreases; decreases C) increases; decreases D) decreases; increases E) does not change; increases Answer: D Topic: Gains from exports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 23) When a nation exports a good, its ________ surplus decreases and its ________ surplus increases. A) consumer; producer B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: A Topic: Gains from exports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

24) When a nation exports a good, its ________ surplus decreases and its ________ surplus increases. A) consumer; total B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: A Topic: Gains from exports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 25) When a nation exports a good, its ________ surplus increases and its ________ surplus increases. A) consumer; total B) consumer; consumer C) producer; producer D) producer; total E) total; consumer Answer: D Topic: Gains from exports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 26) When a nation exports a good or service, the nation's consumer surplus ________, its producer surplus ________, and its total surplus ________. A) increases; decreases; increases B) increases; decreases; decreases C) increases; increases; increases D) decreases; decreases; decreases E) decreases; increases; increases Answer: E Topic: Gains from exports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

27) If Country A opens up their corn market to trade with the rest of the world and the global price of corn is higher than the equilibrium price of corn in Country A, then Country A will ________ corn, which will ________ consumer surplus, ________ producer surplus, and ________ total surplus. A) import; increase; decrease; increase B) import; decrease; increase; increase C) export; increase; decrease; increase D) export; decrease; increase; increase E) export; decrease; increase; decrease Answer: D Topic: Gains from exports Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

28) The above figure shows the U.S. market for wheat. When there is no international trade, consumer surplus is equal to A) area A + area B + area C. B) area A. C) area E + area F. D) area B + area C + area D. E) area A + area B + area C + area D. Answer: A Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 34 Copyright © 2021 Pearson Education, Inc.

29) The above figure shows the U.S. market for wheat. With international trade, consumer surplus is equal to A) area A + area B + area C. B) area E + area F. C) area B + area C + area D. D) area A + area B + area C + area D. E) area A. Answer: E Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 30) The above figure shows the U.S. market for wheat. Without international trade, producer surplus is equal to A) area B + area C + area E + area F. B) area A. C) area B + area C +area D + area E + area F. D) area E + area F. E) area A + area B + area C + area D. Answer: D Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 31) The above figure shows the U.S. market for wheat. With international trade, the gain in total surplus is equal to A) area A. B) area B + area C. C) area D. D) area C + area F. E) area C + area D + area F. Answer: C Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

32) The above figure shows the U.S. market for wheat. With no international trade, consumer surplus is equal to ________ and producer surplus is equal to ________. A) area A; area B + area C + area E + area F B) area A + area B + area C; area E + area F C) area E + area F; area A D) area B + area C + area D; area E + area F E) area A + area B + area C + area D; area E + area F Answer: B Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 33) The above figure shows the U.S. market for wheat. With international trade, ________ is the transfer of surplus from consumers to producers. A) area B + area C B) area D C) area C + area F D) area C + area D E) area B + area C + area D Answer: A Topic: Gains from exports Skill: Level 3: Using models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 34) When a nation exports a good, its total surplus ________, and when it imports a good, its total surplus ________. A) increases; increases B) decreases; decreases C) increases; decreases D) decreases; increases E) does not change; does not change Answer: A Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

35) When a nation exports a good, its ________ surplus increases, and when it imports a good, its ________ surplus increases. A) total; total B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: A Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 36) When a nation exports a good, its ________ surplus increases, and when it imports a good, its ________ surplus increases. A) consumer; total B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: A Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 37) When a nation exports a good, its ________ surplus increases, and when it imports a good, its ________ surplus increases. A) consumer; producer B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: D Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

38) When a nation exports a good, its ________ surplus decreases, and when it imports a good, its ________ surplus decreases. A) consumer; producer B) consumer; consumer C) producer; producer D) producer; consumer E) total; consumer Answer: A Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 39) International trade is definitely in the social interest if A) consumer surplus increases. B) producer surplus increases. C) consumer surplus does not decreases. D) producer surplus does not decreases. E) total surplus increases. Answer: E Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking 40) Imports ________ consumer surplus, ________ producer surplus, and ________ total surplus. A) decrease; decrease; decrease B) increase; increase; increase C) increase; decrease; decrease D) increase; decrease; increase E) decrease; increase; increase Answer: D Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

41) When a country imports a good, the ________ in consumer surplus is ________ the ________ in producer surplus. A) decrease; larger than; increase B) decrease; smaller than; increase C) increase; smaller than; decrease D) increase; equal to; decrease E) increase; larger than; decrease Answer: E Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 42) When a country exports a good, the country's producer surplus ________, consumer surplus ________, and the country ________ from the trade. A) increases; increases; gains B) decreases; increases; gains C) increases; decreases; gains D) decreases; decreases; loses E) increases; decreases; loses Answer: C Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 43) Which of the following is correct? i. U.S. total surplus decreases when the United States exports a good. ii. U.S. total surplus decreases when the United States imports a good. iii. U.S. total surplus increases when the United States imports a good and when it exports a good. A) i only B) iii only C) i and ii D) ii only E) None of the above because the U.S. total surplus does not change as a result of trade Answer: B Topic: Gains from imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Reflective thinking

44) Consider the U.S. market for running shoes shown above. With no international trade, area W represents ________ and area X + Y represents ________. A) consumer surplus; producer surplus. B) producer surplus; consumer surplus. C) the total surplus; producer surplus. D) consumer surplus; a deadweight loss. E) deadweight loss; producer surplus. Answer: A Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Application of knowledge 45) Consider the U.S. market for running shoes shown above. As a result of international trade, the price of running shoes in the United States ________ and consumer surplus ________. A) rises from $60 to $80; equals area W B) falls from $80 to $60; increases to area W + X + V + Z C) rises from $60 to $80; shrinks by area V + Z D) falls from $80 to $60; increases by area Y E) falls from $80 to $60; increases by area X + Y Answer: B Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Application of knowledge

46) Suppose the United States engage in less international trade, decreasing both imports and exports. As a result of this policy, U.S. consumer surplus would ________, U.S. producer surplus would ________ and U.S. total surplus would ________. A) decrease; decrease; decrease B) decrease; increase; increase C) increase; increase; increase D) increase; decrease; not change E) decrease; increase; not change Answer: A Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Application of knowledge 47) Suppose the United States restricts imports. As a result of this policy, which of the following will occur? i. U.S. consumer surplus will decrease. ii. U.S. producer surplus will increase. iii. U.S. total surplus will decease. A) i and ii only B) i and iii only C) i, ii and iii D) iii only E) i only Answer: C Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Application of knowledge

48) Suppose North Korea decides to open its borders to trade. As a result, which of the following will occur. i. North Korean consumer surplus in all markets will increase. ii. North Korean producer surplus in all markets will decrease. iii. North Korean total surplus in all markets will increase. A) i, ii and iii B) i only C) ii only D) iii only E) ii and iii only Answer: D Topic: Gains from trade Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Revised AACSB: Application of knowledge 9.3 International Trade Restrictions 1) A tariff is A) a tax imposed on imports. B) any non-tax action used to restrict trade. C) a tax imposed on exports. D) any non-subsidy used to increase trade. E) a subsidy granted to imports. Answer: A Topic: Trade restrictions Skill: Level 1: Definition Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 2) A tariff is a tax A) on an exported good. B) on an imported good. C) imposed on all traded goods. D) imposed on people's income. E) imposed on the difference between the value of the goods a firm imports and the value of the goods it exports. Answer: B Topic: Trade restrictions Skill: Level 1: Definition Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

3) A tax on a good that is imposed by the importing country is called a A) tariff. B) nontariff barrier. C) quantitative restriction. D) licensing regulation. E) trade constraint. Answer: A Topic: Trade restrictions Skill: Level 1: Definition Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 4) Since the mid-1970s until 2017, the average U.S. tariff rate was A) less than 5 percent. B) between 6 percent and 15 percent. C) between 16 percent and 25 percent. D) between 26 percent and 35 percent. E) larger than 36 percent. Answer: A Topic: Eye on the past, the history of the U.S. tariff Skill: Level 1: Definition Section: Checkpoint 9.3 Status: Revised AACSB: Reflective thinking 5) Looking at the average tariff rate in the United States since 1930, we see that A) at first tariffs declined, but have recently risen. B) tariffs have trended downward for most of the period. C) tariff levels have remained high, at over 50 percent throughout the period. D) while we talk about free trade, tariff levels have risen over the last 30 years. E) tariffs were made illegal in the United States in 1955. Answer: B Topic: Eye on the past, the history of the U.S. tariff Skill: Level 1: Definition Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

6) During the past 70 years, the peak average tariff rate in the United States stemmed from the A) creation of GATT in the middle of the 1940s. B) Kennedy Administration in the early 1960s. C) Uruguay round of GATT in the 1980s. D) Smoot-Hawley Tariff Act in the early 1930s. E) Clinton-Bush tariff of 2000-2001. Answer: D Topic: Eye on the past, the history of the U.S. tariff Skill: Level 1: Definition Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 7) Given job losses in U.S. manufacturing, President Trump increased tariffs on Chinese products coming into America. If higher tariffs are imposed on clothing produced in China, the price of clothing in America will A) decrease. B) increase. C) not change. D) first increase then decrease. E) first decrease then increase. Answer: B Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Revised AACSB: Reflective thinking 8) After a tariff is imposed on a good, the price of the good A) does not change. B) falls. C) rises. D) rises ONLY IF the domestic demand for the good does not change. E) might rise, fall, or not change depending on whether the government did or did not simultaneously impose a quota. Answer: C Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

9) After a tariff is imposed, consumers must pay a price equal to the A) world market price. B) domestic equilibrium price when there is no trade. C) world market price plus the tariff. D) world market price less the tariff. E) domestic equilibrium price when there is no trade plus the tariff. Answer: C Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 10) Suppose the world price of widgets is $5 each. If a widget-importing country imposed a $2 per widget tariff, what price would that country's consumers pay for widgets? A) $10 B) $7 C) $5 D) $3 E) A price that is greater than $5 and less than $7 Answer: B Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 11) Which of the following chain of events occurs when a tariff is imposed on a good? A) Domestic prices rise, shifting the domestic supply curve rightward. B) Domestic prices fall, shifting the demand curve rightward, and consumers buy more of the good. C) Domestic prices fall, decreasing the domestic quantity supplied and increasing the quantity demanded. D) Domestic prices rise, decreasing the quantity demanded and increasing the domestic quantity supplied. E) Domestic prices rise, shifting the demand curve leftward and the domestic supply curve rightward. Answer: D Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

12) The imposition of tariffs on Korean steel has led to ________ in imports of Korean steel to the United States and ________ the price of steel in the United States. A) no change; raised B) a decrease; raised C) an increase; lowered D) a decrease; no change in E) an increase; raised Answer: B Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 13) As a result of U.S. tariffs imposed on appliances from China, the quantity of imported appliances has A) decreased. B) increased a little. C) not changed. D) increased a lot. E) changed but whether it has increased or decreased is ambiguous. Answer: A Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Revised AACSB: Reflective thinking 14) Imposing a tariff on a good leads to a ________ in the price of the product and ________ in imports. A) rise; an increase B) rise; a decrease C) fall; an increase D) fall; a decrease E) rise; no change Answer: B Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

15) As a result of U.S. tariffs on fishnets produced in other nations, the quantity of fishnets purchased in the United States has A) not been affected. B) increased. C) decreased but not to zero. D) fallen to zero. E) probably changed, but whether it has increased or decreased is ambiguous. Answer: C Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 16) If the United States imposes a tariff on foreign chocolate, how are U.S. buyers of chocolate affected? A) The price they pay for chocolate rises. B) Their demand for chocolate increases because the U.S. production chocolate increases. C) The quantity they consume is unchanged. D) The price they pay for chocolate falls but they consume less chocolate because less is imported. E) The price they pay for chocolate falls and they consume more chocolate. Answer: A Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 17) If the United States imposes a tariff on a good, then A) domestic consumption of the good decreases. B) foreign consumption of the good decreases. C) foreign production of the good increases. D) domestic production of the good decreases. E) the government makes less revenue than it would have gained if it imposed a quota. Answer: A Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

18) When the United States imposes a tariff on an imported good, the A) price of the good in the United States falls. B) quantity of the good purchased in the United States decreases. C) quantity of the good produced in the United States decreases. D) outcome becomes more efficient. E) amount imported increases. Answer: B Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 19) U.S. tariffs on steel led to ________ production of steel within the United States. A) no change in B) an increase in C) the elimination of D) a decrease in E) making illegal the Answer: B Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Revised AACSB: Reflective thinking 20) If the government decides to impose a new tariff on orange juice from Brazil, the tariff would lead to ________ the tariff revenue collected by the U.S. government. A) no change in B) an increase in C) a decrease in D) an elimination of E) making illegal Answer: B Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

21) The imposition of a tariff will typically ________ government revenue and ________ domestic production of the good. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: A Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 22) Country A imports 1,000 cars per month. After imposing a $50 per car tariff, imports fall to 800 cars per month. How much does Country A's government collect in tariff revenue? A) $90,000 B) $50,000 C) $40,000 D) $10,000 E) $60,000 Answer: C Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 23) Of the following, which group is hurt by a tariff? A) domestic producers of the good B) foreign consumers of the good C) domestic consumers of the good D) domestic government E) foreign government Answer: C Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

24) Of the following, who is harmed by a tariff? A) domestic buyers of the good or service B) the overall domestic economy C) the foreign exporter of the good or service D) domestic producers of the good or service E) Both answers A and B are correct. Answer: E Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 25) Relative to free trade, domestic consumers of a good are ________ off with a tariff because of the ________. A) better; higher price and greater quantity sold B) better; higher price and smaller quantity sold C) better; lower price and greater quantity sold D) worse; lower price and smaller quantity sold E) worse; higher price and greater quantity sold Answer: D Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 26) If a tariff is imposed on shrimp imported into the United States, U.S. consumer surplus from shrimp will ________ and U.S. producer surplus from shrimp will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: C Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

27) If a tariff is imposed on shrimp imported into the United States, U.S. consumer surplus from shrimp will ________ and U.S. total surplus from shrimp will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: D Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 28) If a tariff is imposed on shrimp imported into the United States, U.S. producer surplus from shrimp will ________ and U.S. total surplus from shrimp will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: B Topic: Effects of tariffs, inefficiency Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 29) A tariff makes the total economy A) better off because it increases the domestic production of the good. B) better off because it decreases the deadweight loss from international trade. C) worse off because it creates a deadweight loss. D) worse off because it creates revenue for the government. E) worse off because it decreases both domestic consumer surplus and domestic producer surplus. Answer: C Topic: Effects of tariffs, inefficiency Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

30) Relative to free trade, when a tariff is imposed in a market for an imported good A) the consumer surplus in that market increases. B) the producer surplus in that market decreases. C) the total surplus in that market decreases. D) tariff revenue decreases. E) deadweight loss decreases. Answer: C Topic: Effects of tariffs, inefficiency Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 31) Of the following, who gains because of tariffs and why? A) domestic producers of protected goods because they can sell at a higher price B) domestic buyers because they can be sure of buying high-quality products C) foreign producers because they earn more total revenue D) foreign government because they gain more revenue E) domestic buyers because they pay a lower price Answer: A Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 32) Relative to free trade, domestic producers of a good are ________ off with a tariff because of the ________. A) better; higher price and greater quantity sold B) better; higher price and smaller quantity sold C) better; lower price and greater quantity sold D) worse; lower price and smaller quantity sold E) worse; higher price and greater quantity sold Answer: A Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

33) If the United States imposes a tariff on foreign chocolate, how are U.S. producers of chocolate affected? A) The quantity of chocolate they sell decreases because U.S. consumption of chocolate decreases. B) The quantity of chocolate they produce increases. C) The price at which they sell their chocolate falls. D) They are harmed because foreign exporters of chocolate increase their supply in response to the higher price. E) They are unaffected because the tariff applies to foreign producers, not to U.S. producers. Answer: B Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Revised AACSB: Reflective thinking 34) If the United States imposes a tariff on foreign chocolate, how are foreign producers of chocolate affected? A) Their supply increases because they have to pay the tariff. B) They export less to the United States. C) They earn more profit because their chocolate sells for a higher price. D) Their supply is unaffected because the tariff must be paid by U.S. producers. E) The tariff has no effect on foreign producers because U.S. consumers must pay the higher price. Answer: B Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Revised AACSB: Reflective thinking

35) The above figure shows the U.S. market for replacement cell phone batteries. When there is no international trade, the equilibrium price is ________ per battery and when there is international trade the equilibrium price is ________ per battery. A) $16; $14 B) $14; $12 C) $12; $14 D) $12; $16 E) $16; $12 Answer: E Topic: Tariffs Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 36) The above figure shows the U.S. market for replacement cell phone batteries. With free international trade, the United States A) exports 300,000 batteries. B) imports 400,000 batteries. C) imports 500,000 batteries. D) imports 800,000 batteries. E) exports 700,000 batteries. Answer: D Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

37) The above figure shows the U.S. market for replacement cell phone batteries. Suppose the U.S. government imposes the tariff illustrated in the figure. The tariff is equal to ________ and the price U.S. consumers pay ________ compared to the price paid when there was free trade. A) $2; decreases B) $14; decreases C) $2; increases D) $12; increases E) $14; increases Answer: C Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 38) The above figure shows the U.S. market for replacement cell phone batteries. With free trade, the United States imports ________ batteries and once the tariff illustrated in the figure is imposed, the United States imports ________ batteries. A) 900,000; 700,000 B) 800,000; 400,000 C) 300,000; 100,000 D) 700,000; 300,000 E) 900,000; 100,000 Answer: B Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 39) The above figure shows the U.S. market for replacement cell phone batteries. With free trade, U.S. production is equal to ________ batteries per year. When a $2 tariff is in place, U.S. production is equal to ________ batteries per year. A) 100,000; 300,000 B) 100,000; 500,000 C) 300,000; 100,000 D) 300,000; 500,000 E) 900,000; 700,000 Answer: A Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

40) The above figure shows the U.S. market for replacement cell phone batteries. The U.S. government collects tariff revenue of ________ on each battery imported. A) $4 B) $14 C) $12 D) $6 E) $2 Answer: E Topic: Effects of tariffs, government revenue Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 41) The above figure shows the U.S. market for replacement cell phone batteries. Area C is the A) deadweight loss from tariff. B) decrease in consumer surplus due to the tariff. C) increase in producer surplus due to the tariff. D) tariff revenue. E) loss in total surplus because of the tariff. Answer: D Topic: Effects of tariffs, government revenue Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 42) The above figure shows the U.S. market for replacement cell phone batteries. Area B + area D is the A) tariff revenue. B) decrease in consumer surplus due to the tariff. C) deadweight loss from tariff. D) increase in producer surplus due to the tariff. E) gain in total surplus due to the tariff. Answer: C Topic: Effects of tariffs, inefficiency Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

43) The above figure shows the U.S. market for replacement cell phone batteries. Area A + area E is the A) consumer surplus when there is a tariff. B) producer surplus when there is a tariff. C) tariff revenue. D) increase in producer surplus due to the tariff. E) gain in total surplus due to the tariff. Answer: B Topic: Tariffs Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 44) The above figure shows the U.S. market for replacement cell phone batteries. Area E is the A) producer surplus when there is free trade. B) deadweight loss from tariff. C) tariff revenue. D) increase in producer surplus due to the tariff. E) gain in total surplus due to the tariff. Answer: A Topic: Tariffs Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 45) Of the following, who gains with a tariff? A) domestic buyers of the good or service B) the importer of the good or service C) the foreign exporter of the good or service D) the government of the importing nation E) the government of the exporting nation Answer: D Topic: Effects of tariffs, government revenue Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

46) If the U.S. government imposes a tariff on imported steel, who else besides U.S. steel producers gains from the tariff? A) U.S. steel consumers B) the U.S. government C) U.S. importers of steel D) foreign exporters of steel E) the foreign government Answer: B Topic: Effects of tariffs, government revenue Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 47) Of the following, who gains from a tariff? A) the government of the importing country B) the government of the exporting country C) consumers in the importing country D) producers in the exporting country E) both the government of the exporting country and the government of the importing country Answer: A Topic: Effects of tariffs, government revenue Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 48) Which type of policy raises the most revenue for the government? A) tariff B) quota C) voluntary export restraints D) If they are set at the same level, all of the above raise the same amount of revenue. E) None of the above answers is correct because none of the policies raises revenue for the government. Answer: A Topic: Effects of tariffs, government revenue Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

49) The difference between a tariff and a quota is that the revenue from the tariff goes to the A) domestic consumer. B) domestic producer. C) domestic government. D) foreign producers. E) foreign government. Answer: C Topic: Effects of tariffs, government revenue Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

50) The table above gives the domestic demand and supply schedules for a good. Suppose the world price of the good is $40 and the government imposes a $20 per unit tariff. How much will the government collect as tariff revenue? A) $160 B) $320 C) $80 D) $240 E) $360 Answer: C Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

51) A quota is A) a tax on imports. B) a specified minimum amount that must be imported. C) a specified maximum amount that can be imported. D) a tariff on exports. E) the minimum amount that domestic firms can dump. Answer: C Topic: Quotas Skill: Level 1: Definition Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 52) A quota is a A) quantitative restriction on an import imposed by the importing country. B) quantitative restriction on an import imposed by the exporting country. C) restriction on how much a customer can buy of a scarce good imposed by the seller. D) tax that is imposed on a good when it crosses an international boundary. E) trade barrier that does not harm domestic consumers of the good or service. Answer: A Topic: Quotas Skill: Level 1: Definition Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 53) When governments specify the maximum amount of a good that may be imported in a given period of time, they are establishing a A) tariff. B) quota. C) dynamic tariff. D) tax. E) dumping limit. Answer: B Topic: Quotas Skill: Level 1: Definition Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

54) A specified maximum amount of the good that may be imported in a given period of time is a A) forcible limit. B) quota. C) tariff. D) sanction. E) dumping limit. Answer: B Topic: Quotas Skill: Level 1: Definition Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 55) The imposition of a quota ________ domestic production, ________ imports, and ________ domestic purchases. A) increases; decreases; decreases B) increases; decreases; increases C) decreases; increases; decreases D) decreases; decreases; decreases E) increases; increases; increases Answer: A Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 56) Of the following, who gains with a quota? A) domestic buyers of the good or service B) the importer of the good or service C) the foreign exporter of the good or service D) the government of the importing nation E) the government of the exporting nation Answer: B Topic: Effects of quotas Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

57) If the United States imposed a quota on the amount of salmon imported from Chile, the result would be ________ salmon prices in the United States and ________ in the quantity of salmon demanded in the United States. A) higher; an increase B) higher; a decrease C) lower; an increase D) lower; a decrease E) higher; no change Answer: B Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 58) If a quota is imposed on imports of shrimp into the United States, U.S. consumer surplus from shrimp will ________ and U.S. producer surplus from shrimp will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: C Topic: Effects of quotas Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 59) If an import quota is imposed on imports of shrimp into the United States, U.S. consumer surplus from shrimp will ________ and U.S. total surplus from shrimp will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: D Topic: Effects of quotas Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

60) If an import quota is imposed on imports of shrimp into the United States, U.S. producer surplus from shrimp will ________ and U.S. total surplus from shrimp will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) increase; not change Answer: B Topic: Effects of quotas Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 61) A quota ________ a deadweight loss and a tariff ________ a deadweight loss. A) creates; creates B) creates; does not create C) does not create; creates D) does not create; does not create E) might create; might create Answer: A Topic: Effects of quotas Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

62) The above figure shows the U.S. market for 1 carat diamonds. With free trade, Americans buy ________ diamonds and pay a price of ________ per diamond. A) 500,000; $4,000 B) 300,000; $3,000 C) 700,000; $3,000 D) 300,000; $4,000 E) 900,000; $2,000 Answer: E Topic: International trade Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 63) The above figure shows the U.S. market for 1 carat diamonds. With free trade, the United States produces ________ diamonds and imports ________ diamonds. A) 300,000; 600,000 B) 0; 900,000 C) 100,000; 900,000 D) 100,000; 800,000 E) 500,000; 400,000 Answer: D Topic: International trade Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

64) The above figure shows the U.S. market for 1 carat diamonds. Suppose the United States imposes the import quota shown in the figure. With the import quota, how many diamonds can be imported? A) 500,000 B) 700,000 C) 400,000 D) 900,000 E) 300,000 Answer: C Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 65) The above figure shows the U.S. market for 1 carat diamonds. The free trade, the price in the United States for diamonds is equal to ________ and with the quota illustrated in the figure, the price in the United States is equal to ________. A) $4,000; $2,000 B) $2,000; $3,000 C) $4,000; $3,000 D) $2,000; $2,000 E) $2,000; $4,000 Answer: B Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 66) The above figure shows the U.S. market for 1 carat diamonds. With free trade, U.S. production of diamonds is equal to ________ diamonds. When the quota illustrated in the figure is in place, U.S. production is equal to ________ diamonds. A) 100,000; 300,000 B) 100,000; 500,000 C) 300,000; 100,000 D) 300,000; 500,000 E) 900,000; 700,000 Answer: A Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

67) The above figure shows the U.S. market for 1 carat diamonds. Area B + area D is the A) decrease in consumer surplus due to the import quota. B) importers' profit from the quota. C) gain in total surplus due to the import quota. D) deadweight loss from the import quota. E) increase in producer surplus due to the import quota. Answer: D Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 68) The above figure shows the U.S. market for 1 carat diamonds. Area A + area B + area C + area D is the A) deadweight loss from the import quota. B) importers' profit from the quota. C) decrease in consumer surplus due to the import quota. D) gain in total surplus due to the import quota. E) increase in producer surplus due to the import quota. Answer: C Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 69) The above figure shows the U.S. market for 1 carat diamonds. Area C is the A) decrease in consumer surplus due to the import quota. B) importers' profit from the quota. C) deadweight loss from the import quota. D) increase in producer surplus due to the import quota. E) gain in total surplus due to the import quota. Answer: B Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

70) The above figure shows the U.S. market for 1 carat diamonds. Area A is the A) increase in producer surplus due to the import quota. B) importers' profit from the import quota. C) decrease in consumer surplus due to the import quota. D) deadweight loss from the import quota. E) gain in total surplus due to the import quota. Answer: A Topic: Effects of quotas Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 71) If the United States negotiates a voluntary export restraint with international sugar producing nations, then A) U.S. sugar buyers pay a lower price for sugar. B) U.S. sugar producers produce a smaller quantity. C) imports of sugar increase. D) the U.S. government collects less revenue than if it imposed a tariff on sugar. E) the foreign governments collect more revenue than if a tariff is imposed on sugar. Answer: D Topic: Voluntary export restraint Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 72) Which of the following methods of restricting trade does NOT create a deadweight loss? A) a tariff B) a quota C) a voluntary export restraint D) Both answers A and B are correct. E) None of the above answers is correct because all the methods create a deadweight loss. Answer: E Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

73) Economists argue for free trade in import markets because A) all consumers and producers benefit from importing goods. B) the gains to the U.S. producers outweigh the losses to the U.S. consumers. C) the gains to the U.S. consumers outweigh the losses to the U.S. producers. D) no one is made worse off by importing goods. E) importing goods decreases total surplus. Answer: C Topic: Gains from trade Skill: Level 5: Critical thinking Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 74) Economists argue for free trade in export markets because A) all consumers and producers benefit from exporting goods. B) the gains to the U.S. producers outweigh the losses to the U.S. consumers. C) the gains to the U.S. consumers outweigh the losses to the U.S. producers. D) no one is made worse off by exporting goods. E) exporting goods decreases total surplus. Answer: B Topic: Gains from trade Skill: Level 5: Critical thinking Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 75) A tax on a good that is imposed when it is imported is called A) an import quota. B) a VER. C) a tariff. D) a sanction. E) a border tax. Answer: C Topic: Trade restrictions Skill: Level 1: Definition Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

76) The average U.S. tariff was highest in the A) 1930s. B) 1990s. C) 1970s. D) 2000s. E) 2010s. Answer: A Topic: Eye on the past, the history of the U.S. tariff Skill: Level 1: Definition Section: Checkpoint 9.3 Status: Revised AACSB: Reflective thinking 77) Suppose the world price of a shirt is $10. If the United States imposes a tariff of $5 a shirt, then the price of a shirt in the A) United States falls to $5. B) United States rises to $15. C) world falls to $5. D) world rises to $5. E) world rises to $15 Answer: B Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 78) When a tariff is imposed on a good, the ________ increases. A) domestic quantity purchased B) domestic quantity produced C) quantity imported D) quantity exported E) world price Answer: B Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

79) When a tariff is imposed on a good, domestic consumers of the good ________ and domestic producers of the good ________. A) win; lose B) lose; win C) win; win D) lose; lose E) lose; neither win nor lose Answer: B Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 80) Which of the following parties benefits from an import quota but not from a tariff? A) the domestic government B) domestic producers C) domestic consumers D) the person with the right to import the good E) the foreign government Answer: D Topic: Effects of quotas Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking

81) Consider the market for running shoes shown above. Before a tariff is imposed, if the United States trades with the world, then the United States produces ________ running shoes at a price of ________. A) 1 million; $40 B) 5 million; $40 C) 3 million; $80 D) 5 million; $80 E) 3 million; $40 Answer: A Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Application of knowledge 82) Consider the market for running shoes shown above. A tariff of ________ is imposed and causes the amount of shoes imported to ________ pairs. A) $40; decrease from 4 million to 2 million B) $20; decrease from 4 million to 3 million C) $40; decrease from 5 million to 2 million D) $20; decrease from 4 million to 2 million E) $60; decrease from 4 million to 2 million Answer: D Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Application of knowledge

83) Consider the market for running shoes shown above. As a result of the tariff imposed, ________ collect(s) tariff revenue of ________. A) the government; $40 million B) firms; $40 million C) the government; $80 million D) firms; $80 million E) the government; $120 million Answer: A Topic: Effects of tariffs Skill: Level 4: Applying models Section: Checkpoint 9.3 Status: Old AACSB: Application of knowledge 84) Suppose the Chinese government helps Chinese textile firms pay the cost of producing textiles. This payment is considered a(n) A) export subsidy and increases producer surplus in the United States. B) tariff and creates a deadweight loss in the United States. C) tariff and increases consumer surplus in the United States. D) export subsidy and creates a deadweight loss in China. E) quota and creates a deadweight loss in China. Answer: D Topic: Export subsidy Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 85) The U.S. government provides payments to U.S. cotton producers to help defray the cost of cotton production. This ________ results in ________ of cotton in the United States and ________ in other countries. A) export subsidy; overproduction; underproduction B) export subsidy; underproduction; overproduction C) tariff; overproduction; underproduction D) tariff; underproduction; overproduction E) quota; overproduction; underproduction Answer: A Topic: Export subsidy Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Application of knowledge

9.4 The Case Against Protection 1) If supporters of restrictions on imports argue that protection is needed to preserve a strategic industry, which of the following is being used? A) save domestic jobs argument B) national security argument C) dumping argument D) infant-industry argument E) protecting national culture argument Answer: B Topic: National security argument Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 2) Which of the following is the national security argument against free trade? A) A country must protect industries that produce defense equipment and armaments. B) A country must protect new industries to give them a chance to mature before facing foreign competition. C) A country must protect firms from dumping by foreign companies. D) A country must protect its consumers from foreign influences. E) A country must preserve its jobs. Answer: A Topic: National security argument Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 3) What is the national security argument to support protection from international trade? A) Domestic firms must be protected until they gain a comparative advantage. B) Any firm necessary in wartime must be protected. C) Foreign producers selling below cost to drive domestic firms bankrupt must be stopped. D) Domestic jobs must be protected from competition from low-paid foreign workers. E) Foreigners selling products in the economy limit the nation's diversity and stability. Answer: B Topic: National security argument Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking

4) What is the infant-industry argument for protection from international trade? A) Domestic firms must be protected until they gain a comparative advantage. B) Any firm necessary in wartime must be protected. C) Foreign producers selling below cost to drive domestic firms bankrupt must be stopped. D) Domestic jobs must be protected from competition from low-paid foreign workers. E) Foreigners selling products in the economy limit the nation's diversity and stability. Answer: A Topic: Infant industry Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 5) When protection is encouraged to protect a growing domestic industry; which of the following is being used? A) save domestic jobs argument B) national security argument C) anti-dumping argument D) infant-industry argument E) diversity and stability argument Answer: D Topic: Infant industry Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 6) The infant-industry argument is used by those who assert they want to A) limit imports to protect new industries. B) increase exports to encourage growth of new industries. C) limit exports. D) increase imports to earn money to support new industries. E) encourage foreign firms to dump in the United States. Answer: A Topic: Infant industry Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking

7) The infant-industry argument for protection is based on the idea of A) learning-by-doing. B) dumping. C) absolute advantage. D) quotas are the least harmful method of protecting domestic firms. E) saving jobs in the U.S. economy. Answer: A Topic: Infant industry Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 8) What is the dumping argument for protection from international trade? A) Domestic firms must be protected until they gain a comparative advantage. B) Any firm necessary in wartime must be protected. C) Foreign producers selling below cost to drive domestic firms bankrupt must be stopped. D) Domestic jobs must be protected from competition from low-paid foreign workers. E) Foreigners selling products in the economy limit the nation's diversity and stability. Answer: C Topic: Dumping Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 9) When a tariff supporter argues that foreign producers are selling their products for prices below the costs of production, which of the following is being used? A) save domestic jobs argument B) national security argument C) dumping argument D) infant-industry argument E) diversity and stability argument Answer: C Topic: Dumping Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking

10) Dumping is defined as the situation in which A) domestic producers sell a product at prices below the cost of production. B) foreign producers sell a product at a price below the cost of production. C) foreign producers sell a product at a price above a fair level. D) domestic producers cut production to drive up domestic prices. E) domestic producers are protected by tariffs. Answer: B Topic: Dumping Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 11) Which of the following is NOT a major argument for restricting international trade? A) the promotion of dumping in America B) the national security argument C) the infant industry argument D) the prevention of dumping argument E) saves U.S. jobs argument Answer: A Topic: Dumping Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 12) Suppose the United States subsidizes domestic chicken production and then sells surpluses on the world market at a price below the cost of production. In foreign countries, the argument that would made to restrict chicken trade with the United States would be the A) penalizes lax environmental standards argument. B) saves jobs argument. C) infant-industry argument. D) dumping argument. E) national security argument. Answer: D Topic: Dumping Skill: Level 3: Using models Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking

13) A flawed argument for protection from foreign trade is that i. tariffs save domestic jobs. ii. tariffs protect the national culture. iii. quotas bring about diversity and stability. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Protection Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 14) Which of the following is an argument that is used for protection from free trade? i. the national security argument ii. the infant-industry argument iii. the dumping argument A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Protection Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 15) When politicians debate trade agreements, some who oppose the agreement tell stories of U.S. workers whose jobs would be moved abroad. Which of the following arguments in favor of protection was being used? A) save domestic jobs argument B) national security argument C) anti-dumping argument D) infant-industry argument E) diversity and stability argument Answer: A Topic: Saving jobs Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Revised AACSB: Reflective thinking 77 Copyright © 2021 Pearson Education, Inc.

16) The argument that jobs are lost to free trade is A) totally false because no jobs are lost to free trade. B) correct because jobs are lost but foreign countries are helped and we can afford losses. C) incorrect because no jobs are lost and new jobs are created by trade. D) correct because some jobs are lost but incorrect because new jobs also are created. E) true only when tariffs are imposed on the goods being imported. Answer: D Topic: Saving jobs Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 17) International trade decreases the demand for workers in domestic industries that A) produce goods that are exported from the country. B) produce goods that are imported into the country. C) help businesses import and export. D) service imported goods. E) produce the goods in which the nation has a comparative advantage. Answer: B Topic: Saving jobs Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 18) What is an effective counter against the argument that international trade should be restricted to protect domestic jobs? A) A more effective policy would be to support the industry with subsidies. B) The more diversified the economy, the more stable it is. C) Free trade increases the number of jobs in which workers earn higher incomes. D) Rent seeking behavior should be encouraged. E) Free trade in "green" goods will increase jobs. Answer: C Topic: Saving jobs Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking

19) The typical relationship between a worker's productivity and the worker's wage rate is A) high productivity workers receive low wage rates. B) low productivity workers receive low wage rates. C) no link between productivity and wages earned. D) high productivity workers find that their jobs are often outsourced. E) that workers with high productivity need to have their high wages protected by tariffs. Answer: B Topic: Cheap foreign labor Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 20) While high-paid American workers fear competition with low-paid foreign workers, lowpaid foreign workers fear competition with high-paid American workers. Why? A) It is completely irrational and unfounded. B) Because America has such a large market it can protect its workers. C) Because high wages reflect high worker productivity and the low-paid foreign workers are not as productive. D) Because high wages are the result of extensive tariff and other trade restrictions. E) Because high wages mean that U.S. workers can buy more goods and services. Answer: C Topic: Cheap foreign labor Skill: Level 5: Critical thinking Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 21) The ________ are hurt by importing a good. A) domestic consumers of the good B) domestic producers of the good C) domestic governments D) foreign producers of the good E) foreign governments Answer: B Topic: Why is trade restricted? Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking

22) When the United States imports goods from the rest of the world, which of the following parties is harmed? i. domestic producers of the good ii. domestic consumers of the good iii. foreign producers of the good A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: A Topic: Why is trade restricted? Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 23) The two main reasons why international trade is restricted is because restricting trade means that governments can ________ and because domestic businesses ________. A) create jobs; earn profits B) obtain revenue; rent seek C) rent seek; want to dump D) prevent dumping; want to dump E) rent seek; obtain revenue Answer: B Topic: Why is trade restricted? Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 24) Comparing developed and developing nations in their use of tariffs, we see that A) the developing nations' governments get very little revenue from tariffs. B) both governments get large amounts of revenue from tariffs. C) many developing nations' governments get a large portion of their revenue from tariffs. D) developing nations almost never impose tariffs because they want their people to obtain goods and services at the lowest possible price. E) developed nations rely much more than developing nations on tariff revenue. Answer: C Topic: Why is trade restricted? Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking

25) A major reason why it is difficult to lower the barriers to free trade is A) that total benefits are less than total costs from free trade. B) the uneven distribution of gains and losses from free trade. C) the loss of jobs without any gain of jobs from free trade. D) the inability to compensate losers from free trade. E) that the barriers allow us to compete with cheap foreign labor. Answer: B Topic: Why is trade restricted? Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 26) What is rent seeking with respect to restricting international trade? A) The rent on factory buildings increases if trade is restricted. B) The government avoids paying rent on buildings when importers pay the tariff. C) An attempt to capture the gains from trade by imposing a tariff. D) The government's efforts to capture tariff rents. E) The attempt by importers to avoid paying a tariff. Answer: C Topic: Rent seeking Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 27) Which of the following groups gain from international trade? i. producers of exported goods ii. domestic consumers of imported goods iii. workers in exporting firms A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Why is trade restricted? Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking

28) Why are the losers from free international trade not fully compensated for their losses? A) The amount of compensation needed would bankrupt the government. B) The people who claim to lose are also the same ones who benefit. C) Identifying all losers and the size of their losses is extremely difficult. D) No one actually loses from international trade. E) The losers are foreigners. Answer: C Topic: Why is trade restricted? Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 29) Trade is often restricted because the A) total gain to all producers is larger than the total loss to all consumers. B) total gain to all producers is smaller than the total loss to all consumers. C) gain per producer is larger than the loss per consumer. D) gain per producer is less than the loss per consumer. E) gain per consumer is larger than the loss per producer. Answer: C Topic: Why is trade restricted? Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 30) The national security argument is used by those who assert they want to A) increase imports as a way of strengthening their country. B) increase exports as a way of earning money to strengthen their country. C) limit imports that compete with domestic producers important for national defense. D) limit exports to control the flow of technology to third world nations. E) limit all imports. Answer: C Topic: National security argument Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking

31) The argument that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets is known as the A) national security argument. B) diversity argument. C) infant-industry argument. D) environmental protection argument. E) national youth protection argument. Answer: C Topic: Infant industry Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 32) ________ occurs when a foreign firm sells its exports at a lower price than its cost of production. A) Dumping B) The trickle-down effect C) Rent seeking D) Tariff avoidance E) Nontariff barrier protection Answer: A Topic: Dumping Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 33) The United States A) needs tariffs to allow us to compete with cheap foreign labor. B) does not need tariffs to allow us to compete with cheap foreign labor. C) should not trade with countries that have cheap labor. D) will not benefit from trade with countries that have cheap labor. E) avoids trading with countries that have cheap labor. Answer: B Topic: Cheap foreign labor Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking

34) Why do governments in less-developed nations impose tariffs? A) The government gains revenue from the tariff. B) The government's low-paid workers are protected from high-paid foreign workers. C) The nation's total income will be increased. D) The national security of the country definitely is improved. E) The government diversifies its economy. Answer: A Topic: Why is trade restricted? Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 35) What is a major reason international trade is restricted? A) rent seeking B) to allow competition with cheap foreign labor C) to save jobs D) to prevent dumping E) to eliminate monopolies Answer: A Topic: Why is trade restricted? Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking

9.5 Chapter Figures

The figure above shows the U.S. market for T-shirts, where SUS is the domestic supply curve and DUS is the domestic demand curve. The United States trades freely with the rest of the world. The world price of a T-shirt is $5. 1) In the figure above, with international trade U.S. consumers buy ________ million T-shirts per year at ________ per T-shirt. A) 60; $5 B) 40; $8 C) 20; $5 D) 40; $5 E) 60; $11 Answer: A Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

2) Based on the figure above, as a result of international trade, U.S. domestic production ________ million T-shirts per year. A) decreases by 20 B) increases by 20 C) decreases by 10 D) increases by 40 E) increases by 10 Answer: A Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 3) In the figure above, with international trade the United States ________ million T-shirts per year. A) imports 40 B) exports 40 C) exports 20 D) imports 20 E) imports 60 Answer: A Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 4) Based on the figure above, as a result of international trade, consumer surplus A) increases by $150 million. B) decreases by $150 million. C) increases by $90 million. D) decreases by $90 million. E) remains unchanged. Answer: A Topic: Gains from imports Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

5) Based on the figure above, as a result of international trade, producer surplus A) increases by $150 million. B) decreases by $150 million. C) increases by $90 million. D) decreases by $90 million. E) remains unchanged. Answer: D Topic: Gains from imports Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 6) Based on the figure above, international trade leads to A) a net gain of surplus of $60 million. B) a net loss of surplus of $60 million. C) a net gain of surplus of $90 million. D) a net loss of surplus of $90 million. E) no net gain or loss of surplus. Answer: A Topic: Gains from imports Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

The figure above shows the U.S. market for airplanes, where SUS is the domestic supply curve and DUS is the domestic demand curve. The United States trades freely with the rest of the world. The world price of an airplane is $150 million. 7) Based on the figure above, as a result of international trade, U.S. domestic production ________ airplanes per year. A) decreases by 200 B) increases by 300 C) decreases by 100 D) increases by 500 E) increases by 200 Answer: B Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

8) In the figure above, U.S. consumers buy ________ airplanes per year at ________ million per airplane. A) 200; $150 B) 400; $100 C) 700; $150 D) 400; $150 E) 200; $100 Answer: A Topic: International trade Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 9) In the figure above, the United States ________ airplanes per year. A) imports 500 B) exports 500 C) exports 400 D) imports 400 E) exports 200 Answer: B Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 10) Based on the figure above, as a result of international trade, consumer surplus A) increases by $15 billion. B) decreases by $15 billion. C) increases by $27.5 billion. D) decreases by $12.5 billion. E) remains unchanged. Answer: B Topic: Gains from exports Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

11) Based on the figure above, as a result of international trade, producer surplus A) increases by $15 billion. B) decreases by $15 billion. C) increases by $27.5 billion. D) decreases by $12.5 billion. E) remains unchanged. Answer: C Topic: Gains from exports Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 12) Based on the figure above, international trade leads to A) a net gain in surplus of $12.5 billion. B) a net loss of surplus of $12.5 billion. C) a net gain in surplus of $27.5 billion. D) a net loss of surplus of $15 billion. E) no net gain or loss of surplus. Answer: A Topic: Gains from exports Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

The figure above shows the U.S. market for T-shirts, where SUS is the domestic supply curve and DUS is the domestic demand curve. The world price of a T-shirt is $5. The U.S. government imposes a $2 per unit tariff on imported T-shirts. 13) The figure above shows that as a result of the tariff, the price of a T-shirt in the United States ________, and the quantity of T-shirts bought ________. A) rises by $2; decreases by 15 million per year B) rises by $2; increases by 15 million per year C) falls by $2; increases by 5 million per year D) does not change; decreases by 5 million per year E) does not change; does not change Answer: A Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

14) The figure above shows that as a result of the tariff, the quantity of T-shirts produced in the United States ________, and the quantity of T-shirts imported ________. A) increases by 15 million per year; decreases by 30 million per year B) increases by 15 million per year; increases by 15 million per year C) decreases by 15 million per year; decreases by 30 million per year D) decreases by 30 million per year; increases by 30 million per year E) does not change; decreases by 15 million per year Answer: A Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 15) The figure above shows that as a result of the tariff, consumer surplus in the United States A) decreases by $105 million per year. B) increases by $55 million per year. C) decreases by $30 million per year. D) decreases by $20 million per year. E) remains unchanged. Answer: A Topic: Effects of tariffs, inefficiency Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 16) The figure above shows that as a result of the tariff, producer surplus in the United States A) decreases by $105 million per year. B) increases by $55 million per year. C) decreases by $30 million per year. D) decreases by $20 million per year. E) remains unchanged. Answer: B Topic: Effects of tariffs, inefficiency Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

17) The figure above shows that the government revenue from the tariff is A) $20 million per year. B) $30 million per year. C) $15 million per year. D) $55 million per year. E) zero. Answer: A Topic: Effects of tariffs, government revenue Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 18) The figure above shows that the deadweight loss from the tariff is A) $20 million per year. B) $30 million per year. C) $15 million per year. D) $55 million per year. E) zero. Answer: B Topic: Effects of tariffs, inefficiency Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 19) The figure above shows that the U.S. net ________ surplus from the tariff is ________. A) loss of; 30 million per year B) gain in; $20 million per year C) loss of; $10 million per year D) gain in; $55 million per year E) gain in; zero Answer: A Topic: Effects of tariffs, inefficiency Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

9.6 Integrative Questions 1) Assume that the state of Missouri decided to place a tariff on every product produced outside the state in an effort to increase the state's revenue and increase employment in the state. If Missouri did so A) the state's total output would definitely increase. B) workers with jobs in new firms replacing out-of-state imports would earn high income. C) the standard of living within Missouri would decrease. D) other states would begin to dump in Missouri. E) the prices of goods imported into Missouri would fall. Answer: C Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 2) During the 1980s, Harley-Davidson, the American motorcycle maker asked Congress for tariff protection from large motorcycles imported from Japan. Harley-Davidson argued that their company needed protection so the company could reorganize and, after some time had passed, could become more competitive. Harley-Davidson's argument is similar to the ________ argument for protection. A) save domestic jobs B) national security C) anti-dumping D) infant-industry E) bring diversity and stability Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 3) In the 1950s, crude oil and natural gas imports were restricted to keep the domestic industries viable in case of a war. The rationale for this protection is the ________ argument for protection. A) save domestic jobs B) national security C) anti-dumping D) infant-industry E) penalizing lax environmental standards Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 94 Copyright © 2021 Pearson Education, Inc.

4) In the 1980s, the U.S. government forced Japanese automakers to limit their exports to the United States. The union representing the autoworkers (UAW), argued that otherwise the U.S. auto industry would have contracted. The UAW's argument is the ________ argument for protection. A) save domestic jobs B) national security C) anti-dumping D) infant-industry E) bringing diversity and stability Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 5) In 2017, President Trump imposed a tariff on imported steel. He did so in response to rent seeking by A) domestic steel consumers. B) domestic steel producers. C) foreign steel consumers. D) foreign steel producers. E) foreign politicians. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Revised AACSB: Reflective thinking 6) If the opportunity cost of producing a T-shirt is ________ in China than in the United States, China has ________ advantage in producing T-shirts. A) lower; a comparative B) lower; an absolute C) higher; a comparative D) higher; an absolute E) higher; no Answer: A Topic: Comparative advantage Skill: Level 5: Critical thinking Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

7) Because the United States has ________ advantage compared to China in producing airplanes, China can buy airplanes from the United States at a ________ opportunity cost than that at which China can produce them. A) comparative; lower B) comparative; higher C) absolute; lower D) absolute; higher E) None of the above because China will produce airplanes and sell them to the United States. Answer: A Topic: Comparative advantage Skill: Level 5: Critical thinking Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking 8) Which of the following is TRUE? i. Comparative advantage drives international trade. ii. Compared to a no-trade situation, in a market with imports, producer surplus is larger. iii. Tariffs lower the domestic price of imported goods. A) only i B) only ii C) only iii D) i and ii E) i and iii Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 9) Which of the following is TRUE? i. When the world price of a good is lower than the price that balances domestic supply and demand, a country gains from exporting the good. ii. Compared to a no-trade situation, in a market with imports, consumer surplus is larger. iii. Quotas raise the domestic price of imported goods. A) only i B) only ii C) only iii D) i and ii E) ii and iii Answer: E Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Analytical thinking 96 Copyright © 2021 Pearson Education, Inc.

10) Which of the following is TRUE? i. Compared to a no-trade situation, in a market with exports, consumer surplus is larger. ii. Tariffs decrease consumer surplus. iii. Trade is restricted because protection brings small losses to a large number of people and large gains to a small number of people. A) only i B) only ii C) only iii D) i and iii E) ii and iii Answer: E Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Analytical thinking 11) We find that the world price of sugar is 20 cents a pound, the U.S. does not trade internationally, and the U.S. equilibrium price of sugar is 30 cents a pound. If the U.S. begins to trade internationally, the price of sugar in the U.S. ________ to the world price and U.S. consumers buy ________ sugar. A) falls; more B) falls; less C) rises; more D) rises; less E) falls; no Answer: A Topic: Imports Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

12) The world price of steel is $100 a ton. Before international trade, the price of steel in India is $60 a ton. If India begins trading internationally, the price of steel in India ________ and steel mills in India ________ the quantity they produce. A) rises; increase B) falls; increase C) does not change; increase D) rises; decrease E) falls; decease Answer: A Topic: International trade Skill: Level 4: Applying models Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 13) Imports ________ society's total surplus because of the ________ in price and ________ in consumption. A) increase; rise; increase B) increase; rise; decrease C) decrease; fall; increase D) decrease; fall; decrease E) increase; fall; increase Answer: E Topic: Exports Skill: Level 5: Critical thinking Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 14) Exports ________ society's total surplus because of the ________ in price and ________ in production. A) increase; rise; increase B) increase; rise; decrease C) decrease; fall; increase D) decrease; fall; decrease E) increase; fall; increase Answer: A Topic: Exports Skill: Level 5: Critical thinking Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

9.7 Essay: How Global Markets Work 1) How can a nation and its producers determine whether or not it has a comparative advantage in producing a particular good or service? Answer: Whether a nation has a comparative advantage in the production of a particular good or service can be determined by comparing the price the good or service sells for domestically to the world price of the same good or service. If the domestic price is less than the world, the nation has a comparative advantage in the production of that good or service. If the domestic price exceeds the world price, the nation does not have a comparative advantage in the production of that good or service. Topic: Gains from trade Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication 2) After NAFTA was signed, the United States allowed more tomatoes to be imported from Mexico. What happened to the price of tomatoes in the United States when the United States allowed more tomatoes to be imported? Answer: The price of tomatoes fell. Topic: Imports Skill: Level 2: Using definitions Section: Checkpoint 9.1 Status: Old AACSB: Reflective thinking 3) A few years ago, as oil and gas prices continued to increase, a growing number of Americans called for the United States to become less reliant on Middle-Eastern oil. Would it make sense for the United States to try to become totally self-reliant in the production of oil? Why or why not? Answer: It would be foolish for the United States to try to become totally self-reliant in oil production. There is a reason that approximately 40 percent of our oil comes from OPEC nations: Middle-Eastern countries can produce oil at a far lower opportunity cost than U.S. producers. In the Middle East the vast reserves of oil, combined with more lax regulations imposed by the government, have combined to drive down the per barrel opportunity cost of oil extraction to very low levels. Hence the United States gains from trade with these nations. Even though the price of oil was higher than in the past, that price was much less than what would be the opportunity cost of producing enough oil domestically so that the United States was totally self-reliant. Topic: Imports Skill: Level 5: Critical thinking Section: Checkpoint 9.1 Status: Old AACSB: Written and oral communication

4) The United States imports television sets from Japan. The table above contains the U.S. demand and U.S. supply schedules for television sets. The world price of a television set is $600 per set. a. With no trade, what is the domestic price and quantity of television sets? b. At the world price, what is the quantity of sets demanded in the United States? c. At the world price, how many sets are produced in the United States? d. At the world price, how many sets are imported into the United States? e. What is the opportunity cost of producing the 4-millionth television set in the United States? In Japan? Answer: a. In the absence of trade, the price is $1,000 per television set and the quantity is 4 million sets. b. At the world price, 8 million sets are demanded in the United States. c. At the world price, 2 million sets are produced in the United States. d. At the world price, the quantity of sets imported is 6 million. e. The opportunity cost in the United States to produce the 4-millionth set is $1,000. The opportunity cost in Japan is $600. Topic: Imports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

5) Merck, an American pharmaceutical company, produces a vaccination that is used against chicken pox. The table shows the domestic demand for, and supply of, this medication, measured in thousands of doses per day. The world price of this medicine is $24 per dose. a. With no trade, what is the U.S. price and quantity of the vaccine? b. At the world price, how many doses are demanded in the United States? c. At the world price, how many doses are produced in the United States? d. At the world price, how many doses are exported? Answer: a. With no trade, the U.S. price is $20 a dose and the quantity is 10,000 doses per day. b. At the world price, 8,000 doses per day are demanded in the United States. c. At the world price, 13,000 doses per day are produced in the United States. d. At the world price, 5,000 doses per day are exported. Topic: Exports Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

6) The table above has the domestic supply and domestic demand schedules for a product. What is the equilibrium price with no trade? Over what range of prices will the country export the good? Over what range will it import the good? Suppose the world price is $20. What is the quantity demanded, the quantity supplied, and the amount of the good exported or imported? Answer: The price with no trade is $12. The country will import the good at world prices below $12 and export it at world prices above $12. If the world price is $20, the quantity demanded is 160, the quantity supplied is 220, and the quantity exported is 60. Topic: Trade Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

7) The figure above shows the U.S. demand and the U.S. supply curves of canned peaches. a. In the absence of trade, what is price of canned peaches in the United States? b. In the absence of trade, what is the level of production in the United States? c. If the world price of canned peaches is $1 a can and the United States engages in trade, does the United States import or export canned peaches? d. If the world price of canned peaches is $1 a can and the United States engages in trade, what is the quantity produced in the United States and what is the quantity consumed? What is the quantity imported or exported? e. If the world price of canned peaches is $2 a can and the United States engages in trade, does the United States import or export canned peaches? f. If the world price of canned peaches is $2 a can and the United States engages in trade, what is the quantity produced in the United States and what is the quantity consumed? What is the quantity imported or exported? Answer: a. In the absence of trade, the price is $1.50 per can of peaches. b. In the absence of trade, 4 million cans are produced. c. The United States imports canned peaches. d. The quantity produced in the United States is 2 million cans and the quantity consumed is 6 million cans. The quantity imported is 4 million cans. e. The United States exports canned peaches. f. The quantity produced in the United States is 6 million cans and the quantity consumed is 2 million cans. The quantity exported is 4 million cans. Topic: Trade Skill: Level 3: Using models Section: Checkpoint 9.1 Status: Old AACSB: Analytical thinking

9.8 Essay: Winners, Losers, and Net Gains from Trade 1) Who gains from imports? How do they gain? Who loses? How do they lose? Does the overall economy gain or lose from imports? Answer: Consumers of the good being imported gain from imports. They gain because the price they pay falls. As a result, they buy more of the good and their consumer surplus increases. Producers of the good being imported lose from imports. They lose because the price they receive falls. As a result, they produce less of the good and their producer surplus decreases. The overall economy gains because the increase in consumer surplus exceeds the decrease in producer surplus. Topic: Imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Written and oral communication 2) How do imports affect buyers' consumer surplus? Answer: Consumer surplus increases. It increases because imports lower the price of the good being imported, so buyers purchase more of the good and hence their consumer surplus increases. Topic: Imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 3) How do imports affect sellers' producer surplus? Answer: Producer surplus decreases. It decreases because imports lower the price of the good being imported, so sellers produce less of the good and hence their producer surplus decreases. Topic: Imports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking

4) Who gains from exports? How do they gain? Who loses? How do they lose? Does the overall economy gain or lose from exports? Answer: Producers of the good being exported gain from exports. They gain because the price they receive rises. As a result, they produce more of the good and their producer surplus increases. Consumers of the good being exported lose from exports. They lose because the price they pay rises. As a result, they buy less of the good and their consumer surplus decreases. The overall economy gains because the increase in producer surplus exceeds the decrease in consumer surplus. Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 5) How do exports affect buyers' consumer surplus? Answer: Consumer surplus decreases. It decreases because exports raise the price of the good being exported, so buyers purchase less of the good and hence their consumer surplus decreases. Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 6) How do exports affect sellers' producer surplus? Answer: Producer surplus increases. It increases because exports raise the price of the good being exported, so sellers produce more of the good and hence their producer surplus increases. Topic: Exports Skill: Level 2: Using definitions Section: Checkpoint 9.2 Status: Old AACSB: Analytical thinking 9.9 Essay: International Trade Restrictions 1) Briefly define a tariff and a quota. Do any of these methods restrict trade without harming domestic consumers? Answer: Governments restrict trade through the use of tariffs and quotas. A tariff is a tax imposed on a good when it is imported into the nation. A quota is a limit on the amount of a good that may be imported. Both of these methods restrict trade and they both harm domestic consumers by raising the price and decreasing the quantity consumed. Topic: Trade restrictions Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Written and oral communication

2) "Tariffs today in the United States are much higher than in the past." Is the previous statement correct or incorrect? Answer: The statement is most decidedly incorrect. U.S. tariffs today are lower compared to what they were in the past. Topic: Eye on the past, the history of the U.S. tariff Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 3) How does a tariff affect the domestic price of the import, the domestic consumption, the domestic production, and the quantity imported? Answer: A tariff raises the price of the good. As a result, domestic consumption decreases as domestic consumers decrease the quantity they demand. And, also as a result, domestic production increases as domestic producers increase the quantity they supply. Because domestic consumption decreases and domestic production increases, the quantity imported decreases. Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Written and oral communication 4) The United States imposes a tariff on foreign limes. How does the tariff affect the U.S. price of a lime and the production of limes in the United States? Answer: The tariff raises the price of limes in the United States. As a result of the higher price, U.S. lime production increases. Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Written and oral communication 5) How does a tariff affect the consumer surplus and the producer surplus from the imported good? Is the overall economy helped or harmed by tariffs? Briefly explain your answers. Answer: A tariff raises the price of the good so that domestic consumption decreases and domestic production increases. As a result, domestic consumer surplus decreases and domestic producer surplus increases. The overall economy is harmed. The decrease in consumer surplus is larger than the increase in producer surplus so a deadweight loss is created. Topic: Effects of tariffs Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

6) Currently, the United States has a quota on the amount of sugar that is allowed to be imported into the United States. What would happen to the price of sugar in the United States if the quota was removed? What would happen to U.S. consumption and U.S. production of sugar? Answer: If the quota is removed, the price of sugar in the United States would fall, U.S. consumption of sugar would increase, and U.S. production of sugar would decrease. Topic: Effects of quotas Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Reflective thinking 7) How does a quota affect the domestic price of the import, the domestic consumption, the domestic production, and the quantity imported? Answer: A quota raises the price of the good because it decreases the amount that can be imported. As a result, domestic consumption decreases as domestic consumers decrease the quantity they demand. And, also as a result, domestic production increases as domestic producers increase the quantity they supply. Topic: Effects of quotas Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking 8) How does a quota affect the consumer surplus and the producer surplus from the imported good? Is the overall economy helped or harmed by quotas? Briefly explain your answers. Answer: A quota raises the price of the good so that domestic consumption decreases and domestic production increases. As a result, domestic consumer surplus decreases and domestic producer surplus increases. The overall economy is harmed. The decrease in consumer surplus is larger than the increase in producer surplus so a deadweight loss is created. Topic: Effects of quotas Skill: Level 2: Using definitions Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

9) The United States imports cheese from a variety of countries. The table above gives the domestic supply of, and demand for, cheese in the United States. The world price of cheese is $12 per pound, and trade is unrestricted. a. How many pounds of cheese are consumed in the United States? b. How many pounds of cheese are produced in the United States? c. How many pounds of cheese are imported into the United States? If a $3 per pound tariff is imposed, d. How many pounds of cheese are consumed in the United States? e. How many pounds of cheese are produced in the United States? f. How many pounds of cheese are imported into the United States? g. How much will the U.S. government collect in tariff revenue? h. Who benefits from the tariff? Who loses? Answer: a. 180,000 pounds of cheese are consumed. b. 60,000 pounds of cheese are produced. c. 120,000 pounds of cheese are imported. d. 140,000 pounds of cheese are consumed. e. 80,000 pounds of cheese are produced. f. 60,000 pounds of cheese are imported. g. The government collects $3 per pound × 60,000 pounds = $180,000. h. U.S. producers and the U.S. government gain while U.S. consumers and foreign producers lose. Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

10) The above figure shows the domestic supply of and domestic demand for an imported good. The world price is $15 per unit. a. At the world price of $15 per unit, what is the domestic consumption and domestic production? b. At the world price of $15 per unit, what is the quantity imported? c. If the government imposes a tariff of $5 per unit, what is the domestic consumption and domestic production? d. With the $5 per unit tariff, what is the quantity imported? e. How much revenue does the government collect with a tariff of $5 per unit? Answer: a. Domestic consumption is 8 million units per year and domestic production is 0. b. The quantity imported is 8 million units per year. c. Domestic consumption is 6 million units per year and domestic production is 2 million units per year. d. The quantity imported is 4 million units per year. e. The government collects $5 per unit imported and 4 million units are imported, so the government's revenue from the tariff is $5 × 4 million = $20 million per year. Topic: Effects of tariffs Skill: Level 3: Using models Section: Checkpoint 9.3 Status: Old AACSB: Analytical thinking

9.10 Essay: The Case Against Protection 1) Three arguments used to promote trade barriers are the national security argument, the infantindustry argument, and the dumping argument. Explain each of these arguments and evaluate whether each one has any flaws. Answer: The national security argument is that countries must protect industries that produce defense equipment and armaments as well as those industries upon which the defense industries rely. The problem with this argument is that all industries contribute to national defense, though some do so more indirectly than others. For instance, the pillow industry can claim that it contributes to national defense because without good pillows, plant workers will be unable to sleep well and hence their efficiency will be lowered. The pillow industry therefore can make a claim for protection-which, incidentally, it did in the 1950s using the argument just described! The infant-industry argument is that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets. The problem with this argument is that if an industry can eventually compete, then its backers should be willing to fund it until that time. In addition, if the industry has benefits that spill over to other industries, then the more efficient government policy is to subsidize the industry rather than protect it from competition. Finally, the dumping argument asserts that protection is needed to protect domestic industries from foreign dumping practices designed to eliminate competition. (Dumping is selling a good for a price that is less than its cost of production.) The problems with this argument are two-fold. First, it is extremely difficult to determine if a firm is dumping because determining the cost of production is difficult. Second, even if a firm is dumping, its success in establishing a monopoly is in doubt and its success in maintaining its global (!) monopoly is even more doubtful. Hence dumping to obtain a monopoly is likely a very uncommon practice. Topic: Case against protection Skill: Level 3: Using models Section: Checkpoint 9.4 Status: Old AACSB: Written and oral communication 2) What is the national security argument for restricting international trade? What is its flaw? Answer: The national security argument is that the nation must protect and maintain industries that produce defense equipment and armaments as well as those industries upon which the defense industries rely. The problem with this argument is that all industries contribute to national defense, though some do so directly while others do so indirectly. For instance, the sugar industry contributes to national defense because factory workers and armed service men and women drink colas made using sugar, but protecting the sugar industry for reasons of national defense is ludicrous. Topic: National security Skill: Level 3: Using models Section: Checkpoint 9.4 Status: Old AACSB: Written and oral communication

3) What is dumping? Answer: Dumping is the situation in which a firm sells its export goods and services for a lower price than its cost of production. Topic: Dumping Skill: Level 1: Definition Section: Checkpoint 9.4 Status: Old AACSB: Reflective thinking 4) Because wage rates are so low in Africa, why don't Microsoft, Cisco and other major corporations close down their American operations and move to Africa? Answer: Wage rates must be weighed against productivity. It is not just wages that influence where production occurs. Wages divided by the productivity of the workers gives the average cost of production. In Africa, workers have low levels of skill, education, and training so their productivity is much less than in the United States. Therefore the cost of production would be far higher in Africa than in America. So even though U.S. wage rates are high, industries stay here because the cost of production is lower because U.S. productivity is so high. Topic: Cheap foreign labor Skill: Level 5: Critical thinking Section: Checkpoint 9.4 Status: Old AACSB: Written and oral communication 5) Explain how governments restrict international trade and who benefits as well as who loses from the restrictions. Answer: Governments use tariffs and nontariff barriers, such as quotas, to restrict trade. Tariffs and quotas both boost the domestic price of the protected good. Consumers in that country lose because of the higher price. The domestic suppliers, however, gain from the higher price. Tariffs are source of revenue for the government that imposes it on imported goods, so the domestic government gains from a tariff. Quotas, on the other hand, do not create revenue for government so the government does not gain from a quota. Topic: Why is trade restricted? Skill: Level 3: Using models Section: Checkpoint 9.4 Status: Old AACSB: Written and oral communication

6) What is "rent seeking"? How does it apply to restricting imports? Answer: Rent seeking is lobbying and other political activity that seeks to capture the gains from trade. When imports are restricted, some people gain from the restrictions. Rent seekers, such as domestic producers of import-competing goods or services, lobby the government to impose import restrictions because restrictions allow the rent seekers to gain revenue and/or profit. Topic: Rent seeking Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Written and oral communication 7) Economics demonstrates that opening up unrestricted free international trade is beneficial to all nations. However, are there any losers from such a policy change? Answer: Yes, there are losers from opening up to free trade. Domestic suppliers of imported goods lose from allowing free trade. Owners of the businesses lose as do workers who had jobs in the import-competing industries. However, it is important to realize that although there are losers from free trade, there also are substantial gains and the gains exceed the loses so that the nation as a whole is made better off with free trade. Topic: Why is trade restricted? Skill: Level 3: Using models Section: Checkpoint 9.4 Status: Old AACSB: Written and oral communication 8) How does the United States attempt to compensate losers from lower trade restrictions? Answer: The U.S. government attempts to compensate workers who lose from lowering U.S. trade restrictions. For instance, the U.S. government set up a fund to support and retrain workers who lost their jobs because of NAFTA. Job losers can also collect unemployment compensation benefits. Topic: Compensating losers Skill: Level 2: Using definitions Section: Checkpoint 9.4 Status: Old AACSB: Written and oral communication

9) Suppose that elimination of tariffs on agricultural products means that 1,000 farm workers lose jobs that pay an average of $20,000 per year. At the same time, because of the importation of relatively cheaper foreign vegetables, 150 million consumers save $2 per year on their grocery bills. a. What is the total income lost by farm workers because of the free trade? b. What is the total dollar amount saved by all consumers combined? c. Which is greater, the lost income or the consumer savings? Do the benefits of free trade outweigh the costs in this simple example? d. Which group is most likely to become politically involved over the issue of removing the tariffs, the farm workers or the consumers? Why? Answer: a. The total income lost by farm workers is 1,000 × $20,000 = $20,000,000. b. The total saving by all consumers is 150,000,000 × $2 = $300,000,000. c. The consumer savings is much larger than the lost income, so the benefits of free trade outweigh the costs. d. The farm workers are more likely to become involved, because their individual loss is much greater than an individual consumer's gain. Topic: Rent seeking Skill: Level 3: Using models Section: Checkpoint 9.4 Status: Old AACSB: Analytical thinking

Foundations of Microeconomics, 9e (Bade) Chapter 10 Externalities 10.1 Negative Externalities: Pollution 1) Externalities A) can be either benefits or costs. B) always create extra social costs. C) always make society better off. D) cannot be expressed in dollar amounts. E) are always part of private costs or private benefits. Answer: A Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 2) A cost that arises from the production or consumption that falls on someone other than the producer or consumer is called A) a negative benefit. B) a public choice impact. C) a positive externality. D) a negative externality. E) a private good. Answer: D Topic: Externalities Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 3) Evidence of external costs in the production of a product is present if A) the price of the product is higher than it should be. B) the production cost increases because of an increase in the minimum wage. C) non-buyers and/or non-producers of the product experience a loss for which they are not compensated. D) buyers refuse to purchase the product. E) producers pay all of the costs of producing the good or service. Answer: C Topic: Externalities Skill: Level 4: Applying models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

4) An example of someone bearing the burden of a negative production externality would be A) Taylor living downwind from a smelly feedlot where pigs are raised. B) Jess's roommate smokes and she doesn't. C) Lynna's neighbors play loud music late at night. D) All of these are examples of someone bearing the burden of a negative production externality. E) None of these is an example of someone bearing the burden of a negative production externality. Answer: A Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 5) An example of someone bearing the burden of a negative consumption externality would be A) Taylor living downwind from a feedlot. B) LaShawn grows beautiful roses in her garden. C) Jess's roommate smokes and she doesn't. D) All of these are examples of someone bearing the burden of a negative consumption externality. E) None of these is an example of someone bearing the burden of a negative consumption externality. Answer: C Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 6) To ensure all students are protected from getting the flu this year, your school offers free flu shots. What type of externality exists in this example? A) negative consumption externality B) positive consumption externality C) positive production externality D) negative production externality E) neutral externality Answer: B Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

7) A example of a good with external benefits is A) a pizza. B) a dose of flu vaccine. C) a sewing machine. D) an imported good. E) a pair of running shoes. Answer: B Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 10.3 Status: Old AACSB: Reflective thinking 8) Which of the following is NOT an example of a good with an external cost? A) electricity generation producing carbon dioxide emissions that contribute toward climate change B) logging that pollutes a nearby river C) Jess smoking near her non-smoking roommate D) Ahmed getting a flu shot each fall E) noise pollution from aircraft Answer: D Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Revised AACSB: Reflective thinking 9) Pollution is an example of a ________ externality. A) negative production B) positive production C) negative consumption D) positive consumption E) Coasian Answer: A Topic: Externalities Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

10) When studying pollution and the environment, economists A) have no role to play. B) concentrate on the physical aspects of the environment. C) emphasize costs and benefits. D) attempt to reduce pollution at all costs. E) think pollution is good if it occurs when production takes place. Answer: C Topic: Economics and pollution Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 11) The production of electricity creates pollution. When deciding how much electricity to buy, customers ________ the cost of pollution. When deciding how much electricity to sell, producers ________ the cost of pollution. A) take into account; take into account B) do not take into account; do not take into account C) take into account; do not take into account D) do not take into account; take into account E) None of the above answers is correct. Answer: B Topic: Externalities Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Revised AACSB: Reflective thinking 12) Marginal private cost A) is always zero if there is an external cost. B) equals the marginal social cost only if the marginal external cost is positive. C) is the cost of producing an additional unit of a good or service that is paid by the producer of that good or service. D) the cost of producing an additional unit of a good or service that falls on people other than the producer of that good or service. E) the cost of producing an additional unit of a good or service that is paid by the entire society. Answer: C Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

13) A private cost is a cost of production that is A) borne by the producer of a good. B) equal to zero if there is an external cost. C) borne by someone other than the producer of a good. D) always the same as the social cost of production. E) the same as an external cost. Answer: A Topic: Private cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Revised AACSB: Reflective thinking 14) The cost of producing an additional unit of a good or service that is borne by the producer of that good or service is the marginal A) external cost. B) private cost. C) social cost. D) public cost. E) None of the above answers is correct. Answer: B Topic: Private cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 15) The difference between private cost and social cost is that A) social cost only considers the external cost borne by society. B) social cost only considers the cost borne by people other than the producer. C) private cost only considers the cost borne by producers of the good. D) social cost also includes any external benefit whereas private cost excludes all external benefits. E) there is no difference; the terms refer to the same cost. Answer: C Topic: Private cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

16) Harry, the owner of a beauty salon, hires a new hair stylist. The wages paid to the new stylist are A) a private cost and not an external cost. B) an external cost and not a private cost. C) both a private cost and an external cost. D) neither a private cost nor an external cost. E) only a private benefit because people want their hair styled. Answer: A Topic: Private cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 17) Joanne rents a TV production studio to produce an extra hour of a TV show. The rent is A) a private cost and not an external cost. B) an external cost and not a private cost. C) both a private cost and an external cost. D) neither a private cost nor an external cost. E) a private benefit because viewers will benefit from watching the extra hour of the show. Answer: A Topic: Private cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 18) For a product with an external cost, the supply curve A) represents the various quantities people can buy. B) is the same as the marginal private cost curve. C) is the same as the marginal social cost curve. D) is the same as the marginal external cost curve. E) is undefined. Answer: B Topic: Private cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

19) For a firm, its labor costs are A) a marginal benefit. B) a private cost. C) an external cost. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Private cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 20) The cost of producing an additional unit of a good or service that falls on people other than the producer is the marginal A) external cost. B) private cost. C) social cost. D) social benefit. E) None of the above answers is correct. Answer: A Topic: External cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 21) A marginal external cost of a product is equal to A) what the producer has to pay to hire resources to produce another unit. B) the cost someone other than the producer incurs when another unit is produced. C) the cost the producer incurs to produce another unit. D) what the consumer must pay when he or she buys the good or service. E) None of these answers describes a marginal external cost. Answer: B Topic: External cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

22) A loud band plays a concert late at night in a neighborhood park. The noise produced by the band that keeps the neighbors not attending the concert awake is A) only a private cost. B) only an external cost. C) both a private cost and an external cost. D) neither a private cost nor an external cost. E) a private benefit because the neighbors get to hear the band. Answer: B Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 23) Which of the following is an example of an external cost? A) taxes B) the price of a car wash C) pollution D) an electricity bill E) paying a wage that exceeds the minimum wage Answer: C Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 24) A firm dumps dioxin in a river, thereby severely polluting the river. The cost of the water pollution is i. zero for the firm. ii. an external cost. iii. part of the marginal social cost A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: E Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

25) When logging in the Pacific Northwest destroys forests that hikers would have used for ecotourism, the destruction of the trails is an example of A) an external cost. B) a private cost. C) a government cost. D) an external benefit. E) None of the above answers is correct. Answer: A Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 26) Which of the following is an example of an external cost? A) a grove of trees planted in a park in Seattle B) a library built in Philadelphia C) a new, faster computer chip D) an oil spill off the coast of South America E) a student graduating from college Answer: D Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 27) Jacob pays $5,000 to paint his house because pollution from a nearby factory damaged the paint. To the factory, the $5,000 cost is A) a private cost and not an external cost. B) an external cost and not a private cost. C) both a private cost and an external cost. D) neither a private cost nor an external cost. E) a private benefit because viewers will benefit from watching the extra hour of the show. Answer: A Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

28) A landfill site produces an obnoxious odor. Homes downwind of the site rent for $1,000 per month while homes upwind of the site rent for $1,500 per month. If the odor is the only detectable difference between two neighborhoods, the difference in the rent is the ________ of the odor. A) social cost B) external cost C) private cost D) marginal cost-benefit E) private benefit Answer: B Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 29) Suppose two neighborhoods (A and B) have identical housing, but neighborhood A has a strictly enforced deed restriction that prohibits homeowners from parking junk cars in the front yard. If houses in neighborhood A sell for $105,000 and houses in neighborhood B sell for $100,000, how would an economist value the external cost of visible junk cars, per house? A) $205,000 B) $105,000 C) $100,000 D) $5,000 E) None of the above answers is correct. Answer: D Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 30) Suppose two neighborhoods with 10 homes each in Buffalo, New York are identical except one of them is near a toxic waste dump. If homes near the dump sell for an average of $40,000 and the other homes sell for $90,000, the external cost of the dump is A) $400,000. B) $1,300,000. C) $900,000. D) $500,000. E) $90,000. Answer: D Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 10 Copyright © 2021 Pearson Education, Inc.

31) The marginal cost incurred by the entire society to produce a good or service is the A) marginal external cost. B) marginal private cost. C) marginal social cost. D) marginal social benefit. E) marginal private benefit. Answer: C Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 32) Marginal social cost is equal to A) the amount people who buy a product pay for another unit. B) whatever producers have to pay to produce output. C) the sum of marginal private cost and the marginal external cost. D) the average of marginal private cost and the marginal external cost. E) None of the above answers is correct. Answer: C Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 33) Marginal social cost is the A) price a consumer pays for one more unit of a good. B) cost a producer incurs producing one more unit of a good. C) cost of producing one more unit of a good that falls on someone other than the producer. D) sum of the cost a producer incurs from producing one more unit of a good plus the cost of producing one more unit of a good that falls on someone other than the producer. E) same as marginal cost only if there is an external cost when the good is produced. Answer: D Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

34) Which of the following equations is correct? A) MC = MSC + marginal external cost B) MSC = MC ÷ marginal external cost C) MSC = MC + marginal external cost D) MSC = MC × marginal external cost E) MC = marginal external cost - MSC Answer: C Topic: Marginal social cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 35) The marginal social cost of producing a good or service is the A) cost of producing an additional unit borne by the producer. B) cost of producing an additional unit borne by people other than the producer. C) sum of the marginal private cost and the marginal external cost. D) same as marginal external cost. E) sum of the marginal private cost and the marginal external cost minus the marginal social benefit. Answer: C Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 36) Which of the following is TRUE? A) MSC = MC + Marginal external cost B) MC = Marginal external cost - MSC C) MC = Marginal external benefit + MSC D) MSC = Marginal external cost + marginal external benefit E) MSC = Marginal external cost - marginal external benefit Answer: A Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

37) If there is no external cost, then marginal social cost A) increases as output increases. B) decreases as output increases. C) is constant regardless of the level of output. D) is unrelated to output levels. E) first increases and then decreases as output increases. Answer: A Topic: Marginal social cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 38) If a product has zero external costs, then A) marginal social cost equals marginal private cost. B) marginal social cost is greater than marginal private cost. C) marginal social cost is less than marginal private cost. D) marginal social cost equals zero. E) We need more information to determine the relationship between marginal private cost and marginal social cost. Answer: A Topic: Marginal social cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 39) If the marginal external cost of building a children's playground equals zero, then the i. marginal private cost equals the marginal social cost. ii. marginal social cost equals zero. iii. marginal private cost equals zero. A) i only B) ii only C) iii only D) ii and iii E) i and ii Answer: A Topic: Marginal social cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

40) If the marginal private cost of running a car is $0.30 a mile and the marginal external cost is $0.10, what is the marginal social cost? A) $0.20 B) $3.00 C) $0.03 D) $0.40 E) None of the above answers is correct. Answer: D Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 41) If the marginal social cost of generating a kilowatt of electricity is $0.10 and the marginal private cost is $0.08, what is the marginal external cost? A) $0.18 B) $0.10 C) $0.08 D) $0.02 E) $0.80 Answer: D Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 42) If the marginal social cost of producing a ton of cement is $4,000 and the marginal private cost is $3,500, then the A) marginal benefit of a ton of cement will equal $4,000. B) total cost of producing a ton of cement is $7,500. C) marginal external cost of producing a ton of cement is $500. D) marginal external cost of producing a ton of cement is $7,500. E) marginal external cost of producing a ton of cement is $4,000. Answer: C Topic: Marginal social cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

43) If a good has an external cost, then the marginal private cost curve A) lies below then the marginal social cost curve. B) lies above the marginal social cost curve. C) lies below the horizontal axis. D) is the same as the marginal external cost curve. E) is undefined because the firms' costs are not equal to the social costs. Answer: A Topic: Marginal social cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 44) If the production of a good causes an external cost, then the efficient quantity is A) equal to the quantity at which the marginal benefit equals marginal cost. B) less than the quantity at which the marginal benefit equals the marginal cost. C) more than the quantity at which the marginal benefit equals the marginal cost. D) the quantity at which the marginal private benefit is greater than the marginal social benefit. E) None of the above answers is correct. Answer: B Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 45) If a good has an external cost, the A) unregulated competitive market outcome is efficient. B) marginal private cost reflects the external cost. C) unregulated competitive market outcome is inefficient. D) marginal social benefit is equal to the marginal social cost when the market is in equilibrium. E) external benefit must equal the external cost. Answer: C Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

46) The basic reason that a competitive unregulated market produces an inefficient amount of a good with an external cost is because A) producers cannot measure marginal social cost. B) producers do not pay the external cost. C) the general public does not care about external costs. D) external costs are not a political issue. E) the external cost is paid by consumers rather than producers. Answer: B Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 47) When production of a good results in an external cost, the unregulated competitive market equilibrium quantity is A) the efficient level of output. B) greater than the efficient level of output. C) not zero but is less than the efficient level of output. D) unattainable. E) zero. Answer: B Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 48) If producing a good or a service creates pollution, then A) an unregulated competitive market produces an efficient output. B) the industry's supply curve includes the extra cost of pollution. C) at the unregulated, competitive market equilibrium quantity, marginal social cost is greater than the equilibrium price. D) at the unregulated, competitive market equilibrium quantity, marginal social benefit and marginal social cost are equal. E) at the unregulated, competitive market equilibrium quantity, marginal social benefit is less than the equilibrium price. Answer: C Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

49) An external cost in the production of a good creates a difference between the i. costs borne by the producer and the costs borne by society in general. ii. efficient quantity of output and the equilibrium quantity of output. iii. marginal social cost and the marginal private cost. A) i only B) iii only C) ii and iii D) i, ii, and iii E) i and iii Answer: D Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 50) The deadweight loss associated with producing a product that has an external cost occurs because A) too much output is produced. B) too little output is produced. C) the price that firms charge for the good is too high. D) not enough resources are allocated to producing the good. E) the marginal social cost does not equal zero. Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 51) When production of a good results in an external cost, the unregulated competitive market equilibrium is inefficient because A) MSC = MC. B) MSC = MB. C) MSC > MB. D) MSC < MB. E) MSC is undefined. Answer: C Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

52) For a good whose production creates an external cost, the efficient quantity of output is A) where the market demand curve and the market supply curve intersect. B) where the marginal social cost curve and marginal benefit curve intersect. C) as low as possible. D) zero. E) the amount of production so that the marginal social benefit exceeds the marginal social cost by as much as possible. Answer: B Topic: Efficiency Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

53) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. If 5 concerts are put on, then the A) marginal external cost will be greater than the marginal social cost. B) marginal external cost will be greater than the marginal private cost. C) marginal external cost will equal the marginal private cost. D) marginal social cost will equal the marginal external cost. E) marginal external cost will equal zero. Answer: B Topic: External cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

54) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. Suppose the marginal private cost of the 5th concert is $10,000. Then, for the 5th concert, the A) marginal external cost equals $30,000. B) marginal social cost equals $30,000. C) marginal external cost equals the marginal private cost. D) marginal external cost equals $40,000. E) marginal external cost equals $10,000. Answer: A Topic: External cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 55) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. At 10 concerts, the A) marginal private cost equals the marginal external cost. B) marginal social cost equals $60,000. C) marginal private cost is more than $40,000. D) marginal external cost equals $60,000. E) marginal external cost equals $80,000. Answer: D Topic: External cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

56) The figure above shows the marginal social cost of generating electricity and the marginal private cost. For 4 billion kilowatts, what is the marginal external cost? A) $0.12 B) $0.08 C) $0.04 D) $0.00 E) $0.20 Answer: C Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

57) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The difference between the marginal cost curve and the marginal social cost curve equals A) marginal private cost. B) private cost. C) external cost. D) marginal external cost. E) Coasian cost. Answer: D Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 58) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal cost borne by producers when 100 billion kilowatt hours are produced is A) 5¢ per kilowatt. B) 10¢ per kilowatt. C) 15¢ per kilowatt. D) 20¢ per kilowatt. E) 0¢ per kilowatt. Answer: A Topic: Private cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

59) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal cost borne by producers when 200 billion kilowatt hours are produced is A) 0¢ per kilowatt. B) 10¢ per kilowatt. C) 20¢ per kilowatt. D) 15¢ per kilowatt. E) 5¢ per kilowatt. Answer: B Topic: Private cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 60) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal external cost when 100 billion kilowatt hours are produced is A) 0¢ per kilowatt. B) 5¢ per kilowatt. C) 10¢ per kilowatt. D) 15¢ per kilowatt. E) 20¢ per kilowatt. Answer: B Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 61) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal external cost when 200 billion kilowatt hours are produced is A) 0¢ per kilowatt. B) 10¢ per kilowatt. C) 20¢ per kilowatt. D) 15¢ per kilowatt. E) 5¢ per kilowatt. Answer: B Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

62) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal cost paid by the producers and everyone else in society when 100 billion kilowatt hours are produced is A) 0¢ per kilowatt. B) 5¢ per kilowatt. C) 10¢ per kilowatt. D) 20¢ per kilowatt. E) 15¢ per kilowatt. Answer: C Topic: Marginal social cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 63) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal cost paid by the producers and everyone else in society when 200 billion kilowatt hours are produced is A) 0¢ per kilowatt. B) 10¢ per kilowatt. C) 20¢ per kilowatt. D) 15¢ per kilowatt. E) 5¢ per kilowatt. Answer: C Topic: Marginal social cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

Quantity of steel Marginal social Marginal benefit (millions of tons cost (dollars per (dollars per ton) per week) ton) 5 40 20 10 35 25 15 30 30 20 25 35 25 20 40 64) The table above shows information about the costs and benefits of a steel smelter that pollutes the air of a city. The market is efficient when the quantity of steel produced is ________ tons per week. A) 5 B) 10 C) 15 D) 20 E) 25 Answer: C Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 65) The table above shows information about the costs and benefits of a steel smelter that pollutes the air of a city. If the marginal external cost is $10 per ton at every quantity of steel produced, the equilibrium quantity when the steel industry is unregulated is ________ tons per week. A) 5 B) 15 C) 20 D) 25 E) 10 Answer: C Topic: An unregulated market Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

66) Homeowners living under the flight path of a large airport complain their home values suffer due to the roar of airplane traffic overhead. They claim the value of their homes is $2,000 less compared to similar homes not in the flight path. The ________ of the noise pollution equals the ________. A) total external cost; number of affected homes multiplied by $2,000 per home B) marginal external cost; number of affected homes multiplied by $2,000 per home C) total external cost; $2,000 D) marginal external cost; $2,000 divided by the number of homes E) total cost; number of homes multiplied by $2,000 Answer: A Topic: Total external cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Application of knowledge

67) The figure above shows the costs and benefits associated with wood pulp production. As the amount of wood pulp produced increases, the cost paid by the producer for each additional ton ________ and the external cost of pollution of each additional ton ________. A) increases; decreases B) increases; increases C) stays the same; increases D) increases; stays the same E) decreases; increases Answer: B Topic: Externalities Skill: Level 4: Applying models Section: Checkpoint 10.1 Status: Old AACSB: Application of knowledge 25 Copyright © 2021 Pearson Education, Inc.

68) The figure above shows the costs and benefits associated with wood pulp production. The fact that the marginal external cost increases is seen in________ as production increases. A) the upward sloping MC curve B) the upward sloping MSC curve C) the downward sloping MB curve D) the increasingly large difference between the MSC and MC curves E) the fact that MB = MC Answer: D Topic: Externalities Skill: Level 4: Applying models Section: Checkpoint 10.1 Status: Old AACSB: Application of knowledge 69) The graph shows the benefits and costs associated with wood pulp production. When the firm produces 5 tons of wood pulp, marginal private cost equals ________ per ton. A) $700 B) $600 C) $900 D) $1,000 E) $200 Answer: A Topic: Externalities Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Application of knowledge 70) The figure above shows the costs and benefits associated with wood pulp production. Without regulation the market will produce ________ tons of wood pulp at a price of ________ per ton. A) 5; $1,100 B) 3; $900. C) 5; $700 D) 3; $600 E) 4; $900 Answer: C Topic: Externalities Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Application of knowledge

71) The figure above shows the costs and benefits associated with the production of wood pulp. With regulation that achieves an efficient outcome, the market produces ________ tons of wood pulp at a price of ________ per ton. A) 3; $800 B) 3; $700 C) 5; $700 D) 5; $1,100 E) 4; $800 Answer: A Topic: Externalities Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Application of knowledge 72) The figure above shows the costs and benefits associated with wood pulp production. Government regulation can produce the efficient outcome by ensuring that production is such that A) MC = MB. B) MB > MSC. C) MB > marginal external cost. D) MSB > MSC. E) MSC = MB. Answer: E Topic: Externalities Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Application of knowledge 73) The figure shows the costs and benefits associated with wood pulp production. A tax of ________ can be imposed to achieve the efficient level of production of ________ tons. A) $200; 3 B) $200; 2 C) $300; 5 D) $1,000; 5 E) $900; 3 Answer: A Topic: Externalities Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Application of knowledge

74) The figure above shows the costs and benefits associated with producing paper. What is the marginal external cost when output is 6 tons? A) $1,600 B) $1,200 C) $1,000 D) $600 E) $400 Answer: D Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 75) The figure above shows the costs and benefits associated with producing paper. What is the unregulated competitive market level of output? A) 0 B) 4 tons C) 6 tons D) more than 6 tons E) None of the above answers is correct. Answer: C Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

76) The figure above shows the costs and benefits associated with producing paper. What is the efficient level of output? A) 0 B) 4 tons C) 6 tons D) more than 6 tons E) None of the above answers is correct. Answer: B Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

77) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. It also illustrates the marginal benefit. There is no external benefit. If the city of Seattle puts on 5 concerts per year, then the marginal benefit will A) exceed the marginal social cost. B) equal the marginal private cost. C) be less than the marginal social cost. D) will equal the marginal social cost. E) None of the above answers is correct. Answer: A Topic: Marginal benefit, marginal social cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 29 Copyright © 2021 Pearson Education, Inc.

78) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. It also illustrates the marginal private benefit. There is no external benefit. The efficient number of concerts in Seattle is A) 0. B) 5. C) 10. D) 20. E) 15. Answer: C Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 79) Legally established titles to ownership, use, and disposal of factors of production and goods and services, are called ________ rights. A) government B) pollution C) property D) inefficient E) private Answer: C Topic: Property rights Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 80) Legally established titles to the ownership, use, and disposal of factors of production are referred to as A) property rights. B) Coase rights. C) pollution rights. D) emission rights. E) price-setting rights. Answer: A Topic: Property rights Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

81) One reason why property rights help achieve an efficient level of pollution is because property rights A) force the marginal private cost to equal the marginal social cost. B) force the marginal social cost to zero. C) force the marginal external cost to a lower level than marginal private cost. D) eliminate marginal private costs. E) change the marginal external cost so that they are equal to the marginal social benefit. Answer: A Topic: Property rights Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 82) If a producer must pay the cost of his or her pollution because property rights have been assigned, then A) pollution will be completely eliminated. B) the supply curve will shift rightward as the new costs are added. C) the supply curve will shift leftward as the new costs are added. D) consumers will now consume more of the good because the external costs are reduced. E) there is no longer any marginal benefit from the good or service being produced. Answer: C Topic: Property rights Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 83) The Coase theorem states that A) the level of pollution should be equal to zero to maximize social net benefit. B) profit making producers pollute because they are forced to. C) the efficient level of output is where marginal external cost equals marginal external benefit. D) if property rights exist and transactions costs are low, private transactions are efficient. E) the best way to limit pollution is by taxing producers who pollute. Answer: D Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

84) The proposition that if property rights exist and are enforced, then private transactions are efficient is referred to as the A) Coase theorem. B) property rights theorem. C) pollution rights theorem. D) emission rights theorem. E) private-market efficiency theorem. Answer: A Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 85) The Coase theorem deals with the problem of pollution by A) giving the government regulatory power over polluters. B) making all polluters stop polluting. C) establishing and enforcing private property rights. D) having the government take over ownership of all polluting processes. E) allowing the government to set the proper emission charge. Answer: C Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 86) If transactions costs are low, then assigning property rights in a market with external costs i. increases the deadweight loss. ii. means private transactions are efficient. iii. means that only consumers must pay the external costs. A) i only B) ii only C) ii and iii D) i and iii E) i and ii Answer: B Topic: Coase theorem Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

87) Transactions costs are the A) costs of using the Coase theorem. B) opportunity costs of conducting a transaction. C) external marginal costs of the externality. D) reason why taxes cannot affect the inefficiency resulting from an external cost. E) external costs when a firm pollutes. Answer: B Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 88) Which of the following is the best example of a transactions cost? A) the value of the time spent negotiating a contract B) the price of a new set of tires C) the cost associated with producing a golf club D) the price of labor and materials used to produce a house E) the price of food Answer: A Topic: Coase theorem Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 89) Methods the government can use to cope with the external cost from pollution are A) pollution taxes, subsidies, and command and control regulations. B) pollution taxes, regulations, and pollution vouchers. C) marketable permits, pollution subsidies, and pollution taxes. D) pollution taxes and cap-and-trade pollution limits. E) pollution vouchers, pollution subsidies, and pollution taxes. Answer: D Topic: Government actions in the face of external costs Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Revised AACSB: Reflective thinking

90) Methods the government can use to cope with the external cost from pollution are A) pollution taxes and pollution subsidies. B) pollution taxes and remove property rights. C) remove property rights, command and control regulations, and pollution taxes. D) command and control regulations, pollution taxes, and cap-and-trade pollution limits. E) grant polluters vouchers or pollution subsidies, and cap-and-trade pollution limits. Answer: D Topic: Government actions in the face of external costs Skill: Level 1: Definition Section: Checkpoint 10.1 Status: New AACSB: Reflective thinking 91) Regulations issued under the Clean Air Act and the Clean Water Act are examples of A) pollution taxes. B) the Coase theorem. C) cap-and-trade permits. D) command and control regulations. E) pollution subsidies. Answer: D Topic: Government actions in the face of external costs Skill: Level 1: Definition Section: Checkpoint 10.1 Status: New AACSB: Reflective thinking 92) The "Green New Deal" is an example of A) government imposed pollution taxes. B) the Coase theorem. C) government granted pollution subsidies. D) government command and control regulations. E) vouchers used to combat pollution. Answer: D Topic: Government actions in the face of external costs Skill: Level 1: Definition Section: Checkpoint 10.1 Status: New AACSB: Reflective thinking

93) Which of the following is a common method used by government to cope with the situation in which production of a good creates an external cost? A) removing property rights B) subsidizing production C) cap-and-trade D) lottery E) vouchers Answer: C Topic: Government actions in the face of external costs Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

94) Producing leather creates external costs in the form of water pollution. The figure above illustrates the market for leather. In the absence of any government regulation, how many tons of leather will be produced? A) 0 tons B) 200 tons C) 300 tons D) more than 300 tons E) None of the above answers is correct. Answer: D Topic: Government actions in the face of external costs Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 35 Copyright © 2021 Pearson Education, Inc.

95) Producing leather creates external costs in the form of water pollution. The figure above illustrates the market for leather. If the government sets a pollution limit that achieves efficiency, how many tons of leather are produced? A) 0 tons B) 200 tons C) 300 tons D) more than 300 tons E) more than 0 tons and less than 200 tons Answer: C Topic: Pollution limits Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 96) Which of the following is TRUE regarding pollution charges? i. They force a polluter to pay a price for its pollution. ii. They are based on the marginal external cost of pollution. iii. The fee that produces the efficient amount of pollution is easily determined. A) i only B) i and ii C) ii and iii D) i, ii, and iii E) i and iii Answer: B Topic: Pollution charges Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 97) When using pollution charges to improve efficiency in a market with an external cost, regulators attempt to set the pollution charge equal to the A) marginal social cost of production. B) marginal external cost of production. C) marginal private cost of production. D) marginal private benefit of consumption. E) marginal external benefit minus the marginal external cost. Answer: B Topic: Pollution charges Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

98) Suppose a firm pollutes a river when it produces a product. To achieve the efficient amount of output, a government could impose a ________ that equals the ________ of the pollution. A) pollution charge; marginal social cost B) pollution charge; marginal external cost C) pollution tax; marginal social cost D) pollution tax; marginal external cost E) pollution subsidy; marginal social cost Answer: D Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 99) In order for pollution taxes to be effective in eliminating the deadweight loss resulting from pollution, the pollution tax must be set equal to the A) marginal private cost. B) marginal external cost. C) marginal social cost. D) marginal benefit of polluting. E) price of the good. Answer: B Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 100) To eliminate the inefficiency resulting from pollution that creates an external cost, the government can impose a pollution tax on producers that is equal to the A) MSB. B) MC. C) marginal external cost. D) MSC. E) price. Answer: C Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

101) If the government taxes producers that create pollution, the government's policy A) allows the producers to pollute more by increasing their costs. B) results in less production because the producers' costs have risen. C) eliminates pollution entirely by shifting the supply curve leftward. D) allows the firms to pass along higher costs but doesn't cut pollution. E) forbids the firms from passing along higher costs. Answer: B Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 102) A tax on a polluting industry A) is not desirable because it reduces efficiency. B) leads to less output in this industry. C) causes more resources to be used in the polluting industry. D) shifts the marginal social benefit curve leftward. E) shifts the marginal social benefit curve rightward. Answer: B Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 103) If the government taxes an industry that creates pollution, the tax i. decreases the pollution. ii. increases the price of the product produced by the firms. iii. decreases the quantity of the good produced. A) i only. B) ii only. C) ii and iii. D) i and iii. E) i, ii, and iii. Answer: E Topic: Taxes Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

104) If a pollution tax in a market with an external cost changes the market so that it produces the efficient level of output, which of the following occurs? i. The supply curve shifts leftward. ii. The price increases. iii. The quantity produced decreases. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Taxes Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 105) When government levies pollution taxes on sellers to eliminate the inefficiency from the cost of pollution, the result is A) a lower price. B) a smaller quantity produced. C) a smaller cost of production. D) a rightward shift of the supply curve. E) leftward shifts of the supply and demand curves. Answer: B Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

106) The figure above illustrates the gasoline market. There is no external benefit from gasoline. If this market is left unregulated and no pollution tax is imposed, the equilibrium quantity of gasoline is A) 0 gallons. B) 5 million gallons. C) 10 million gallons. D) 20 million gallons. E) 15 million gallons. Answer: D Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 107) The figure above illustrates the gasoline market. There is no external benefit from gasoline. If a pollution tax equal to the marginal external cost is imposed on gasoline, then the quantity of gasoline produced and consumed equals A) 0 gallons. B) 5 million gallons. C) 10 million gallons. D) 20 million gallons. E) None of the above answers is correct. Answer: C Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 40 Copyright © 2021 Pearson Education, Inc.

108) The figure above illustrates the gasoline market. There is no external benefit from gasoline. If a tax on gasoline is imposed as shown in the figure, then the total tax revenue earned by the government equals A) $24 million. B) $16 million. C) $8 million. D) more than $24 million. E) less than $8 million. Answer: C Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

109) The figure above shows the market for the chemical hydrogen sulfide, the production of which creates an external cost. If the government assesses the marginal external cost correctly, what is the amount of the pollution tax that eliminates the inefficiency? A) $2 per pound B) $3 per pound C) $4 per pound D) $1 per pound E) None of the above answers is correct. Answer: B Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 41 Copyright © 2021 Pearson Education, Inc.

110) The figure above shows the market for the chemical hydrogen sulfide, the production of which creates an external cost. The government imposes the pollution tax shown in the above figure. What quantity is produced after the pollution tax is imposed? A) zero pounds B) 80 million pounds C) 160 million pounds D) more than 160 million pounds E) more than 80 million pounds and less than 160 million pounds Answer: B Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 111) The figure above shows the market for the chemical hydrogen sulfide, the production of which creates an external cost. The government imposes the pollution tax shown in the figure. How much tax revenue does the government collect? A) $640 million B) $320 million C) $240 million D) more than $640 million E) zero, because the government has taxed the firms out of business Answer: C Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

112) The figure above shows a tax imposed on a good with an external cost. The area of the rectangle abcd equals A) the MSB. B) the total tax revenue collected by the government. C) the amount of pollution tax per ton. D) the MC. E) the deadweight loss. Answer: B Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

113) The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. The marginal external cost of producing 200 billion kilowatt hours per day is ________ per kilowatt. A) 0¢ B) 10¢ C) 20¢ D) 15¢ E) 5¢ Answer: B Topic: Marginal external cost Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 114) The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the market is competitive and unregulated, the equilibrium price is ________ per kilowatt hour and the equilibrium quantity is ________ billion kilowatt hours per day. A) 10¢; 200 B) 15¢; 150 C) 20¢; 200 D) 20¢; 100 E) 7.5¢; 150 Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 44 Copyright © 2021 Pearson Education, Inc.

115) The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the market is competitive and unregulated, the equilibrium quantity is ________ billion kilowatt hours per day and the efficient quantity is ________ billion kilowatt hours per day A) 150; 200 B) 200; 150 C) 0; 150 D) 250; 0 E) 150; 150 Answer: B Topic: Efficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 116) The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the Coase theorem can be used in this market, output equals ________ kilowatt hours per day. A) 0 B) 150 billion C) 200 billion D) 100 billion E) more than 200 billion Answer: B Topic: Coase theorem Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 117) The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the government imposes a pollution tax to achieve the efficient level of production, the tax equals ________ per kilowatt hour. A) 0¢ B) 7.5¢ C) 10¢ D) 15¢ E) 2.5¢ Answer: B Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

118) What is the biggest problem of using government actions such as taxes and pollution charges to control external costs? A) insufficient legal power to enforce the controls B) obtaining enough data to determine how much the tax or pollution charge will be C) In some situations, there is no known way to control the external costs. D) political lobbying and voter disagreement E) The Coase theorem points out that taxes and pollution charges work only in the short run and not in the long run. Answer: B Topic: Pollution charges Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 119) A problem with pollution charges or taxes as a solution to pollution is that A) people don't want the government to regulate industry. B) the necessary information about the polluting industry is costly and usually unavailable. C) taxes are already too high. D) pollution would still continue. E) the producers do not want the property right to their pollution. Answer: B Topic: Pollution charges Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 120) Cap-and-trade refers to A) capping emissions and issuing tradeable emissions permits. B) capping revenue from selling emissions permits. C) countries trading fishing rights in international waters. D) capping taxes on firms that engage in international trade. E) capping the benefits gained from pollution controls. Answer: A Topic: Marketable permits Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

121) Using a cap-and-trade policy and issuing marketable permits to firms that produce a product with external costs will give the firms the incentive to A) declare bankruptcy. B) buy and sell the permits amongst themselves. C) escape the problem completely. D) quit producing the output. E) increase the external cost because they no longer need to deal with the externality. Answer: B Topic: Marketable permits Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 122) Firm A and Firm B emit 300 tons of pollution each and each have marketable permits that allow each to emit 100 tons of pollution. If it costs $5,000 for Firm A to eliminate 100 tons of pollution and it costs Firm B $6,000 to eliminate 100 tons of pollution, then A) Firm B sells its permits to Firm A for a price above $6,000. B) Firm A sells its permits to Firm B for a price below $6,000. C) Firm A sells its permits to Firm B for a price above $6,000. D) Firm B sells its permits to Firm A for a price below $6,000. E) neither Firm A nor Firm B sells permits because neither has extra permits. Answer: B Topic: Marketable permits Skill: Level 4: Applying models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 123) Cost effective technologies to reduce pollution are most likely to result from A) marketable pollution permits. B) pollution charges. C) taxes. D) pollution limits. E) quotas. Answer: A Topic: Marketable permits Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

124) Which of the following best describes an externality? A) something that is external to the economy B) a sales tax on a good in addition to the market price C) an effect of a transaction felt by someone other than the buyer or seller D) anything produced in other countries E) a change from what is normal Answer: C Topic: Externalities Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 125) The cost of producing an additional unit of a good or service that is borne by the producer of that good or service A) always equals the benefit the consumer derives from that good or service. B) equals the cost borne by people other than the producer. C) is the marginal private cost. D) is the external cost. E) is the marginal social cost. Answer: C Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 126) The cost of producing an additional unit of a good or service that falls on people other than the producer is A) the marginal cost. B) represented by the demand curve. C) represented by the supply curve. D) the marginal external cost. E) the marginal social cost. Answer: D Topic: External cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

127) Which of the following is an example of an activity that creates an external cost? i. a smoker emitting second-hand smoke ii. sulfur emitting from a smoke stack iii. throwing garbage on the roadside A) i only B) i and ii C) iii only D) ii and iii E) i, ii, and iii Answer: E Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 128) The marginal cost of production that is borne by the entire society is called the marginal A) private cost. B) social cost. C) external cost. D) public cost. E) user cost. Answer: B Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 129) If the marginal private cost of producing one kilowatt of power in California is ten cents and the marginal social cost of each kilowatt is fourteen cents, then the marginal external cost equals ________ per kilowatt. A) ten cents B) nineteen cents C) four cents D) zero cents E) fourteen cents Answer: C Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

130) When the production of a good has a marginal external cost, which of the following occurs in an unregulated market? i. Overproduction relative to the efficient level will occur. ii. The market price is less than the marginal social cost at the equilibrium quantity. iii. A deadweight loss occurs. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 131) The Coase theorem is the proposition that if property rights exist and are enforced, private transactions are A) inefficient. B) efficient. C) inequitable. D) illegal. E) unnecessary. Answer: B Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 132) A marketable permit A) allows firms to pollute all they want without any cost. B) allows firms to buy and sell the right to pollute at government controlled prices. C) eliminates pollution by setting the price of pollution permits above the marginal cost of polluting. D) allows firms to buy and sell the right to pollute. E) is the Coase theorem solution to pollution. Answer: D Topic: Marketable permits Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

133) If a polluting producer is forced to pay a pollution charge, what is the effect on the supply and demand curves for the product? A) The quantity supplied along the firm's supply curve increases. B) The firm's demand curve shifts leftward. C) The firm's supply curve shifts rightward. D) The firm's supply curve shifts leftward. E) BOTH the supply curve and the demand curve shift leftward. Answer: D Topic: Government actions in the face of external costs Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 134) Which of the following best describes an externality? A) something that is external to the economy B) a sales tax on a good in addition to the market price C) an effect of a transaction felt by someone other than the buyer or seller D) anything produced in other countries E) a change from what is normal Answer: C Topic: Externalities Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 135) The cost of producing an additional unit of a good or service that is borne by the producer of that good or service A) always equals the benefit the consumer derives from that good or service. B) equals the cost borne by people other than the producer. C) is the marginal private cost. D) is the external cost. E) is the marginal social cost. Answer: C Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

136) The cost of producing an additional unit of a good or service that falls on people other than the producer is A) the marginal cost. B) represented by the demand curve. C) represented by the supply curve. D) the marginal external cost. E) the marginal social cost. Answer: D Topic: External cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 137) Which of the following is an example of an activity that creates an external cost? i. a smoker emitting second-hand smoke ii. sulfur emitting from a smoke stack iii. throwing garbage on the roadside A) i only B) i and ii C) iii only D) ii and iii E) i, ii, and iii Answer: E Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 138) The marginal cost of production that is borne by the entire society is called the marginal A) private cost. B) social cost. C) external cost. D) public cost. E) user cost. Answer: B Topic: Marginal social cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

139) If the marginal private cost of producing one kilowatt of power in California is ten cents and the marginal social cost of each kilowatt is fourteen cents, then the marginal external cost equals ________ per kilowatt. A) ten cents B) nineteen cents C) four cents D) zero cents E) fourteen cents Answer: C Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 140) When the production of a good has a marginal external cost, which of the following occurs in an unregulated market? i. Overproduction relative to the efficient level will occur. ii. The market price is less than the marginal social cost at the equilibrium quantity. iii. A deadweight loss occurs. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 141) The Coase theorem is the proposition that if property rights exist and are enforced, private transactions are A) inefficient. B) efficient. C) inequitable. D) illegal. E) unnecessary. Answer: B Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

142) A marketable permit A) allows firms to pollute all they want without any cost. B) allows firms to buy and sell the right to pollute at government controlled prices. C) eliminates pollution by setting the price of pollution permits above the marginal cost of polluting. D) allows firms to buy and sell the right to pollute. E) is the Coase theorem solution to pollution. Answer: D Topic: Marketable permits Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 143) If a polluting producer is forced to pay a pollution charge, what is the effect on the supply and demand curves for the product? A) The quantity supplied along the firm's supply curve increases. B) The firm's demand curve shifts leftward. C) The firm's supply curve shifts rightward. D) The firm's supply curve shifts leftward. E) BOTH the supply curve and the demand curve shift leftward. Answer: D Topic: Government actions in the face of external costs Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 144) A mill in Florida emits pollution into a river as it produces wood pulp. Which of the following is TRUE regarding regulation of the industry? A) The Environmental Protection Agency (EPA) can regulate the mill using command-andcontrol policies. B) The Senate regulates the mill using the Coase theorem. C) The United States Supreme Court regulates the industry using cap-and-trade policies. D) The Department of Homeland Security regulates the industry using Pigouvian taxes. E) The Department of Agriculture ensures clean water by using cap-and-trade policies. Answer: A Topic: Regulation Skill: Level 5: Critical thinking Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

10.2 Positive Externalities: Education 1) When the benefits of producing a good or service spill over to other people, rather than just the buyer, the spillover is referred to as A) an external benefit. B) an external cost. C) a marginal cost. D) an equilibrium social output. E) a Coasian good. Answer: A Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 2) The additional benefit that Marvin gets from being vaccinated against the flu is known as the A) external benefit. B) marginal private benefit. C) private cost. D) social cost. E) marginal social benefit. Answer: B Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 3) The benefit that Joan gets from eating cherries is an example of A) when the external benefit equals the private benefit. B) a private benefit. C) an external benefit. D) an external cost. E) the marginal social cost of eating cherries. Answer: B Topic: Private benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

4) When a person receives a flu vaccination, the ________ is the additional benefit the person receives from getting the shot. A) marginal private benefit B) marginal external benefit C) marginal social benefit D) marginal social cost E) marginal external cost Answer: A Topic: Private benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 5) External benefits are the extra A) benefits a consumer gets from consuming a good. B) costs a producer creates in producing a good. C) benefits that accrue to people other than the consumers of a good. D) costs a producer bears for producing a polluting good. E) benefits a producer obtains for reducing production of a polluting good. Answer: C Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 6) If the marginal private benefit of attending college for Shelly is $40,000 and the marginal external benefit is $15,000, she will attend college if the cost of attendance is no more than A) $55,000. B) $45,000. C) $40,000. D) $25,000. E) $15,000. Answer: C Topic: Private benefit Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

7) Individuals making decisions about how much to purchase of a product with an external benefit base their decisions on which of the following? A) the price and marginal private benefit B) the economically efficient output C) the price and the marginal social benefit D) the size of the deadweight loss E) the size of the external benefit and the price Answer: A Topic: Private benefit Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 8) When Keisha receives a flu vaccination, the benefit from her flu shot enjoyed by her friends is the A) marginal private benefit. B) marginal external benefit. C) marginal social benefit. D) private benefit. E) marginal private cost. Answer: B Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 9) Education leads to external benefits because A) the people who become better educated get better jobs. B) better educated people commit fewer crimes. C) better educated people are less lazy. D) little pollution is created when educating people. E) better educated people are more productive. Answer: B Topic: Education Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

10) Which of the following is the best example of a good or service with an external benefit? A) gasoline B) education C) garbage disposal D) fertilizers E) bread Answer: B Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 11) Which of the following actions would most likely have an external benefit? A) eating a peanut butter sandwich B) throwing trash out your car window as you drive to class C) sleeping D) attending college E) developing a better marketing strategy for Honda Answer: D Topic: External benefit Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 12) Which of the following is an example of an external benefit? A) a ton of coal burned in a power plant to produce electricity B) a car accident that crowds a major Los Angeles freeway C) the production of a slice of pizza D) the cleanup of a large lake E) the consumption of a can of Mountain Dew Answer: D Topic: External benefit Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

13) Which of the following is TRUE? A) MSB = MB + Marginal external benefit B) MB = Marginal external benefit - MSB C) MB = Marginal external benefit + MSC D) MSB = Marginal external cost - marginal external benefit E) MSB = MB + Marginal external benefit - Marginal external cost Answer: A Topic: Marginal social benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 14) MSB equals A) MC + the marginal external cost. B) MC + the marginal external benefit. C) MB + the marginal external cost. D) MB + the marginal external benefit. E) MB + MC. Answer: D Topic: Marginal social benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 15) If an external benefit is present in the consumption of a good or service, then A) there can be no external cost. B) the marginal social benefit is greater than the marginal private benefit. C) the marginal social benefit is equal to the marginal private benefit. D) the marginal private benefit is equal to the marginal social benefit plus the marginal external benefit. E) the marginal external benefit is equal to the marginal private benefit minus the marginal social benefit. Answer: B Topic: Marginal social benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

16) If a product has an external benefit, how does its marginal private benefit compare to its marginal social benefit? A) Marginal private benefit is less than marginal social benefit. B) Marginal private benefit is greater than marginal social benefit. C) At low quantities, marginal private benefit is less than marginal social benefit but at high quantities, marginal private benefit is greater than marginal social benefit. D) At low quantities, marginal private benefit is greater than marginal social benefit but at high quantities, marginal private benefit is less than marginal social benefit. E) Marginal private benefit cannot be compared to marginal social benefit. Answer: A Topic: Marginal social benefit Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 17) The sum of the marginal private benefit and the marginal external benefit derived from ecotourism in British Columbia is called the A) total private benefit. B) net gain. C) total external benefit. D) marginal social benefit. E) total Coase benefit. Answer: D Topic: Marginal social benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 18) Suppose Julie plants a beautiful garden in her front yard. The benefits of the garden to Julie AND to her neighbors equals the A) external benefit. B) marginal private benefit. C) marginal external benefit. D) marginal social benefit. E) marginal social cost. Answer: D Topic: Marginal social benefit Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

19) Suppose scientific research generates external benefits. Without government intervention, the market for scientific research would A) produce the efficient amount. B) produce more than the efficient amount. C) produce some research, but less than the efficient amount. D) produce zero research. E) either produce more than or less than the efficient amount depending on whether the external benefit is on the production or consumption of the research. Answer: C Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 20) The existence of marginal external benefits for a product like higher education creates a deadweight loss for society because, without government intervention, ________ would be consumed and ________ would be produced. A) more than the efficient amount; more than the efficient amount B) more than the efficient amount; less than the efficient amount C) less than the efficient amount; more than the efficient amount D) less than the efficient amount; less than the efficient amount E) the efficient amount; the efficient amount Answer: D Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 21) For a product with external benefits that is produced in a competitive, unregulated market, how can the resulting market output be described? A) underproduction compared to the efficient level B) overproduction compared to the efficient level C) Production equals the efficient level. D) Underproduction and overproduction are both possible depending on whether the external benefit is to consumption or production. E) None of the above is correct. Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

22) If all education in the United States were provided by private, tuition-charging schools A) too much education would be consumed. B) too little education would be consumed. C) the efficient level of education would be provided. D) the government would provide both students and schools with vouchers. E) education would no longer have an external benefit. Answer: B Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

23) The figure above shows the market for college education. The efficient quantity of education is A) 0 students. B) 4 million students. C) 6 million students. D) more than 6 million students. E) more than 4 million students and less than 6 million students. Answer: C Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

24) The figure above shows the market for college education. Left to itself without any government intervention, a competitive market would create a deadweight loss equal to A) zero. B) the area d. C) the area a + c. D) the area b + c. E) the area b + d. Answer: C Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

25) The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the government does not intervene in this market, the equilibrium price of private education is A) $12,000. B) $16,000. C) $20,000. D) $4,000. E) $6,000. Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 63 Copyright © 2021 Pearson Education, Inc.

26) The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the government does not intervene in this market, the equilibrium number of students being privately educated is A) 0 students. B) 200 students. C) 400 students. D) 600 students. E) None of the above answers is correct. Answer: C Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 27) The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the government does not intervene in this market, the equilibrium number of students being privately educated is ________ and the efficient quantity is ________. A) 0 students; 400 students B) 400 students; 400 students C) 400 students; 600 students D) 600 students; 400 students E) 600 students; 600 students Answer: C Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 28) The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the government does not intervene in this market, the deadweight loss equals A) 0. B) $800,000. C) $1,600,000. D) more than $1,600,000. E) more than $800,000 and less than $1,600,000. Answer: B Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

29) The figure above shows the market for private elementary school education in Chicago. There is no external cost of private elementary education. If the marginal social benefit of private elementary education equaled the marginal social cost, the deadweight loss in Chicago's private education market would equal A) 0. B) $800,000. C) $1,600,000. D) more than $1,600,000. E) more than $800,000 and less than $1,600,000. Answer: A Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 30) If a government action is designed to achieve efficiency, then the action must have the market produce the amount of output so that the A) marginal private cost equals the marginal private benefit. B) marginal social cost equals the marginal social benefit. C) marginal external cost equals the marginal external benefit. D) marginal private cost equals the tax. E) marginal social benefit exceeds the marginal social cost by as much as possible. Answer: B Topic: Government actions in the face of external benefits Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 31) Which of the following are devices that the government uses to achieve a more efficient allocation of resources in the presence of external benefits? A) taxes, private subsidies, and regulation B) public provision, taxes, and private subsidies C) regulations, public provision, and vouchers D) vouchers, public provision, and private subsidies E) public provision, taxes, and vouchers Answer: D Topic: Government actions in the face of external benefits Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

32) The government can overcome the inefficiency created by a good with an external benefit by using A) public provision. B) marketable permits. C) taxes. D) emission charges. E) None of the above answers is correct. Answer: A Topic: Public provision Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 33) Public provision A) is the production of a good by the government by giving funds to private producers. B) lowers the marginal cost of producing the good. C) means the good is produced by a public authority that receives the most of its revenue from the government. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: C Topic: Public provision Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 34) The production of a good or service by an authority that receives the most of its revenue from the government is referred to as A) public provision. B) private subsidies. C) vouchers. D) copyrights. E) Coasian production. Answer: A Topic: Public provision Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

35) Which of the following is an example of a product that is made available through public provision? i. local police protection ii. public schools iii. local fire department A) i only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Public provision Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 36) When government provides a good with an external benefit, to attain efficiency the price paid by consumers is set equal to the A) marginal private benefit at the efficient level of output. B) marginal private cost at the efficient level of output. C) amount paid by taxpayers. D) market-determined price. E) marginal external benefit at the efficient level of output. Answer: A Topic: Public provision Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 37) A subsidy is A) the revenue received from the government to produce a good or service by a public authority. B) a voucher received by the government from producers of goods and services. C) a payment that the government makes to private producers of goods and services. D) a tax imposed on the producers of certain goods or services. E) a tax imposed on the consumers of certain goods or services. Answer: C Topic: Subsidies Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

38) A payment made by the government to private producers of roads and libraries would be an example of A) a subsidy. B) a copyright. C) a voucher. D) public provision. E) a Coase payment. Answer: A Topic: Subsidies Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 39) Which of the following is a method used by government to cope with the situation in which production of a good creates an external benefit? A) removing property rights B) subsidizing production C) marketable permits D) running a lottery E) imposing Coasian taxes Answer: B Topic: Subsidies Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 40) A government subsidy A) is a policy that can be used to help eliminate the deadweight loss from an external cost. B) can help achieve an efficient amount of output when the good has an external benefit. C) increases consumers' marginal benefit from the good. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: B Topic: Subsidies Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

41) Private subsidies granted to producers affect A) the supply side of the market by shifting the supply curve. B) the demand side of the market by shifting the demand curve. C) property rights. D) transaction costs. E) both the supply side of the market and the demand side because they shift both the supply curve and the demand curve. Answer: A Topic: Subsidies Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 42) When the government uses a private subsidy in a market with an external benefit, to reach the efficient quantity of production, the subsidy must be equal to the marginal A) social benefit. B) cost of production. C) private benefit. D) external benefit. E) external cost. Answer: D Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 43) For a government subsidy on a good with an external benefit to result in the efficient amount of output being produced, what must be done? A) The size of marginal external benefit must be accurately determined. B) The government must produce the product. C) Private production and private consumption must both be directly subsidized. D) The quantity demanded must be decreased to the efficient amount. E) Private production without the subsidy must be prohibited. Answer: A Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

44) If the government provides a subsidy to producers, what is the effect of this policy in a supply and demand diagram? A) The demand curve shifts leftward and the price rises. B) The supply curve shifts rightward and the price falls. C) The supply curve shifts leftward and the price falls. D) The supply curve shifts leftward and the price rises. E) The demand curve shifts rightward and the price rises. Answer: B Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 45) A government subsidy paid to a firm i. increases the demand for the good. ii. has no effect on the supply of the good. iii. leads to an increase in the equilibrium quantity. A) i only B) i and ii C) ii only D) iii only E) i and iii Answer: D Topic: Subsidies Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

46) The figure above shows the market for a good with an external benefit. If the market is competitive and the government takes no action, the equilibrium quantity is ________ units and the equilibrium price is ________ per unit. A) 8; $150 B) 8; $300 C) 10; $250 D) 10; $100 E) 10; $150 Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 47) The figure above shows the market for a good with an external benefit. If the market is competitive and the government takes no action, the equilibrium quantity of ________ units is inefficient because ________. A) 8; marginal benefit exceeds marginal cost B) 8; marginal cost exceeds marginal benefit C) 10; marginal cost exceeds marginal benefit D) 10; marginal social benefit exceeds marginal benefit E) 10; marginal external benefit exceeds marginal social benefit Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 71 Copyright © 2021 Pearson Education, Inc.

48) The figure above shows the market for a good with an external benefit. When 6 units are produced, marginal social benefit equals ________ and marginal external benefit equals ________. A) $200; $150 B) $350; $200 C) $200; $50 D) $350; $150 E) $150; $250 Answer: D Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 49) The figure above shows the market for a good with an external benefit. The efficient level of production is ________ units because ________. A) 8; marginal benefit equals marginal cost B) 8; marginal cost is less than marginal social benefit C) 10; marginal cost equals marginal social benefit D) 10; marginal social benefit exceeds marginal benefit E) 8; marginal benefit equals the marginal external benefit Answer: C Topic: Efficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 50) The figure above shows the market for a good with an external benefit. If the government wants to grant a subsidy so that the efficient quantity is produced, the subsidy must equal ________ per unit. A) $100 B) $150 C) $250 D) $300 E) $50 Answer: B Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

51) The above figure shows the market for college education in the United States. With no government intervention, the market equilibrium is at a tuition of ________ and ________ million students per year. A) 16,000; 14 B) $20,000; 10 C) $13,000; 10 D) $13,000; 17 E) $16,000; 10 Answer: C Topic: Education Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 52) The above figure shows the market for college education in the United States. With no government intervention, the unregulated market equilibrium is ________ because education generates ________. A) efficient; positive external benefits B) inefficient; positive external benefits C) inefficient; positive external costs D) efficient; positive external costs E) inefficient; public goods Answer: B Topic: Education Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 73 Copyright © 2021 Pearson Education, Inc.

53) The figure above shows the market for college education in the United States. If there is no external benefit from a college education and the government does not intervene in the market, then the equilibrium tuition of college education is A) $13,000. B) $16,000. C) $20,000. D) $7,000. E) None of the above answers are correct. Answer: A Topic: Education Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 54) The figure above shows the market for college education in the United States. The efficient quantity of college education is ________ students per year. A) 10 million B) 12 million C) 17 million D) 18 million E) 14 million Answer: E Topic: Education Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 55) The figure above shows the market for college education in the United States. The marginal external benefit associated with educating 14 million students is ________ per student per year. A) $16,000 B) $13,000 C) $11,000 D) $5,000 E) $7,000 Answer: D Topic: Education Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

56) The figure above shows the market for college education in the United States. If the government does not intervene in this market, the number of students going to college is ________ and the efficient number of students is ________. A) 13 million students per year; 16 million students per year B) 14 million students per year; 16 million students per year C) 10 million students per year; 14 million students per year D) 10 million students per year; 13 million students per year E) 14 million students per year; 10 million students per year Answer: C Topic: Education Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 57) The figure above shows the market for college education in the United States. If the government does not intervene in this market, the deadweight loss equals ________ per year. A) $28 billion B) $14 billion C) $280 billion D) $224 billion E) $7 billion Answer: B Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 58) The figure above shows the market for college education in the United States. If the government intervenes in the market and provides a subsidy to colleges to enroll the efficient number of students, the amount of the subsidy equals ________ per student. A) $5,000 B) $16,000 C) $13,000 D) $11,000 E) $7,000 Answer: A Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

59) The figure above shows the market for college education in the United States. If the government provides a subsidy to colleges to enroll the efficient number of students, the amount of the subsidy per student equals ________ and each student pays ________ per year. A) $16,000; $13,000 B) $7,000; $13,000 C) $5,000; $13,000 D) $11,000; $16,000 E) $5,000; $11,000 Answer: E Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 60) The figure above shows the market for college education in the United States. If the government has a goal of enrolling the efficient number of students each year, the government should provide a voucher to students equaling A) $16,000. B) $13,000. C) $11,000. D) $5,000. E) $7,000. Answer: D Topic: Vouchers Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

61) The figure above shows the market for education, a good possessing an external benefit. In order to attain the efficient number of students, a government subsidy must equal ________ per student. A) $2,000 B) $8,000 C) $6,000 D) $10,000 E) $16,000 Answer: C Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 62) A voucher is A) the production of a good by some public institution. B) a payment that government makes to private producers. C) a token that government provides to households to use in purchasing a specific good. D) a permit to pollute. E) a tax that is imposed on consumers rather than producers. Answer: C Topic: Vouchers Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

63) Which of the following government actions is appropriate in a market with an external benefit? A) taxes B) vouchers C) marketable permits D) setting a tax equal to the transactions costs E) price ceiling Answer: B Topic: Vouchers Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 64) Some policymakers have proposed giving parents of children in poorly performing schools tax dollars to help send their children to private schools. This proposal is an example of A) vouchers. B) public provision. C) external costs. D) taxes. E) correcting an externality using a government good. Answer: A Topic: Vouchers Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 65) Pell grants are money given to students attending college. Pell grants are most closely similar to A) public provision of a good. B) private subsidies given to producers of a good. C) vouchers given to consumers of a good. D) property rights assigned to consumers of a good. E) a subsidy given to the producer of a good. Answer: C Topic: Vouchers Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

66) Food stamps provided by the government to households are an example of A) vouchers. B) marginal benefits from producing a good or service. C) marginal cost from producing a good or service. D) marginal external cost. E) a government good. Answer: A Topic: Vouchers Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 67) Vouchers given to consumers A) increase the demand for a good. B) decrease the demand for a good. C) increase the supply of a good. D) decrease the supply of a good. E) increase both the demand for the good and the supply of the good. Answer: A Topic: Vouchers Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 68) The use of vouchers for education A) decreases the demand for education and increases the equilibrium quantity. B) increases the demand for education and increases the equilibrium quantity. C) increases the deadweight loss for those who can't afford schooling. D) decreases the quantity provided to the efficient level. E) decreases the demand for education and decreases the equilibrium quantity. Answer: B Topic: Vouchers Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

69) Education has an external benefit. So to achieve the efficient level of education, an education voucher must equal the difference between the A) marginal (private) cost and the marginal social benefit. B) marginal (private) benefit and the marginal social benefit. C) marginal social benefit and the marginal (private) cost. D) dollar price and marginal (private) cost. E) marginal (private) cost and the marginal social cost. Answer: B Topic: Vouchers Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 70) If vouchers for a good or service given to consumers, then the supply curve ________ and the demand curve ________. A) shifts leftward; shifts leftward B) shifts leftward; shifts rightward C) shifts rightward; shifts rightward D) does not shift; shifts rightward E) shifts rightward; does not shift Answer: D Topic: Vouchers Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

71) The figure above shows an education market in which the government is providing households with vouchers. What is the efficient quantity of students? A) 2 million B) 4 million C) 6 million D) more than 6 million E) more than 4 million and less than 6 million Answer: C Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 72) The figure above shows an education market in which the government is providing households with vouchers. What is the dollar value of a voucher in this market? A) $4,000 B) $8,000 C) $12,000 D) $16,000 E) None of the above answers is correct. Answer: B Topic: Vouchers Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

73) The figure above shows an education market in which the government is providing households with vouchers. IN TOTAL, how much do the schools receive for a student? A) $4,000 B) $8,000 C) $12,000 D) $16,000 E) $20,000 Answer: D Topic: Vouchers Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 74) The figure above shows an education market in which the government is providing households with vouchers. EXCLUDING the voucher, what do the students pay the schools? A) $4,000 B) $8,000 C) $12,000 D) $16,000 E) $0 Answer: B Topic: Vouchers Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

75) The figure shows the market for college education. If the market for education is competitive and with no government intervention, the equilibrium quantity of college students is ________ million and the efficient quantity of college students is ________ million. A) 2; 4 B) 8; 2 C) 8; 4 D) 4; 8 E) 0; 10 Answer: D Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 76) The figure shows the market for college education. The efficient number of students is A) less than 4 million. B) more than 4 million and less than 8 million. C) 4 million. D) 8 million. E) more than 8 million. Answer: D Topic: Efficiency Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

77) The figure shows the market for college education. In order for the efficient amount of education to occur, the government could provide a subsidy of ________ per student. A) $4,000 B) $8,000 C) $12,000 D) $20,000 E) $16,000 Answer: B Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 78) The figure shows the market for college education. In order for the efficient amount of education to occur, the government could provide a voucher of ________ per student. A) $4,000 B) $8,000 C) $12,000 D) $20,000 E) $16,000 Answer: B Topic: Vouchers Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

79) The figure above shows the market for annual influenza immunizations the United States. With no government intervention, the market equilibrium is at a price of ________ and ________ million immunizations per year. A) $60; 14 B) $40; 14 C) $30; 14 D) $40; 22 E) None of the above answers are correct. Answer: C Topic: Health-care markets Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 80) The figure above shows the market for annual influenza immunizations the United States. The market equilibrium with no government intervention is ________ because health care generates ________. A) efficient; positive external benefits B) inefficient; positive external benefits C) inefficient; positive external costs D) efficient; positive external costs E) inefficient; public goods Answer: B Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 85 Copyright © 2021 Pearson Education, Inc.

81) The figure above shows the market for annual influenza immunizations the United States. If there is NO external benefit from health care and the government does not intervene in the market, then the equilibrium price of immunizations is A) $30. B) $20. C) $40. D) $60. E) $70. Answer: A Topic: Health-care markets Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 82) The figure above shows the market for annual influenza immunizations the United States. The efficient quantity of immunizations is A) 14 million per year. B) 10 million per year. C) between 14 and 21 million per year. D) less than 10 million per year. E) 22 million per year. Answer: E Topic: Efficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 83) The figure above shows the market for annual influenza immunizations the United States. The marginal external benefit associated with immunizing 14 million people is ________ per person per year. A) $40 B) $20 C) $90 D) $30 E) $60 Answer: D Topic: External benefit Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

84) The figure above shows the market for annual influenza immunizations the United States. If the government does not intervene in this market, the number of immunizations per year is ________ and the efficient number of immunizations per year is ________. A) 14 million; 20 million B) 20 million; 22 million C) 14 million; 22 million D) 14 million; 10 million E) 10 million; 14 million Answer: C Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

85) The figure above shows the market for annual influenza immunizations the United States. If the government does not intervene in this market, deadweight loss equals A) $350 million. B) $250 million. C) $500 million. D) $600 million. E) $37.5 million. Answer: B Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

86) The figure above shows the market for annual influenza immunizations the United States. If the government intervenes in the market and provides a subsidy to providers of immunizations to immunize the efficient number of people, the amount of the subsidy is ________ per person. A) $25 B) $50 C) $35 D) $15 E) $40 Answer: A Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 87) The figure above shows the market for annual influenza immunizations the United States. If the government intervenes in the market and provides a $10 subsidy to providers of immunizations, the number of people immunized is A) 20 million per year. B) exactly 10 million per year. C) between 15 and 20 million per year. D) less than 10 million per year. E) more than 10 million and less than 15 million. Answer: E Topic: Efficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

88) The figure above shows the market for annual influenza immunizations the United States. Area A is the A) total deadweight loss when there is not the illustrated subsidy. B) remaining deadweight loss when there is the illustrated subsidy. C) gain in efficiency from the illustrated subsidy. D) loss in efficiency from the illustrated subsidy. E) consumer surplus with the illustrated subsidy. Answer: C Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 89) The figure above shows the market for annual influenza immunizations the United States. Area B is the A) gain in efficiency from the illustrated subsidy. B) remaining deadweight loss when there is the illustrated subsidy. C) deadweight loss when there is not the illustrated subsidy. D) equilibrium with the illustrated subsidy. E) loss in efficiency from the illustrated subsidy. Answer: B Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

90) The figure above shows the market for annual influenza immunizations the United States. Area A + Area B is the A) deadweight loss when there is not the illustrated subsidy. B) loss in efficiency from the illustrated subsidy. C) gain in efficiency from the illustrated subsidy. D) remaining deadweight loss when there is the illustrated subsidy. E) equilibrium with the illustrated subsidy. Answer: A Topic: Deadweight loss Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 91) The benefit the consumer of a good or service receives is the A) social benefit. B) external benefit. C) private benefit. D) public benefit. E) consumption benefit. Answer: C Topic: Private benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 92) An external benefit is a benefit from a good or service that someone other than the ________ receives. A) seller of the good or service B) government C) foreign sector D) consumer E) market maker Answer: D Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

93) When Ronald takes another economics class, other people in society benefit. The benefit to these other people is called the marginal ________ benefit of the class. A) social B) private C) external D) Coasian E) extra Answer: C Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 94) Marginal social benefit equals A) marginal external benefit. B) marginal private benefit. C) marginal private benefit minus marginal external benefit. D) marginal private benefit plus marginal external benefit. E) marginal external benefit minus marginal private benefit. Answer: D Topic: Marginal social benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 95) If an external benefit is present, then the A) marginal private benefit curve lies above the marginal private cost curve. B) marginal social benefit curve lies above the marginal private benefit curve. C) marginal social cost curve lies above the marginal private benefit curve. D) marginal social benefit is equal to the marginal social cost. E) marginal social benefit curve is the same as the marginal private benefit curve. Answer: B Topic: Marginal social benefit Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

96) In an unregulated market with an external benefit, the A) quantity produced is greater than the efficient quantity. B) price charged is too high for efficiency. C) quantity produced is less than the efficient quantity. D) producer is causing pollution but not paying for it. E) government might impose a tax to help move the market toward the efficient amount of production. Answer: C Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 97) If tuition at a college is $30,000 and the external benefit of graduating from this college is $10,000, then i. in the absence of any government intervention, the number of students graduating is less than the efficient number. ii. the government could increase the number of graduates by giving the college a $10,000 subsidy per student. iii. the government could increase the number of graduates by giving the students $10,000 vouchers. A) i only B) i and ii C) i and iii D) ii and iii E) i, ii, and iii Answer: E Topic: Government actions in the face of external benefits Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 98) Which of the following is an example of a voucher? A) the postal service B) police services C) Social Security D) food stamps E) a patent on a pharmaceutical drug Answer: D Topic: Vouchers Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 92 Copyright © 2021 Pearson Education, Inc.

99) Only a few countries in the world do not provide free public education. These countries are likely to have ________ than the efficient number of students educated and as a result, the ________ of education are not captured by their societies. A) less; marginal external benefits B) less; marginal private benefits C) more; marginal external costs D) more; marginal private benefits E) less; private social costs Answer: A Topic: Marginal external benefit Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 100) Several politicians support providing free college tuition in the United States. These politicians recognize that the ________ of a college education and that providing free college tuition will ________ in the market. A) MB = MC; decrease the deadweight loss. B) MB > MC; decrease the deadweight loss. C) MSB > MB; decrease the deadweight loss D) MSB > MB; eliminate the marginal external benefit E) MC > MEC; decrease the deadweight loss Answer: C Topic: Marginal social benefit Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 101) Several countries provide free college educations. These countries recognize that college educations produce a ________ and that subsidizing college educations produce an efficient outcome where ________. A) marginal external benefit; MSB = MC B) marginal private benefit; MC = MB C) marginal external cost; MC = MB D) marginal external benefit; MSB > MC E) marginal benefit; MSB > MC Answer: A Topic: Marginal external benefit Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Application of knowledge

102) Florida offers free pre-kindergarten for 4-year-olds by collecting taxes to subsidize this education. The state chooses to subsidize pre-kindergarten because ________ of education. A) marginal benefit > marginal social cost B) marginal benefit < marginal social benefit C) marginal private benefit = marginal social benefit D) marginal private benefit < marginal social benefit E) marginal external cost = marginal external benefit Answer: B Topic: Marginal social benefit Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Application of knowledge 103) Florida offers free pre-kindergarten for 4-year-olds by collecting taxes to subsidize this education. By providing free education, the state ________ that would otherwise occur because the ________ of education without any subsidies. A) reduces the deadweight loss; MB < MSB B) reduces the deadweight loss; MC < MSC C) increases the deadweight loss; MB > MSB D) increases the marginal external benefit; MB < MSB E) increases the marginal external benefit; MC < MSC Answer: A Topic: Marginal social benefit Skill: Level 5: Critical thinking Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

10.3 Chapter Figures

A chemical factory dumps waste into a river. The figure above shows the demand curve for the chemical (D) and the marginal private cost (MC) and marginal social cost (MSC) of producing it. 1) In the figure above, the unregulated market equilibrium occurs at a price of ________ a ton and quantity of ________ tons. A) $100; 4,000 B) $150; 2,000 C) $150; 4,000 D) $225; 4,000 E) $100; 2,000 Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

2) In the figure above, when the market is unregulated and in equilibrium, marginal social cost ________ marginal benefit, and the quantity of chemical produced is ________. A) exceeds; above the efficient quantity B) exceeds; below the efficient quantity C) is below; above the efficient quantity D) is below; below the efficient quantity E) equals; efficient Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 3) In the figure above, when the market is unregulated and in equilibrium, the deadweight loss is ________ per month. A) $250 thousand B) $125 thousand C) $150 thousand D) $50 thousand E) zero Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 4) Based on the figure above, if the factory owned the river then at the equilibrium, marginal social cost would ________ marginal benefit, and the quantity of chemical produced would be ________. A) exceed; above the efficient quantity B) exceed; below the efficient quantity C) be below; above the efficient quantity D) be below; below the efficient quantity E) equal; efficient Answer: E Topic: Coase theorem Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

5) In the figure above, if a pollution tax is imposed that is equal to the marginal external cost of pollution, then at the equilibrium, marginal social cost would ________ marginal benefit, and the quantity of chemical produced would be ________. A) exceed; above the efficient quantity B) exceed; below the efficient quantity C) be below; above the efficient quantity D) be below; below the efficient quantity E) equal; efficient Answer: E Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 6) In the figure above, if a pollution tax is imposed that is equal to the marginal external cost of pollution, then when the market is in equilibrium, the deadweight loss is ________ per month. A) $250 thousand B) $125 thousand C) $150 thousand D) $50 thousand E) zero Answer: E Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

The figure above shows the demand for college education (D), the marginal social benefit of college education (MSB), and the marginal cost of the private schools (MC). 7) The figure above shows that the unregulated market equilibrium occurs at a tuition of ________ a year and ________ million students. A) $15,000; 7.5 B) $25,000; 15 C) $15,000; 15 D) $25,000; 7.5 E) $38,000; 7.5 Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

8) The figure above shows that at the unregulated market equilibrium, marginal social benefit ________ marginal cost, and the number of students enrolled is ________. A) exceeds; above the efficient quantity B) exceeds; below the efficient quantity C) is below; above the efficient quantity D) is below; below the efficient quantity E) equals; efficient Answer: B Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 9) Based on the figure above, when the market is unregulated and is in equilibrium, the deadweight loss is A) $86.25 million per year. B) $56.25 million per year. C) $48.75 million per year. D) $37.50 million per year. E) zero. Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 10) Using the figure above, suppose education is provided by public colleges, where tuition is set at $10,000 a year. Then, ________ million students are enrolled, and the taxpayers cover ________ of the marginal cost per student. A) 15; $15,000 B) 7.5; $5,000 C) 3.5; none D) 15; $25,000 E) 7.5; $15,000 Answer: A Topic: Public provision Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

11) Using the figure above, suppose education is provided by public colleges, where tuition is set at $10,000 a year. When the market is in equilibrium, the marginal social benefit is ________, the marginal cost is ________, and the number of students enrolled is ________. A) $25,000; $25,000; efficient B) $25,000; $10,000; inefficient C) $15,000; $25,000; inefficient D) $15,000; $15,000; efficient E) $25,000; $15,000; inefficient Answer: A Topic: Public provision Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 12) Using the figure above, suppose education is provided by public colleges. At what level should tuition be set to ensure the efficient number of students? A) $10,000 B) $5,000 C) $20,000 D) $25,000 E) $15,000 Answer: A Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 13) Using the figure above, suppose a subsidy of $15,000 per student is provided to private colleges. Then, the market equilibrium occurs at a tuition of ________ a year and ________ million students. A) $10,000; 15 B) $25,000; 15 C) $15,000; 15 D) $15,000; 7.5 E) $20,000; 20 Answer: A Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

14) Using the figure above, suppose a subsidy of $15,000 per student is provided to private colleges. When the market is in equilibrium, marginal social benefit ________ marginal cost, and the number of students enrolled is ________. A) exceeds; above the efficient quantity B) exceeds; below the efficient quantity C) is below; above the efficient quantity D) is below; below the efficient quantity E) equals; efficient Answer: E Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 15) In the figure above, suppose a subsidy is provided to private colleges. What amount of subsidy will ensure the efficient number of students? A) $10,000 B) $25,000 C) $15,000 D) $5,000 E) $20,000 Answer: C Topic: Subsidies Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 16) In the figure above, suppose the government provides vouchers worth $15,000 per student per year. Then the market equilibrium occurs at a tuition of ________ a year and ________ million students. A) $10,000; 15 B) $25,000; 15 C) $15,000; 15 D) $15,000; 7.5 E) $20,000; 20 Answer: A Topic: Vouchers Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

17) In the figure above, suppose the government provides vouchers worth $15,000 per student per year. When the market is in equilibrium, marginal social benefit ________ marginal cost, and the number of students enrolled is ________. A) exceeds; above the efficient quantity B) exceeds; below the efficient quantity C) is below; above the efficient quantity D) is below; below the efficient quantity E) equals; efficient Answer: E Topic: Vouchers Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 10.4 Integrative Questions 1) A noisy party that keeps neighbors awake is an example of a A) negative production externality. B) positive production externality. C) negative consumption externality. D) positive consumption externality. E) Both answers B and C are correct. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 2) An externality can be a cost or benefit arising from the production of a good that falls upon A) consumers but not producers. B) producers but not consumers. C) both the consumer and the producer. D) someone other than the consumer or producer. E) no one, so it goes unpaid. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

3) Externalities A) are important in the areas of environment and education. B) only have a negative impact on people. C) deal with issues that are not our internal issues. D) affect the people who are responsible for production. E) are nonexistent in unregulated, competitive markets. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 4) In a market with an external cost, government action A) cannot decrease the amount of the deadweight loss from the external cost. B) can sometimes help to achieve an efficient outcome. C) cannot alter firms' cost curves. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 5) A competitive, unregulated market would A) produce too much pollution because pollution is an external cost. B) produce too little education because education has an external benefit. C) fail to achieve equilibrium if there are externalities present. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

6) When property rights are assigned and transactions costs are low A) all costs and benefits are taken into account by the transacting parties so the transaction is efficient. B) externalities will result in market failure. C) the marginal social benefit curve shifts leftward and the marginal social cost curve does not shift. D) the marginal social cost curve shifts rightward and the marginal social benefit curve does not shift. E) the marginal social cost curve shifts rightward and the marginal social benefit curve also shifts rightward. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 7) Which of the following is TRUE? i. In an unregulated market with an external benefit, consumers don't take it into account and consume less than the efficient quantity. ii. Marginal social cost equals marginal private cost minus marginal external cost. iii. An unregulated market produces more than the efficient quantity of a good with an external cost. A) only i B) only ii C) only iii D) i and ii E) i and iii Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

8) When people decide whether or not to get a flu vaccination, they ignore the ________ and as a result ________. A) marginal private benefit; too few vaccinations are given B) external benefit; too few vaccinations are given C) private cost; too many vaccinations are given D) marginal external cost; vouchers must be provided E) social cost; too many vaccinations are given Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 9) A carbon tax would ________ the cost of producing goods and services that create large carbon emissions, and would lead Americans to use ________ carbon-intensive goods and services, which could ________ climate change. A) raise; more; slow B) raise; fewer; speed up C) lower; fewer; slow D) raise; fewer; slow E) raise; more; speed up Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Application of knowledge 10) When there is a marginal external ________ producers take account only of marginal private cost and produce ________ than the efficient quantity. A) cost; more B) cost; less C) benefit; more D) benefit; less E) increase; more Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Application of knowledge

11) The Coase theorem says that if property rights exist and the costs of enforcing them are ________, then the market outcome is ________ and it doesn't matter who has the property rights. A) low; inefficient B) high; inefficient C) low; efficient D) high; efficient E) stable; efficient Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Application of knowledge 10.5 Essay: Negative Externalities: Pollution 1) What is marginal external cost? Give an example. Answer: Marginal external cost is the additional cost that is imposed on someone other than the producer of the good or service. An example is the sulfur dioxide and other chemicals emitted by utility companies in the Midwest. These pollutants travel north with the winds, causing acid rain that harms vegetation and kills fish in the Northeast of the United States. Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication 2) Explain the difference between a negative production externality and a negative consumption externality. Answer: A negative production externality occurs when a firm produces a good and the cost of the good falls on parties other than the firm. A negative consumption externality occurs a person consumes a good and that consumption imposes a cost on others. Topic: Negative production and negative consumption externalities Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking

3) Discuss the difference between a private cost and a social cost. Answer: A private cost is the cost of producing a good or service that is borne by the producers. In certain instances, however, some of the costs of production are borne by someone other than the producer. This cost is called an external cost. The social cost is the total cost borne by all of society. Thus the social cost equals the private cost, the costs borne by the producers, plus the external cost, the costs borne by everyone else. Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication 4) When a forest is logged, it is possible for the logging to create "soil runoff," a situation in which the soil, no longer protected by trees, erodes and silts a river miles downstream from the logging area. Is soil runoff created by logging in Montana that ruins a river an example of a private cost to the lumbering company or an external cost? Answer: The soil runoff is an external cost. The lumber company does not pay the cost of the ruined river, so the cost is not a private cost to the company. Instead, the cost is borne by fishermen or other users of the river who can no longer use the river, or by society, which pays to clean up the river so that the fishermen and other users can utilize it once again. Topic: External cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication 5) Explain why a producer who is causing external costs does not have the incentive to reduce these costs. Answer: The answer lies in the fact that the costs are EXTERNAL. These are not costs borne by the producer. The producer responds to the costs he or she must pay and external costs are paid by someone else. Hence the producer has no incentive to decrease the activity that is creating the external cost because the activity costs the producer nothing. Topic: External cost Skill: Level 5: Critical thinking Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication

6) If the production of a good creates an external cost, is the supply curve the same as the marginal social cost or the same as the marginal private cost curve or both? Answer: The supply curve is ALWAYS the same as the marginal private cost curve. In the case of an external cost, however, the marginal private cost curve is not the same as the marginal social cost curve. In this case, the supply curve is the same as only the marginal private cost curve and is not the same as the marginal social cost curve. Topic: Social cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication 7) The marginal social cost of burning garbage in Houston is the sum of the marginal private cost and the marginal external cost." Is this assertion correct or incorrect? Answer: The statement is correct. The marginal social cost of ANY activity is the sum of the marginal private cost plus the marginal external cost. Topic: Social cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 8) Why does an external cost lead to inefficient overproduction? Answer: If there is an external cost, then the market supply curve represents only the private costs rather than ALL the costs of production. Private producers respond only to the costs that they pay. In the case of an external cost, because producers are not paying all of the costs, they produce too much of the good from the social perspective, that is, there is overproduction. Thus government policies, such as pollution limits, taxes, pollution charges, or marketable permits, can move the market toward efficiency. Topic: Inefficient equilibrium Skill: Level 4: Applying models Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication 9) Why is it not efficient to eliminate all pollution? Answer: Eliminating pollution is a task that uses resources, so there is an opportunity cost. If the cost of eliminating another unit of pollution is greater than the benefit, it would not be an efficient use of resources to eliminate the pollution because there are other activities with a higher value to society. In other words, pollution elimination is similar to any other good: pollution should be eliminated until the marginal benefit of pollution reduction equals the marginal cost of pollution reduction. Topic: Production and pollution: how much? Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication 108 Copyright © 2021 Pearson Education, Inc.

10) What is the Coase theorem? What conditions need to be present for this theorem to work? Answer: The Coase theorem states that if property exist, only a small number of people are involved, and transactions costs are low, then private transactions are efficient and the outcome is not affected by who is assigned the property right. The conditions that need to be present for the Coase theorem to work are: ∙ property rights exist; ∙ only a small number of people are involved; ∙ the transactions costs are low. If these conditions are met, then the Coase theorem applies and there are no externalities. Topic: Coase theorem Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication 11) "According to the Coase theorem, if Gabriel wants the local television station to cease having helicopters fly over his house at night, he will be more likely to be able to reach an agreement with the station if the property right to the airspace is clearly defined and the transaction costs of negotiating are high." Is this statement true or false? Explain your answer. Answer: The statement is false. The first part of the statement is correct, insofar as the property right to the airspace needs to be clearly defined. However, the second part is incorrect. In particular, if the costs of negotiating are high, Gabriel and the television station are less likely to be able to come to an agreement. Topic: Coase theorem Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication 12) What do we mean by "property rights" and why are they important? Answer: Property rights are legally established titles to ownership, use, and disposal of factors of production and goods and services that are enforceable in the courts. Property rights are important because ownership of a resource provides a strong incentive to its owner to see that the resource they own is not damaged, overused, or degraded. Topic: Property rights Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication

13) If the production of a good causes pollution (an external cost), is the unregulated competitive market equilibrium of that product efficient? Answer: The presence of pollution means that the supply curve of the firm, which is also the firm's marginal cost curve, only represents the firm's private costs and ignores all external costs. The equilibrium between supply and demand curves leads to overproduction of this good. The amount produced, therefore, is not efficient because the level of production occurs where the marginal private cost equals the marginal (social) benefit rather than where the marginal social cost equals the marginal (social) benefit. Topic: Inefficiency Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication 14) Burning coal to generate electricity can create pollution. If the market for generating electricity is competitive and is allowed to operate without any government intervention, is the equilibrium quantity of coal burned equal to, more than, or less than the efficient quantity? Answer: The equilibrium quantity of coal burned is more than the efficient quantity. In a market for a good with an external cost, an unregulated competitive market will have an equilibrium quantity that exceeds the efficient quantity. Topic: Inefficiency Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication 15) "If production of a good creates an external cost, then, when production is such that the marginal private costs are equal to the marginal private benefits, the market outcome will be inefficient." Explain whether this assertion is correct or incorrect. Answer: The assertion is correct. Efficiency requires that the marginal social benefit equal the marginal social cost. If the production of a good creates an external cost, then the marginal private cost does not equal the marginal social cost. So, even if the marginal private benefit equals the marginal social benefit, setting the marginal private cost equal to the marginal private benefit creates inefficiency because the marginal social benefit does not equal the marginal social cost. Topic: Inefficiency Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication

16) Use the idea of external costs to explain why some cities have laws against late-night rock concerts. Answer: While many people might like to see a midnight show featuring AC/DC or Creed, many others argue that a rock concert blaring away early in the morning imposes external costs on many nearby residents who do not want to be disturbed late at night. Therefore regulations on the time that music can be "emitted" are common. To the extent that the regulations are motivated by the externality, such regulations increase efficiency. Topic: Government actions in the face of external costs Skill: Level 4: Applying models Section: Checkpoint 10.1 Status: Old AACSB: Written and oral communication 17) The production of paper creates pollution, an external cost. What happens to the production of paper if the government imposes a tax on paper producers equal to the marginal external cost of the pollution? Answer: When the government imposes a tax equal to the marginal external cost of the pollution, the production of paper decreases. Prior to the tax being imposed, the external cost was ignored by the producers because they did not pay this cost. However, once the tax is in place, the external cost now becomes a cost that the producer must pay. As a result, the producers' costs increase and so the supply of paper decreases. Topic: Taxes Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 18) How has air quality changed in the United States since 1980? Answer: Generally air quality in the United States has improved. Most sources of pollution have decreased substantially and even ozone, which has changed the least, has decreased. Topic: Eye on the U.S. economy, pollution trends Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Reflective thinking 19) If the marginal social cost of a good is $70 and the marginal external cost is $20, what does the marginal private cost equal? Answer: The marginal social cost equals the marginal private cost plus the marginal external cost. Hence, substituting in the numbers from the problem gives $70 = marginal private cost + $20, so that the marginal private cost = $50. Topic: Social cost Skill: Level 1: Definition Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking 111 Copyright © 2021 Pearson Education, Inc.

20) The table above gives the private costs and external costs of producing paper. a. Complete the table by finding the marginal social cost at each level of production. b. If the market is competitive and is left unregulated and 400 tons of paper are produced, what is the price of a ton of paper? c. If the government imposes a tax equal to the external cost at each level of production, what price would be charged if 400 tons are produced? Answer:

a. The table above completes the marginal social cost column. At any level of output, the marginal social cost equals the sum of the marginal private cost plus the marginal external cost. b. The price will equal the marginal private cost of $40 a ton. c. If a tax is imposed equal to the marginal external cost, when 400 tons of paper are produced this tax will be $20 a ton. Hence the price will rise by $20, to $60 a ton, which is the same as the marginal social cost. Topic: Social cost Skill: Level 2: Using definitions Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

21) Suppose unregulated production of pesticides results in an equilibrium price and quantity of $400 and 1,000 tons per day, respectively, and a marginal external cost of $10 a ton. a. If the government were to eliminate the external cost by using pollution charges, what should the pollution charge be set at? b. If the government were to eliminate the external cost by using taxes, what should the tax equal? c. Would the government actions described above affect the quantity of pesticides produced? If yes, how? If no, why not? Answer: a. $10 a ton b. $10 a ton c. Yes, for both the pollution charge and the tax, the output of pesticides would be decreased to the efficient level. Topic: Government actions in the face of external costs Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

22) Use the figure above to answer this question. Explain what the marginal social cost curve and the marginal external cost mean. In the figure, if the market is competitive and unregulated, what is the equilibrium price and quantity? What is the efficient amount of output? Illustrate the deadweight loss.

Answer:

The marginal social cost curve shows the sum of marginal private cost and marginal external cost. Marginal external cost is the cost of producing an extra unit of a good that falls on people other than the firm. The (inefficient) market equilibrium is 8 units with a price of $150 per unit. The efficient quantity is 6 units. The deadweight loss is illustrated in the figure. Topic: Marketable permits Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

23) The above figure shows the market for fertilizer. When fertilizer is applied to lawns, it runs off into neighboring streams and ponds, killing fish and creating an external cost. a. What is the equilibrium price and quantity of fertilizer in an unregulated, competitive market? b. What is the efficient quantity of fertilizer? c. Suppose government imposes a tax equal to the marginal external cost. What is the equilibrium price paid by consumers and the equilibrium quantity after implementation of the tax? d. At the output level in part (c), how much is the tax? e. How much tax revenue does government collect? f. What is the deadweight loss borne by society if the externality is left uncorrected? Answer: a. The equilibrium price is $1,000 a ton and the equilibrium quantity is 6 tons per day. b. The efficient quantity is 4 tons per day. c. The price paid by consumers after the tax is $1,200 a ton and the equilibrium quantity is the efficient quantity, 4 tons per day. d. The tax is $400 a ton. e. The government collects $1,600 a day in taxes. f. The deadweight loss with no government action is $600 a day. Topic: Government actions in the face of external costs Skill: Level 4: Applying models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

24) The figure above shows the market for steel, the production of which creates pollution. a. What point represents the equilibrium price and what point represents the equilibrium quantity in an unregulated, competitive market? b. What area represents the deadweight loss of the unregulated, competitive market outcome? c. What point represents the efficient quantity? d. If the output level in part (c) was achieved through the use of a government imposed tax, what price would consumers pay? What price would the producers receive? What distance represents the amount of the tax? Answer: a. The price is given by point c and the quantity is given by point f. b. The deadweight loss is area gij. c. The efficient quantity is given by point e. d. Consumers pay a price equal to point b. Producers receive a price equal to point d. The amount of the tax is the distance bd (which is the same as gh). Topic: Taxes, inefficiency Skill: Level 3: Using models Section: Checkpoint 10.1 Status: Old AACSB: Analytical thinking

10.6 Essay: Positive Externalities: Education 1) Explain the difference between a positive production externality and a positive consumption externality. Answer: A positive production externality occurs when a firm produces a good and that production provides benefits to parties other than the firm. A positive consumption externality occurs when a person consumes a good and that consumption provides benefits to others who did not consume the good. Topic: Positive production and positive consumption externalities Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking 2) Does the existence of the University of Oklahoma affect citizens who do NOT attend the University? Answer: Education creates an external benefit. Hence people who do not attend the University of Oklahoma benefit from the education received by its students because this education has external benefits. For instance, the presence of hundreds of thousands of educated graduates from the University of Oklahoma raises public discourse on certain topics and makes the provision of high quality social activities, such as live theater, more common. Topic: External benefit Skill: Level 1: Definition Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 3) Explain the difference between marginal social benefit and marginal external benefit. Answer: Marginal social benefit equals the marginal benefit enjoyed by society (by consumers of the good plus others). It equals marginal benefit plus marginal external benefit. Marginal external benefit is the benefit from an additional unit of a good that is enjoyed by someone other than the consumer. Topic: External benefit Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Reflective thinking

4) "Education in elementary and high schools has external benefits because families who have a lot of children do not pay any more than families without children." Is this statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. Education has external benefits because educated people create benefits for everyone else. Who pays for the education is not an external benefit. Topic: External benefit Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Written and oral communication 5) Describe some of the external benefits associated with education. What can government do to encourage production of the efficient amount of education? Answer: External benefits to education include the facts that college graduates: ∙ communicate more effectively with others, ∙ tend to be better citizens, ∙ have lower crime rates, ∙ are more tolerant of others' views. To insure that the efficient amount of education is produced, the government could: ∙ provide education, as it does with public schools, ∙ subsidize education, as it does with state universities, or ∙ give consumers vouchers to reduce the cost of private schooling, as is happening in some states or with various college grant programs. Topic: External benefit Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Written and oral communication 6) Does inoculation against chicken pox have both private and external benefits? Answer: Yes, inoculation against chicken pox has both private and external benefits. The individual who is vaccinated benefits because he or she will not catch chicken pox. In addition, everyone who interacts with that person will benefit because they will not catch chicken pox from him or her. Topic: External benefit Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Written and oral communication

7) "External benefits lead to overproduction so that more than the efficient quantity is produced." Is the previous statement true or false? Answer: The statement is false. External benefits lead to underproduction so that less than the efficient quantity is produced. Topic: Inefficiency Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking 8) Why does the existence of an external benefit lead to the production of less than the efficient quantity? Answer: Buyers ignore the presence of an external benefit because the benefit they receive is the private benefit. As a result, buyers do not take account of all the benefits from a good or service. Because buyers do not take account of all the benefits, their demand for the good or service, which reflects their private benefit, is less than the marginal social benefit, is less than the marginal social benefit. So, with the demand being less than the marginal social benefit, the equilibrium quantity is less than the efficient quantity. Topic: Inefficiency Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Written and oral communication 9) Why does government provide educational opportunities in the form of vouchers, private subsidies, and public provision? Answer: Education generates external benefits. With a better educated population, everyone is better off. The more educated the population, the more productive it is. Educated individuals need less social services than uneducated individuals. Crime rates are lower the more educated the population. And a more educated population makes it more likely to provide other goods with external benefits, such as high quality newspapers. But because part of the social benefit from education is an external benefit, an unregulated market will create less than the efficient amount of education. Hence government policies such as vouchers, subsidies, and public provision are attempts to overcome inefficiency and move the market to the efficient amount of education. Topic: Government actions in the face of externalities Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Written and oral communication

10) A private subsidy has what effect on the amount of a good or service produced? Is a subsidy an appropriate policy to offset the inefficiency from an external cost or an external benefit? Answer: A private subsidy increases the production of the good or service that is subsidized. Because it increases the production, a private subsidy is the appropriate policy to overcome the inefficiency that is the result of an external benefit. (A good or service with an external benefit is underproduced by a competitive, unregulated market.) Topic: Private subsidy Skill: Level 2: Using definitions Section: Checkpoint 10.2 Status: Old AACSB: Written and oral communication 11) Explain the process by which a private subsidy corrects an external benefit. Answer: If a good or service has an external benefit, an unregulated competitive market will produce less than the efficient quantity. A private subsidy, which is money given to firms, reduces the cost of production. With the subsidy, firms are willing to produce more at any given price. If the subsidy equals the marginal external benefit, production with the subsidy will be at the efficient level. Topic: Private subsidy Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

12) The table above gives the marginal social cost (which equals the price), marginal private benefit, and marginal social benefit of students attending Diablo Valley College (DVC) in Concord, California. a. When 4,500 students attend DVC, what does the marginal external benefit equal? b. If the market is competitive and left without government intervention, what is the quantity of students that will attend DVC and what will be the price of a course? c. What is the efficient quantity of students attending DVC? d. If the government can set the price per course, in order to have the efficient quantity of students attending DVC, what should the government set as the price? Answer: a. The marginal external benefit equals $40, the difference between the marginal social benefit ($60) and the marginal private benefit ($20). b. 3,500 students will attend and the price of a course will be $60. c. The efficient quantity is 4,000 students because at this quantity the marginal social benefit equals the marginal social cost. d. In order to have 4,000 students attend DVC, the government must set the price at $40 per course. Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

13) The figure above shows the market for polio vaccination in Pakistan. Polio vaccination confers an external benefit because one person's vaccination makes it less likely that other people will catch polio. a. If the market is competitive and left unregulated, how many doses of vaccine will be administered? b. If the Melinda and Bill Gates Foundation underwrites the cost of the vaccine by paying for a large fraction of the preparation and delivery cost, what will happen to the number of doses administered? Why? Answer: a. If the market is competitive and left unregulated, 4 million doses will be administered. b. If the Foundation underwrites the cost of the vaccine, the marginal cost of the vaccine will drop. The result will be similar to a government subsidy: the marginal cost curve will shift rightward, thereby increasing the number of doses administered. The market's efficiency will be increased. Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

14) The figure above shows the market for education. Education has an external benefit. a. If the market is competitive and left unregulated, how many students will be enrolled per year? b. What is the efficient number of students? c. In the figure, show the effect of a government subsidy that moves the market to the efficient number of students. What is the amount of the subsidy and what tuition must the students pay?

Answer: a. If the market is competitive and left unregulated, 4 million students will be enrolled. b. The efficient number of students enrolled is 6 million students.

c. The above figure shows the effect of the government subsidy and how the supply curve shifts. The subsidy is $6,000 and students pay tuition of $10,000. Topic: Subsidies Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

15) When young students are hungry, they can be disruptive and inattentive in class. Thus, providing lunch to students has external benefits. The figure above represents the market for school lunches before and after government vouchers are issued. a. What is the unregulated private market equilibrium? b. What is the efficient quantity of lunches? c. What is the amount of the voucher necessary to move the economy to the efficient number of lunches? d. When vouchers are used, what is the dollar price of the lunch that suppliers receive and what is the dollar price that consumers pay when the voucher is used? Answer: a. If the market is left unregulated, 4 million school lunches per day will be served and the price will be $1.50 per school lunch. b. The efficient quantity of lunches is 6 million school lunches per day. c. The amount of the voucher is $1.00. d. The dollar price of the lunch received by sellers is $2.00. The consumers have a voucher for $1, so the total dollar price paid by the consumers is $1.00. Topic: Vouchers Skill: Level 4: Applying models Section: Checkpoint 10.2 Status: Old AACSB: Analytical thinking

Foundations of Microeconomics, 9e (Bade) Chapter 11 Public Goods and Common Resources 11.1 Classifying Goods and Resources 1) A good is nonexcludable if A) only the government can produce it. B) nobody can be excluded from enjoying the benefits of the good. C) when you pay for the good, you are guaranteed to be the sole consumer. D) when you consume a unit, that means there is no less for someone else. E) it is also nonrival. Answer: B Topic: Excludable Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 2) If you can prevent someone from consuming a good, that good is called A) rival. B) nonrival. C) excludable. D) nonexcludable. E) a public good. Answer: C Topic: Excludable Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 3) A good or resource is excludable if A) only the government can produce them. B) nobody can be excluded from enjoying the benefits of the good or resource. C) when you pay for the good or resource, you are guaranteed to be the sole consumer. D) when you consume a unit, that means there is one less for someone else. E) it is a common resource. Answer: C Topic: Excludable Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

4) Which of the following goods is best described as nonexcludable? A) flood-control levees B) pay-per-view television C) a restaurant meal D) a college education E) a cow grazing in a pasture Answer: A Topic: Excludable Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 5) The fact that technology prevents Sam in Nevada from using the email account of Samantha in Virginia means that email is an example of A) a good that is nonexcludable. B) a good that is excludable. C) a public good. D) the free-rider problem. E) the tragedy of the commons. Answer: B Topic: Excludable Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 6) A good is rival if A) it has substitutes. B) it can be consumed by many people simultaneously. C) it is excludable. D) consumption by one person decreases the quantity available for another person. E) it has no complements. Answer: D Topic: Rival Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

7) A good is nonrival if A) only the government can produce it. B) nobody can be excluded from enjoying the benefits of the good. C) when you pay for the good, you are guaranteed to be the sole consumer. D) when you consume a unit, you have not decreased the amount left for consumption by other people. E) anybody can be excluded from enjoying the benefits of the good. Answer: D Topic: Rival Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 8) A basketball game aired as a pay-per-view show by your local cable network and to which you can invite your friends to watch is a ________ good. A) rival B) nonrival C) nonexcludable D) rival and nonexcludable E) quasi public/quasi private Answer: B Topic: Rival Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 9) The fact that Florida's consumption of national defense does not preclude North Dakota from consuming the same national defense is an example of A) a private good. B) a common resource. C) the rival nature of consumption. D) excludable goods. E) a good that is nonrival in consumption. Answer: E Topic: Rival Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

10) A private good is defined as a good or service A) that is something tangible. B) that is rival and excludable. C) that is rival and nonexcludable. D) produced by a single country. E) that is nonrival and nonexcludable. Answer: B Topic: Private good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 11) A private good is A) nonexcludable and nonrival. B) excludable and rival. C) excludable and nonrival. D) nonrival and excludable. E) subject to the free-riding problem. Answer: B Topic: Private good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 12) A good that is both rival and excludable is A) a good that is impossible to produce. B) a private good. C) a common resource. D) a public good. E) nonexistent because no good can be both rival and excludable. Answer: B Topic: Private good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

13) A good that is ________ and ________ is a ________. A) rival; excludable; private good B) rival; excludable; public good C) nonrival; excludable; public good D) rival; nonexcludable; private good E) nonrival; nonexcludable; private good Answer: A Topic: Private good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 14) A good is a private good if A) people who do not pay for the good can enjoy it without paying for it. B) it is not a common resource. C) the good is nonrival. D) the good is excludable and rival. E) it is both nonexcludable and nonrival. Answer: D Topic: Private good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 15) Which of the following is the best example of a private good? A) a can of Diet Pepsi B) a missile defense system C) a library in St. Louis D) a sidewalk in Fargo E) a cod fish swimming in the middle of the ocean Answer: A Topic: Private good Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

16) Which of the following is an example of a pure private good? A) national defense B) the Florida State Turnpike, a non-congested toll highway C) Lake Erie D) the Metropolitan Museum of Art in New York City E) the new heat pump your neighbor bought for her house Answer: E Topic: Private good Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 17) An office in the Empire State Building is A) a private good. B) nonexcludable, because it is possible to restrict access to it. C) a common resource. D) a public good because many people can be in the Empire State Building. E) excludable and nonrival. Answer: A Topic: Private good Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 18) A professional football game played in a completely full stadium is NOT a public good because it is A) nonexcludable and nonrival. B) excludable and nonrival. C) excludable and rival. D) nonexcludable and rival. E) not supplied by the government. Answer: C Topic: Private good Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

19) One important feature that distinguishes a private good from a public good is that A) only the government can produce private goods. B) nobody can be excluded from enjoying the benefits of a private good. C) a private good is excludable and a public good is nonexcludable. D) if you consume a unit of a private, that means there is no less for someone else. E) a private good is nonrival and a public good is rival. Answer: C Topic: Private good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 20) One important feature that distinguishes a public good from a private good is that A) only the government can produce public goods. B) it is impossible to prevent a person from enjoying the benefits from a public good. C) if you pay for a unit of a public good, you are guaranteed to be the sole consumer. D) if you consume a unit of a public good, there is one unit less for someone else. E) Both answers C and D are correct. Answer: B Topic: Public good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 21) A good or resource that is both nonrival and nonexcludable is A) a good that is impossible to produce. B) a private good. C) a common resource. D) a public good. E) nonexistent because it is impossible for a good or resource to be both nonrival and nonexcludable. Answer: D Topic: Public good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

22) A public good is A) rival and excludable. B) rival and nonexcludable. C) nonrival and excludable. D) nonrival and nonexcludable. E) a good that has an infinite number of substitutes. Answer: D Topic: Public good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 23) A public good A) only yields benefits to those that decide to buy it. B) is the same as a common resource. C) is nonrival and nonexcludable. D) is rival. Answer: C Topic: Public good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 24) A good or resource from which no one can be excluded and which is nonrival is a A) government good. B) private good. C) common good. D) public good. E) common resource. Answer: D Topic: Public good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

25) If no one can be excluded from receiving the benefits of a good or service and the consumption of the good or service does not decrease the amount available to someone else from consuming it, then the good A) is a private good. B) is a common resource. C) is a public good. D) is a club good. E) Both answers B and C are correct. Answer: C Topic: Public good Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Revised AACSB: Reflective thinking 26) If a good or resource is rival, it could be a A) public good. B) private good. C) common resource. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: D Topic: Private good, common resource Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 27) A common resource is A) a service rather than a good. B) nonrival and nonexcludable. C) rival and excludable. D) rival and nonexcludable. E) nonrival and excludable. Answer: D Topic: Common resource Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

28) A club good is A) a service rather than a good. B) nonrival and nonexcludable. C) rival and excludable. D) rival and nonexcludable. E) nonrival and excludable. Answer: E Topic: Club good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: New AACSB: Reflective thinking 29) If a good or resource is nonrival but excludable it is a A) private good. B) club good. C) common resource. D) public good. E) None of the above answers are correct because it is impossible for a good to be nonrival and excludable. Answer: B Topic: Club good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: New AACSB: Reflective thinking 30) An example of a club good is A) Youtube. B) Amazon.com. C) Target. D) Disney+. E) Honda SUVs. Answer: D Topic: Club good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: New AACSB: Reflective thinking

31) Use the table to answer this question. Consider 3 goods or resources: apples, a fireworks display, and copper in a mine Classify each item by noting the characteristics in each of the table's cells. A) apples = cell A; fireworks display = cell D; copper = cell A. B) apples = cell B; fireworks display = cell B; copper = cell A. C) apples = cell A; fireworks display = cell B; copper = cell C. D) apples = cell B; fireworks display = cell D; copper = cell A. E) apples = cell A; fireworks display = cell B; copper = cell D Answer: A Topic: Classifying goods and resources Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Application of knowledge 32) Use the table to answer this question. Consider 3 goods or resources: sewer system, wild fish, legal system. Classify each item by noting the characteristics in each of the table's cells. A) sewer system = cell C; wild fish = cell B; legal system = cell D. B) sewer system = cell B; wild fish = cell A; legal system = cell D. C) sewer system = cell A; wild fish = cell B; legal system = cell D. D) sewer system = cell C; wild fish = cell B; legal system = cell A. E) sewer system = cell C; wild fish = cell D; legal system = cell B. Answer: A Topic: Classifying goods and resources Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Application of knowledge

33) Use the table to answer this question. Consider 3 goods or resources: shoes, scenic view, satellite radio. Classify each item by noting the characteristics in each of the table's cells. A) shoes = A; scenic view = C; satellite radio = D. B) shoes = A; scenic view = D; satellite radio = C. C) shoes = D; scenic view = B; satellite radio = C. D) shoes = B; scenic view = A; satellite radio = C. E) shoes = C; scenic view = B; satellite radio = D. Answer: B Topic: Classifying goods and resources Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Application of knowledge 34) An example of a common resource is A) a bridge. B) a non-crowded movie theater. C) a tuna in the ocean. D) national defense. E) All of the above answers are correct. Answer: C Topic: Common resource Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 35) To hunters, deer in the woods are an example of a A) public good. B) private good. C) common resource. D) public resource. E) natural monopoly. Answer: C Topic: Common resource Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

36) A mother notices that when she divides brownies equally between her two children and gives each child her share on a separate plate, the brownies last a long time. But when she gives her children a plate to share, the brownies are gone pretty quickly. The mother concludes from this that brownies given on a single plate are A) excludable but they might either be rival or nonrival. B) nonexcludable and nonrival. C) excludable and rival. D) excludable and nonrival. E) nonexcludable and rival. Answer: E Topic: Common resource Skill: Level 4: Applying models Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 37) Which of the following goods is excludable and nonrival? A) food B) air C) the Internet D) a streetlight E) a two liter bottle of Mountain Dew Answer: C Topic: Club good Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 38) When use of a good decreases the quantity available for someone else, the good is A) rival. B) nonrival. C) excludable. D) nonexcludable. E) a public good. Answer: A Topic: Rival Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

39) The fact that Sha's enjoyment of a sunset on Saint Simon's Island does NOT preclude Lou from enjoying the sunset is an example of A) a good that is nonrival. B) a good that is excludable. C) a private good. D) the rival nature of consumption. E) a common resource. Answer: A Topic: Rival Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 40) A private good is ________ and ________. A) rival; excludable B) rival; nonexcludable C) nonrival; excludable D) nonrival; nonexcludable E) scarce; expensive Answer: A Topic: Private good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 41) If I order a pizza and invite my neighbors to eat it, the pizza is A) a private good. B) a common resource. C) a public good because many people ate it. D) either a common resource or a public good depending on whether it is overused. E) produced by a natural monopoly. Answer: A Topic: Private good Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

42) A public good is ________ and ________. A) rival; excludable B) rival; nonexcludable C) nonrival; excludable D) nonrival; nonexcludable E) cheap; available Answer: D Topic: Public good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 43) A public good A) can only be consumed by one person at a time. B) can be consumed simultaneously by many people. C) is any good provided by a company owned by a member of the public. D) is any good provided by government. E) is both rival and excludable. Answer: B Topic: Public good Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 44) Which of the following is the best example of a public good? A) national defense B) a Ford Thunderbird C) Yosemite National Park D) a Mountain Dew E) satellite radio Answer: A Topic: Public good Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking

45) Which of the following is the best example of a common resource? A) national defense B) a Ford Thunderbird C) Yosemite National Park D) a can of Mountain Dew E) a cable television network Answer: C Topic: Common resource Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Reflective thinking 11.2 Public Goods and the Free-Rider Problem 1) The free-rider problem exists because A) private goods or services cause some people to want to take them for free. B) some goods or services are excludable and cause envy for those who don't have them. C) some goods or services that are rival and leave some people without them. D) people cannot be excluded from consuming public goods even if they don't pay for them. E) people must all consume the same public good and so everyone wants to pay for it. Answer: D Topic: Free rider Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 2) The free-rider problem is associated with A) public goods. B) private goods. C) common resources. D) any type of good. E) club goods. Answer: A Topic: Free rider Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Revised AACSB: Reflective thinking

3) Public goods create a free-rider problem because A) only people who pay for the good or service can enjoy the good or service. B) people do not want to consume public goods. C) the good or service is rival in nature. D) the good or service is excludable. E) people can enjoy the good or service no matter whether or not they pay for it. Answer: E Topic: Free rider Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 4) A good that can be consumed even if the consumer does NOT pay for it A) is necessarily rival in consumption. B) completely avoids the free rider problem. C) does not exist because firms won't produce goods for which consumers won't pay. D) is nonexcludable. E) might be nonexcludable but is definitely nonrival. Answer: D Topic: Free rider Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 5) The free-rider problem i. means that people can consume a good without paying for it. ii. means that people pay too much for a good in order to consume it. iii. applies to a public good. A) i only B) iii only C) i and ii D) ii and iii E) i and iii Answer: E Topic: Free rider Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

6) Which of the following is an example of the free-rider problem? A) John attends a lecture on investing in high-tech companies for which he paid $100 to hear. B) Tom watches Mystery on his local PBS television station, but Tom does not contribute anything to PBS. C) Sarah works overtime while her co-workers opt for a traditional schedule. D) Jethro buys a skunk-hunting permit that he refuses to share with his sister. E) Katie catches a swordfish in the ocean. Answer: B Topic: Free rider Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 7) The local public broadcasting station (PBS) calls you during its pledge drive. You do not donate any money but do tune in to watch reruns of Downton Abbey on the PBS station. Your behavior is an example of A) the free rider problem. B) the law of demand. C) the law of supply. D) a marginal cost. E) a rival good. Answer: A Topic: Free rider Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Application of knowledge 8) Which of the following is a correct statement? A) To obtain the economy's marginal benefit for a public good, marginal benefits of all individuals at each quantity have to be added. B) To obtain the economy's marginal benefit for a public good, the quantity that all individuals are willing to buy at each price must be added. C) To obtain the economy's marginal benefit curve for a public good, we sum the individual demand curves horizontally. D) Because public goods are nonexcludable, the economy's marginal benefit curve for a public good is the same as its marginal cost curve. E) None of the above answers is correct. Answer: A Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

9) If we know everyone's individual marginal benefit curve for a public good, then the economy's marginal benefit curve for that public good can be found by A) finding the average of everyone's marginal benefit. B) summing horizontally the amount of everyone's marginal benefit. C) summing vertically the amount of everyone's marginal benefit. D) averaging either horizontally or vertically the amount of everyone's marginal benefit. E) none of the above; it is impossible to find this value. Answer: C Topic: Marginal benefit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 10) To find the economy's marginal benefit curve of a public good, we A) sum the marginal benefits of each individual at each quantity. B) sum the costs of the inputs used to produce the good. C) sum the quantities demanded at each individual price. D) sum the prices consumers are willing to pay for different quantities of the good. E) average the prices consumers are willing to pay for the same quantity of the good. Answer: A Topic: Marginal benefit Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 11) We determine the economy's marginal benefit curve for a public good or service by A) vertically summing the individual marginal benefit curves of each member of society. B) horizontally summing the individual marginal benefits curves of each member of society. C) multiplying the marginal benefits of each member of society. D) dividing the sum of the marginal benefits of each member of society by the number of people in society. E) vertically summing the individual firm's marginal cost curves. Answer: A Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

12) For which type of good is it necessary to sum the marginal benefit curves vertically in order to obtain the economy's marginal benefit curve? A) public goods B) club goods C) private goods D) any excludable good E) common resources Answer: A Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Revised AACSB: Analytical thinking 13) Suppose a public good is provided in an economy with only two consumers, Popeye and Captain Hook. If Popeye values the public good at $4,000 per year, and Captain Hook values it at $3,000 per year, the economy's marginal benefit of the public good per year is A) $7,000. B) $4,000. C) $3,000. D) $1,000. E) $12,000. Answer: A Topic: Marginal benefit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 14) The marginal benefit of a public good ________ as more of the good is produced. A) increases B) decreases C) stays the same D) None of the above is correct because the marginal benefit could increase, decrease, or not change depending on whether the marginal cost increases, decreases, or does not change as more is produced. E) None of the above is correct because the marginal benefit could increase, decrease, or not change depending on whether more, fewer, or the same number of people consume the good as more is produced. Answer: B Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

15) As more of a public good is produced, the marginal benefit of each additional unit ________ and as more of a private good is produced, the marginal benefit of each additional unit ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: D Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 16) Marginal cost curves for public goods are usually A) downward sloping. B) upward sloping. C) horizontal. D) vertical. E) U-shaped. Answer: B Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 17) A library is a public good. The marginal cost curve for libraries in Lafayette, California A) has a negative slope. B) is definitely a horizontal line. C) has a positive slope. D) is a vertical line. E) is identical to the marginal benefit curve because libraries are nonrival. Answer: C Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

18) To determine the efficient quantity of a public good to supply A) the private firms that will produce the good each produce the exact same quantity. B) marginal benefit and marginal cost are equated, the same as is done to determine the efficient quantity of a private good. C) total benefit is equated to total cost, the same as is done to determine the efficient quantity of a private good. D) politicians use the principle of maximum differentiation. E) marginal benefit must exceed marginal cost by as much as possible. Answer: B Topic: Efficient quantity of a public good Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 19) Which of the following represents an efficient quantity of a public good? A) the quantity at which the marginal cost of production is minimized B) the quantity at which the number of free riders is maximized C) the quantity at which the marginal benefit minus marginal cost is minimized D) the quantity at which the marginal benefit is equal to the marginal cost E) the quantity at which the marginal benefit exceeds the marginal cost by the maximum amount possible Answer: D Topic: Efficient quantity of a public good Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 20) The efficient quantity of a public good is the quantity at which marginal benefit is A) greater than marginal cost by any amount. B) less than marginal cost. C) equal to marginal cost. D) zero. E) greater than marginal cost by the maximum amount. Answer: C Topic: Efficient quantity of a public good Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

21) To achieve the efficient level of national defense A) the government could provide national defense because it is a public good. B) private firms can provide national defense because it is a private good. C) the government can provide national defense because it is a private good. D) the government can provide national defense because it is a common resource. E) None of the above answers is correct. Answer: A Topic: Efficient quantity of a public good Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 22) Suppose the marginal cost of the fourth unit of a public good is $20. If Mark and Judy are the only members of society, and they are willing to pay $10 and $11, respectively, for the fourth unit of the good, then the efficient quantity is A) 3 units. B) 4 or more units. C) 0 units. D) More information is needed about the marginal benefits of the first, second, and third units of the public good. E) None of the above answers is correct. Answer: B Topic: Efficient quantity of a public good Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 23) Suppose the government is producing a public good. If the marginal benefit of the last unit of a public good produced is greater than the marginal cost of that unit, to achieve the efficient amount of production, what should be done? A) The government should produce more units. B) The government should cease production. C) Private firms should take over the production and sale of the good. D) Nothing, because the government is already producing the efficient quantity of the public good. E) The government should produce fewer units. Answer: A Topic: Efficient quantity of a public good Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

24) Paul and Paula are the only members of society. The table above gives their marginal benefits from missile gunboats, a public good. Determine the marginal benefit to society of the second missile gunboat. A) $16 million B) $8 million C) $12 million D) $10 million E) $4 million Answer: C Topic: Marginal benefit Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 25) Paul and Paula are the only members of society. The table above gives their marginal benefits from missile gunboats, a public good. Determine the marginal benefit to society of the fourth missile gunboat. A) $8 million B) $4 million C) $2 million D) $1 million E) $40 million Answer: B Topic: Marginal benefit Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

26) Paul and Paula are the only members of society. The table above gives their marginal benefits from missile gunboats, a public good. Suppose the marginal cost of a missile gunboat is $8 million. What is the efficient quantity of missile gunboats? A) 1 boat B) 2 boats C) 3 boats D) 4 boats E) More information about whether the services provided by missile gunboats are rival or not is needed. Answer: C Topic: Efficient quantity of a public good Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

Minutes of fireworks 16 17 18 19 20

Anita's MB (dollars per minute) $20 18 16 14 12

Steve's MB (dollars per minute) $28 25 22 19 16

27) The table above shows Anita and Steve's marginal benefits for the annual 4th of July fireworks show at City Park. If Anita and Steve are the only two people in the economy, what is the economy's marginal benefit from the 18th minute of fireworks? A) $38 B) $33 C) $30 D) $162 E) $129 Answer: A Topic: External benefit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

28) The table above shows Anita and Steve's marginal benefits for the annual 4th of July fireworks show at City Park. If Anita and Steve are the only two people in the economy, what is the economy's marginal benefit from the 19th minute of fireworks? A) $38 B) $30 C) $162 D) $129 E) $33 Answer: E Topic: External benefit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 29) The table above shows Anita and Steve's marginal benefits for the annual 4th of July fireworks show at City Park. If Anita and Steve are the only two people in the economy and the marginal cost to produce one minute of fireworks is $28, what is the efficient quantity of fireworks? A) 16 minutes B) more than 20 minutes C) 19 minutes D) less than 16 minutes E) 20 minutes Answer: E Topic: External benefit Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

30) The figure above shows the marginal cost and marginal benefit of police protection in the city of Hugo, Oklahoma. Police protection is a public good. If the city of Hugo hires 25 officers, then A) marginal cost will exceed marginal benefit, which means that the efficient number of officers is more than 25. B) marginal cost will exceed marginal benefit, which means that the efficient number of officers is less than 25. C) marginal benefit will exceed marginal cost, which means that Hugo should reduce the number of officers they hire. D) marginal benefit equals marginal cost. E) None of the above answers is correct. Answer: B Topic: Efficient quantity of a public good Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

31) The figure above shows the marginal cost and marginal benefit of police protection in the city of Hugo, Oklahoma. Police protection is a public good. If the city of Hugo hires 5 officers, marginal A) cost exceeds marginal benefit, so therefore fewer officers should be hired. B) benefit exceeds marginal cost, so therefore more officers should be hired. C) benefit equals marginal cost. D) benefit exceeds marginal cost, so therefore no more officers should be hired. E) benefit exceeds marginal cost but not by as much as possible, so 5 officers is not the efficient number to be hired. Answer: B Topic: Efficient quantity of a public good Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 32) The figure above shows the marginal cost and marginal benefit of police protection in the city of Hugo, Oklahoma. Police protection is a public good. The efficient number of officers that should be hired by the city of Hugo is A) 15. B) 25. C) 10. D) 0. E) More than 25 because MB > $0 when 25 officers are hired. Answer: A Topic: Efficient quantity of a public good Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 33) Because national defense is potentially subject to free riding, a private sector market for national defense would lead to A) the efficient amount of national defense if there is free riding. B) more than the efficient amount being produced if there is free riding. C) less than the efficient amount being produced if there is free riding. D) less than the efficient amount being produced if there is NOT free riding. E) None of the above answers is correct. Answer: C Topic: Private provision Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

34) The free-rider problem for a public good means that A) a private market would provide less than the efficient amount of the good. B) a private market would provide more than the efficient amount of the good. C) the good is rival. D) the good is excludable. E) a private market would provide the efficient amount of the good. Answer: A Topic: Private provision Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 35) For any individual consumer, free-riding is A) common for private goods. B) rational. C) irrational. D) impossible for public goods. E) the same as paying a fair price for the good. Answer: B Topic: Private provision Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 36) A private, competitive market A) provides the efficient quantity of a public good. B) allocates too few resources for a public good. C) allocates too many resources for a public good. D) can be relied upon to allocate resources efficiently both for private and public goods. E) will allocate too many resources for a public good only if free riding occurs. Answer: B Topic: Private provision Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

37) Why are private firms unable to produce public goods? A) Because the government outlaws private firms from producing them. B) The marginal cost of production is too high for private production to be possible. C) They can produce these goods, but they would not earn any revenue because of the free-rider problem. D) The tragedy of the commons means that private firms produce an inefficient amount of public goods. E) None of the above answers is correct. Answer: C Topic: Private provision Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 38) Bureaucrats A) have no incentive to influence the quantity of public goods provided by the government. B) have no role in the production of public goods. C) attempt to maximize their budget. D) make political policy. E) are generally rationally ignorant about the size of their budget. Answer: C Topic: Bureaucrats Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 39) Voters typically have information only about issues that have a perceptible effect on their well-being and tend not to have information about other issues. Behavior such as this is known as A) voter preferences. B) inefficient overprovision. C) political competition. D) rational ignorance. E) the tragedy of voters. Answer: D Topic: Rational ignorance Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

40) It is rational for a voter to be ignorant about an issue unless the A) voter is maximizing his or her well-being. B) voter is a member of a political party. C) issue is on the ballot. D) issue has a perceptible effect on the voter's well-being. E) voter worries about the tragedy of the free rider. Answer: D Topic: Rational ignorance Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 41) When Jean makes a decision NOT to obtain information about an issue that doesn't have a perceptible effect on her, Jean's choice is referred to as A) rational exuberance. B) irrational exuberance. C) irrational intelligence. D) rational ignorance. E) the principle of minimum ignorance. Answer: D Topic: Rational ignorance Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 42) Rational ignorance is the decision NOT to A) vote in elections. B) acquire information because the marginal benefit of doing so exceeds the marginal cost. C) acquire information because the marginal cost of doing so exceeds the expected marginal benefit. D) acquire information because the marginal cost of doing so equals the expected marginal benefit. E) follow the principle of minimum differentiation. Answer: C Topic: Rational ignorance Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

43) The concept of rational ignorance is defined as A) the decision not to acquire knowledge because of high marginal cost. B) the deceit by bureaucrats who fool politicians in order to maximize their budgets. C) politicians not telling the voters the real truth to stay in office. D) voters being kept from knowing the facts by bureaucrats. E) bureaucrats not knowing the size of their budget. Answer: A Topic: Rational ignorance Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 44) Very few voters know the enormous cost of providing price supports to farmers. As a result, these voters most likely exhibit A) the public provision of a good. B) the principle of minimum differentiation. C) rational ignorance. D) the tragedy of the commons. E) None of the above answers is correct. Answer: C Topic: Rational ignorance Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 45) Competition in the political marketplace can result in the efficient provision of a public good if A) there is only one political party. B) voters' preferences are unknown. C) benefits are small. D) voters are well informed and evaluate the alternatives. E) politicians need to be elected by majority votes. Answer: D Topic: Efficient provision Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

46) Which of the following can bring about an efficient level of public goods being provided by the government? A) voters who do not care about benefits and costs of public goods B) rational ignorance on the part of voters C) competition between political parties trying to win an election D) self-interest among government bureaucrats E) free riding on the part of voters Answer: C Topic: Efficient provision Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 47) Which of the following is necessary for competition in the political marketplace to result in the production of the efficient amount of a public good? A) bureaucrats practice self-interest B) well informed voters and political parties C) rational ignorance D) maximum differentiation of political competitors E) Answers A, B and D are correct. Answer: B Topic: Efficient provision Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 48) The government can be large in size because of A) inefficient overprovision caused by high voter turnout in elections. B) efficient overprovision caused by rational voter ignorance. C) inefficient overprovision caused by rational voter ignorance. D) efficient overprovision caused by irrational voter ignorance. E) inefficient overprovision caused by rational politician/bureaucrat ignorance. Answer: C Topic: Inefficient overprovision Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

49) One reason the size of the government is large is because A) people's demand for private goods grows faster than their demand for public goods. B) politicians do not support spending on things such as education and public health. C) voters' incomes grow, thereby causing an increased demand for private goods. D) budget maximization by bureaucrats and rational ignorance by voters lead to overproduction. E) rational ignorance by politicians who follow the principle of minimum differentiation. Answer: D Topic: Inefficient overprovision Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 50) Inefficient overproduction of a public good by the government is A) the only efficient method of producing public goods. B) not likely to occur when voters choose rational ignorance. C) the term used to describe a surplus of a public good. D) one explanation of why government might be large. E) not likely to occur if voters are rationally ignorant. Answer: D Topic: Inefficient overprovision Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 51) When someone enjoys the benefit of a good or service but does NOT pay for it, that person A) is a free range consumer. B) is a free rider. C) receives no marginal benefit from the good. D) must be consuming an excludable good. E) is contributing to the tragedy of the commons. Answer: B Topic: Free rider Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

52) The marginal benefit of a public good is the A) sum of the marginal benefits of all the individuals at each quantity. B) marginal benefit of the individual person who places the lowest value on the good, multiplied by the number of people in the economy. C) marginal benefit of the individual person who places the highest value on the good, multiplied by the number of people in the economy. D) benefit of the last person's consumption. E) average of the marginal benefits of all the individuals at each quantity. Answer: A Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 53) The marginal benefit curve of a public good A) slopes downward. B) slopes upward. C) is vertical. D) is horizontal. E) is U-shaped. Answer: A Topic: Marginal benefit Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 54) Sue and Mark are the only two members of a community. Sue's marginal benefit from one lighthouse is $2,000 and Mark's marginal benefit is $1,000. If the marginal cost of one lighthouse is $2,500 and if a lighthouse is a public good, then for efficiency the lighthouse should A) be built but only Sue should be allowed to use it. B) be built but only Mark should be allowed to use it. C) be built and both Sue and Mark should be allowed to use it. D) not be built because its marginal cost exceeds Sue's marginal benefit. E) not be built because its marginal cost exceeds both Sue's and Mark's marginal benefit. Answer: C Topic: Efficient quantity of a public good Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

55) The efficient quantity of a public good is A) the quantity produced by private firms. B) the quantity at which the marginal benefit equals the marginal cost. C) impossible to determine because each person's marginal benefit is different. D) the quantity at which the marginal benefit exceeds the marginal cost by as much as possible. E) the quantity determined by the intersection of the demand curve and the supply curve. Answer: B Topic: Efficient quantity of a public good Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 56) The efficient quantity of a public good can't be produced by private firms because A) only the government has the necessary resources. B) it is impossible to determine the efficient amount. C) consumers have an incentive to free ride and not pay for their share of the good. D) private firms aren't large enough. E) the price would be too high if private firms produced the goods. Answer: C Topic: Public good, private provision Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 57) If the two political parties propose similar or identical policies, they are following the principle of A) rational ignorance. B) inefficient overprovision. C) free riding. D) minimum differentiation. E) the commons. Answer: D Topic: Principle of minimum differentiation Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

58) ________ is the decision not to acquire information because the marginal cost of doing so exceeds the marginal benefit. A) Rational ignorance B) The principle of minimum differentiation C) A free rider D) Consumer ignorance E) The tragedy of the commons Answer: A Topic: Rational ignorance Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 59) Government bureaucracies over-provide public goods and grow larger because of their goal of ________ combined with ________ of the voters. A) budget maximization; rational ignorance B) budget minimization; irrational intelligence C) budget maximization; minimum differentiation D) budget maximization; irrational exuberance E) minimum differentiation; budget maximization Answer: A Topic: Inefficient overprovision Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 60) Consider the benefits and costs associated with the maintenance on U.S. transportation infrastructure, a public good. The efficient amount of maintenance on the infrastructure is determined by the intersection of the ________ curves. A) marginal social cost and marginal social benefit B) marginal benefit and marginal cost C) marginal private benefit and marginal private cost D) marginal external benefit and marginal external cost E) marginal social cost and marginal cost Answer: A Topic: Eye on U.S. Infrastructure Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

61) ________ are public goods. If bureaucrats want to ensure the efficient quantity is produced, ________. A) Life-saving drugs; marginal social benefit must be greater than marginal cost B) Cars; marginal cost must equal to marginal benefit C) Highways; marginal social benefit must be equal to marginal social cost D) Factories; marginal social cost must be greater than marginal cost E) U.S. exports; marginal cost must be greater than marginal benefit Answer: C Topic: Public good Skill: Level 5: Critical thinking Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

62) The figure shows the costs and benefits associated with the maintenance of interstate highways. If bureaucrats maintain the efficient number of miles, ________ miles will be maintained at a cost of ________. A) 25,000; $50 billion B) more than 25,000; $100 billion C) less than 25,000; $50 billion D) more than 25,000; $50 billion E) 25,000; $100 billion Answer: A Topic: Efficient quantity of a public good Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

63) The figure shows the costs and benefits associated with the maintenance of interstate highways. If bureaucrats maintain the efficient number of miles, the net benefit totals A) $100 billion. B) $50 billion. C) $37.5 billion. D) $87.5 billion. E) $12.5 billion. Answer: C Topic: Net benefit Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 64) The figure shows the costs and benefits associated with the maintenance of interstate highways. If bureaucrats maintain the efficient number of miles, the total benefit equals A) $87.5 billion. B) $100 billion. C) 25,000 miles. D) $50 billion. E) $37.5 billion. Answer: A Topic: Total benefit Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 11.3 Common Resources 1) In which of the following cases does the tragedy of the commons occur? i. cattle grazing on private ranches ii. catching lobsters off the coast of Florida iii. raising salmon on salmon farms iv. using legal services provided by the courts A) i only B) ii only C) ii and iii D) i and iv E) i and iii Answer: B Topic: Tragedy of the commons Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking 39 Copyright © 2021 Pearson Education, Inc.

2) The tragedy of the commons arises because ________ exceeds ________ when the resource is used. A) marginal social benefit; marginal private benefit B) marginal social cost; marginal private cost C) marginal social benefit; marginal private cost D) marginal private cost; marginal private benefit E) marginal private cost; marginal social cost Answer: B Topic: Tragedy of the commons Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking 3) Which of the following applies to the tragedy of the commons and a common resource? i. In the absence of government action, there are no incentives to prevent the overuse of the common resource. ii. When consumers take account of the marginal social benefit and marginal cost, overuse of the common resource occurs. iii. Even with government action, it is impossible to achieve the efficient level of use of a common resource. A) i only B) i and ii C) ii and iii D) i, ii, and iii E) ii only Answer: A Topic: Tragedy of the commons Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking 4) For a common resource, it is the case that A) MSC > MC. B) MSC < MC. C) MSB > MB. D) MB > MSB. E) None of the above answers is correct. Answer: A Topic: Tragedy of the commons Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

5) For a common resource, the marginal private benefit of the resource is A) greater than the marginal social benefit. B) equal to the marginal social benefit. C) less than the marginal social benefit. D) not comparable to the marginal social benefit. E) not defined because the resource is nonexcludable. Answer: B Topic: Tragedy of the commons Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking 6) To achieve the efficient amount of use of a common resource, the use should be such that ________ equals ________. A) marginal social cost; marginal private cost B) marginal social cost; marginal social benefit C) marginal private benefit; marginal cost D) marginal cost; marginal benefit E) marginal social benefit; marginal private cost Answer: B Topic: Efficient use of the commons Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking 7) A common resource is used efficiently if A) the output is maximized. B) marginal social benefit equals marginal social cost. C) marginal private benefit equals marginal cost. D) marginal social benefit is maximized. E) only the excess of the resource is utilized. Answer: B Topic: Efficient use of the commons Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

8) One way to overcome the tragedy of the commons is to A) assign property rights so that someone owns the resource. B) take away property rights so that no one owns the resource. C) leave the market alone because the market will reach an equilibrium in which the efficient amount of the resource is used. D) educate people in order to overcome the problem of rational ignorance. E) None of the above answers is correct. Answer: A Topic: Property rights Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking 9) A government policy that can lead to the efficient use of a common resource is A) a tax. B) a production quota. C) an emission fee. D) a price ceiling. E) None of the above answers is correct. Answer: B Topic: Quotas Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking 10) When a production quota is used to remedy the tragedy of the commons, then A) the quota is set so that use of the resource is where marginal private benefit equals marginal private cost. B) the quota is set so that use of the resource is where marginal private benefit equals marginal social benefit. C) the market equilibrium, but not the efficient outcome, is achieved. D) users of the resource have an incentive to cheat on the quota. E) previous users of the resource are given the incentive to avoid use of the resource. Answer: D Topic: Quotas Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

11) When producers are hard to monitor and property rights are too costly, ________ is (are) an effective method to achieve efficient use of a(n) ________. A) individual transfer quotas; public good B) making a government payment equal to the marginal private benefits; public good C) individual transferable quotas; common resource D) individual transferable quotas; excludable good E) making a government payment equal to the marginal private costs; common resource Answer: C Topic: Individual transferable quotas Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

Marginal social Tons of benefit fish (dollars per hour) 100 700 200 600 300 500 400 400 500 300 600 200 12) The table above shows the marginal social benefit of fishing in Mediterranean Sea. The marginal private cost of operating a fishing boat is the same for all producers, $300 per hour. The marginal social cost is twice the marginal private cost. With no government intervention, the equilibrium quantity of fish caught is ________ tons. A) 100 B) 200 C) 300 D) 400 E) 500 Answer: E Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

13) The table above shows the marginal social benefit of fishing in Mediterranean Sea. The marginal private cost of operating a fishing boat is the same for all producers, $300 per hour. The marginal social cost is twice the marginal private cost. The efficient quantity of fish caught is ________ tons. A) 100 B) 200 C) 300 D) 400 E) 500 Answer: B Topic: Efficient use of the commons Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking 14) The table above shows the marginal social benefit of fishing in Mediterranean Sea. The marginal private cost of operating a fishing boat is the same for all producers, $300 per hour. The marginal social cost is twice the marginal private cost. With no government intervention, the market is A) catching the efficient quantity of fish. B) underproducing by 100 tons of fish. C) underproducing by 300 tons of fish. D) overproducing by 300 tons of fish. E) overproducing by 200 tons of fish. Answer: D Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking 15) The table above shows the marginal social benefit of fishing in Mediterranean Sea. The marginal private cost of operating a fishing boat is the same for all producers, $300 per hour. The marginal social cost is twice the marginal private cost. If the government sets a production quota, to have the efficient quantity of fish caught, the quota should equal ________ tons of fish. A) 100 B) 200 C) 300 D) 400 E) 500 Answer: B Topic: Quotas Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Revised AACSB: Analytical thinking 44 Copyright © 2021 Pearson Education, Inc.

16) The table above shows the marginal social benefit of fishing in Mediterranean Sea. The marginal private cost of operating a fishing boat is the same for all producers, $300 per hour. The marginal social cost is twice the marginal private cost. If the government sets an efficient production quota, the profit on the last ton of fish caught is ________ per ton. A) $0 B) $100 C) $200 D) $300 E) $400 Answer: D Topic: Quotas Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Revised AACSB: Analytical thinking 17) The table above shows the marginal social benefit of fishing in Mediterranean Sea. The marginal private cost of operating a fishing boat is the same for all producers, $300 per hour. The marginal social cost is twice the marginal private cost. If the government uses individual transferrable quotas to achieve the efficient outcome, what is the total quantity of fish caught? A) 0 tons B) 100 tons C) 200 tons D) 300 tons E) 500 tons Answer: C Topic: Individual transferable quotas Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

18) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for cod, a common resource. The efficient outcome is A) 0 tons per week. B) 300 tons per week. C) 400 tons per week. D) None of the above answers is correct. Answer: B Topic: Efficient use of the commons Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking 19) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for cod, a common resource. The market equilibrium with no government intervention is A) 0 tons per week. B) 200 tons per week. C) 400 tons per week. D) 500 tons per week. E) None of the above answers is correct. Answer: C Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

20) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for cod, a common resource. The efficient outcome is A) 0 tons per week. B) 200 tons per week. C) 300 tons per week. D) 400 tons per week. E) 500 tons per week. Answer: C Topic: Efficient use of the commons Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking 21) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for cod, a common resource. A quota to prevent the overuse of the cod sets the catch equal to A) 0 tons per week. B) 200 tons per week. C) 400 tons per week. D) 300 tons per week. E) 500 tons per week. Answer: D Topic: Quotas Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

22) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for raising goats on a common pasture. The market equilibrium with no government intervention is raising A) 0 goats. B) 40 goats. C) 50 goats. D) 55 goats. E) None of the above answers is correct. Answer: C Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking 23) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for raising goats on a common pasture. The efficient outcome is raising A) 0 goats. B) 40 goats. C) 50 goats. D) 55 goats. E) None of the above answers is correct. Answer: B Topic: Efficient equilibrium Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

24) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for raising goats on a common pasture. A quota to prevent the overuse of the common pasture sets the number of goats to be raised equal to A) 0 goats. B) 40 goats. C) 50 goats. D) 55 goats. E) None of the above answers is correct. Answer: B Topic: Quotas Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking 25) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for raising goats on a common pasture. If property rights to the pasture are granted to a farmer so that the farmer owns the pasture, the farmer raises A) 0 goats. B) 40 goats. C) 50 goats. D) 55 goats. E) None of the above answers is correct. Answer: B Topic: Property rights Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking 26) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for raising goats on a common pasture. Suppose the government assigns individual transferable quotas (ITQ) set to achieve the efficient outcome. The market price of an ITQ is ________ per pound. A) $4.20 B) $2.00 C) $6.00 D) $4.00 E) $0.00 Answer: A Topic: Individual transferable quotas Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

27) The tragedy of the commons is the absence of incentives to A) correctly measure the marginal benefit. B) prevent under use of the common resource. C) prevent overuse and depletion of the common resource. D) discover the resource. E) prevent the free-rider problem. Answer: C Topic: Tragedy of the commons Skill: Level 1: Definition Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking 28) For a common resource such as fish, the marginal private benefit ________ the marginal social benefit and the marginal private cost ________ the marginal social cost. A) equals; is less than B) is greater than; equals C) equals; equals D) is less than; is less than E) is greater than; is greater than Answer: A Topic: Marginal private cost versus marginal social cost Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking 29) For a common resource, the marginal private cost curve generally ________ and the marginal social cost curve generally ________. A) slopes upward; slopes upward B) slopes upward; slopes downward C) slopes downward; slopes upward D) slopes downward; slopes downward E) is vertical; is horizontal Answer: A Topic: Marginal private cost versus marginal social cost Skill: Level 1: Definition Section: Checkpoint 11.3 Status: Revised AACSB: Analytical thinking

30) For a common resource, the equilibrium with no government intervention is such that ________ equals ________. A) marginal private benefit; marginal social cost B) marginal social benefit; marginal private cost C) marginal social cost; marginal social benefit D) marginal external benefit; marginal external cost E) marginal social benefit; marginal external cost Answer: B Topic: Inefficient equilibrium Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking 31) For a common resource, efficiency requires that the ________ equals the ________. A) marginal private benefit; marginal private cost B) marginal social benefit; marginal private cost C) marginal social benefit; marginal social cost D) marginal external benefit marginal external cost E) marginal social benefit; marginal external cost Answer: C Topic: Efficient use of the commons Skill: Level 1: Definition Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking 32) Which of the following is NOT a potential solution to the tragedy of the commons? A) setting a production quota B) granting individual transferable quotas C) subsidizing use of the resource D) establishing property rights to the resource E) None of the above is correct because they are all potential solutions to the tragedy of the commons. Answer: C Topic: Efficient use of the commons Skill: Level 1: Definition Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

33) If the government assigns private property rights to a common resource, then the A) resource is under-utilized. B) marginal private cost becomes equal to the marginal social cost. C) government needs to set a quota to achieve efficiency. D) resource becomes subject to the free riding problem. E) resource cannot be utilized. Answer: B Topic: Property rights Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking 34) The market price of an individual transferable quota is equal to the A) marginal private benefit. B) marginal social benefit. C) marginal private benefit minus the marginal cost. D) marginal social benefit minus the marginal cost. E) marginal private benefit plus the marginal cost. Answer: D Topic: Individual transferable quotas Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

35) The figure shows the costs and benefits associated with commercial harvesting of Florida lobster. The overharvesting equilibrium occurs when ________ lobster are caught. A) 400 B) between 250 and 400 C) 250 D) less than 250 E) The question errs. Information about the marginal benefit curve is needed. Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking 36) The figure shows the costs and benefits associated with commercial harvesting of Florida lobster. The efficient number equals ________ lobster where ________. A) 250; marginal benefit = marginal cost B) 250; marginal social cost = marginal social benefit C) between 250 and 400; marginal social cost > marginal cost D) 400; marginal cost = marginal social benefit E) 400; marginal cost = marginal benefit Answer: B Topic: Efficient use of the commons Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

37) The figure shows the costs and benefits associated with commercial harvesting of Florida lobster. Without government intervention, the deadweight loss equals area ________ at the overharvesting equilibrium. A) C + B B) A + B C) B D) C E) A Answer: C Topic: Deadweight loss Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Analytical thinking

11.4 Chapter Figures

The figure above shows the marginal benefit curve (MB) and marginal cost curve (MC) of surveillance satellites that provide national defense services. 1) In the figure above, the efficient quantity of satellites to produce is A) 200, because this is where marginal benefit equals marginal cost. B) 200, because this is where the market is in equilibrium. C) anywhere below 200, i.e., where marginal benefit exceeds marginal cost. D) anywhere above 200, i.e., where marginal benefit is below marginal cost. E) zero, because no one is willing to pay for satellites. Answer: A Topic: Efficient quantity of a public good Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

2) In the figure above, a private market will most likely produce A) no satellites because of the free-rider problem. B) 200 satellites because at this point marginal benefit equals marginal cost. C) less than 200 satellites because over this output range marginal benefit exceeds marginal cost. D) more than 200 satellites because over this output range marginal benefit is below marginal cost. E) 200 satellites because at this point the market will be in equilibrium. Answer: A Topic: Public good, private provision Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 3) Using the figure above, suppose there are two political parties, the Hawks and the Doves, which agree on all issues except for the quantity of defense satellites. The Hawks want 300 satellites and the Doves want 100 satellites. The voters are well informed and know what is best for them. The parties run a voter survey and discover the marginal benefit curve (MB). They also know the marginal cost curve (MC). What quantity of satellites will most likely result from this political process? A) 200, because unless each party proposes 200 satellites, the other party can beat it in an election B) 300, because the Hawks are more likely to win C) 100, because the Doves are more likely to win D) 200, because the parties will strike a deal: each will agree to give up 100 satellites E) Zero, because given the marginal benefit and the marginal cost of satellites, none should be provided. Answer: A Topic: Principle of minimum differentiation Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

4) Suppose that satellites are publicly provided. The voters are rationally ignorant, while the Defense Ministry is well informed. Using the figure above, which of the following quantities of satellites is most likely to be provided? A) 300 B) 200 C) 150 D) 100 E) zero Answer: A Topic: Efficient quantity of a public good Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 11.5 Integrative Questions 1) Which of the following can be rival and excludable? i. a good ii. a service iii. a resource A) i and ii B) i and iii C) ii and iii D) i, ii and iii E) only i Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 2) National defense is a ________ because ________. A) public good; it can be an overused resource B) public good; it is nonrival and nonexcludable C) common resource; no one has the incentive to pay for his or her share D) private good; no one has an incentive to conserve the good E) common resource; it suffers from the tragedy of the commons Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

3) Fish in the ocean are an example of ________ because they are ________. A) public good; nonexcludable and nonrival B) public good; rival and excludable C) common resource; rival and nonexcludable D) common resource; nonrival and nonexcludable E) private good; caught by private fishermen Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 4) A club good, such as Netflix, is A) nonrival and excludable. B) rival and excludable. C) nonrival and nonexcludable. D) rival and nonexcludable. E) None of the above answers is correct. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Revised AACSB: Reflective thinking 5) The free-rider problem applies A) to rival and excludable goods. B) to common resources. C) to nonrival and nonexcludable goods. D) when marginal social benefit exceeds marginal private benefit. E) when marginal social cost equals marginal private cost. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

6) The marginal benefit curve of a public good is calculated by ________ individual marginal ________ curves. A) averaging; cost/benefit B) horizontally summing; cost C) averaging; benefit D) vertically summing; benefit E) horizontally summing; benefit Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 7) The reason that private provision of a public good often leads to inefficiency is because A) private property rights are too costly to enforce. B) marginal private benefits are too costly to calculate. C) no one has the incentive to pay for the good. D) no one has an incentive to conserve the good. E) the tragedy of the commons occurs and too many public goods are provided. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 8) Which of the following is TRUE? i. A common resource is a resource that is nonrival and nonexcludable. ii. Issuing individual transferable quotas (ITQ) means that for users of common resources, the marginal cost plus the price of the ITQ equals the marginal social cost. iii. In an unregulated market, a common resource is used to the point at which marginal private benefit equals marginal cost. A) only i B) only ii C) only iii D) i and ii E) ii and iii Answer: E Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

9) Ocean fish are considered rival because a fish taken by one person is ________ for anyone else, and they are nonexcludable because it is ________ to prevent people from catching them. A) not available; difficult B) not available; easy C) available; difficult D) available; easy E) not available; fair Answer: A Topic: Excludable Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Application of knowledge 10) A seat at an N.B.A. Finals game is a ________ good because it is ________ and excludable. A) natural monopoly; rival B) public; rival C) private; rival D) natural monopoly; nonrival E) private; nonrival Answer: C Topic: Private good Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Application of knowledge 11) Because fire protection is a ________ good, the free-rider problem is avoided by public provision and financing through ________. A) public; taxes B) private; taxes C) natural monopoly; taxes D) public; grants E) public; vouchers Answer: A Topic: Public good Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Application of knowledge

12) For a common resource, such as tuna fish in the ocean, no fisher has a ________ incentive to conserve the resource and use it at an ________ rate. A) private; inefficient B) private; efficient C) public; inefficient D) public; efficient E) personal; inefficient Answer: B Topic: Tragedy of the commons Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Analytical thinking 11.6 Essay: Classifying Goods and Resources 1) What does it mean for a good to be "nonexcludable"? Are private goods nonexcludable? Are public goods nonexcludable? Are common resources nonexcludable? Answer: A good is nonexcludable if it is impossible or extremely costly to prevent someone from consuming it even if they have not paid for it. Private goods are excludable, not nonexcludable. Public goods are nonexcludable. Common resources are nonexcludable. Topic: Excludable, nonexcludable Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication 2) When describing goods and services, what is meant by the terms "rival" and "nonrival?" Are private goods rival or nonrival? Are public goods rival or nonrival? Are common resources rival or nonrival? Answer: A good is rival if its use by one person decreases its consumption by other people. A good is nonrival if its use by one person does not decrease its consumption by other people. Private goods are rival. Public goods are nonrival. Common resources are rival. Topic: Rival, nonrival Skill: Level 1: Definition Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication

3) A few years back, The Wall Street Journal reported that the government of Thailand "plans to launch a chain of more than 3,000 Thai restaurants world-wide over the next five years, with the largest number, more than 1,000, slated for the United States." The Thai government will have a 30 percent minority stake in the restaurants and the rest will be given to Thai owners. The country's deputy commerce minister explains that the government will play an active role in drawing up menus, making sure that genuine Thai food is served and ensuring that 70 percent of supplies for the restaurants are imported from Thailand. Because the Thai government will be part owner of these restaurants, are these restaurants public goods? Answer: Although the government of Thailand has a minority stake in these restaurants, these restaurants are both rival and excludable. Hence these restaurants are like all restaurants, specifically, they are private goods. In defining a public good, the source of financing is irrelevant. To be a public good, the good must be nonrival and nonexcludable and a restaurant is neither. Topic: Public good Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Analytical thinking 4) Is a sailboat purchased in Victoria, British Columbia, a private good or a public good? Answer: The sailboat is a private good. The sailboat has none of the characteristics of a public good. First, people can easily be excluded from using the boat. Basically, the only people allowed on the boat are the people the owner allows on the boat. Second, the owner's use of the boat prevents other people from simultaneously using the boat. That is, the owner's consumption of the boat decreases the consumption by other consumers. Topic: Private good Skill: Level 3: Using models Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication 5) What are the differences between public goods and private goods? Answer: Public goods are ∙ nonrival, which means that consumption by one person doesn't decrease the quantity available for others' consumption, and ∙ nonexcludable, so that it is impossible or very costly to prevent people from consuming the good even if they did not pay for the good. In contrast, private goods are ∙ rival, so that consumption by one person decreases the amount available for consumption by another person, and ∙ excludable, which means that it is possible to prevent someone from enjoying the benefits of consuming the good unless they pay for the good. Topic: Public goods versus private goods Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication 62 Copyright © 2021 Pearson Education, Inc.

6) You are studying with a friend and your friend says, "private goods are excludable and nonrival, while public goods are nonexcludable and rival." Do you agree? Answer: No, private goods are excludable and rival, while public goods are nonexcludable and nonrival. Contrary to what your friend asserted, it is common resources rather than public goods that are nonexcludable and rival. Topic: Public goods versus private goods Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication 7) Some resources are private and others are common. Define a common resource, explain the definition, and provide an example of a private resource and a common resource. Answer: A common resource is rival and nonexcludable. Because the resource is rival, if one person uses some of the resource, the person decreases the use of the resource by other people. And because the resource is nonexcludable, it is not possible to prevent someone from using the resource. An example of a private resource is a gold mine: This resource is rival but is excludable. It is rival because one person's use of the gold decreases the consumption of other people. And it is excludable because the owner of the gold mine can keep anyone out of the mine that he or she wants to keep out of the mine. An example of a common resource is fish in the ocean. This resource is rival and nonexcludable. It is rival because one person's catch of a fish decreases the catch of other people. And it is nonexcludable because a fisherman cannot keep anyone from fishing in the river, lake, or ocean. Topic: Common resource Skill: Level 2: Using definitions Section: Checkpoint 11.1 Status: Old AACSB: Written and oral communication 11.7 Essay: Public Goods and the Free-Rider Problem 1) What is the free-rider problem and with what is it associated? Answer: The free-rider problem is associated with public goods. The free-rider problem is that no one has an incentive to pay their share of the cost of providing a public good. Hence everyone tries to free ride, that is, consume the public good without paying for it. Topic: Free rider Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking

2) What is the free-rider problem? What results from the free-rider problem? What is a solution to the free-rider problem? Answer: The free-rider problem occurs when people enjoy the benefits from a good or service without paying for it. The free-rider problem occurs with public goods because no one can be excluded from using them without paying for them. As a result, the free-rider problem is that the private market produces too little of these goods. To produce the efficient quantity, the government can intervene by taxing people and using those funds to pay for the public good. Topic: Free rider Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Written and oral communication 3) "The principle of increasing marginal cost does not apply to public goods." Is this statement correct or not? Answer: The statement is false. For both public goods and private goods, the marginal cost increases as more of the good is produced. Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Reflective thinking 4) Protection of rivers in Idaho is a public good. If the marginal cost of protecting rivers in Idaho exceeds the marginal benefit of river protection, is there more than, less than, or the efficient amount of river protection taking place? Answer: If the marginal cost exceeds the marginal benefit, there is more than the efficient amount of protection taking place. The efficient amount is the quantity such that the marginal benefit equals the marginal cost. Any other amount creates a deadweight loss. Topic: Efficient quantity of a public good Skill: Level 2: Using definitions Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

5) How is the efficient quantity of public goods determined? Answer: The efficient quantity of a public good is determined in the same way as the efficient quantity of any good: by comparing marginal cost and marginal benefit, and producing where one equals the other. The marginal cost of a public good is calculated similarly as the marginal cost for a private good. It is based on the cost of producing one more unit of the good. The marginal benefit, however, is calculated differently for a public good than for a private good. For a public good, the economy's marginal benefit is determined by summing the INDIVIDUAL marginal benefits at each quantity of the public good. Once the marginal cost and marginal benefits are known, the efficient quantity is equal to the quantity such that the marginal cost equals the marginal benefit. Topic: Efficient quantity of a public good Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Written and oral communication 6) Why isn't national defense provided by free markets? Answer: National defense is a public good. This fact means that it is hard to exclude anyone from consuming the benefits of national defense. If left to the free market, it would be very difficult for private companies to charge people for protection. People would be unwilling to pay for the service because they can get it without paying. The free-rider problem would make the ability to earn a profit a difficult or impossible prospect and hence little or no defense would be provided. Topic: Private provision Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Written and oral communication 7) What is rational ignorance? Answer: Rational ignorance is the voter's decision not to acquire information about an issue because the marginal cost of doing so exceeds the expected marginal benefit. Thus the voter remains (rationally) ignorant about the issue. Topic: Rational ignorance Skill: Level 1: Definition Section: Checkpoint 11.2 Status: Old AACSB: Written and oral communication

8) Why is watching sports more important to many prospective voters than watching the news? In your answer, mention the role played by rational ignorance and the cost of gathering information. Answer: It takes a great deal of time to learn about all of the issues that affect our lives. The marginal cost of information gathering can be very high for many people, especially when we are very busy with work, school, personal matters, and so forth. Quite likely the cost of gathering information about sports is less than that of politics. Most assuredly, it is easy to determine the key elements of sports (e.g., who won, who lost, standings, rankings, and so on). It is much more difficult to gather the relevant information about all the details of various policy proposals, plus it is significantly more likely that the proposals will be changed than is the likelihood that the outcome of an already played game will be changed. Thus people are more likely to remain rationally ignorant of political events while staying informed about sporting events. Topic: Rational ignorance Skill: Level 5: Critical thinking Section: Checkpoint 11.2 Status: Old AACSB: Written and oral communication 9) Under what conditions will the political process provide an inefficient amount of a public good? Answer: The government will provide an inefficient amount of a public good when voters are rationally ignorant of the marginal benefits and marginal costs of the good. In this case, bureaucrats, intent on maximizing the size of their budgets, will provide an inefficiently large quantity of the good. Topic: Inefficient overprovision Skill: Level 3: Using models Section: Checkpoint 11.2 Status: Old AACSB: Written and oral communication

10) The table above shows the marginal benefit that arises from providing police protection in an economy of two people, Paul and Art. a. Construct a table of the economy's marginal benefit from providing police protection. b. What is the economy's marginal benefit from having 3 police cars on duty? Answer:

a. The table showing the economy's marginal benefit from providing police protection is above. At each quantity, the economy's marginal benefit is the sum of Paul's marginal benefit plus Art's marginal benefit. b. The economy's marginal benefit from having three cars on duty is $90. Topic: Marginal benefit Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

11) Ten homeowners live around Lake Alice. Unfortunately, the lake is contaminated with various chemicals and the level of contamination is currently 20 parts per million. All the homeowners benefit equally if the level of contamination is reduced. The table above gives the marginal cost and marginal benefit for removing the contaminants from the lake. a. What will be the parts per million if the homeowners alone are in charge of reducing the contaminants? b. What is the efficient amount of contamination? Answer: a. Homeowners will not reduce the contaminants at all because a free-rider problem prevails. The level of contamination will be 20 parts per million. b. The efficient level of contamination is 10 parts per million, because that is the level for which the marginal cost is equal to the marginal benefit. Topic: Efficient quantity of a public good Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking

12) The table above provides information about the marginal cost and marginal benefit of streetlights, which are a public good. a. What quantity would a private company provide? Why? b. What is the efficient quantity? Answer: a. Street lights are a public good, so a private company would provide zero street lights. The company would provide zero because everyone would free ride, that is, no one would voluntarily pay for the street lighting. Because the company knows that no one will pay, it will not provide any street lights. b. The efficient quantity is 3 street lights per block because that is the quantity that equates the marginal benefit to the marginal cost. Topic: Efficient quantity of a public good Skill: Level 4: Applying models Section: Checkpoint 11.2 Status: Old AACSB: Analytical thinking 11.8 Essay: Common Resources 1) What is the tragedy of the commons? Answer: The tragedy of the commons is the absence of incentives to prevent the overuse and depletion of a commonly owned resource like fish in the oceans and open pasture land upon which anyone can graze sheep. A common resource is rival, so that one person's use of the resource decreases other people's use, but nonexcludable, so no one can be prevented from using the common resource. Topic: Tragedy of the commons Skill: Level 1: Definition Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication

2) "The problem with a common resource is that no one gets to use the resource." Comment on the preceding assertion. Answer: The assertion is totally false; the problem with a common resource is that too many people use the resource so that it is overused and depleted. A common resource is rival, so that one person's use of the resource decreases other people's use, but nonexcludable, so that no one can be prevented from using the common resource. As a result, everyone has the incentive to use the resource and no one has the incentive to conserve the resource. Topic: Tragedy of the commons Skill: Level 1: Definition Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication 3) Why are fish in the ocean an example of a resource that suffers from the tragedy of the commons but cattle grazing in a farmer's pasture do not suffer from the tragedy of the commons? Answer: Fish in the ocean are a common resource because as they are rival, so that one person catching a fish prevents others from catching the same fish, and they are nonexcludable, so that no one can be prevented from fishing. As a result, over-fishing is likely to occur. But cattle grazing in a farmer's pasture are not a common resource. The cattle are rival, so that one person butchering a steer prevents others from butchering the same steer, but the cattle are excludable, so that no one can butcher a steer unless the cattle's owner is compensated. As a result, the owner has the incentive to conserve the resource, that is, the owner has the incentive to insure that the cattle are not overused. Topic: Tragedy of the commons Skill: Level 3: Using models Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication 4) How does the marginal social cost curve of a common resource compare to the marginal private cost curve of the common resource? If there is a difference, why is there a difference? If there is not a difference, why is there not a difference? Answer: The marginal social cost curve of a common resource lies above the marginal private cost curve. The marginal private cost from a common resource takes account of only the cost accruing to the user of the common resource. But when an additional person uses a common resource, the additional person increases the marginal cost of other users. This additional cost is an external cost. The marginal social cost from a common resource adjusts the marginal private cost by adding the marginal external cost. So, the marginal social cost from use of a common resource is greater than the marginal private cost. Topic: Marginal social cost of a common resource Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication

5) How does the government determine the quota amount that will produce an efficient use of a common resource? Answer: The government must determine the marginal social benefit and the marginal social cost of the common resource. By equating marginal social benefit to marginal social cost, the efficient use of a common resource is determined. A quota is set to this level of production. Producers are assigned a portion of this quota. As long as no one cheats on his or her quota, the efficient outcome occurs. Topic: Quotas Skill: Level 2: Using definitions Section: Checkpoint 11.3 Status: Old AACSB: Written and oral communication 6) What is an individual transferable quota (ITQ)? Answer: An ITQ is a production limit that is assigned to an individual who is free to transfer the quota to someone else. An ITQ is used in a market where there are common resources that might otherwise be overused. Topic: Individual transferable quotas Skill: Level 1: Definition Section: Checkpoint 11.3 Status: Old AACSB: Reflective thinking

Foundations of Microeconomics, 9e (Bade) Chapter 12 Markets with Private Information 12.1 The Lemons Problem and its Solution 1) Private information is a situation in which A) two parties to an exchange have information that is available to outsiders if they ask. B) one party to an exchange has information that is not available to the other. C) the marginal cost of a person's obtaining additional information is zero. D) the marginal cost of making information available to one more person is zero. E) outsiders have relevant information that is not available to the people in the market. Answer: B Topic: Private information Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 2) Of the following, the best example of private information is when A) Michael knows the price of a gallon of milk at the minimart but Michelle doesn't know. B) you are selling a used car and you know your used car's defects but a potential buyer cannot find out about them until after buying. C) you are selling a used car and you do not know your used car's defects. D) you don't know the quality of a used car and must hire a trained mechanic who tells you all its defects. E) you pay the owner of a used car a little extra and she lets you know all of the car's defects. Answer: B Topic: Private information Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 3) Adverse selection is created by A) incentives to change behavior after two parties have reached an agreement. B) risk. C) signaling. D) taxes. E) private information. Answer: E Topic: Adverse selection Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

4) Adverse selection can occur when A) all parties have full information. B) one party has information not available to the other party. C) information is not full but both parties have the same information. D) incentives result in one party not reaching an agreement with the other party. E) nobody has any information. Answer: B Topic: Adverse selection Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 5) The tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party is known as A) adverse selection. B) a pooling selection. C) moral hazard. D) the market for oranges. E) a signal. Answer: A Topic: Adverse selection Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 6) Adverse selection is the tendency for people who accept contracts to be those who A) buy goods and then regret it later. B) buy goods for more than their own reservation price. C) want to avoid the lemons problem. D) plan to use private information to the disadvantage of the less well-informed party. E) engage in a number of searches larger than that specified in the contract. Answer: D Topic: Adverse selection Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

7) In the used car market, adverse selection is a problem primarily when A) sellers cannot judge buyers' creditworthiness. B) buyers cannot signal their willingness to buy. C) buyers cannot determine the quality of a used car. D) sellers offer warranties on all used cars. E) sellers and buyers both agree that a particular used car is a lemon. Answer: C Topic: Lemons problem Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 8) The used car market without warranties suffers from A) perfect competition. B) a separating equilibrium. C) oligopoly. D) adverse selection. E) excessive signaling. Answer: D Topic: Lemons problem Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Revised AACSB: Reflective thinking 9) Without warranties, used car buyers can assume that all used cars are "lemons" because of A) moral hazard. B) false signals. C) moral dilemma. D) adverse selection. E) adverse reaction. Answer: D Topic: Lemons problem Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

10) In the used car market without warranties, adverse selection results in A) sellers of "lemons" claiming that their car is a lemon. B) only lemons being available for sale. C) the market price of used cars equal to that of good used cars. D) an efficient pooling equilibrium. E) all of the above. Answer: B Topic: Lemons problem Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 11) Suppose that there are only two types of used cars, peaches and lemons. Peaches are worth $10,000 and lemons are worth $4,000. Without effective signals such as warranties, the owners of peaches cannot sell their cars for $10,000 because the A) owners of peaches cannot convince buyers that their cars are worth $10,000. B) buyers cannot convince owners of peaches to sell their cars for $10,000. C) owners of lemons cannot convince buyers that their cars are worth more than $4,000. D) buyers cannot convince owners of lemons to sell their cars for more than $4,000. E) buyers cannot convince owners of lemons to sell their cars for $4,000. Answer: A Topic: Market for used cars Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 12) Suppose that there are only two types of used cars, peaches and lemons. Peaches are worth $10,000, and lemons are worth $6,000. Three fourths of all used cars are peaches, and one fourth are lemons. In a market with no signals, for instance, a market without warranties, the average value of cars actually sold will be A) $6,000. B) $7,000. C) $7,500. D) $9,000. E) $10,000. Answer: A Topic: Market for used cars Skill: Level 4: Applying models Section: Checkpoint 12.1 Status: Old AACSB: Analytical thinking

13) Suppose there are only two kinds of cars in the market for used cars: lemons and good cars. A lemon is worth $1,000 both to its current owner and to anyone who buys it. A good car is worth $8,000 to its current and potential owners. Buyers can't tell whether a car is a lemon until after they have bought the car, and there is no warranty. What is the equilibrium price of a used car? A) $8,000 B) $1,000 C) $4,500 D) $9,000 E) The equilibrium price depends on how many lemons and how many good cars are traded. Answer: B Topic: Market for used cars Skill: Level 4: Applying models Section: Checkpoint 12.1 Status: Old AACSB: Analytical thinking 14) Signals are believable when the cost of sending a ________ is known to be ________. A) false signal; low B) false signal; high C) true signal; low D) true OR false signal; low E) true signal; high Answer: B Topic: Private information; signals Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 15) Your grade point average acts as ________ to potential employers. A) a signal B) private information C) a reservation price D) a guarantee E) insurance Answer: A Topic: Private information; signals Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

16) One of the ways the market for used cars copes with the problems associated with private information is through the offering of A) leases. B) warranties. C) low interest rates. D) high prices for high-quality used cars. E) low prices. Answer: B Topic: Market for used cars, warranties Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 17) Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because A) car sellers would never lie. B) car buyers are gullible. C) signals lead to efficient pooling equilibriums. D) the signal cannot be false. E) a false signal can be costly to the seller. Answer: E Topic: Market for used cars, warranties Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 18) Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because A) a warranty on a lemon is costly to the seller. B) warranties are only offered on lemons. C) the signal cannot be false. D) adverse selection means that warranties will not be used as a signal. E) a false signal has no effect on the seller. Answer: A Topic: Market for used cars, warranties Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

19) Warranties in the used car market ________ the problem of private information thereby causing the price of good and bad used cars to ________. A) reduce; be the same B) reduce; differ C) magnify; be the same D) magnify; differ E) None of the above answers is correct because warranties have nothing to do with private information. Answer: B Topic: Market for used cars, warranties Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 20) In the used car market with no warranties, the equilibrium is a ________ and there is ________. A) pooling equilibrium; inefficiency, partly because of oversupply of good cars B) pooling equilibrium; inefficiency, partly because of oversupply of lemons C) separating equilibrium; no inefficiency D) separating equilibrium; inefficiency, partly because of oversupply of lemons E) pooling equilibrium; no inefficiency Answer: B Topic: Market for used cars, inefficient Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Analytical thinking 21) In the used car market with warranties, the market for lemons (poor quality used cars) is ________ and the market for good cars is ________. A) efficient; efficient B) inefficient because of oversupply; inefficient because of undersupply C) inefficient because of oversupply; inefficient because of oversupply D) efficient; inefficient because of undersupply E) inefficient because of oversupply; efficient Answer: A Topic: Market for used cars, efficient Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Analytical thinking

22) In the used car market with warranties, the equilibrium is a ________ and there is ________. A) pooling equilibrium; inefficiency, partly because of oversupply of good cars B) pooling equilibrium; inefficiency, partly because of oversupply of lemons (poor quality used cars) C) separating equilibrium; no inefficiency D) separating equilibrium; inefficiency, partly because of oversupply of lemons (poor quality used cars) E) pooling equilibrium; no inefficiency Answer: C Topic: Market for used cars, efficient Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Analytical thinking 23) In the used car market with warranties, the equilibrium is a ________ and the lemons problem is ________. A) pooling equilibrium; solved B) pooling equilibrium; unresolved C) separating equilibrium; unresolved D) separating equilibrium; solved E) pooling equilibrium; possibly solved and possibly unresolved, depending on whether good used cars sell for a higher price than do lemons Answer: D Topic: Market for used cars, efficient Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Analytical thinking 24) Asymmetric information means that A) the buyer MUST have information that the seller does not have. B) the seller MUST have information that the buyer does not have. C) the buyer and seller have the same information. D) either the buyer has information that the seller does not have OR the seller has information that the buyer does not have. E) None of the above answers is correct. Answer: D Topic: Private information Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

25) The fact that people who know they are risky drivers are more likely to buy auto insurance reflects A) adverse selection. B) moral hazard. C) a separating equilibrium. D) signaling. E) the lemons problem. Answer: A Topic: Adverse selection Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 26) The lemons problem in the used car market is that A) the price of a lemon is too high. B) the price of a lemon is too low. C) no lemons are bought and sold. D) only lemons are bought and sold. E) Both answers A and D are correct. Answer: D Topic: Lemons problem Skill: Level 1: Definition Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 27) If buyers cannot assess the quality of used cars and there are no warranties A) only lemons are sold. B) only good used cars are sold. C) good cars are sold at a higher price than bad cars. D) there is no adverse selection problem. E) lemons and good cars sell for the same price. Answer: A Topic: Lemons problem Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking

28) JCPenney guarantees to refund a customer's money if the customer returns poorly made clothing. This guarantee is an example of A) the adverse selection problem. B) the moral hazard problem. C) the cost of risk. D) signaling. E) a lemon problem. Answer: D Topic: Signals Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 29) In the used car market, with a pooling equilibrium the price of a lemon is ________ the price of a good used car and with a separating equilibrium the price of a lemon is ________ the price of a good used car. A) less than; equal to B) equal to; less than C) equal to; more than D) more than; more than E) equal to; equal to Answer: B Topic: Market for used cars Skill: Level 4: Applying models Section: Checkpoint 12.1 Status: Old AACSB: Analytical thinking 30) CARFAX is a service that provides comprehensive vehicle history reports on accidents and maintenance for used cars. By providing this reliable information to used car buyers, CARFAX helps A) solve the lemon problem. B) create only adverse selection. C) create only moral hazard. D) create a pooling equilibrium. E) create both adverse selection and moral hazard. Answer: A Topic: Market for used cars Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Analytical thinking

31) CARFAX is a service that provides comprehensive vehicle history reports on accidents and maintenance for used cars. By providing this reliable information to used car buyers, CARFAX helps ________ in the used car market. A) create adverse selection B) create a pooling equilibrium C) create a separating equilibrium D) drive down prices E) create the need for warranties Answer: C Topic: Market for used cars Skill: Level 5: Critical thinking Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 12.2 Information Problems in Insurance Markets 1) The idea of an insurance company "pooling" the risk means that A) the risk is completely eliminated from society. B) the insurance company requires buyers to pay a large deductible. C) the risk is spread over a large population. D) the insurance company insists on a pooling equilibrium. E) moral hazard and adverse selection are eliminated. Answer: C Topic: Pooling risk Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 2) In the auto insurance market, who is most likely to have private information that leads to adverse selection? A) the government agency that regulates insurance companies B) the insurance company C) the drivers D) the insurance company and the drivers E) the government regulating agency and the insurance company Answer: C Topic: Private information Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

3) In the insurance market, private information A) creates moral hazard but eliminates adverse selection. B) creates adverse selection but eliminates moral hazard. C) creates both moral hazard and adverse selection. D) eliminates both moral hazard and adverse selection. E) means that screening is unnecessary. Answer: C Topic: Private information Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 4) In the insurance market, moral hazard and adverse selection are the result of A) poorly functioning markets. B) government intervention. C) private information. D) treachery. E) a separating equilibrium. Answer: C Topic: Private information Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 5) Moral hazard is A) the tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party. B) when one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party. C) a situation in which only bad quality items are bought and sold. D) absent after a person who dislikes risk buys insurance against the risk. E) an action taken outside a market that conveys information that can be used by that market. Answer: B Topic: Moral hazard Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

6) In an insurance market, moral hazard exists chiefly because of A) economies of scale. B) adverse selection. C) diseconomies of scale. D) private information. E) public information. Answer: D Topic: Moral hazard Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 7) Because Don has health insurance, he is more likely to see the doctor when he has a cold. This is an example of A) adverse selection. B) moral hazard. C) the lemons problem. D) both moral hazard and adverse selection. E) private information. Answer: B Topic: Moral hazard Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 8) If Sally drives less carefully after buying auto insurance, she illustrates A) adverse selection. B) negative selection. C) screening risk. D) moral hazard. E) lemon hazard. Answer: D Topic: Market for insurance; moral hazard Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

9) In the market for automobile insurance, moral hazard implies that A) those who are insured might take greater risks. B) those who are uninsured might take greater risks. C) insured and uninsured alike will take greater risks. D) screening will have no effect in the market. E) drivers with greater risks are more likely to buy insurance. Answer: A Topic: Market for insurance; moral hazard Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 10) Dan, age 19, may have trouble buying auto insurance at a low price because insurance companies A) have private information that he is a risky driver. B) have private information that his signals are valid. C) fear that he has private information that his deductible is too high. D) fear that he has private information that he is a risky driver. E) operate in markets in which screening is inefficient. Answer: D Topic: Market for health insurance; adverse selection Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 11) In the market for automobile insurance, adverse selection implies that A) those who are insured might take greater risks. B) those who are uninsured might take greater risks. C) private information cannot be successfully screened. D) insured and uninsured alike will take greater risks. E) drivers with greater risks are more likely to buy insurance. Answer: E Topic: Market for insurance; adverse selection Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

12) In the market for automobile insurance, adverse selection implies that A) drivers with greater risks want to buy a policy without deductibles. B) drivers with greater risks want to buy a policy with large deductibles. C) uninsured drivers will drive recklessly. D) insured drivers will drive recklessly. E) moral hazard does not exist in this market. Answer: A Topic: Market for insurance; adverse selection Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 13) Life insurance companies often give applicants a physical examination to prevent A) moral hazard. B) screening. C) adverse selection. D) signaling. E) warranties. Answer: C Topic: Market for insurance; adverse selection Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 14) Bill purchases property insurance for his office building, which includes coverage for fire damage. The policy offers premium discounts for smoke detectors, fire alarms, fire extinguishers and sprinkler systems. This is an incentive system to help avoid A) adverse selection. B) adverse signals. C) moral hazard. D) screening. E) None of the above answers is correct. Answer: A Topic: Market for insurance; adverse selection Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

15) "Screening" means that an auto insurance company is A) enforcing a pooling equilibrium. B) ignoring all private information. C) creating an incentive to eliminate moral hazard even though it reinforces the possibility of adverse selection. D) creating an incentive to eliminate adverse selection even though it reinforces the possibility of moral hazard. E) creating an incentive for a risky driver to reveal that he or she is risky. Answer: E Topic: Market for insurance; screening Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 16) When an auto insurance company is screening, it is A) ignoring the possibility of moral hazard in order to minimize adverse selection. B) attempting to keep its private information private. C) trying to determine if a driver is an aggressive driver or a safe driver. D) making its private information public. E) marketing its policies to customers. Answer: C Topic: Market for insurance; screening Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 17) Auto insurance companies charge a lower premium to drivers who carry a higher deductible because A) insurance companies are not profit maximizers. B) a driver's riskiness increases as the driver's deductible increases. C) a high deductible signals a high risk. D) insurance companies prefer that drivers carry no deductible. E) a high deductible reveals that driver is a careful driver. Answer: E Topic: Market for insurance; screening Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

18) One way of screening in the automobile insurance market is for companies to A) offer policies with different deductibles and different premiums. B) insure only careful drivers. C) insure only risky drivers. D) eliminate policies with no-claim bonuses because these policies are usually not profitable. E) offer warranties. Answer: A Topic: Market for insurance; screening Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 19) In the market for auto insurance, in a pooling equilibrium A) risky and safe drivers pay the same premium for insurance. B) risky drivers pay a larger premium than do safe drivers for insurance. C) risky drivers pay a smaller premium than do safe drivers for insurance. D) risky drivers cannot obtain insurance. E) safe drivers cannot obtain insurance. Answer: A Topic: Market for insurance; pooling and separating equilibriums Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 20) In the market for auto insurance, in a separating equilibrium A) risky and safe drivers pay the same premium for insurance. B) risky drivers pay a larger premium than do safe drivers for insurance. C) risky drivers pay a smaller premium than do safe drivers for insurance. D) risky drivers cannot obtain insurance. E) safe drivers cannot obtain insurance. Answer: B Topic: Market for insurance; pooling and separating equilibriums Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

21) In the market for auto insurance, with a pooling equilibrium ________ and with a separating equilibrium ________. A) aggressive drivers pay a higher premium than do safer drivers; aggressive drivers pay a higher premium than do safer drivers B) no one can buy auto insurance; aggressive drivers pay a higher premium than do safer drivers C) aggressive and safe drivers pay the same premium; aggressive and safe drivers pay the same premium D) aggressive and safe drivers pay the same premium; aggressive drivers pay a higher premium than do safer drivers E) aggressive drivers pay a higher premium than do safer drivers; aggressive and safe drivers pay the same premium Answer: D Topic: Market for insurance; pooling and separating equilibriums Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 22) A safe driver is likely to prefer an auto insurance policy that has a ________ deductible and a ________ premium. A) high; high B) high; low C) low; high D) low; low E) None of the above answers is correct because private information has no effect in the market for auto insurance. Answer: B Topic: Market for insurance; screening Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 23) In the United States, of all types of insurance, people spend the most on ________ insurance. A) health B) hurricane C) auto D) life E) property and casualty Answer: A Topic: Market for insurance Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

24) Insurance companies A) pool risk and enable everyone to share the costs of bad outcomes. B) never can earn a profit because they accept risk. C) eliminate the risk of a bad outcome. D) know who will have a bad outcome. E) are risk averse. Answer: A Topic: Market for insurance Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 25) When Sam makes an agreement and then behaves after the agreement in a way to increase his benefits and harm then other party to the agreement, Sam is illustrating A) moral hazard. B) adverse selection. C) signaling. D) the cost of contracting. E) a pooling equilibrium. Answer: A Topic: Market for insurance; moral hazard Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 26) Ben is an aggressive driver so he is more likely to buy auto insurance. This situation illustrates the idea of A) moral hazard. B) adverse selection. C) the lemon problem. D) inefficiency. E) a pooling equilibrium. Answer: B Topic: Market for insurance; adverse selection Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

27) If you have private information that you are a riskier driver than your record indicates, you are likely to buy an insurance policy that has a ________ deductible and a ________ premium. A) high; high B) high; low C) low; high D) low; low E) None of the above answers is correct because private information has no effect in the market for auto insurance. Answer: C Topic: Market for insurance; screening Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 28) Screening A) leads to a pooling equilibrium in the insurance market. B) means an uninformed person passes knowledge to an informed person. C) makes no-claim bonuses unnecessary. D) explains why insurance companies offer low-premium, high-deductible policies and highpremium, low-deductible policies. E) makes the insurance market inefficient. Answer: D Topic: Market for insurance; screening Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 29) Progressive Auto Insurance offers applicants the chance to temporarily install its Snapshot device to monitor their driving habits prior to signing up for insurance. This device A) allows screening to occur. B) creates adverse selection. C) drives auto insurance premiums higher for all drivers. D) drives auto insurance deductible rates higher for all drivers. E) creates a pooling equilibrium. Answer: A Topic: Market for insurance; screening Skill: Level 5: Critical thinking Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

30) Progressive Auto Insurance offers applicants the chance to temporarily install its Snapshot device to monitor their driving habits prior to signing up for insurance. This practice will result in A) a pooling equilibrium B) a separating equilibrium. C) lower deductibles for safe drivers. D) low premiums for unsafe drivers. E) equal premiums for all drivers. Answer: B Topic: Market for insurance; pooling and separating equilibriums Skill: Level 5: Critical thinking Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

31) The figure shows the market for auto insurance. Progressive Auto Insurance offers applicants to temporarily install its Snapshot device to monitor their driving habits prior to signing up for insurance. This practice should result in ________ paying a premium of ________ per year. A) 120 million safe drivers; $500 B) 100 million drivers; $500 C) 120 million safe drivers; $700 D) 80 million unsafe drivers; $500 E) 80 million unsafe drivers; $700 Answer: A Topic: Market for insurance; pooling and separating equilibriums Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Application of knowledge

32) The figure shows the market for auto insurance. Progressive Auto Insurance offers applicants to temporarily install its Snapshot device to monitor driving habits prior to signing up for insurance. This practice should result in ________ paying a premium of ________ per year. A) 100 million safe drivers; $900 B) 120 million safe drivers; $700 C) 80 million unsafe drivers; $900 D) 80 million safe drivers; $500 E) 100 million drivers; $700 Answer: C Topic: Market for insurance; pooling and separating equilibriums Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Application of knowledge 33) The figure shows the market for auto insurance. Progressive Auto Insurance offers applicants to temporarily install its Snapshot device to monitor driving habits prior to signing up for insurance. Which of the following statements are TRUE as a result of this practice? i. Safe drivers will pay a $500 premium and a high deductible. ii. Unsafe drivers will pay a $900 premium and a low deductible. iii. A pooling equilibrium will occur. A) i and iii B) ii and iii C) i only D) ii only E) i and ii only Answer: E Topic: Market for insurance; pooling and separating equilibriums Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Application of knowledge

34) The figure shows the market for car insurance. If the companies can't determine who is a safe or an unsafe driver, ________ drivers are insured at a premium of ________. A) only safe drivers; $1,000 B) only safe drivers: $800 C) only 100 unsafe drivers; $800 D) 150 safe and unsafe; $1,000 E) 150 unsafe; $1,000 Answer: D Topic: Market for insurance; pooling and separating equilibriums Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Application of knowledge 35) The figure shows the market for car insurance. If the companies can't determine who is a safe or unsafe driver, a ________ equilibrium occurs and the premium is ________ per year. A) pooling; $1,000 B) pooling; $800 C) pooling; between $800 and $1,000 D) separating; $1,000 E) separating; $800 Answer: A Topic: Market for insurance; pooling and separating equilibriums Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Application of knowledge

12.3 Health-Care Markets 1) In the health insurance market, adverse selection occurs when A) chronically ill people buy health insurance. B) insured people go to the doctor unnecessarily. C) patients sue their doctor. D) people with health insurance tend to behave more recklessly. E) chronically ill people are unable to buy health insurance. Answer: A Topic: Market for health insurance; adverse selection Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking 2) If a health insurance company offers coverage regardless of age, health status, or smoking history, it is likely to suffer A) moral hazard problems. B) adverse selection problems. C) lower costs. D) low demand for its product. E) a screening equilibrium. Answer: B Topic: Market for health insurance; adverse selection Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking 3) In the health insurance market, moral hazard occurs when A) chronically ill people buy insurance. B) chronically ill people cannot buy insurance. C) providers overtreat patients. D) patients sue their doctor. E) chronically ill people refuse appropriate medical treatment. Answer: C Topic: Market for health insurance; moral hazard Skill: Level 1: Definition Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

4) In the market for health care services, Health Maintenance Organizations A) exist to insure people with pre-existing medical conditions. B) overprovide medical care and thereby result in increased costs. C) help overcome adverse selection by enrolling only healthy clients. D) help overcome moral hazard by monitoring the quality of the service. E) None of the above answers is correct. Answer: D Topic: Market for health care; moral hazard Skill: Level 1: Definition Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking 5) Which of the following statements about health-care systems is correct? A) Most major nations do not have extensive government-funded insurance programs. B) U.S. expenditure per person on health care is near the middle of the range of expenditures made in major nations. C) Unlike other major nations, private health insurance is not available only in the United States. D) In the United States, Medicare and Medicaid account for slightly less than 90 percent of total expenditures on health care. E) In the United States, most healthcare services are provided by private doctors and hospitals. Answer: E Topic: Health-care systems Skill: Level 1: Definition Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking 6) Health-care vouchers have been proposed. These vouchers would A) cap total expenditure on health care but do nothing to solve the problem of uninsurance. B) limit choice and would create long waiting times for health care service. C) solve the problem of the doctor shortage but would not affect the problem of over spending on health care. D) ensure universal coverage for health care and would cap total expenditure on health care. E) None of the above answers is correct. Answer: D Topic: Health-care systems Skill: Level 1: Definition Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

7) Which of the following is NOT a problem in health-care markets? A) Hospitals are not trying to maximize their profit. B) asymmetric information C) underestimation of future needs D) adverse selection E) None of the above answers is correct; that is, all the answers are problems in health-care markets. Answer: A Topic: Health-care markets Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking 8) Moral hazard in the market for health-care services leads A) patients to adopt healthy life styles. B) to a separating equilibrium. C) to all people buying health insurance. D) to healthy people not buying health insurance. E) to providers overtreating patients. Answer: E Topic: Health-care markets Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking 9) Compared to other major nations, the United States spends ________ on health care and achieves ________ efficiency. A) less; greater B) more; about the same C) less; less D) more; less E) about the same; less Answer: D Topic: Health-care systems Skill: Level 1: Definition Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

10) Tim exercises everyday and eats healthy. Cam is a couch potato and smokes. A health insurance company can't tell the difference between Tim and Cam's behavior. As a result, ________ occurs and the health insurance company is likely to offer a policy with ________. A) asymmetric information; low premiums and high deductibles B) asymmetric information; high deductibles and low premiums C) a separating equilibrium; low premiums and high deductibles D) a deadweight loss; high deductibles and low premiums E) the lemons problem; low premiums and high deductibles Answer: A Topic: Health-care markets Skill: Level 5: Critical thinking Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking 11) Tim exercises everyday and eats healthy. Cam is a couch potato and smokes. A health insurance company can't tell the difference between Tim and Cam's behavior. As a result, Tim will be offered a policy with a ________ and Cam will be offered a policy with a ________. A) low deductible; low premium B) high deductible; low deductible C) high deductible; high deductible D) low deductible; low deductible E) low deductible; high premium Answer: B Topic: Health-care markets Skill: Level 5: Critical thinking Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking 12) Obamacare ________ in the health insurance market ________. A) creates moral hazard; but an efficient outcome occurs B) creates adverse selection; but an efficient outcome occurs C) creates a pooling equilibrium; and generates an efficient outcome D) creates a separating equilibrium; and an inefficient outcome occurs E) may create efficiency; but more information is needed about the amount of the subsidies Answer: E Topic: Obamacare Skill: Level 5: Critical thinking Section: Checkpoint 12.3 Status: Old AACSB: Application of knowledge

12.4 Chapter Figures

The figures show two auto insurance markets, one market for safe drivers and one market for aggressive drivers. 1) The market for aggressive drivers is illustrated in ________, and the market for safe drivers is illustrated in ________. A) Figure A; Figure A also B) Figure B; Figure A C) Figure A; Figure B D) Figure B; Figure B also E) More information is needed to answer the question. Answer: B Topic: Market for insurance; pooling and separating equilibriums Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

2) In a pooling equilibrium, aggressive drivers pay a premium of ________ and safe drivers pay a premium of ________. A) $1,000; $1,000 B) $800; $1,200 C) $1,200; $800 D) $1,000; $800 E) $1,200; $1,000 Answer: A Topic: Market for insurance; pooling and separating equilibriums Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking 3) In a separating equilibrium, aggressive drivers pay a premium of ________ and safe drivers pay a premium of ________. A) $1,000; $1,000 B) $800; $1,200 C) $1,200; $800 D) $1,000; $800 E) $1,200; $1,000 Answer: C Topic: Market for insurance; pooling and separating equilibriums Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking 4) In a pooling equilibrium, there ________ a deadweight loss in the market for safe drivers, and there ________ a deadweight loss in the market for aggressive drivers. A) is; is B) is; is not C) is not; is D) is not; is not E) might be; might be Answer: A Topic: Market for insurance; pooling and separating equilibriums Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

5) In a pooling equilibrium, there is ________ of insurance in the market for safe drivers, and there is ________ of insurance in the market for aggressive drivers. A) overprovision; underprovision B) overprovision; overprovision C) underprovision; underprovision D) underprovision; overprovision E) underprovision; an efficient quantity Answer: D Topic: Market for insurance; pooling and separating equilibriums Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking 6) In a separating equilibrium, there is ________ of insurance in the market for safe drivers, and there is ________ of insurance in the market for aggressive drivers. A) overprovision; underprovision B) overprovision; overprovision C) underprovision; underprovision D) underprovision; overprovision E) an efficient quantity; an efficient quantity Answer: E Topic: Market for insurance; pooling and separating equilibriums Skill: Level 4: Applying models Section: Checkpoint 12.2 Status: Old AACSB: Analytical thinking

7) The figures show the expenditures per person on health care and the efficiency of the health care system in 8 different nations. The United States is best represented by bar ________ in expenditures per person and is bar ________ in efficiency index. A) A; A B) B; A C) A; D D) E; E E) D; B Answer: D Topic: Health-care systems Skill: Level 1: Definition Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking 12.5 Integrative Questions 1) Moral hazard typically occurs because A) people are dishonest. B) agreements sometimes create incentives that are costly to monitor so people can act in their self-interest. C) workers possess diminishing marginal productivity. D) screening leads to informed people revealing their relevant private information. E) workers possess adverse selection. Answer: B Topic: Moral hazard Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

2) Moral hazard results from ________ information, and adverse selection results from ________ information. A) private; private B) private; public C) public; private D) public; public E) None of the above answers is correct because both are the result of the lemons problem. Answer: A Topic: Private information Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking 3) If a salesperson is paid by the volume of sales he or she makes, then the A) moral hazard problem is diminished. B) lemons problem can be screened. C) moral hazard problem is enhanced. D) adverse selection problem is enhanced. E) None of the above answers is correct. Answer: A Topic: Moral hazard and adverse selection Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 4) Which of the following is an example of moral hazard? A) I hire you to work in my garden for a fixed fee, and you work hard all day. B) I hire you to work at an hourly rate and you work as slowly as possible. C) You apply for the job only because I pay a fixed wage per day, no matter how much or little you do. D) You agree to be paid by the weed to work in my garden, and then you work hard. E) You agree to be paid by the weed to work in my garden, and then you don't work hard. Answer: B Topic: Moral hazard Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

5) The lemons problem is caused by A) health-care providers' incentive to order unnecessary tests. B) used car buyers' inability to determine the quantity of used cars offered for sale. C) auto insurance companies inability to adequately screen drivers. D) the missing health care market. E) government regulations than make some information private. Answer: B Topic: Lemons problem Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 6) In the used car market, adverse selection creates the lemon problem when A) sellers cannot judge buyers' creditworthiness. B) buyers believe that sellers will offer only high-priced "good" used cars for sale. C) buyers believe that sellers will sell only lemons. D) sellers offer warranties on all used cars. E) None of the above answers is correct because it is moral hazard that creates the lemon problem. Answer: C Topic: Lemons problem Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking 7) In the used car market, ________ is (are) a way of signaling. A) high-deductibles B) warranties C) low interest rates D) high prices for high-quality used cars E) screening, using low prices for low quality used cars and high prices for high quality used cars Answer: B Topic: Signals Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

8) ________ occurs when an informed person takes an action to send information to an uninformed person, and ________ occurs when an uninformed person creates an incentive for an informed person to reveal private information. A) Moral hazard; adverse selection B) Adverse selection; moral hazard C) Signaling; screening D) Screening; signaling E) Pooling; separating Answer: C Topic: Signals Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking 9) Private information A) can create adverse selection but plays no role in creating moral hazard. B) explains why drivers screen auto insurance companies. C) means that unless it is overcome, the equilibrium in the market will be a separating equilibrium. D) plays a role in the markets for health-care insurance and auto insurance. E) cannot explain why the U.S. expenditures on health care per person exceed those in other major nations. Answer: D Topic: Private information Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 10) Even if your college degree is irrelevant to an employer's needs, your high GPA might still get you the job because A) the firm is not a profit maximizer. B) your GPA screens some of your private information. C) your GPA sends a signal about your quality as a worker. D) the firm will most likely make an adverse selection. E) the high GPA eliminates the possibility of moral hazard. Answer: C Topic: Private information; signals Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

11) Which of the following can create inefficiency and deadweight loss? A) Moral hazard can create inefficiency and deadweight loss but adverse selection cannot. B) Adverse selection can create inefficiency and deadweight loss but moral hazard cannot. C) Both moral hazard and adverse selection can create inefficiency and deadweight loss. D) Neither moral hazard nor adverse selection can create inefficiency and deadweight loss. E) None of the above answers is correct because whether inefficiency and deadweight loss are created depends on whether the moral hazard and adverse selection affect demanders or suppliers. Answer: C Topic: Private information Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 12) In the market for used cars, the lemons problem means that owners of ________ cars have no incentive to offer them for sale because the market price is ________ than their marginal benefit. A) good; more B) bad; more C) bad; less D) fair; more E) good; less Answer: E Topic: Private information Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Reflective thinking 13) In the market for automobile insurance, drivers can reveal that they are low risk by buying policies with ________ deductibles and ________ premiums. A) high; low B) low; high C) high; high D) low; low E) zero; high Answer: A Topic: Private information Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytical thinking

14) The private market ________ health care because it sometimes ________ those with preexisting conditions and because people ________ the benefits of health care. A) underprovides; includes; overestimate B) underprovides; excludes; underestimate C) overprovides; includes; overestimate D) overprovides; excludes; underestimate E) underprovides; includes; underestimate Answer: B Topic: Health-care markets Skill: Level 5: Critical thinking Section: Integrative Status: Old AACSB: Analytical thinking 12.6 Essay: The Lemons Problem and its Solution 1) Explain the concept of adverse selection. Give an example. Answer: Adverse selection is a tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party. For example, if a car dealership offers its salespeople a fixed wage, it will attract lazy salespeople. Hardworking salespeople will prefer not to work for this dealership because they can earn more by working a dealership that pays by results. Topic: Adverse selection Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 2) Consider a market for used cars. Suppose there are only two kinds of cars: lemons and good cars. A lemon is worth $1,500 both to its current owner and to anyone who buys it. A good car is worth $6,000 to its current and potential owners. Buyers can't tell whether a car is a lemon until after they have bought the car. What do economists call the problem that buyers of used cars face? What kind of cars (lemons, good cars, or both) are traded? Explain and substantiate your answer. Answer: Because buyers can't tell the difference between a lemon and a good car, they are willing to pay only one price for a used car. And they are not willing to pay $6,000 since there is some probability that they are buying a lemon worth only $1,500. If buyers are not willing to pay $6,000 for a used car, the owners of good cars are not willing to sell them: their car is worth $6,000 to them. So only the owners of lemons are willing to sell. But if only the owners of lemons are selling, all the used cars available are lemons. Thus the market for used cars is a market for lemons. Economists call the problem that buyers of used cars face adverse selection. Topic: Used car market Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 36 Copyright © 2021 Pearson Education, Inc.

3) Consider a market for used cars. Suppose there are only two kinds of cars: lemons and good cars. A lemon is worth $1,500 both to its current owner and to anyone who buys it. A good car is worth $6,000 to its current and potential owners. Buyers can't tell whether a car is a lemon until after they have bought the car. What do economists call the problem that buyers of used cars face? What is the price of a used car? Explain and substantiate your answer. Answer: Because buyers can't tell the difference between a lemon and a good car, they are willing to pay only one price for a used car. And they are not willing to pay $6,000 since there is some probability that they are buying a lemon worth only $1,500. If buyers are not willing to pay $6,000 for a used car, the owners of good cars are not willing to sell them: their car is worth $6,000 to them. So only the owners of lemons are willing to sell. But if only the owners of lemons are selling, all the used cars available are lemons, so the maximum price worth paying is $1,500. Thus the market for used cars is a market for lemons, and the price of a used car is $1,500. Economists call the problem that buyers of used cars face adverse selection. Topic: Used car market Skill: Level 3: Using models Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 4) How can a warranty at the seller's expense signal that a product is high quality? Answer: If the product is low quality, the warranty would be very costly for the seller to uphold. Low quality products would need numerous repairs for which the seller would be required to pay. Thus, warranties are not likely to be offered on low quality products. Topic: Private information; signals Skill: Level 2: Using definitions Section: Checkpoint 12.1 Status: Old AACSB: Reflective thinking 12.7 Essay: Information Problems in Insurance Markets 1) What is private information and what problems does it create? Answer: Private information is information that is available to one person but too costly for anyone else to obtain. Private information creates two problems: moral hazard and adverse selection. Topic: Private information Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

2) Explain the concept of moral hazard. Give an example. Answer: Moral hazard exists when one of the parties to an agreement has an incentive after the agreement made to act in a manner that brings additional benefits to himself or herself at the expense of the other party. Moral hazard arises because it is too costly for the injured party to monitor the actions of the advantaged party. For example, Bob hires Jack as a salesperson and pays him a fixed wage. Jack has an incentive to put the least possible effort, benefiting himself and lowering Bob's profits. Topic: Moral hazard Skill: Level 1: Definition Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 3) "People buy insurance to protect themselves from moral hazard." True or false? Explain. Answer: The statement is false. In fact, insurance creates a moral hazard problem because a person with insurance coverage for a loss has less incentive than an uninsured person to avoid such a loss. For example, a person with fire insurance for his house has less incentive to take precautions against fire than a person with no fire insurance does. Topic: Moral hazard Skill: Level 2: Using definitions Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking 4) Most college professors are granted tenure after six years of employment. Tenure implies a lifetime appointment. What problem does this situation create, and how can colleges minimize the problem? Answer: Receiving a lifetime appointment creates a moral hazard. Knowing that one cannot be fired creates an incentive to shirk work. Colleges minimize the problem by looking for signals such as publications and an ongoing commitment to one's discipline during the six year probation period with the belief that those who work hard for these six years are also likely to work hard throughout the future. Topic: Moral hazard Skill: Level 3: Using models Section: Checkpoint 12.2 Status: Old AACSB: Reflective thinking

12.8 Essay: Health-Care Markets 1) What is the private information in the market for health-care insurance? What is the private information in the market for health care? Answer: The private information in the market for health-care insurance is the information possessed by buyers of this insurance. In particular, buyers of insurance have private information about their health and life style. Buyers know if they are generally healthy and if they practice a healthy life style. The private information in the market for health care is the information possessed by sellers of health care services. In particular, sellers of health-care services (for instance, doctors, hospitals, etc.) know if they are high-quality/low-cost providers, who diagnose and treat reliably, or if they are low-quality/high-cost providers, who are prone to costly errors. Topic: Private information Skill: Level 2: Using definitions Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking 2) What role does moral hazard play in the market for health care? Answer: Providers of health care have private information not available to patients or insurance companies about the need for particular tests or services. Providers have the incentive to over use tests and services because the provider might have a financial interest in the test or service, or because the provider wants to play safe by overtreating patients to avoid potential lawsuits. Topic: Private information Skill: Level 3: Using models Section: Checkpoint 12.3 Status: Old AACSB: Reflective thinking

Foundations of Microeconomics, 9e (Bade) Chapter 13 Consumer Choice and Demand 13.1 Consumption Possibilities 1) A budget line shows the A) quantities of goods a buyer can purchase with given income and prices. B) relationship between price and quantity demanded. C) total utility a consumer realizes from consuming different quantities of a good. D) quantities of consumption that maximizes marginal utility. E) the prices of the two goods a buyer can purchase. Answer: A Topic: Budget line Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 2) A consumption point inside the budget line A) is unaffordable. B) is possible to afford but has some unspent income. C) shows that the consumer has chosen to spend all of his or her income on both products. D) shows that the consumer spends income on only one of the goods. E) is affordable and, because it is inside the budget line, means that all the person's budget has been spent. Answer: B Topic: Budget line Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 3) Which of the following statements is correct? A) Consumers have the ability to buy everything they desire. B) A consumer's budget line shows the limits to what a consumer can buy. C) A consumer's budget line shows the goods with the highest marginal utilities. D) Rich consumers are unaffected by prices. E) A budget line changes ONLY IF the person's budget changes. Answer: B Topic: Budget line Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

4) Which of the following is shown by a budget line? i. The combinations of goods a person can afford ii. The production possibilities for a person iii. The combinations of goods a person prefers A) i only B) i and ii C) i and iii D) ii and iii E) ii only Answer: A Topic: Budget line Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Revised AACSB: Reflective thinking 5) The budget line is the boundary between A) preferred and nonpreferred consumption combinations. B) affordable and unaffordable consumption combinations. C) goods and bads. D) income and expenditure. E) income and consumption. Answer: B Topic: Budget line Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 6) The point where the budget line intersects the y-axis represents a combination of goods that contains A) some of both goods. B) only the good measured on the y-axis. C) only the good measured on the x-axis. D) no goods. E) the quantity of the good measured on the y-axis that has zero marginal utility. Answer: B Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

7) A budget line A) shows the limits to what can be consumed. B) has a slope equal to a relative price. C) rotates or shifts only when the consumer's budget changes. D) Answers B and C are both correct. E) Answers A and B are both correct. Answer: E Topic: Budget line Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 8) Which of the following statements is correct? A) The slope of the budget line shows the opportunity cost of the good measured along the xaxis. B) Along the budget line, consuming more of one good implies consuming more of the other. C) The slope of the budget line shows there is no tradeoff between the two goods because the consumer can buy each of them. D) If the consumer's budget increases, the budget line shifts leftward and its slope does not change. E) None of the above answers is correct. Answer: A Topic: Budget line Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 9) In order to draw Lucky's budget line, we need to know A) only Lucky's budget. B) only the prices of the goods Lucky consumes. C) both Lucky's budget and the prices of the goods Lucky consumes. D) Lucky's budget, the prices of the goods lucky consumes, and the utilities of the goods Lucky does not consume. E) the utilities of the goods Lucky consumes. Answer: C Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

10) Katie has $15. She likes M&M candies and Hershey's white chocolate bars. M&M candies are $1.50 a pack and (the large) Hershey bars are $3.00 each. Katie can choose to buy A) 4 Hershey bars and 2 packs of M&Ms. B) 2 Hershey bars and 6 packs of M&Ms. C) 5 Hershey bars and 10 packs of M&Ms. D) Answers A and B are correct. E) Answers A, B, and C are correct. Answer: D Topic: Budget line Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 11) Suppose a consumer has $100 to spend on two goods, shoes and shirts. If the price of a pair of shoes is $20 per pair and the price of a shirt is $15 each, which of the following combinations is unaffordable to the consumer? A) 5 pairs of shoes and 0 shirts B) 2 pairs of shoes and 4 shirts C) 0 pairs of shoes and 7 shirts D) 2 pairs of shoes and 3 shirts E) 0 pairs of shoes and 0 shirts Answer: C Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 12) If Fatma has $30 to spend on apples and bananas, where on the apple axis would Fatma's budget line intersect if the price of apples is $3 a pound? A) 30 pounds B) 10 pounds C) 3 pounds D) 0 pounds E) It is impossible to determine with the given information. Answer: B Topic: Budget line Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

13) Timmy makes $100 per week as a taxidermist. He spends all this income to buy pizza and hair gel. The price of a pizza is $10 and the price of a bottle of hair gel is $4. If Timmy buys 5 bottles of hair gel, then he buys ________ pizzas. A) 10 B) 4 C) 8 D) 20 E) None of the above answers is correct. Answer: C Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 14) Timmy makes $100 per week as a taxidermist. He spends all this income to buy pizza and hair gel. The price of a pizza is $10 and the price of a bottle of hair gel is $4. If Timmy buys 6 pizzas per week, how many bottles of gel can he purchase? A) 10 B) 60 C) 20 D) 40 E) None of the above answers is correct. Answer: A Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 15) Reb earns $1,000 per week as a fishing guide in Texas. With this money he buys fishing lures and steaks. Lures cost $5 each, steaks cost $10 each. With this level of income, which consumption points are NOT possible? A) 200 lures, 0 steaks B) 100 lures, 60 steaks C) 80 lures, 20 steaks D) 0 lures, 50 steaks E) 50 lures, 50 steaks Answer: B Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

16) Reb earns $1,000 per week as a fishing guide in Texas. With this money he buys fishing lures and steaks. Lures cost $5 each, steaks cost $10 each. If Reb purchases 124 lures per week, how many steaks can he buy? A) 620 B) 38 C) 123 D) 380 E) 100 Answer: B Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 17) Sarah earns $500 per week selling baskets made out of tree vines. With this money she buys sushi and rose bushes. Each piece of sushi costs $1 and each rose bush costs $10. If Sarah spends $170 per week on sushi, the maximum quantity of rose bushes can she buy each week is ________ bushes. A) 33 B) 330 C) 3 D) 17 E) None of the above answers is correct. Answer: A Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

18) Susan can watch movies or attend plays. The table above gives combinations of movies and plays that are on her budget line. If the price of a movie is $10, then her budget for movies and plays is A) $10 per month. B) $50 per month. C) $60 per month. D) $120 per month. E) unknown from the information. Answer: C Topic: Budget line Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

19) The figure above shows Sarah's budget line. Sarah earns $500 per week selling baskets made out of tree vines. With this money she buys sushi and rose bushes. Each piece of sushi costs $1 and each rose bush costs $10. Sarah will be at what point on her budget line if she spends $200 per week on sushi? A) Point a B) Point b C) Point c D) Point d E) Point f Answer: C Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

20) The figure above shows Sarah's budget line. Sarah earns $500 per week selling baskets made out of tree vines. With this money she buys sushi and rose bushes. Each piece of sushi costs $1 and each rose bush costs $10. Sarah will be at what point on her budget line if she spends $500 per week on rose bushes? A) Point a B) Point b C) Point c D) Point f E) Point e Answer: A Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 21) The figure above shows Sarah's budget line. Sarah earns $500 per week selling baskets made out of tree vines. With this money she buys sushi and rose bushes. Each piece of sushi costs $1 and each rose bush costs $10. Sarah will be at what point on her budget line if she spends $300 per week on rose bushes? A) Point a B) Point b C) Point c D) Point f E) Point e Answer: C Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 22) The figure above shows Sarah's budget line. Sarah earns $500 per week selling baskets made out of tree vines. With this money she buys sushi and rose bushes. Each piece of sushi costs $1 and each rose bush costs $10. Sarah is NOT able to purchase the combination of A) 50 roses bushes and 0 pieces of sushi. B) 20 rose bushes and 200 pieces of sushi. C) 0 roses bushes and 300 pieces of sushi. D) 30 roses bushes and 300 pieces of sushi. E) None of the above answers is correct because Sarah is able to purchase all the listed combinations of roses and sushi. Answer: D Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 9 Copyright © 2021 Pearson Education, Inc.

23) The figure above shows a consumer's budget line for sodas and DVD rentals. Point a represents an A) affordable combination of sodas and DVDs that spends the entire budget. B) affordable combination of sodas and DVDs that does not spend the entire budget. C) unaffordable combination of sodas and DVDs. D) affordable combination of sodas and DVDs but whether it spends the entire budget cannot be determined from the figure. E) None of the above answers is correct. Answer: B Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 24) The figure above shows a consumer's budget line between sodas and DVD rentals. Point b represents an A) affordable combination of sodas and DVDs that spends the entire budget. B) affordable combination of sodas and DVDs that does not spend the entire budget. C) unaffordable combination of sodas and DVDs. D) affordable combination of sodas and DVDs but whether it spends the entire budget cannot be determined from the figure. E) None of the above answers is correct. Answer: A Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 10 Copyright © 2021 Pearson Education, Inc.

25) The figure above shows a consumer's budget line between sodas and DVD rentals. Point c represents an A) affordable combination of sodas and DVDs that spends the entire budget. B) affordable combination of sodas and DVDs that does not spend the entire budget. C) unaffordable combination of sodas and DVDs. D) affordable combination of sodas and DVDs, but whether it spends the entire budget cannot be determined from the figure. E) None of the above answers is correct. Answer: A Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 26) The figure above shows a consumer's budget line between sodas and DVD rentals. Point d represents an A) affordable combination of sodas and DVDs that spends the entire budget. B) affordable combination of sodas and DVDs that does not spend the entire budget. C) unaffordable combination of sodas and DVDs. D) affordable combination of sodas and DVDs, but whether it spends the entire budget cannot be determined from the figure. E) None of the above answers is correct. Answer: C Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 27) Bobby buys cat food for his cat, Pearl. If the price of cat food falls, then Bobby's budget line will A) rotate outward and its slope will change. B) rotate inward and its slope will change. C) shift outward and its slope will not change. D) shift inward and its slope will not change. E) either rotate or shift outward depending on whether cat food has positive or negative marginal utility. Answer: A Topic: Budget line, change in price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

28) The graph shows the budget line facing Jeanne. The price of smoothies is $4 and the price of a cup of coffee is $2. The combinations of smoothies and coffees on the budget constraint means that Jeanne A) has a budget of $20. B) has a budget of $10. C) prefers to buy coffees over smoothies. D) prefers to buy smoothies over coffees. E) cannot afford to buy 4 coffees and 3 smoothies. Answer: A Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 29) The graph shows Jeanne's budget line. Jeanne has a budget of $20 which means that smoothies must cost ________ and a cup of coffee must cost ________. A) $4; $2 B) $2; $4 C) $10; $5 D) $5; $10 E) $20; $10 Answer: A Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Application of knowledge 12 Copyright © 2021 Pearson Education, Inc.

30) The graph shows Jeanne's budget line. A combination of ________ coffees and ________ smoothies is affordable. A combination of ________ coffees and ________ smoothies is unaffordable. A) 3; 2; 8; 2 B) 6; 1; 8; 1 C) 10; 0; 0; 5 D) 5; 0; 0; 10 E) 6; 2; 2; 6 Answer: A Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Application of knowledge 31) If one of the products a consumer buys rises in price, the consumer's budget line will A) shift farther away from the origin of the graph and not change its slope. B) rotate inward, closer to the origin. C) vanish. D) undergo no change. E) shift farther away from the origin of the graph and become steeper. Answer: B Topic: Budget line, change in price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 32) When the price of a good a consumer buys rises, the consumer's budget line A) shifts inward and its slope does not change. B) shifts outward and its slope does not change. C) rotates inward and its slope changes. D) rotates outward and its slope changes. E) does not change. Answer: C Topic: Budget line, change in price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

33) You consume hamburgers and hot dogs. If the price of a hamburger increases while the price of a hot dog and your budget do not change, then your budget line will A) not change because your budget hasn't changed. B) shift outward and not change its slope. C) rotate outward and change its slope. D) rotate inward and change its slope. E) shift inward and not change its slope. Answer: D Topic: Budget line, change in price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 34) If the slope of the budget line changes, there MUST have been A) a change in the consumer's preferences. B) an increase in the consumer's income. C) a change in the price of at least one good. D) a change in the price of both goods. E) None of these could cause a change in the slope of the budget line. Answer: C Topic: Budget line, change in price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 35) An increase in the price of a good A) rotates the budget line inward and changes its slope. B) rotates the budget line outward and changes its slope. C) results in a movement downward along the budget line. D) results in a movement upward along the budget line. E) shifts the budget line inward and does not change its slope. Answer: A Topic: Budget line, change in price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

36) If the price of the good measured on the x-axis becomes relatively cheaper, the budget line will A) become vertical. B) become steeper. C) become flatter. D) become horizontal. E) shift rightward and not change its slope. Answer: C Topic: Budget line, change in price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 37) Assume that there are two goods, x and y. The quantity of good x is measured on the x-axis and the quantity of good y is measured on the y-axis. If the price of good y rises, then the A) y-axis intercept of the budget line increases. B) y-axis intercept of the budget line increases and the x-axis intercept of the budget line decreases. C) y-axis intercept of the budget line decreases and the x-axis intercept does not change. D) slope of the budget line changes. E) Both answers C and D are correct. Answer: E Topic: Budget line, change in price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 38) Suppose Alice spends her budget on books and downloaded movies. If her budget does not change, and the price of a book stays the same but the price of a downloaded movie falls, her budget line A) shifts outward and its slope does not change. B) shifts inward and its slope does not change. C) rotates inward and its slope changes. D) rotates outward and its slope changes. E) does not change because her budget has not changed. Answer: D Topic: Budget line, change in price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

39) Reb buys fishing lures and steaks. If his budget does not change and the price of a fishing lure decreases, the maximum number of fishing lures he can purchase ________ and the maximum number of steaks he can purchase ________. A) increases; increases B) increases; decreases C) increases; does not change D) decreases; increases E) does not change; does not change Answer: C Topic: Budget line, change in price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 40) Samantha has an income of $40 and buys beef jerky and fried pork rinds. Her income does not change and the price of both beef jerky and fried pork rinds increases. As a result A) Samantha's consumption possibilities have decreased. B) Samantha's budget line shifts inward. C) Samantha can still buy the combination of beef jerky and fried pork rinds she was initially consuming because her income did not change. D) Answers A and B are correct. E) Answers A and C are correct. Answer: D Topic: Budget line, change in price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 41) Nadir and Nina consume the same goods. If Nadir has more income than Nina, then Nina's budget line will A) lie to the left of Nadir's budget line. B) be steeper than Nadir's budget line. C) lie to the right of Nadir's budget line. D) be flatter than Nadir's budget line. E) More information is needed to determine how Nina's and Nadir's budget lines compare. Answer: A Topic: Budget line, change in income Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

42) Which of the following describes what happens to a consumer's budget line if that consumer's budget increases? A) The budget line becomes steeper. B) The budget line becomes more horizontal. C) The budget line shifts farther away from the origin of the graph. D) The budget line shifts closer to the origin of the graph. E) The budget line does not change. Answer: C Topic: Budget line, change in income Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 43) When a consumer's budget increases, the budget line A) becomes steeper. B) becomes flatter. C) shifts outward. D) shifts inward. E) does not change. Answer: C Topic: Budget line, change in income Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 44) An increase in a consumer's budget A) shifts the budget line outward and does not change its slope. B) shifts the budget line inward and does not change its slope. C) rotates the budget line outward around the point where it intersects the x-axis. D) rotates the budget line inward around the point where it intersects the x-axis. E) rotates the budget line outward around the point where it intersects the y-axis. Answer: A Topic: Budget line, change in income Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

45) An increase in a consumer's budget A) changes the relative prices of the goods. B) changes the slope of the budget line. C) decreases consumption possibilities. D) increases consumption possibilities. E) has no effect on the consumer's budget line. Answer: D Topic: Budget line, change in income Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 46) A budget line will shift outward and not change its slope if A) there is an increase in the consumer's budget. B) the consumer's preferences change. C) the price of one good changes. D) the price of both goods increase by the same percentage. E) None of the above shift the budget line outward. Answer: A Topic: Budget line, change in income Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 47) If you consume hot dogs and hamburgers and your budget increases while the prices of hot dogs and hamburgers do not change, then your budget line A) does not change. B) shifts outward and its slope does not change. C) rotates outward and its slope changes. D) shifts inward and its slope does not change. E) rotates inward and its slope changes. Answer: B Topic: Budget line, change in income Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

48) The graph shows Jeanne's budget line. She currently has a budget of $10. If Jeanne's budget increases A) the budget line will become flatter. B) the budget line will shift outward. C) the budget line will become steeper. D) the budget line will shift in toward the origin. E) we cannot tell what will happen to the budget line without information about the prices of coffee and smoothies. Answer: B Topic: Budget line, change in budget Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Application of knowledge 49) The graph shows Jeanne's budget line. If the price of coffee increases, the budget line A) rotates outward and becomes flatter. B) may change, but we need information about what Jeanne's demand curve is. C) rotates inward and becomes steeper. D) shows that relative prices don't change. E) shifts outward away from the origin. Answer: C Topic: Budget line, change in price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 19 Copyright © 2021 Pearson Education, Inc.

50) The graph shows Jeanne's budget line. When the price of a smoothie is $4 and the price of a cup of coffee is $2, which of the following is TRUE? i. The slope of the budget line is 2 smoothies per cup of coffee. ii. The opportunity cost of a smoothie is 2 cups of coffee. iii. The relative price of a smoothie is 2 cups of coffee. A) ii and iii only B) i only C) i, ii and iii D) i and iii E) iii only Answer: A Topic: Budget line, opportunity cost Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Application of knowledge

51) Which of the above figures reflects an increase in the price of chicken? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C Answer: C Topic: Budget line, change in price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

52) Which of the above figures reflects a decrease in the price of chicken? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure A and Figure D Answer: A Topic: Budget line, change in price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 53) Which of the above figures reflects an increase in the price of fish? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C Answer: B Topic: Budget line, change in price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 54) Which of the above figures reflects an increase in the consumer's budget? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure A and Figure D Answer: D Topic: Budget line, change in income Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

55) The slope of the budget line can be interpreted as which of the following? A) an opportunity cost B) the consumer's budget divided by the price of the good measured on the y-axis C) the consumer's budget divided by the price of the good measured on the x-axis D) the number of units of the good measured on the y-axis plus the number of units of the good measured on the x-axis E) the budget necessary to buy the combinations of goods on the budget line Answer: A Topic: Budget line, slope Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 56) The slope of the budget line represents an opportunity cost because, moving along the line A) income is increasing. B) income is decreasing. C) additional income must be earned in order to purchase more of one good. D) a consumer must give up some of one good in order to get more of the other. E) it is possible to consume more of both goods. Answer: D Topic: Budget line, slope Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 57) Sue consumes oysters and clams. Pounds of oysters are measured on the y-axis and pounds of clams on the x-axis. If the slope of Sue's budget line is 5 pounds of oysters per pound of clams, Sue must A) give up 5 pounds of clams to obtain 1 pound of oysters. B) give up 5 pounds of oysters to obtain 1 pound of clams. C) pay $5 for a pound of clams only. D) pay $5 for a pound of oysters only. E) pay $5 for a pound of clams AND pay $5 for a pound of oysters. Answer: B Topic: Budget line, slope Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

58) When the price of one good changes while another good's price does not change, then there has been a change in the A) relative price. B) marginal utility price. C) absolute price. D) marginal price. E) utility price. Answer: A Topic: Relative price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 59) On a budget line, sub sandwiches are measured on the x-axis and sodas are measured on the y-axis. The price of a sub is $5 and the price of a soda is $1. If the price of a sub decreases to $4, the relative price of A) sub sandwiches falls and the budget line becomes less steep. B) sub sandwiches rises and the budget line becomes flatter. C) sodas falls and the budget line becomes flatter. D) both sub sandwiches and soda falls and the budget line shifts outward. E) sodas does not change and neither does the budget line. Answer: A Topic: Relative price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 60) If the price of a soda is $1 and the price of a sub sandwich is $5, the relative price of a sub sandwich is ________ because ________. A) 5 sodas; it costs 5 sodas to buy a sub B) $5; 5 sodas will cost $5 C) 20 cents; $1 divided by $5 is 20 cents D) 1/5; a sub costs 1/5 of a soda E) None of the above answers is correct. Answer: A Topic: Relative price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

61) Over the past 10 years, the relative price of gasoline has ________. As a result, ________. A) increased; consumers have found substitutes for gasoline and bought less gasoline B) increased; the consumption possibilities for gasoline have increased C) decreased; consumers have had an incentive to buy more gasoline D) decreased; the relative prices of other goods have increased E) not changed; the relative prices of other goods have fallen Answer: A Topic: Eye on the U.S. economy, Relative Prices on the Move Skill: Level 5: Critical thinking Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 62) A budget line shows the A) limits to production possibilities. B) limits to production opportunities. C) slope of the demand curve. D) limits to consumption possibilities. E) way the demand curve shifts if the consumer's budget changes. Answer: D Topic: Budget line Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 63) A budget line A) represents combinations of goods a consumer desires. B) marks the boundary between what a consumer can afford and cannot afford. C) has a positive slope. D) is the same as the production possibilities frontier. E) is the same as a demand curve. Answer: B Topic: Budget line Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

64) Linda has $10 a month to spend on ice cream cones and chocolate bars. If the price of an ice cream cone is $2 a cone and the price of a chocolate bar is $1 a bar, which of the following is a point on Linda's budget line? A) 4 cones and 0 chocolate bars B) 1 cone and 8 chocolate bars C) 3 cones and 1 chocolate bar D) 5 cones and 10 chocolate bars E) 0 cones and 0 chocolate bars Answer: B Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 65) If a budget line rotates inward and becomes steeper, then the A) consumer's budget decreased. B) consumer's budget increased. C) price of one of the goods decreased. D) price of one of the goods increased. E) price of both of the goods must have decreased. Answer: D Topic: Budget line, change in price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 66) If the budget line rotates inward and becomes steeper, there is a A) higher opportunity cost of the good measured on the x-axis. B) lower opportunity cost of the good measured on the x-axis. C) larger budget. D) higher price for the good measured on the y-axis. E) lower price for the good measured on the x-axis. Answer: A Topic: Budget line, opportunity cost Skill: Level 4: Applying models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

67) A relative price is the A) price of a substitute. B) price of a related good. C) price of one good divided by the price of another. D) absolute price of a good. E) price of one good multiplied by the price of another. Answer: C Topic: Relative price Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 68) If a consumer's budget increases, the budget line A) rotates outward and its slope changes. B) rotates inward and its slope changes. C) shifts outward and its slope does not change. D) shifts inward and its slope does not change. E) does not change. Answer: C Topic: Budget line, change in income Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 69) Reb buys fishing lures and steaks. If his budget increases, the maximum number of fishing lures he can purchase ________ and the maximum number of steaks he can purchase ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: A Topic: Budget line, change in income Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

13.2 Marginal Utility Theory 1) Utility is the A) benefit or satisfaction that a person gets from the consumption of a good or service. B) measure of how useful a resource is in the production process. C) measure of productivity associated with a good or service. D) economic term for consumption possibilities. E) economic term for how changes in price affect a consumer's purchases. Answer: A Topic: Utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 2) The benefit that John gets from eating an additional grape is called the ________ the grape. A) net gain from B) demand for C) quantity demanded of D) total utility from E) marginal utility from Answer: E Topic: Utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 3) As more of a good is consumed, TOTAL utility A) increases. B) decreases. C) remains the same. D) becomes negative and then turns positive. E) might change but whether or not it changes depends on why more of the good is consumed. Answer: A Topic: Total utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

4) If you get 40 units of utility from eating the first bag of pretzels, 30 from the second bag, and 20 from the third bag, the total utility of three bags of pretzels is ________ units of utility. A) 40 B) 70 C) 90 D) 50 E) 20 Answer: C Topic: Total utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 5) If a consumer obtains 20 units of utility for the first unit consumed, 10 for the second, and 5 for the third, what is the total utility of consuming three units? A) 20 units B) 30 units C) 35 units D) 5 units E) None of the above answers is correct. Answer: C Topic: Total utility and marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 6) For Jack, the total utility from three shirts is 50 units and the marginal utility of one more shirt is 5. The total utility of four shirts is A) 45. B) 55. C) 55/4. D) 55/5. E) None of the above answers is correct. Answer: B Topic: Total utility and marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

7) Marginal utility is equal to which of the following? A) total income divided by the price of the product B) the change in total utility from consuming one more unit of a good C) the satisfaction obtained from consuming any number of units of a good D) total utility divided by the number of units of the good E) None of the above answers is correct. Answer: B Topic: Marginal utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 8) Marginal utility is the change in total utility that results from A) an increase in the price of the good. B) a change in the budget line. C) a one-unit change in the quantity of a good consumed. D) a decrease in the price of the good. E) an increase in the consumer's income. Answer: C Topic: Marginal utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 9) If the total utility of 2 bags of chips is 25, the total utility of 3 bags is 33, and the total utility of 4 bags is 40 units, then the marginal utility of the 3rd and 4th bags are A) 8 and 7, respectively. B) 12.5 and 11, respectively. C) 11 and 10, respectively. D) 58 and 73, respectively. E) 33 and 40, respectively. Answer: A Topic: Marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

10) If Joan consumes 1 dinner roll, she has total utility of 15; if she consumes 2, she has total utility of 27; if she consumes 3, she has total utility of 37; and if she consumes 4, she has total utility of 45. What is the marginal utility of the fourth dinner roll consumed? A) 124 units of utility B) 45 units of utility C) 11.25 units of utility D) 8 units of utility E) 37 units of utility Answer: D Topic: Marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 11) If Sarah gets 40 units of utility from her first piece of toast for breakfast and a total of 70 units from two pieces of toast, then the marginal utility of the first piece is ________ units and the marginal utility of the second piece is ________ units. A) 40; 70 B) 40; 110 C) 40; 30 D) 40; 35 E) 70; 40 Answer: C Topic: Marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

Box of doughnuts Homer's total utility 1 30 2 55 3 75 4 90 5 100 6 103 12) The above table shows Homer's total utility from boxes of doughnuts. As Homer's consumption of doughnuts increases A) both his total utility and his marginal utility increase. B) his total utility increases, but his marginal utility decreases. C) his total utility decreases, but his marginal utility increases. D) both his total utility and his marginal utility decrease. E) None of the above answers is correct. Answer: B Topic: Total utility and marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 13) The above table shows Homer's utility from boxes of doughnuts. If Homer decreases his consumption of doughnuts from 4 boxes to 3 boxes, his A) total utility and marginal utility will both decrease. B) total utility will decrease, but his marginal utility will increase. C) total utility will increase, but his marginal utility will decrease. D) total utility and marginal utility will both increase. E) None of the above answers is correct. Answer: B Topic: Total utility and marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

14) The above table shows Homer's utility from boxes of doughnuts. The marginal utility that Homer receives from the third box of doughnuts is equal to A) 75. B) 25. C) 20. D) 3. E) 50. Answer: C Topic: Marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 15) The above table shows Homer's utility from boxes of doughnuts. As Homer's consumption of doughnuts increases, his A) marginal utility is positive and increasing. B) marginal utility is positive but decreasing. C) marginal utility is negative but increasing. D) marginal utility is negative and decreasing. E) total utility is not related to his marginal utility. Answer: B Topic: Marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

Quantity of Total utility ice cream from ice (quarts) cream 0 0 1 80 2 150 3 210 4 260 16) Given the data in the above table, what is the marginal utility of the third quart of ice cream? A) 80 B) 70 C) 60 D) 230 E) 210 Answer: C Topic: Total utility and marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 17) Given the data in the above table, what is the marginal utility of the second quart of ice cream? A) 80 B) 70 C) 60 D) 75 E) 150 Answer: B Topic: Total utility and marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

18) Given the data in the above table, what is the marginal utility of the fourth quart of ice cream? A) 210 B) 50 C) 60 D) 65 E) 260 Answer: B Topic: Total utility and marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 19) If a consumer's total utility increases when another unit of a good is consumed, which of the following is TRUE? Marginal utility must be A) negative. B) equal to one. C) positive. D) increasing. E) some amount, but more information is needed to determine if marginal utility is positive, negative, or equal to zero. Answer: C Topic: Marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 20) Diminishing marginal utility means that as more of a good is consumed A) the price of the good rises. B) the price of the good falls. C) more income is spent. D) the utility of an additional unit decreases. E) the consumption of some other good must diminish. Answer: D Topic: Diminishing marginal utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

21) Diminishing marginal utility means that A) marginal utility decreases as consumption decreases. B) marginal utility increases as consumption increases. C) marginal utility decreases as consumption increases. D) total utility decreases as marginal utility decreases. E) total utility decreases as marginal utility increases. Answer: C Topic: Diminishing marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 22) Brenda's marginal utility per dollar from the second hamburger is 20. Her marginal utility from the third hamburger would be A) less than 20. B) more than 20. C) equal to 20. D) not comparable to the marginal utility per dollar from the second hamburger. E) some amount, but we need more information to determine how it compares to 20. Answer: A Topic: Diminishing marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 23) Total utility ________ as a person consumes more of one good and marginal utility ________. A) increases; increases B) increases; decreases C) remains constant; decreases D) fluctuates; decreases E) decreases; increases Answer: B Topic: Diminishing marginal utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

24) Diminishing marginal utility means that an INCREASE in the consumption of a good leads to A) a decrease in total utility. B) a decrease in marginal utility. C) a decrease in the fall of the price of the good. D) a decrease in the consumer's budget. E) an increase in the consumer's budget. Answer: B Topic: Diminishing marginal utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 25) Kevin likes weasel leg stew. But every bite of the stew that he eats provides him with less and less total utility. This fact means that Kevin's marginal utility is A) decreasing. B) increasing, but at a decreasing rate. C) increasing at an increasing rate. D) not changing. E) changing, but the rate of change is not certain without more information. Answer: A Topic: Diminishing marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

26) The table above shows Buffy's utility from wooden stakes and cloves of garlic. The total utility Buffy gets from 5 wooden stakes is A) 7. B) 65. C) 222. D) 122. E) None of the above answers is correct. Answer: B Topic: Total utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 27) The table above shows Buffy's utility from wooden stakes and cloves of garlic. If Buffy increases her consumption of wooden stakes from 4 to 5 stakes, her marginal utility from the 5th stake is A) 65. B) 7. C) 58. D) 7 ÷ 5 = 1.29. E) None of the above answers is correct. Answer: B Topic: Marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

28) The table above shows Buffy's utility from wooden stakes and cloves of garlic. The marginal utility of which clove of garlic is the largest? A) the first clove B) the second clove C) the fifth clove D) the third clove E) The marginal utility of all cloves is the same. Answer: A Topic: Marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 29) The table above shows Buffy's utility from wooden stakes and cloves of garlic. As Buffy uses more stakes, the marginal utility of a stake ________ and as she uses more cloves of garlic, the marginal utility of a clove of garlic ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: D Topic: Diminishing marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

30) The table above gives Matt's utility from consuming slices of pizza. His marginal utility from the 3rd slice is A) 27 units. B) 5 units. C) 9 units. D) 11 units. E) None of the above answers is correct. Answer: B Topic: Marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 31) The table above gives Matt's utility from consuming slices of pizza. His marginal utility from the 4th slice is A) 30 units. B) 3 units. C) 94 units. D) 23.5 units. E) 7.5 units. Answer: B Topic: Marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

Quantity (bananas) 0 1 2 3 4 5 6 7 8

Total utility 0 35 60 80 100 115 127 137 145

32) Sam's total utility for bananas is in the table above. Sam's marginal utility from the fourth banana is A) 100. B) 25. C) 20. D) 15. E) It cannot be determined from the given information. Answer: C Topic: Marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 33) Sam's total utility for bananas is in the table above. Sam's total utility shows that the law of diminishing marginal utility A) holds because his marginal utility from bananas decreases as Sam eats more bananas. B) does not hold because Sam's total utility does not reach its maximum. C) does not hold because Sam's marginal utility does not decrease to zero. D) holds because Sam's total utility from bananas increases as Sam eats more bananas. E) None of the above answers is correct because there are no data for marginal utility with which to answer the question. Answer: A Topic: Diminishing marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

34) The table above gives Matt's utility from consuming slices of pizza. As Matt consumes more slices of pizza, he A) obtains greater amounts of marginal utility. B) obtains less total utility. C) has diminishing marginal utility. D) has diminishing total utility. E) has unchanging marginal utility. Answer: C Topic: Diminishing marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 35) For a consumer to maximize utility, in part the consumer must A) allocate the entire available budget. B) make the marginal utility per dollar from each good as much different as possible for all goods. C) make the marginal utility per dollar from each good as small as possible for all goods. D) spend as little of the budget as possible. E) Answers A and B are both correct. Answer: A Topic: Maximizing utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

36) In order to maximize his or her utility, a consumer must allocate his or her entire budget and A) buy the combination of goods that makes the marginal utility per dollar from all goods as small as possible. B) buy the combination of goods that equalizes the total utility per dollar from all goods. C) do nothing else because when the entire budget is allocated, utility is maximized. D) buy the combination of goods that equalizes the marginal utility per dollar from all goods. E) buy the combination of goods that makes the marginal utility per dollar from all goods as large as possible. Answer: D Topic: Maximizing utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 37) The utility-maximizing rule says that consumers must A) only allocate the entire available budget. B) only make the marginal utility per dollar the same for all goods. C) allocate the entire available budget AND make the marginal utility per dollar the same for all goods. D) either allocate the entire available budget or make the marginal utility per dollar the same for all goods, but not both. E) None of the above answers is correct. Answer: C Topic: Maximizing utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 38) Suppose the consumer has allocated his or her entire budget. Which of the following conditions is also required for total utility to be maximized? A) Marginal utility has decreased to zero for all goods. B) The least inexpensive combination of goods has been purchased. C) The marginal utility for each good is equal. D) The marginal utility divided by price for each good is equal. E) The number of units of each good consumed must be the same. Answer: D Topic: Maximizing utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

39) Carter spends his entire budget on pizza and Pepsi. He maximizes his utility when he allocates his entire available budget and buys pizza and Pepsi so that the A) marginal utility from pizza is equal to the marginal utility from Pepsi. B) total utility from both pizza and Pepsi is maximized. C) marginal utility per dollar from pizza is equal to the marginal utility per dollar from Pepsi. D) total utility per dollar from both pizza and Pepsi are equal. E) None of the above answers is correct. Answer: C Topic: Maximizing utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 40) For David, the marginal utility from an additional car is 2,000 units and the marginal utility from an additional vacation is 1,000 units. David is allocating all his budget. Hence to maximize his utility, David will A) shift his consumption from the vacation to the car. B) shift his consumption from the car to the vacation. C) save his budget by not spending it until he can afford both the car and the vacation. D) buy both the car and the vacation now. E) possibly do something, but there is not enough information available to determine what he would do. Answer: E Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 41) If a consumer has allocated his or her budget and found the combination of goods where all marginal utilities divided by price are equal, what would happen if the consumer were forced to consume some other combination of goods? The consumer A) will definitely have higher total utility. B) will definitely have lower total utility. C) will definitely not experience any change in total utility. D) might be have higher, lower, or the same total utility, but more information is needed to determine which. E) None of the above answers is correct. Answer: B Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

42) If Raul's marginal utility per dollar from bread is 25 and the marginal utility per dollar from butter is 30 A) Raul should purchase more butter and less bread to increase his total utility. B) Raul's marginal utility from butter will fall if he buys more butter. C) Raul's marginal utility from bread will rise if he buys less bread. D) Only answers B and C are correct. E) Answers A, B, and C are correct. Answer: E Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 43) Sheryl is maximizing her utility. She notices that her marginal utility from the last package of bubble gum consumed is greater than her marginal utility from the last package of mints consumed. This result means that the A) price of a package of gum is greater than the price of a package of mints. B) price of a package of mints is greater than the price of a package of gum. C) total utility of gum must be falling as more gum is consumed. D) total utility of mints must be falling as more mints are consumed. E) More information is needed to determine which, if any, of the above answers is correct. Answer: A Topic: Equalize marginal utility per dollar spent Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 44) Assume you are in a store looking at a shirt you want. You expect to buy the shirt until you look at the price, then you decide the shirt is not a good buy. How can your decision be viewed in economic terms? A) The shirt's marginal utility divided by price was too low compared to other goods. B) The shirt has zero marginal utility for you. C) The opportunity cost of the shirt was too low. D) The shirt's marginal utility divided by price was too high compared to other goods. E) None of the above answers is correct. Answer: A Topic: Equalize marginal utility per dollar spent Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

45) In a month, Samantha consumes the quantity of lobster dinners so that her marginal utility from a lobster dinner is 500 units. The price of a lobster dinner is $25. She also is consuming the quantity of spaghetti dinners so that its marginal utility is 300 units, while its price is $15. Samantha is allocating her entire budget. What should she do to maximize her total utility? A) consume more lobster dinners and fewer spaghetti dinners B) consume more spaghetti dinners and fewer lobster dinners C) consume the current combination of lobster and spaghetti dinners D) consume fewer lobster dinners and fewer spaghetti dinners E) Not enough information is given to answer the question. Answer: C Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 46) Suppose the price of a pair of jeans is $25 and the price of a T-shirt is $15. The consumer's budget is entirely allocated. If the marginal utility from a pair of jeans is 100 units and the marginal utility from a T-shirt is 75 units, the consumer is A) in equilibrium because his or her utility is maximized. B) not in equilibrium and should purchase fewer jeans and more T-shirts. C) not in equilibrium and should purchase fewer T-shirts and more jeans. D) not in equilibrium but should maintain the current level of purchases. E) not in equilibrium and should purchase more T-shirts and more jeans. Answer: B Topic: Maximizing utility Skill: Level 4: Applying models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 47) Mary is currently buying apples and oranges such that the last unit of apples has 30 units of utility and the last unit of oranges has 40 units of utility. She has allocated her entire budget. If the price of an apple is 10 cents and the price of an orange is 20 cents, to maximize her utility, what should Mary do? A) buy more apples and fewer oranges B) buy more oranges and fewer apples C) continue to buy the same amounts of both goods D) buy fewer apples and fewer oranges E) None of the above answers is correct. Answer: A Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 46 Copyright © 2021 Pearson Education, Inc.

48) Suppose that Jen receives 400 units of utility from her last soda and 200 units of utility from her last slice of pizza. What can we conclude about Jen's choices if the price of a soda is $2 and the price of a slice of pizza is $4? A) Jen is maximizing utility because she buys more of the good providing the most utility. B) Jen should buy more soda to maximize her utility. C) Jen should buy more pizza to maximize her utility. D) Jen needs to buy less soda and less pizza to maximize her utility. E) None of the above answers is correct. Answer: B Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Revised AACSB: Analytical thinking 49) The price of coffee increases because of low crop yields. If the consumer's utility schedule for coffee remains constant, we can predict that coffee consumption A) will increase. B) will decrease. C) will stay the same. D) will increase if the marginal utility of coffee diminishes and will decrease if the marginal utility of coffee increases. E) might change, but we need more information to determine if it increased, decreased, or did not change. Answer: B Topic: Maximizing utility Skill: Level 4: Applying models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 50) The consumption of bottled water increased dramatically during the 2010s. If consumers' utility schedules for water remained constant over this time period, in order for consumers to stay in equilibrium, the price of bottled water must have A) risen because marginal utility increased since people consumed more bottled water. B) fallen. C) remained constant because the marginal utility schedule did not change. D) risen because the supply of water must have increased. E) We don't have enough information to say what happened to the price. Answer: B Topic: Maximizing utility Skill: Level 4: Applying models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

Bottles of Soda

Slices of Pizza

51) The table above gives Ali's total utility from consuming bottles of soda and slices of pizza. The price of pizza is $2 per slice and the price of soda is $1 per bottle. His marginal utility from the 4th slice of pizza is A) 7. B) 3.50. C) 34. D) 17.50. E) 27. Answer: A Topic: Marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 52) The table above gives Ali's total utility from consuming bottles of soda and slices of pizza. The price of pizza is $2 per slice and the price of soda is $1 per bottle. His marginal utility from the 4th bottle of soda is A) 21. B) 3. C) 3 units for soda ÷ 7 units for pizza. D) 34. E) 5.25. Answer: B Topic: Marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

53) The table above gives Ali's total utility from consuming bottles of soda and slices of pizza. The price of pizza is $2 per slice and the price of soda is $1 per bottle. Ali has $14 in his budget. When Ali maximizes his utility, how many bottles of soda does he buy? A) fewer than 3 B) 3 C) 4 D) 5 E) more than 5 Answer: C Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 54) The table above gives Ali's total utility from consuming bottles of soda and slices of pizza. The price of pizza is $2 per slice and the price of soda is $1 per bottle. Ali has $14 in his budget. When Ali maximizes his utility, how many slices of pizza does he buy? A) fewer than 2 B) 2 C) 3 D) 4 E) more than 4 Answer: E Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 55) The table above gives Ali's total utility from consuming bottles of soda and slices of pizza. The price of pizza is $2 per slice and the price of soda is $1 per bottle. Ali has $14 in his budget. When Ali maximizes his utility he buys ________ bottles of soda and ________ slices of pizza. A) 4; 5 B) 6; 4 C) 2; 6 D) 6; 6 E) None of the above answers is correct. Answer: A Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

56) The table above gives Ali's total utility from consuming bottles of soda and slices of pizza. The price of pizza is $2 per slice and the price of soda is $1 per bottle. Ali has $14 in his budget. When Ali maximizes his utility, his total utility equals A) 6. B) 9. C) 69. D) 61. E) None of the above answers is correct. Answer: D Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 57) The table above gives Ali's total utility from consuming bottles of soda and slices of pizza. Suppose the price of a slice of pizza increases. As a result, Ali's A) marginal utility per dollar from pizza decreases. B) total utility increases. C) purchases of pizza might increase. D) marginal utility from all the slices of pizza he consumes decreases. E) marginal utility per dollar from soda increases. Answer: A Topic: Marginal utility per dollar Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

58) Chase has a budget of $14 which he must allocate between steak and cranberry juice. The table gives his marginal utility and the marginal utility per dollar for both of those goods. The price of steak is $10 per serving and the price of cranberry juice is $2 per serving. To maximize his utility, Chase should buy A) 2 servings of steak and 2 servings of cranberry juice. B) 2 servings of steak and 4 servings of cranberry juice. C) 1 serving of steak because this has the highest marginal utility. D) 1 serving of steak and 2 servings of cranberry juice. E) 4 servings of steak and 4 servings of cranberry juice. Answer: D Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

59) Liz consumes two goods, candy bars and potato chips. Her budget is $4 per day. The price of a candy bar is $1.00 and the price of a bag of chips is 50 cents. Her utility is in the table above. How much marginal utility per dollar does the 3rd bag of potato chips give Liz? A) 18 B) 4 C) 8 D) 36 E) We need more information to be able to answer the question. Answer: C Topic: Marginal utility per dollar Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 51 Copyright © 2021 Pearson Education, Inc.

60) Liz consumes two goods, candy bars and potato chips. Her budget is $4 per day. The price of a candy bar is $1.00 and the price of a bag of chips is 50 cents. Her utility is in the table above. For Liz to maximize her utility, what combination of candy bars and potato chips should she eat? A) 4 candy bars and 0 bags of potato chips B) 3 candy bars and 2 bags of potato chips C) 2 candy bars and 4 bags of potato chips D) 1 candy bar and 5 bags of potato chips E) None of the above answers is correct. Answer: C Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

Quantity of Total utility Quantity of pizza from pizza Diet Pepsi 0 0 0 1 24 1 2 44 2 3 60 3 4 72 4 5 76 5 6 79 6 7 80 7

Total utility from Diet Pepsi 0 14 26 36 44 50 54 56

61) Suppose that you consume only pizza and Diet Pepsi. The table above gives your utility from consuming these two goods. What is the marginal utility you get from the fourth slice of pizza? A) 36 B) 18 C) 12 D) 4 E) 72 Answer: C Topic: Marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

62) Suppose that you consume only pizza, which costs $4 per slice, and Diet Pepsi, which costs $2 each. The table above gives your utility from consuming these two goods. If your income is $14, which of the following consumption combinations will you choose? A) 3 slices of pizza and 1 Diet Pepsi B) 2 slices of pizza and 3 Diet Pepsis C) 1 slice of pizza and 5 Diet Pepsis D) 0 slices of pizza and 7 Diet Pepsis E) None of the above answers is correct. Answer: B Topic: Equalize marginal utility per dollar spent Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 63) Suppose that you consume only pizza, which costs $4 per slice, and Diet Pepsi, which costs $2 each. The table above gives your utility from consuming these two goods. If your income is $20, which of the following consumption combinations will you choose? A) 5 slices of pizza and no Diet Pepsi B) 4 slices of pizza and 2 Diet Pepsis C) 3 slices of pizza and 4 Diet Pepsis D) 2 slice of pizza and 6 Diet Pepsis E) None of the above answers is correct. Answer: C Topic: Equalize marginal utility per dollar spent Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 64) If the price of steak rises, a consumer who had been maximizing his or her utility before will buy less steak because its A) total utility falls. B) ratio of marginal utility to price is now less than that for other goods. C) marginal utility has fallen. D) ratio of marginal utility to total utility falls. E) ratio of marginal utility to price is now larger than that for other goods. Answer: B Topic: Marginal utility and the demand curve Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

65) The figure above shows that when Jen buys A) 3 pairs of jeans, she enjoys a total of 42 units of utility. B) 3 pairs of jeans, she enjoys 7 additional units of utility. C) a 3rd pair of jeans, she enjoys 7 additional units of utility. D) more than 3 pairs of jeans, her total utility will fall. E) both A and C are correct. Answer: E Topic: Marginal analysis Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Application of knowledge 66) The figure above shows that A) only the first pair of jeans increases total utility. B) only the second pair of jeans increases total utility. C) all three pairs of jeans increase total utility. D) the third pair of jeans has greater marginal utility than the second pair of jeans. E) the first and second pair of jeans have equal marginal utility. Answer: C Topic: Marginal analysis Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Application of knowledge

67) The figure above exhibits the concept of ________ because as more pairs of jeans are consumed, ________. A) diminishing marginal utility; each extra pair of jeans is consumed brings less utility B) diminishing marginal utility; total utility declines as more jeans are bought C) diminishing total utility; total utility declines as more jeans are bought D) increasing marginal utility; total utility declines as more jeans are bought E) increasing marginal utility; marginal utility increases as more jeans are bought Answer: A Topic: Diminishing marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Application of knowledge 68) Suppose the price of jeans is $100 and the price of boots is $100. If Charles buys 3 pairs of jeans and 2 pairs of boots each year A) Charles cannot be maximizing utility. B) jeans must provide more marginal utility than boots. C) boots must provide more marginal utility than jeans. D) Charles must receive the same marginal utility from the 3rd pair jeans as he does from the 2nd pair of boots. E) Charles is not spending all of this budget. Answer: D Topic: Marginal utility per dollar Skill: Level 4: Applying models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 69) Moving downward along a demand curve, so that the price falls and the quantity demanded increases, the marginal utility of each additional unit of the good consumed A) always increases. B) always decreases. C) stays the same. D) could increase, decrease, or stay the same. E) at first increases and then decreases. Answer: B Topic: Marginal utility and the demand curve Skill: Level 5: Critical thinking Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

70) The demand curve for macadamia nuts is downward sloping. This slope is because consumers maximize their utility and an increase in the price of macadamia nuts leads to A) no change in quantity demanded. B) an increase in the marginal utility per dollar from macadamia nuts. C) a decrease in the marginal utility per dollar from macadamia nuts. D) consumers' budget lines rotating outward with their slopes changing. E) consumers' budget lines shifting outward with no change in their slope. Answer: C Topic: Marginal utility and the demand curve Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 71) Juan's marginal utility from strawberries is 200 and his marginal utility from cream is 100. Juan spends all his budget. The price of strawberries is $5 per pound and the price of cream is $5 per pint. To maximize his utility, Juan should A) buy more cream and fewer strawberries. B) buy less cream and more strawberries. C) buy more cream and more strawberries. D) buy less cream and fewer strawberries. E) change nothing because Juan is maximizing his utility now. Answer: B Topic: Marginal analysis Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 72) Paula is currently spending all of her budget and she finds that the marginal utility per dollar from dresses exceeds the marginal utility per dollar from hats. To maximize her utility, Paula should therefore buy A) more dresses and fewer hats. B) more hats and fewer dresses. C) more dresses and hats. D) fewer dresses and hats. E) probably change her purchases but more information is needed to determine if she should buy more or fewer dresses and hats. Answer: A Topic: Marginal analysis Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

73) In economics, utility A) always decreases as income increases. B) equals opportunity cost. C) is an index of satisfaction. D) is measured by the same units as relative price. E) and relative price are the same thing. Answer: C Topic: Utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 74) Marginal utility is the A) change in total utility that results from a one-unit increase in the quantity of a good consumed. B) total benefit from the consumption of a good or service. C) quantity of a good a consumer prefers. D) average utility per unit consumed. E) change in total utility that results from a one dollar increase in the price of a good consumed. Answer: A Topic: Marginal utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 75) Sushi costs $3 per piece. Cynthia's total utility after eating one piece is 30 and her total utility after eating 2 pieces is 51, so her marginal utility from the second piece is A) 17. B) 10. C) 51. D) 7. E) 21. Answer: E Topic: Marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

76) As Shaniq drinks additional cups of tea at breakfast, Shaniq's A) marginal utility from tea decreases. B) total utility from tea increases. C) total utility from tea decreases. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Diminishing marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 77) Marginal utility per dollar is calculated by ________ the price of the good. A) multiplying the marginal utility from a good by B) dividing the marginal utility from a good by C) multiplying the total utility from a good by D) dividing the total utility from a good by E) averaging the marginal utility from the good with Answer: B Topic: Marginal utility per dollar Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 78) Sushi costs $3 per piece. Cynthia's total utility after eating one piece is 30 and her total utility after eating 2 pieces is 51, so her marginal utility per dollar from the second piece is A) 17. B) 10. C) 51. D) 7. E) 21. Answer: D Topic: Marginal utility per dollar Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

79) When Chris maximizes his total utility, then his entire available budget is allocated in such a way that the A) marginal utility of all goods is equal. B) marginal utility per dollar is equal for all goods. C) marginal utility is as large as possible for goods. D) marginal utility will start decreasing if it consumes fewer goods. E) quantities consumed of each good are equal. Answer: B Topic: Maximizing utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 80) Suppose that Misty likes pizza and hotdogs. If her marginal utility per dollar from pizza is 6 and from hotdogs it is 5, Misty A) is maximizing her total utility. B) could increase her total utility by buying more hotdogs and less pizza. C) could increase her total utility by buying more pizza and fewer hotdogs. D) is maximizing her marginal utility. E) must obtain more income in order to reach her consumer equilibrium. Answer: C Topic: Maximizing utility Skill: Level 4: Applying models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 81) You can use marginal utility theory to find the demand curve by changing A) only the price of one good. B) only income. C) the utility schedule. D) only the prices of both goods. E) income AND the prices of both goods. Answer: A Topic: Marginal utility and the demand curve Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

82) Suppose that Hank consumes only Mountain Dew and pizza. If Hank's total utility from all amounts of both Mountain Dew and pizza double from what they were before, then Hank's demand for A) both goods must double. B) one of the goods must double. C) both goods must decrease by one-half. D) one of the goods must decrease by one-half. E) neither good changes. Answer: E Topic: Marginal utility and the demand curve Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 13.3 Efficiency, Price, and Value 1) The maximum price a consumer is willing to pay for an extra unit of a good or service when total utility is maximized is known as A) demand. B) marginal benefit. C) quantity demanded. D) total utility. E) marginal utility. Answer: B Topic: Consumer efficiency Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking 2) Jen consumes 5 CDs and 2 tacos. She receives 500 units of utility from her 5th CD and 200 units of utility from her 2nd taco. The price of a CD is $10, the price of a taco is $4, and she is spending her entire budget. Which of the following is TRUE regarding Jen's choices? A) Jen is consuming on her demand curve for tacos. B) Jen is maximizing utility. C) Jen is consuming on her demand curve for CDs. D) Only answers A and B are correct E) Answers A, B, and C are correct. Answer: E Topic: Consumer efficiency Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

3) The fact that diamonds have a much higher price than water A) violates the rules of utility maximization because water is necessary for life. B) does not violate the rules of utility maximization because globally, fresh water is actually very rare. C) does not violate the rules of utility maximization because water's marginal utility is low. D) violates the rules of utility maximization because diamonds are not necessities. E) violates the rules of utility maximization because the consumer actually consumes a large amount of water. Answer: C Topic: Paradox of value Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking 4) Suppose the price of jeans is $100 and the price of boots is $100. If Charles buys only jeans and boots and purchases 3 pairs of jeans and 2 pairs of boots each year A) Charles may be maximizing his utility, but only if his budget is $500. B) Charles may be maximizing his utility, but only if the marginal utility from jeans and boots are equal. C) Charles' total utility will increase if his budget increases. D) Charles can only maximize utility if he buys equal amounts of jeans and boots. E) A, B and C are correct. Answer: E Topic: Maximizing utility Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Revised AACSB: Application of knowledge 5) Suppose the price of jeans is $100 and the price of boots is $100. If Charles buys 3 pairs of jeans and 2 pairs of boots each year and maximizing utility, which of the following are TRUE? i. Charles is on his demand curve for jeans. ii. Charles is on his demand curve for boots. iii. Charles is using his resources efficiently. A) i, ii and iii B) i and ii only C) i and iii only D) iii only E) ii and iii only Answer: A Topic: Maximizing utility Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking 61 Copyright © 2021 Pearson Education, Inc.

6) Which of the following is the best statement of the paradox of value? A) Why does the amount people are willing to pay for a good vary with the amount consumed? B) Why do some goods like water, which is necessary for life, have a low price while other goods like diamonds have a high price? C) What is the logical relationship between value and price? D) Why is efficiency so valuable for a society? E) None of the above states the paradox of value. Answer: B Topic: Paradox of value Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking 7) To resolve the paradox of value, you must A) compare price elasticities of demand across goods. B) distinguish between marginal and total utility. C) sacrifice efficiency. D) minimize consumer surplus. E) distinguish between marginal utility and price. Answer: B Topic: Paradox of value Skill: Level 4: Applying models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking 8) The solution to the paradox of value is found by looking at which of the following? A) total usefulness of different goods B) the difference between marginal utility and total utility C) relative prices and total utility D) the difference between marginal utility and price E) None of the above helps solve the paradox of value. Answer: B Topic: Paradox of value Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

9) One reason why the price of diamonds is so high is because the A) marginal utility of diamonds is zero. B) marginal utility of diamonds is high. C) marginal utility of diamonds is low. D) total utility of diamonds is low. E) total utility of diamonds is high. Answer: B Topic: Paradox of value Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking 10) Why does the paradox of value between diamonds and water arise? A) because water has a low price and a low total utility, while diamonds have a high price and a high total utility B) because water has a low price and a low marginal utility, while diamonds have a high price and a high marginal utility C) because necessities like water are higher priced than luxuries like diamonds D) because diamonds have a higher value to people even though water is essential to life E) because water has a low price and a low total utility, while diamonds have a high price but also a low total utility Answer: B Topic: Paradox of value Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking 11) Related to the paradox of value, which of the following statements is correct? A) The marginal utility of water is enormous but the total utility is small. B) We consume so much water so its marginal utility is enormous. C) The marginal utility of water is small but the total utility is enormous. D) The consumer surplus from water is small. E) The total utility of water is equal to the marginal utility of water. Answer: C Topic: Paradox of value Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

12) The paradox of value with respect to water and diamonds can be explained using consumer surplus because A) water is cheap but provides a large consumer surplus, while diamonds are expensive with a small consumer surplus. B) diamonds are in large supply relative to their demand, while water is scarce in supply relative to its demand. C) water is cheap but provides a small consumer surplus, while diamonds are expensive but provide a large consumer surplus. D) the total consumer surplus from diamonds is greater than the total consumer surplus from water. E) None of the above answers is correct. Answer: A Topic: Paradox of value, consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking 13) At all points on a demand curve, the i. consumer's budget has been allocated to maximize total utility. ii. quantity is the quantity demanded at each price when total utility is maximized. iii. price represents the marginal benefit the consumer gets from an extra unit of a good. A) i only B) ii only C) i and ii D) i and iii E) i, ii, and iii Answer: E Topic: Consumer efficiency Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking 14) As more of a good is consumed, the marginal utility of an additional unit ________, so consumers are willing to pay ________ for an additional unit. A) decreases; less B) increases; less C) decreases; more D) increases; more E) does not change; less Answer: A Topic: Consumer efficiency Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking 64 Copyright © 2021 Pearson Education, Inc.

15) The paradox of value refers to the A) utility maximizing rule. B) fact that water is vital but cheap while diamonds are relatively useless but expensive. C) fact that consumers have different preferences and utility schedules. D) law of demand. E) issue of why the consumer surplus from water equals the consumer surplus from diamonds. Answer: B Topic: Paradox of value Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking 16) One reason why water is cheap compared to diamonds is because the A) marginal utility of water is enormous. B) marginal utility of water is small. C) total utility of water is enormous. D) total utility of water is small. E) total utility of water and diamonds must be equal, but the marginal utility of water is much lower than the marginal utility of diamonds. Answer: B Topic: Paradox of value Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking 17) In the paradox of value between expensive diamonds and inexpensive water, we see that A) the consumer surpluses are very high for both goods. B) diamonds have a low consumer surplus while water has a high consumer surplus. C) diamonds have a high consumer surplus while water has a low consumer surplus. D) the consumer surpluses are very low for both goods. E) the consumer surpluses for the two goods cannot be compared. Answer: B Topic: Paradox of value Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Reflective thinking

18) ________ in consumer surplus occurs when the price of a good ________. A) An increase; decreases and consumers can buy more of the good at the lower price B) A decrease; decreases and consumers buy less of the good at the cheaper price C) An increase; decreases and consumer efficiency declines D) A decrease; increases and the paradox of value is no longer valid E) An increase; increases but the relative price does not change Answer: A Topic: Eye on Song Downloads Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking 19) Goods that are valuable will have a ________ consumer surplus because ________ units of the good are consumed at a ________ price. A) large; more; lower B) large; less; higher C) smaller; more; lower D) smaller; fewer; lower E) larger; fewer; lower Answer: A Topic: Consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking 20) Diamonds have ________ consumer surplus because ________. A) a smaller; fewer diamonds are sold at higher prices B) a smaller; there is a lower marginal utility for diamonds C) a large; diamonds are a rare and valuable stone D) zero; diamonds have a high price and provide low total utility E) zero; diamonds are not necessary for life Answer: A Topic: Paradox of value Skill: Level 5: Critical thinking Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

13.4 Chapter Figures

The figure above shows three budget lines. 1) Based on the figure above, which of the following would lead the consumer's budget line to shift from BL0 to BL1? A) a rise in the price of water B) a fall in the price of water C) a rise in the price of water and the price of gum D) a decrease in the consumer's budget E) an increase in the consumer's budget Answer: E Topic: Budget line, change in income Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

2) Based on the figure above, which of the following would lead the consumer's budget line to shift from BL0 to BL2? A) a rise in the price of water B) a fall in the price of water C) a rise in the price of water and the price of gum D) a decrease in the consumer's budget E) an increase in the consumer's budget Answer: D Topic: Budget line, change in income Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 3) Based on the figure above, on which budget line is the relative price of gum the highest? A) budget line BL2 B) budget line BL0 C) budget line BL1 D) The relative price is the same along all three budget lines. E) To answer the question, more information is needed about the consumer's income. Answer: D Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

The figure above shows two budget lines. 4) Based on the figure above, which of the following would lead the budget line to change from BL0 to BL1? A) a rise in the price of water B) a fall in the price of water C) a rise in the price of water and the price of gum D) a decrease in the consumer's budget E) an increase in the consumer's budget Answer: B Topic: Budget line, change in price Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

The figure above shows the markets for water and diamonds. 5) Based on the figures above, it is the case that the consumer surplus from water ________ the consumer surplus from diamonds and the marginal utility from water ________ the marginal utility from diamonds. A) is equal to; is equal to B) is larger than; is equal to C) is larger than; is larger than D) is larger than; is smaller than E) is smaller than; is smaller than Answer: D Topic: Paradox of value Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Analytical thinking

13.5 Appendix: Indifference Curves 1) Consumers' preferences are described by A) budget lines. B) indifference curves. C) relative prices. D) household income. E) demand curves. Answer: B Topic: Indifference curve Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking 2) An indifference curve shows A) different combinations of two goods among which the consumer is indifferent. B) consumption possibilities that a consumer faces at different prices and income. C) affordable combinations of goods. D) the opportunity cost of one good relative to another. E) the relative price of one good relative to another. Answer: A Topic: Indifference curve Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking 3) An indifference curve shows all combinations of two goods A) that can be purchased with a given income. B) that can be purchased if relative prices are constant. C) among which the consumer is indifferent. D) that have the same marginal rate of substitution. E) that have the same opportunity cost. Answer: C Topic: Indifference curve Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking

4) An indifference curve is a line that shows A) what the consumer can afford to buy. B) how the quantity demanded of a good changes as its price changes. C) combinations of goods among which the consumer is indifferent. D) combinations of goods that have the same marginal rate of substitution. E) combinations of goods that are affordable. Answer: C Topic: Indifference curve Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking 5) An indifference curve is a line that shows A) combinations of goods among which a consumer is indifferent. B) different combinations of goods a consumer is able to buy. C) the indifference of consumers for the budget constraint. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: A Topic: Indifference curve Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking 6) An indifference curve shows A) utility maximizing levels of consumption. B) preferred combinations of goods. C) a diminishing marginal rate of substitution as more of both goods are consumed. D) combinations of goods among which a person is indifferent. E) an increasing marginal rate of substitution for a good as more of it is consumed. Answer: D Topic: Indifference curve Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking

7) A curve that shows combinations of goods among which a consumer does not prefer one combination to another is A) a budget line. B) an indifference curve. C) a production possibilities curve. D) a demand curve. E) a marginal rate of substitution curve. Answer: B Topic: Indifference curve Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking 8) Sam's budget is $60.00. The combinations of gasoline and coffee along one of Sam's indifference curves are combinations A) that require the same total expenditure. B) that he can afford with his $60.00 budget. C) among which he is indifferent. D) that give him the same marginal rate of substitution. E) None of the above answers is correct. Answer: C Topic: Indifference curve Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking 9) Moving along an indifference curve the A) marginal rate of substitution is constant. B) consumer does not prefer one consumption point to another. C) marginal rate of substitution is equal to 0. D) consumer prefers some of the consumption points to others. E) marginal rate of substitution for a good increases as more of the good is consumed. Answer: B Topic: Indifference curve Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking

10) As a consumer moves away from the origin onto higher indifference curves, what happens? A) nothing B) The consumer reaches more preferred combinations of goods. C) The consumer reaches less preferred combinations of goods. D) The consumer reaches more affordable combinations of goods. E) None of the above because it is impossible to move from one indifference curve to another. Answer: B Topic: Indifference curve Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking 11) Any point above a given indifference curve ________ affordable and is ________ to any point on the indifference curve. A) is not; inferior B) might or might not be; preferred C) is not; preferred D) might or might not be; inferior E) is; preferred Answer: B Topic: Indifference curve Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking 12) Any point below a given indifference curve is A) inferior to any point on the indifference curve. B) preferred to any point on the indifference curve. C) definitely affordable. D) definitely unaffordable. E) More information is needed to determine if the point is or is not affordable and if the point is or is not preferred. Answer: A Topic: Indifference curve Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking

13) We have asked Mac to rank his preferences between three market baskets, A, B, and C. If Mac prefers B to C but does not care if he gets A or B, then A) A is on a higher indifference curve than B. B) B and C are on the same indifference curve. C) both A and B are on a higher indifference curve than C. D) C is on a higher indifference curve than A. E) B is on a higher indifference curve than C, but it is not possible to determine whether C is on a higher, lower, or the same indifference curve as A. Answer: C Topic: Indifference curve Skill: Level 4: Applying models Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking 14) A preference map is a set of A) indifference curves. B) budget lines. C) demand curves. D) substitution curves. E) marginal rate of substitution curves. Answer: A Topic: Preference map Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking 15) Which of the following statements is FALSE? A) A consumer has only one indifference curve. B) A consumer possesses a preference map. C) An indifference curve is a curve that shows the combination of goods among which a consumer is indifferent. D) The marginal rate of substitution is equal to the magnitude of the slope of the indifference curve. E) Diminishing marginal rate of substitution means that the marginal rate of substitution decreases as more of the good is consumed. Answer: A Topic: Preference map Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking

16) A preference map is a A) series of indifference curves. B) positively sloped series of curves, which reflect a consumer's preferences. C) contour map of a consumer's budget. D) map showing how much a consumer prefers one good for another. E) None of the above answers is correct. Answer: A Topic: Preference map Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking 17) An indifference curve is a line that shows combinations of goods among which a consumer A) prefers one over the other. B) places no value on any of the items. C) can afford to buy all the combinations. D) is indifferent. E) believes that all combinations have the same marginal rate of substitution. Answer: D Topic: Indifference curve Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking 18) What is the difference between a budget line and an indifference curve? A) One is measured in dollars while the other in units of goods. B) One shows what is affordable while the other shows what is preferred. C) One shows a positive relationship, and the other shows a negative relationship. D) The budget line is bowed in toward the origin, and the indifference curves are linear. E) There is no difference. Answer: B Topic: Indifference curve Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 1 Status: Revised AACSB: Reflective thinking

19) In a preference map, consumption combinations on higher indifference curves A) always cost more than any combination on a lower indifference curve. B) always are preferred to combinations on lower indifference curves. C) always cost less than any combination on a lower indifference curve. D) always are less preferred than combinations on lower indifference curves. E) are sometimes more preferred, sometimes less preferred, and sometimes equally preferred to any combination on a lower indifference curve. Answer: B Topic: Preference map Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Reflective thinking 20) The marginal rate of substitution is equal to the magnitude of the A) slope of the demand curve. B) price of the good measured along the x-axis. C) slope of the indifference curve. D) relative prices of the two goods. E) price of the good measured along the y-axis. Answer: C Topic: Marginal rate of substitution Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Reflective thinking 21) The marginal rate of substitution of one good for another is measured by moving A) along an indifference curve. B) among different indifference curves. C) along a budget line. D) among different budget lines. E) along a demand curve. Answer: A Topic: Marginal rate of substitution Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Reflective thinking

22) The magnitude of the slope of an indifference curve is the A) marginal rate of substitution. B) rate of relative prices. C) marginal utility of substitution. D) marginal rate of utility of income. E) rate of increasing opportunity cost. Answer: A Topic: Marginal rate of substitution Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Reflective thinking 23) The magnitude of the slope of an indifference curve at a particular point measures the A) total utility. B) marginal utility. C) marginal rate of substitution. D) total rate of substitution. E) demand. Answer: C Topic: Marginal rate of substitution Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Reflective thinking 24) Normally shaped indifference curves are bowed towards the origin of the graph. The reason for this shape is A) that indifference curves farther away from the origin represent higher levels of utility. B) diminishing marginal rate of substitution. C) the law of demand. D) that the marginal rate of substitution is constant along an indifference curve. E) the principle of diminishing marginal rate of relative price. Answer: B Topic: Marginal rate of substitution Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Reflective thinking

25) As Sam moves rightward along his indifference curve, his marginal rate of substitution for the good on the horizontal axis A) is diminishing. B) is increasing. C) remains constant. D) shows the change in his income. E) first increases and then diminishes. Answer: A Topic: Marginal rate of substitution Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Reflective thinking 26) When the indifference curve is steep, the consumer has a A) high marginal rate of substitution for the good on the horizontal axis. B) low marginal rate of substitution for the good on the horizontal axis. C) large budget. D) small budget. E) steep budget line. Answer: A Topic: Marginal rate of substitution Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking 27) Moving along an indifference curve, if a consumer requires a large amount of the good measured along the y-axis to make up for one unit less of the good measured on the x-axis, then A) total utility is increasing. B) the marginal rate of substitution is low and the indifference curve is flat. C) the marginal rate of substitution is low and the indifference curve is steep. D) the marginal rate of substitution is high and the indifference curve is steep. E) the marginal rate of substitution is high and the indifference curve is flat. Answer: D Topic: Marginal rate of substitution Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

28) Moving along an indifference curve, if a consumer requires a small amount of the good measured along the y-axis to make up for one unit less of the good measured on the x-axis, then A) total utility is increasing. B) the marginal rate of substitution is low and the indifference curve is flat. C) the marginal rate of substitution is low and the indifference curve is steep. D) the marginal rate of substitution is high and the indifference curve is steep. E) the marginal rate of substitution is high and the indifference curve is flat. Answer: B Topic: Marginal rate of substitution Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking 29) Suppose the quantity of burgers is measured on the horizontal axis and the quantity of bags of French fries is measured on the vertical axis. The marginal rate of substitution for burgers is A) the ratio of burgers consumed to bags of fries consumed. B) the ratio of bags of fries consumed to burgers consumed. C) the rate at which a person is willing to give up burgers to get more bags of fries while staying on the same indifference curve. D) the rate at which a person is willing to give up bags of fries to get more burgers while staying on the same indifference curve. E) the number of burgers consumed minus the number of bags of fries consumed. Answer: D Topic: Marginal rate of substitution Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

30) Suppose the quantity of burgers is on the horizontal axis and the quantity of bags of French fries is measured on the vertical axis and Carol's indifference curves are drawn in the graph. As Carol consumes more A) burgers, moving along an indifference curve her marginal rate of substitution for burgers decreases. B) bags of fries, moving along an indifference curve her marginal rate of substitution for burgers decreases. C) burgers and bags of fries moving along an indifference curve, Carol reaches her best affordable point. D) of either good, moving along an indifference curve her marginal rate of substitution for burgers increases. E) of both goods, moving from one indifference curve to a higher indifference curve, her marginal rate of substitution definitely does not change. Answer: A Topic: Marginal rate of substitution Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking 31) Along an indifference curve, if the marginal rate of substitution is 3, then the consumer is willing to A) give up 1 unit of the good measured along the y-axis for 3 units of the good measured along the x-axis. B) give up 3 units of the good measured along the y-axis for 1 unit of the good measured along the x-axis. C) pay $3 for one unit of the good measured along the y-axis. D) pay $3 for one unit of the good measured along the x-axis. E) give up 3 units of the good measured along the y-axis for 1 unit of income, that is, $1 of income. Answer: B Topic: Marginal rate of substitution Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Analytical thinking

32) The marginal rate of substitution for the good on the horizontal axis is A) the consumer surplus. B) the same as the consumer's budget line. C) equal to the magnitude of the slope of the indifference curve. D) equal to the magnitude of the slope of the consumer surplus curve. E) equal to 1.0 if the indifference curves are linear. Answer: C Topic: Marginal rate of substitution Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 2 Status: Old AACSB: Reflective thinking 33) In an indifference curve/budget line diagram, a consumer's equilibrium consumption combination will occur A) always inside the budget line. B) always outside the budget line. C) always on the budget line. D) sometimes on and sometimes inside the budget line, depending on the indifference curves. E) at the origin. Answer: C Topic: Consumer equilibrium Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking 34) Which of the following is TRUE if Clarice is at her consumer equilibrium? i. Clarice is on her budget line. ii. Clarice is on her highest attainable indifference curve. iii. Clarice is dividing her budget equally across all goods. A) i only B) i and ii C) i and iii D) ii and iii E) iii only Answer: B Topic: Consumer equilibrium Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking

35) The indifference curve/budget line diagram concludes that Jim is definitely in equilibrium when he is A) spending all his budget. B) saving some of his budget. C) consuming the combination of goods and services that is affordable and on the highest attainable indifference curve. D) consuming a combination of goods and services that is on an indifference curve. E) None of the above answers is correct. Answer: C Topic: Consumer equilibrium Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking 36) A point where the budget line is just touching an indifference curve at one point is A) the least affordable point. B) the best affordable point. C) on the lowest attainable indifference curve. D) Both answers B and C are correct. E) Both answers A and C are correct. Answer: B Topic: Consumer equilibrium Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking 37) In the indifference curve/budget line framework, at the consumer equilibrium, the consumer A) is on the budget line. B) is on the highest attainable indifference curve. C) has a marginal rate of substitution equal to the relative price of the goods. D) Only answers A and B are correct. E) Answers A, B, and C are correct. Answer: E Topic: Consumer equilibrium Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking

38) In an indifference curve/budget line diagram, at the consumer equilibrium the slope of the budget line A) equals the slope of the indifference curve. B) is greater than the slope of the indifference curve. C) is less than the slope of the indifference curve. D) may be greater than, equal to, or less than the slope of the indifference curve. E) has nothing to do with the equilibrium. Answer: A Topic: Consumer equilibrium Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking 39) At the best affordable point A) the marginal rate of substitution reaches its minimum value. B) relative prices reach their minimum value. C) the marginal rate of substitution equals the relative price. D) the marginal rate of substitution equals real income. E) the marginal rate of substitution reaches its maximum value. Answer: C Topic: Consumer equilibrium Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking 40) At the point where the budget line is just touching an indifference curve at one point A) the slope of the budget line is equal to the slope of the indifference curve. B) the marginal rate of substitution equals the relative price. C) the consumer can change his or her consumption and can move to a higher indifference curve. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Consumer equilibrium Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking

41) A consumer is in equilibrium when the A) consumer is buying any combination of goods and services on his or her budget line. B) consumer is buying the combination of goods and services on the budget line and on the highest attainable indifference curve. C) marginal rate of substitution is as small as possible. D) marginal rate of substitution is as large as possible. E) marginal rate of substitution exceeds the relative price of the two goods by as much as possible. Answer: B Topic: Consumer equilibrium Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking 42) Luke enjoys eating tuna sashimi and drinking Pepsi. His consumer equilibrium occurs where his budget line A) just touches the lowest indifference curve at one point. B) just touches the highest indifference curve at one point. C) touches every indifference curve. D) is below every indifference curve. E) More information about Luke's budget is needed to determine his consumer equilibrium. Answer: B Topic: Consumer equilibrium Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking 43) The point where an indifference curve just touches the budget line at one point A) is the best affordable point. B) is where the marginal rate of substitution exceeds the relative price by as much as possible. C) is a point on the consumer's supply of spending curve. D) cannot be possible because indifference curves always cross the budget line at two points. E) None of the above answers is correct. Answer: A Topic: Consumer equilibrium Skill: Level 1: Definition Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking

44) In a budget line/indifference curve diagram, at the consumer's equilibrium at the best affordable point A) any movement upward or downward on the budget line will move the consumer to a less preferred point. B) any movement to the northeast to higher indifference curves moves the consumer to a less preferred point. C) the slope of the budget line exceeds the marginal rate of substitution by as much as possible. D) the budget line has a positive slope and the indifference curve has a negative slope. E) the budget line has a negative slope and the indifference curve has a positive slope. Answer: A Topic: Consumer equilibrium Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking 45) If a person consumes only two goods, which of the following is NOT necessary for a consumer to be at his or her best affordable point of consumption? A) The consumer chooses a bundle of goods that lies on his or her budget line. B) The consumer is on his or her highest attainable indifference curve. C) The consumer chooses equal amounts of both goods. D) The marginal rate of substitution between the two goods is equal to the relative price of those two goods. E) The indifference curve is tangent to the budget line. Answer: C Topic: Consumer equilibrium Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking 46) If a consumer's marginal rate of substitution is greater than the relative price of the goods, the consumer is A) at his or her best affordable point. B) perhaps at his or her best affordable point. C) not at his or her best affordable point and should move along his or her indifference curve to a higher budget line. D) not at his or her best affordable point and should move along his or her budget line to a higher indifference curve. E) More information is needed to determine if the consumer is or is not at his or her best affordable point. Answer: D Topic: Consumer equilibrium Skill: Level 4: Applying models Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Analytical thinking 86 Copyright © 2021 Pearson Education, Inc.

47) At her best affordable point, Kris i. is on her budget line. ii. is on the highest attainable indifference curve. iii. has a marginal rate of substitution equal to the relative price of the goods. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Consumer equilibrium Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking 48) When Bo is at his best affordable consumption point, his marginal rate of substitution is A) greater than the relative price. B) equal to the relative price. C) less than the relative price. D) equal to one. E) maximized. Answer: B Topic: Consumer equilibrium Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 3 Status: Old AACSB: Reflective thinking 49) A consumer's demand for tuna can be found from an indifference curve diagram by doing which of the following? A) observing what happens to the consumption of tuna for different income levels B) finding where the budget line is tangent to an indifference curve for one price of tuna C) allowing the price of tuna to change and observing the different best, affordable levels of tuna D) changing the indifference curves and seeing the changes in the quantity of tuna the consumer demands E) It is impossible to derive a demand curve from an indifference curve graph. Answer: C Topic: Deriving the demand curve Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 4 Status: Old AACSB: Reflective thinking

50) Using Gabriel's budget line and his indifference curves between horseback riding lessons and baseball lessons, and then changing the prices of each activity holding his income constant, which of the following can be derived? A) Gabriel's demand curve for each activity B) Gabriel's supply curve for each activity C) Gabriel's marginal benefit for each activity D) Gabriel's net gain for each activity E) Both answers A and B are correct. Answer: A Topic: Deriving the demand curve Skill: Level 2: Using definitions Section: Chapter 13 Appendix - Checkpoint 4 Status: Old AACSB: Reflective thinking 51) In the indifference curve/budget line diagram, consumers reach higher indifference curves when A) their budget decreases. B) the price of only the good measured along the y-axis increases. C) the price of only the good measured along the x-axis increases. D) the price of EITHER good falls. E) the price of EITHER good rises. Answer: D Topic: Deriving the demand curve Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking 52) In an indifference curve/budget line diagram, generally when the price of a good increases, the consumer purchases A) less of the good and moves to a lower indifference curve. B) less of the good and moves to a higher indifference curve. C) more of the good and moves to a higher indifference curve. D) more of the good and moves to a lower indifference curve. E) the same amount of the good and moves to a higher indifference curve. Answer: A Topic: Deriving the demand curve Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking

53) Gertrude has a $15 budget to spend on soda and crackers. Soda costs $1 per bottle and crackers cost 50¢ each. If the price of soda increases to $2 per bottle, the ________ rotates inward and there is a movement along the ________. A) budget line; demand curve for crackers B) demand curve; indifference curve for crackers C) budget line; demand curve for soda D) demand curve; indifference curve for soda E) indifference curves; demand curve for soda Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 54) Gertrude has a $15 budget to spend on soda and crackers. Soda costs $1 per bottle and crackers cost 50¢ each. The quantity of soda is measured on the vertical axis. If the price of soda increases to $2 per bottle and the price of crackers increase to $1 each, the A) indifference curves shift inward. B) indifference curves shift outward. C) budget line shifts inward. D) budget line shifts outward. E) demand curve for soda shifts leftward. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 55) Moving down along an indifference curve A) the price of the good measured on the vertical axis decreases. B) total utility decreases. C) the marginal rate of substitution for the good on the horizontal axis decreases. D) the slope of the budget line decreases. E) the consumer increasingly prefers the new consumption points to the old consumption points. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

56) Suppose you have one point on a demand curve. To plot another point for this demand curve using a group of indifference curves A) transfer all points from the indifference curve to the corresponding demand curve. B) horizontally sum the indifference curves. C) change the price of a good, rotate the budget line, and find the new best affordable point. This new price and quantity is another point on the demand curve. D) calculate the marginal rates of substitution from the indifference curve and transfer these values to the demand curve. E) transfer the budget line so that it becomes the demand curve. Answer: C Topic: Deriving the demand curve Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking 57) To derive a demand curve using the indifference curve model, you must change the A) consumer's preferences. B) consumer's income. C) price of one good, holding the price of the other good and income constant. D) price of both goods simultaneously but by different amounts. E) price of both goods simultaneously but by the same percentage. Answer: C Topic: Deriving the demand curve Skill: Level 4: Applying models Section: Chapter 13 Appendix - Checkpoint 4 Status: Old AACSB: Analytical thinking 58) Points on a demand curve A) reflect best affordable points along indifference curves. B) show diminishing marginal rate of substitution. C) show increasing marginal rate of substitution. D) show combinations of goods among which a consumer is indifferent. E) show all the combinations of affordable goods the consumer can buy. Answer: A Topic: Deriving the demand curve Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 4 Status: Old AACSB: Reflective thinking

59) In the above figure, I is an indifference curve. Moving from point a to point b A) the marginal rate of substitution for books decreases. B) the budget line rotates inward. C) the budget line rotates outward. D) there is diminishing total utility. E) the marginal rate of substitution for books increases. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 60) The above figure shows one of Cheri's indifference curves. Suppose point a represents the best affordable point for Cheri. Cheri's best affordable point could move to point b if A) marginal utility increases. B) total utility increases. C) the price of a CD falls and the price of a book rises. D) the price of a CD rises and the price of a book falls. E) Cheri's budget increases. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

61) Consider an indifference curve for sodas and pizza, drawn in a figure with sodas measured along the horizontal axis. Moving downward along the indifference curve, the A) marginal utility per dollar for sodas must increase. B) marginal utility per dollar for pizza must increase. C) consumer remains indifferent among the different combinations of soda and pizza. D) the level of total utility must change. E) marginal rate of substitution is constant. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 62) ________ leads to a decrease in marginal utility per dollar for soda. A) Increasing marginal utility B) The diminishing marginal rate of substitution as fewer sodas are consumed C) An outward shift in the indifference curves for soda D) An increase in the price of soda E) A fall in the price of soda Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 63) Suppose Lizzie consumes soda and pizza. If the last bottle of soda she drinks provides 100 units of utility per dollar while the last slice of pizza she eats provides 300 units of utility per dollar A) the demand curve for soda must have shifted outward. B) the demand curve for pizza must have shifted inward. C) Lizzie should buy more pizza and less soda to maximize her utility. D) the indifference curve for soda and pizza must have rotated inward. E) the marginal rate of substitution between soda and pizza equals 3. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

13.6 Appendix Figures

The figure above shows three of a consumer's indifference curves. 1) Which point is most preferred? A) Point C only B) Point J only C) Point G only D) Points C and G are tied for the most preferred. E) More information is needed to determine which point is most preferred. Answer: B Topic: Indifference curve Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

2) Which of the following are TRUE? i. Points C and G are equally preferred because they lie on the same indifference curve. ii. Points C and J are equally preferred because on them the consumption of chewing gum is equal. iii. Points G and J are equally preferred because on them the consumption of water is equal. A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: A Topic: Indifference curve Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

The figure above shows one of a consumer's indifference curves. 3) The marginal rate of substitution (MRS) at point C equals A) 4. B) 8. C) 2. D) 1/2. E) More information is needed to calculate the MRS. Answer: C Topic: Marginal rate of substitution Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking 4) The marginal rate of substitution (MRS) at point G equals A) 4. B) 8. C) 2. D) 1/2. E) More information is needed to calculate the MRS. Answer: D Topic: Marginal rate of substitution Skill: Level 3: Using models Section: Chapter 13 Appendix - Checkpoint 1 Status: Old AACSB: Analytical thinking

13.7 Integrative Questions 1) Billy has a $20 budget to spend on yogurt and cereal. Yogurt cost $2 each and cereal costs $4 each. Suppose that the quantity of yogurt is on the vertical axis and the quantity of cereal is on the horizontal axis. If the price of yogurt increases, which of the following is TRUE? i. The budget line rotates outward. ii. Yogurt's marginal utility per dollar decreases. iii. The relative price of yogurt increases. A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) only i Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 2) Billy has a $20 budget to spend on yogurt and cereal. Yogurt cost $2 each and cereal costs $4 each. Suppose that the quantity of yogurt is on the vertical axis and the quantity of cereal is on the horizontal axis. The budget line's vertical intercept equals A) $10. B) 5 yogurts. C) 10 yogurts. D) 5 cereals. E) None of the above answers is correct. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 13.8 Essay: Consumption Possibilities 1) You are studying with a friend and your friend says "A budget line shows the various combinations of two goods that can be purchased with the buyer's income at current prices." Is your friend's assessment correct or not? Answer: Your friend's description of the budget line is accurate. Topic: Budget line Skill: Level 1: Definition Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 96 Copyright © 2021 Pearson Education, Inc.

2) How is a budget line similar to a production possibilities frontier? How do they differ? Answer: Both the budget line and the production possibilities frontier illustrate limits. The budget line describes the limits to consumption possibilities; the production possibilities frontier describes the limits to production possibilities. A consumer is unable to consume combinations of goods that lie beyond his or her budget line. Similarly, a nation is unable to produce combinations of goods that lie beyond its production possibilities frontier. Topic: Budget line Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 3) Why is the budget line negatively sloped? Answer: Given the consumer's budget and the prices for two goods, if a consumer buys more of one good, he or she must buy less of the other. The budget line shows the trade-off between the two goods, that is, as more of one is purchased, less of the other can be purchased. Topic: Budget line Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 4) If the price of a good rises and the consumer's budget remains the same, what happens to the consumer's consumption possibilities? Answer: The consumer's consumption possibilities decrease. This decrease is reflected by the change in the budget line, which rotates inward. The inward movement means that consumption possibilities that had previously been affordable are no longer affordable and hence the possible consumption possibilities have decreased. Topic: Budget line, change in price Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 5) What does the slope of the budget line equal? Answer: The slope of the budget line equals an opportunity cost. It is the same as the opportunity cost of the good measured along the x-axis. It also equals a relative price. In particular, it is the same as the relative price of the good measured along the x-axis. Topic: Budget line, slope Skill: Level 2: Using definitions Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking

6) If your budget increases, what is the effect on your budget line? Answer: Your budget line shifts outward and its slope does not change. Topic: Budget line, change in budget Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Reflective thinking 7) If Bill's income increases from $30,000 per year to $41,000 per year. He consumes pickup trucks and lamb chops, so with his increase in budget Bill's budget line shifts outward. This increase in Bill's budget means he can consume more trucks and more lamb." Are these statements true or false? Briefly explain your answer. Answer: The statements are true. The increase in Bill's budget shifts his budget line outward. With the budget line shifted outward, Bill can consume more trucks and more lamb chops than before. Topic: Budget line, change in budget Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 8) Explain how changes in the price of goods and the consumer's budget affect the budget line. Answer: If the price of the good measured on the x-axis increases, the budget line rotates inward as the x-intercept decreases and the budget line becomes steeper. Conversely, if the price of the good measured on the x-axis decreases, the budget line rotates outward, the x-intercept increases, and the budget line becomes flatter. If the price of the good measured on the y-axis increases, the y-intercept decreases as the budget line rotates inward and becomes flatter. However, if the price of the good measured on the y-axis decreases, the budget line rotates outward as the y-intercept increases, and the budget line becomes steeper. Finally, if the budget increases, the budget line shifts outward (both intercepts increase) and the slope remains unchanged while if the budget decreases, the budget line shifts inward (both intercepts decrease), and the slope remains unchanged. Topic: Budget line, change in price and change in income Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Written and oral communication

9) The table above has different combinations of egg rolls and sushi rolls that Richard can buy. Richard's budget for egg rolls and sushi rolls is $120 per week. What are the prices of an egg roll and a sushi roll? Answer: If Richard spends all of his budget on egg rolls, he can buy 60 egg rolls. Thus the price of an egg roll is $120 ÷ 60 egg rolls = $2 per egg roll. Similarly, if Richard spends all of his budget on sushi, he can buy 30 rolls. Thus each sushi roll has a price of $120 ÷ 30 sushi rolls = $4 per sushi roll. Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

10) Joe has $100 a week to purchase either computer online service or film for his other hobby, photography. The price of on-line service is $5 an hour while the price of film is $10 a roll. Draw Joe's budget line in the figure below.

Answer:

Joe's budget line is illustrated in the figure above. Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

11) Suppose you have a $20 budget per week, the price of soda is $1 per bottle, and the price of pizza is $4 per slice. In the above below, draw a budget line for soda and pizza, placing soda on the horizontal axis. Correctly label the axes.

Answer:

The budget line is illustrated in the figure above. Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

12) John likes to spend Thursday nights playing pool and drinking soda. John's budget for Thursday nights is $10, a soda costs $2, and one game of pool costs $1. a. Draw a graph of John's budget line in the figure below. b. In your graph, label the affordable and unaffordable areas.

Answer:

a. The budget line is in the figure above. b. The affordable area is the lighter area and the budget line itself. The unaffordable area is the darker area. Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 102 Copyright © 2021 Pearson Education, Inc.

13) The table above has different combinations of hamburgers and hot dogs that Alex can buy. After labeling the axes, graph Alex's budget line in the figure, putting hot dogs on the x-axis.

a. Alex's income is $8 per day. What is the price of a hot dog? Of a hamburger? b. What is the slope of the budget line?

Answer:

The figure above has Alex's budget line. a. The price of a hot dog is $1 and the price of a hamburger is $2. b. The slope of the budget line is 1/2 of a hamburger per hot dog. Topic: Budget line Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

14) Sherry is on vacation and wants to bring souvenirs home to family and friends. Her souvenir budget is $100, and she can choose between T-shirts, which cost $20 each, and key chains, which cost $5 each. a. Draw a graph of Sherry's budget line in the figure below.

b. What is the slope of Sherry's budget line? How does that slope represent an opportunity cost? Suppose that Sherry now finds a store where T-shirts are on sale for $10 each. (Key chains still cost $5 each). c. Draw the new budget line in the figure. d. What is the slope of the new budget line? How has the opportunity cost changed?

Answer:

a. The budget line is in the figure above and is the budget line labeled BL1. b. The slope of the budget line is 20 key chains divided by 5 T-shirts, which equals 4 key chains per T-shirt. 4 key chains per T-shirt is an opportunity cost because it represents the quantity of key chains that must be given up to acquire one more T-shirt. c. The new budget line is in the figure above and is labeled BL2. d. The slope of the new budget line is 2 key chains per T-shirt, which means that the opportunity cost of one T-shirt is now 2 key chains, rather than 4. Thanks to the new store, the opportunity cost of a T-shirt has fallen. Topic: Budget line, change in price and change in budget Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking

15) The figure above contains several budget lines for Sarah, who uses her income to purchase two goods, cheese and crackers. a. A movement between which two budget lines represents an increase in Sarah's budget for cheese and crackers? b. A movement between which two budget lines represents an increase in the price of a pound of cheese? c. A movement between which two budget lines represents an increase in the price of a box of crackers? Answer: a. A movement from BL1 to BL3 shows an increase in Sarah's budget. b. A change from BL2 to BL1 shows an increase in the price of a pound of cheese. c. A change from BL3 to BL2 shows an increase in the price of a box of crackers. Topic: Budget line, change in price and change in budget Skill: Level 3: Using models Section: Checkpoint 13.1 Status: Old AACSB: Analytical thinking 13.9 Essay: Marginal Utility Theory 1) Is "utility" another word for the cost we give up when we consume a good? Answer: No, utility does not mean the opportunity cost of consuming a good. Utility is the benefit or satisfaction a person gets from consumption of a good or service. Topic: Utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 107 Copyright © 2021 Pearson Education, Inc.

2) What is "marginal utility"? Answer: Marginal utility is the change in total utility that results from a one-unit change in the quantity of a good consumed. In other words, it is the added utility a consumer gains by consuming one additional unit of a good or service. Topic: Marginal utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 3) How are total utility and marginal utility related? Answer: Marginal utility is the change in total utility from consuming one more unit of a good. Topic: Marginal utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 4) What is the "principle of diminishing marginal utility"? Answer: As the consumption of a good or service increases, the marginal utility decreases. For example, the first cup of coffee you drink in the morning will give you great satisfaction. As you keep on drinking more and more cups of coffee, the satisfaction from additional cups will diminish. Topic: Diminishing marginal utility Skill: Level 1: Definition Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 5) "As Rob consumes more dates over the course of a day, it is likely that his marginal utility from date consumption will rise." Is the previous statement likely correct or incorrect? Answer: The statement is incorrect. The principle of diminishing marginal utility means that Rob marginal utility from eating dates decreases as he eats more dates. Topic: Diminishing marginal utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking

6) How can restaurants offer all-you-can-eat specials without fear of going bankrupt? Answer: The restaurants that engage in this business practice bank on the concept of diminishing marginal utility. From the first bite of food until the last, the marginal utility derived from successive bites decreases. Therefore well before a restaurant would face food shortages, angry customers, and financial difficulties, patrons leave satisfied but without eating the absolute limit of food that they could have consumed. Topic: Diminishing marginal utility Skill: Level 5: Critical thinking Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 7) If Tommy is consuming a combination of goods and services on his budget line, has he allocated his entire budget? Answer: Yes, Tommy has allocated his entire budget because he is spending his entire budget. Topic: Maximizing utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 8) You are studying with a friend, and your friend says "To maximize utility, a consumer must consume the combination of goods so that the marginal utility of good X equals the marginal utility of good Y." Explain whether your friend's statement is correct or incorrect. Answer: Your friend's statement is incorrect. To maximize utility, a consumer consumes the combination of goods and services so that the marginal utility per dollar from the goods is equal. Topic: Maximizing utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Reflective thinking 9) What is the utility-maximizing rule? Answer: The utility-maximizing rule states that for a person to maximize utility, the person must allocate (spend) his or her entire budget and consume the quantities of goods and services so that the marginal utility per dollar from each good or service is equal to the marginal utility per dollar from all the other goods and services. Topic: Maximizing utility Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Written and oral communication

10) Explain why total utility is maximized when the marginal utility per dollar from a good is equal across goods. Answer: It is easiest to prove that total utility is maximized when the marginal utility per dollar is equal across goods by looking at a situation in which the marginal utility per dollar is NOT equal across goods. If the marginal utility per dollar is 5 from good X and 8 from good Y, then the consumer could reallocate one dollar away from good X (losing 5 units of utility) and towards good Y (gaining 8 units of utility). The net result is a gain of 3 units of utility, for an increase in total utility. Hence WHENEVER the marginal utility per dollar is not equal, the consumer can always rearrange his or her consumption and increase his or her total utility. Therefore the total utility cannot be at its maximum when the marginal utility per dollar differs for different goods. Only when all goods have the same marginal utility per dollar is it impossible for the consumer to reallocate funds and become better off. Hence at this point the consumer must have the maximum total utility. Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Written and oral communication 11) To maximize utility, why does a consumer consume the combination of goods that equates marginal utility per dollar from the different goods rather than just equating the marginal utility of the different goods? Answer: The consumer equates the marginal utility per dollar from the goods because goods have different prices. For instance, the marginal utility from a Porsche might be 120,000 units and the marginal utility from a Hyundai might be 60,000 units. The consumer certainly prefers the Porsche to the Hyundai because the former has a greater marginal utility than the latter. However, we did not consider the prices. If the Porsche costs $120,000 and the Hyundai costs $10,000, the marginal utility per dollar from the Porsche is 1 and the marginal utility per dollar from the Hyundai is 6. A Hyundai gives the consumer more utility per dollar. Thus when maximizing total utility, the consumer compares the marginal utility per dollar not the marginal utility. Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Written and oral communication

12) Amy has the total utility values given above for video downloads a week. Complete the table by calculating her marginal utilities. Answer:

The completed table is above. Topic: Marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

13) The table above gives the utility Andy receives from different quantities of vanilla ice cream cones. Complete the table. Answer:

The completed table is above. Topic: Marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

14) The table above gives Jessie's marginal utility and total utility from tacos. Complete the table. Answer:

The completed table is above. Topic: Marginal utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

15) The table gives the total utility Jamal derives from the consumption of eclairs and cream puffs. Jamal has $12 to spend on these two confectionery goods. The price of an eclair is $3 and the price of a cream puff is $1.50. a. Jamal's budget is $12. In order for Jamal to maximize his utility, how many eclairs and cream puffs should he buy? b. Suppose the price of an eclair increase to $6. Jamal's income does not change and neither does the price of a cream puff. What combination of eclairs and cream puffs will Jamal buy now? c. Using your answers to parts (a) and (b), derive two points on Jamal's demand curve for eclairs. Answer: a. Jamal's utility maximizing combination will allocate (spend) his budget and be such that the marginal utility per dollar from the last eclair equals the marginal utility per dollar from the last cream puff. Jamal's utility maximizing combination is 3 eclairs and 2 cream puffs. At this combination, Jamal spends $9 on eclairs (3 eclairs × $3) and $3 on cream puffs (2 cream puffs × $1.50) for a total of $12. The marginal utility from the third eclair is 99 (= 342 - 243), so the marginal utility per dollar from eclairs is 99 ÷ 3 = 33. The marginal utility from the second cream puff is 49.50 (= 103.5 - 54.0), so the marginal utility per dollar from cream puffs is 49.5 ÷ $1.50 = 33. Hence the marginal utilities per dollar are equal, so the combination of 3 eclairs and 2 cream puffs maximizes Jamal's utility. b. Jamal's new utility maximizing combination is 1 eclair and 4 cream puffs. As in part (a), this combination allocates all of Jamal's income and equalizes the marginal utility per dollar from the two goods. (Both are equal to 21.) c. When the price of an eclair is $3, Jamal buys 3 eclairs, so one point on Jamal's demand curve is the price of $3 and the quantity demanded of 3 eclairs. When the price of an eclair increases to $6, Jamal buys only 1 eclair. So another point on Jamal's demand curve is the price of $6 and quantity demanded of 1 eclair. Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

16) Tris is shopping for pants and belts. He has a budget of $100. The price of a pair of pants is $20 and the price of a belt is $5. His marginal utility schedules are above. What combination of pants and belts does Tris buy? Explain your answer. Answer: Tris buys 4 pairs of pants and 4 belts because this is the combination that allocates (spends) all of his budget and has the marginal utility per dollar from a pair of pants equal to the marginal utility per dollar from a belt. For the first requirement, that Tris allocate his entire budget, the combination of 4 pants and 4 belts spends (4 pairs of pants × $20 per pair of pants) = $80 on pants and (4 belts × $5 per belt) = $20 on belts, for a total spent of $100. For the second requirement, the equality of the marginal utilities per dollar, the marginal utility per dollar from a pair of pants is (100 units) ÷ ($20) = 5 units per dollar and the marginal utility per dollar from a belt is . Topic: Maximizing utility Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 17) Ricardo likes to rent videos and attend concerts. The videos cost $4 and the concerts cost $40. Ricardo's marginal utility from the last video is 20 units. Ricardo is maximizing his utility. What is his marginal utility from the last concert he attended? Answer: The marginal utility from his last concert is 200 units. In order for Ricardo to maximize his utility, the marginal utility per dollar must be equal for all goods. The marginal utility per dollar from the last video is (20 units) ÷ ($4) = 5. So the marginal utility per dollar from the last concert also must equal 5, which, given its price of $40, means that concert has a marginal utility of 200, because . Topic: Equalize marginal utility per dollar spent Skill: Level 4: Applying models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

18) Suppose Abe is allocating his entire income and he receives 100 units of utility per dollar from the tenth slice of pizza and 200 units of utility per dollar from his second soda. Is Abe maximizing his utility? Should Abe change his consumption of pizza and soda? Answer: Abe is not maximizing his utility because his marginal utility per dollar from pizza does not equal his marginal utility per dollar from soda. Abe should consume more soda (because it provides more satisfaction per dollar) and less pizza. Topic: Equalize marginal utility per dollar spent Skill: Level 4: Applying models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking

19) The table above gives Sam's marginal utility schedule for bananas and apples. Sam's fruit budget is $10. a. If bananas cost $1 per pound and apples cost $2 per bag, what is Sam's marginal utility per dollar for all quantities of both goods? b. What is the utility maximizing combination of bananas and apples for Sam? c. If the price of bananas increases to $2 per pound, how does Sam's marginal utility per dollar for bananas change? d. At the banana price of $2 per pound, what is the new utility maximizing combination of bananas and apples for Sam? e. List two points on Sam's demand curve for bananas.

Answer:

a. The table above has Sam's marginal utility per dollar for bananas and apples. b. Sam's utility maximizing combination of bananas and apples is 4 pounds of bananas and 3 bags of apples. This quantity allocates (spends) his budget and equates the marginal utility per dollar from bananas and apples.

c. The table with Sam's new marginal utility per dollar from bananas is above. d. Sam's new utility maximizing combination of bananas and apples is 2 pounds of bananas and 3 bags of apples. e. When the price of a pound of bananas is $1, the quantity demanded is 4 pounds and when the price rises to $2, the quantity demanded decreases to 2 pounds. Topic: Marginal utility and the demand curve Skill: Level 4: Applying models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 20) For a consumer, the marginal utility of good A is 25 and its price is $5. The marginal utility of good B is 60 and its price is $12. The consumer has allocated his entire budget. Is this consumer maximizing his total utility? Explain your answer. Answer: Yes, the consumer is maximizing his utility. He has allocated his entire budget and he is consuming the combination of goods A and B such that the marginal utility per dollar from each good is the same. Topic: Marginal analysis Skill: Level 2: Using definitions Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 118 Copyright © 2021 Pearson Education, Inc.

21) If Mark's marginal utility per dollar from the last taco is 15 and his marginal utility per dollar from the last burrito is 20 units, what should Mark do to increase his total utility? Answer: Mark should buy more burritos and fewer tacos. If Mark decreases his purchases of tacos by $1, he loses 15 units of utility. But if he then spends the dollar on burritos, he gains 20 units of utility. Because his gain in utility exceeds his loss, Mark's total utility increases as he buys more burritos and fewer tacos. Topic: Marginal analysis Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 22) Suppose Jenny's marginal utility from another serving of fish is 40 and her marginal utility from another serving of chips is 20. The price of a serving of fish is $10 and the price of a serving of chips is $1. What should Jenny do to maximize her utility? Explain your answer. Answer: Jenny should buy more chips and fewer fish. Her marginal utility per dollar from chips is 20 and her marginal utility per dollar from fish is 4. If Jenny decreases her purchases of fish by $1, she loses 4 units of utility. But if she spends the dollar on chips, she gains 20 units of utility. Because her gain in utility exceeds her loss, Jenny's total utility increases as she buys more chips and fewer fish. Topic: Marginal analysis Skill: Level 3: Using models Section: Checkpoint 13.2 Status: Old AACSB: Analytical thinking 13.10 Essay: Efficiency, Price, and Value 1) Explain the paradox of value. Answer: The paradox of value questions why water, which is essential for life, costs less than diamonds, which are not. This puzzle can be resolved by realizing the difference between marginal utility and total utility. Water has high TOTAL utility, but because we consume so much water, the last unit has little value, that is, the water has low MARGINAL utility. Diamonds have little TOTAL utility, but because we consume few diamonds, the last unit of diamonds has high MARGINAL utility. Topic: Paradox of value Skill: Level 1: Definition Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication

2) "Water is very inexpensive. Thus the marginal and total utility of water is small." Analyze the previous statements. Answer: Parts of the statement are true but a key part is false. Water is, indeed, very inexpensive and so its marginal utility is small. Because water is so inexpensive, the quantity people buy is large, which is why its marginal utility is small. However, water is essential to life. Hence the total utility of water is immense. Topic: Paradox of value Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication 3) Does the fact that diamonds, which we do not need to survive, are more expensive than water, which is a necessity, constitute a violation of utility maximization? Answer: No, the fact that diamonds are less useful but more expensive than water reflects the paradox of value. The resolution to this paradox comes from the observation that utility maximization involves marginal utility (specifically, marginal utility per dollar) not total utility. Water has a low marginal utility, because people have a lot of it, but a very high total utility, because it is essential to life. Diamonds have a high marginal utility, because people have fewer diamonds, but a relatively low total utility because diamonds are not necessary to life. Hence the low marginal utility of water is reflected in the low price of water, while the high marginal utility of diamonds is reflected in the high price of a diamond. Topic: Paradox of value Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication 4) Why does gold, which is a relatively nonessential item, have a higher price than water, which is essential to life? Answer: Gold has a high price and a high marginal utility, while water has a low price and a low marginal utility. Water is relatively abundant in supply, while gold is relatively scarce. Hence people consume a lot of water and only a little gold. As a result, the marginal utility of water is low and the marginal utility of gold is high. The utility maximizing rule, that the marginal utility per dollar of gold must equal that of water, in combination with the high marginal utility of gold and low marginal utility of water, implies that the price of gold must be higher than that of water. Topic: Paradox of value Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication

5) Kevin allocates his budget according to rules of utility maximization. What are the rules of utility maximization and how do they explain the paradox of value, which is that diamonds are expensive but useless, while water is inexpensive but essential? Answer: The rules of utility maximization are to allocate the entire available budget and consume the combination of goods and services that make the marginal utility per dollar equal for all goods and services. Equating the marginal utility per dollar is what explains the paradox of value. People consume a great deal of water. Because they consume a lot of water, the marginal utility of water is quite low. However, people have only a few diamonds. Hence the marginal utility of a diamond is quite high. Thus, for the marginal utility per dollar of water to equal that of diamonds requires that the price of water be low and the price of diamonds high. Note, however, that this condition says nothing about the total utility from water or the total utility from diamonds. Because water is essential to life, its total utility is tremendous. Because diamonds are not essential, their total utility is much smaller. Topic: Paradox of value Skill: Level 3: Using models Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication 6) "Because the price of a diamond is much greater than the price of a gallon of water, the consumer surplus from diamonds is greater than the consumer surplus from water." Is the previous analysis correct? Explain your answer. Answer: No, the analysis is incorrect. The paradox of value points out the error. Diamonds are scarce, so they have a high price and a high marginal utility. Water is abundant, so it has a low price and a low marginal utility. But the total utility from water (vastly) exceeds that from diamonds and so the consumer surplus from water (vastly) exceeds that from diamonds. Topic: Paradox of value, consumer surplus Skill: Level 2: Using definitions Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication 7) Does the fact that diamonds are so expensive imply that the demand curve for diamonds has a positive slope? Use marginal utility theory to answer the question. Answer: No. In order for the demand curve for diamonds to have a positive slope, the marginal utility of each diamond consumed would have to increase as more diamonds are consumed. Diamonds are no different than any other good. As more diamonds are consumed, the marginal utility of a diamond decreases. Therefore in order to increase the quantity of diamonds people demand, the price of diamonds must fall, which indicates a downward-sloping demand curve for diamonds. Topic: Paradox of value, demand curve Skill: Level 5: Critical thinking Section: Checkpoint 13.3 Status: Old AACSB: Written and oral communication

13.11 Essay: Appendix: Indifference Curves 1) What does the term "indifferent" mean and what is its relationship to an indifference curve? Answer: Indifferent means that the consumer does not care if he or she consumes one combination of goods and services or another, different combination. An indifference curve measures the combinations of goods and services among which the consumer is indifferent as to which he or she consumes. Topic: Indifference curve Skill: Level 1: Definition Section: Chapter 13 Appendix Status: Old AACSB: Written and oral communication 2) "If Ivan says he is indifferent between the consumption of a new pair of jeans or a set of earrings, he means that he does not want either product." Is the previous analysis correct? Explain your answer. Answer: The analysis is incorrect. The term "indifferent" means that Ivan does not care if he gets another pair of jeans or another set of earrings. Topic: Indifference curve Skill: Level 2: Using definitions Section: Chapter 13 Appendix Status: Old AACSB: Reflective thinking 3) Why do consumers prefer higher indifference curves? Answer: When comparing two indifference curves, it is always possible to find consumption combinations on the higher indifference curve that have more of BOTH goods than any particular point on the lower indifference curve. Consumers prefer consuming more goods rather than fewer, so they prefer the higher indifference curve because it offers more consumption of everything. Topic: Indifference curve Skill: Level 3: Using models Section: Chapter 13 Appendix Status: Old AACSB: Written and oral communication 4) "Every point on a budget line has an indifference curve passing through it." Explain if the previous statement is correct or not. Answer: The statement is correct. The consumer has a preference map that consists of an infinite number of indifference curves, one through every possible consumption combination. Topic: Preference map Skill: Level 3: Using models Section: Chapter 13 Appendix Status: Old AACSB: Reflective thinking

5) Tom is stranded on a deserted island where he can only consume coconuts and crabs. Two of his indifference curves are in the figure above. a. Would Tom prefer his consumption to be at point a or at point b? At point b or at point c? Explain your answers. b. Between points a and b, what is Tom's marginal rate of substitution for a crab? Answer: a. Tom is indifferent between consuming at point a or at point b because both points are on the same indifference curve, I1. Tom would prefer to consume at point c rather than point b because point c is on a higher indifference curve, I2 versus I1. b. Between points a and b, Tom's marginal rate of substitution for a crab is 2 coconuts per crab. Topic: Indifference curve Skill: Level 3: Using models Section: Chapter 13 Appendix Status: Old AACSB: Analytical thinking

6) The figure above shows a preference map for Sarah, who likes hamburgers and milk shakes. a. Which two combinations contain the same amount of hamburgers but different quantities of shakes? b. Which combination(s) does Sarah most prefer? Why? c. Which combination(s) does Sarah least prefer? Why? d. Between which combinations is Sarah indifferent? Why? Answer: a. Combinations a and b have the same amount of hamburgers but different amounts of milk shakes. b. Sarah most prefers combination d because it is on the highest indifference curve. c. Sarah least prefers combination a because it is on the lowest indifference curve. d. Sarah is indifferent between combinations b and c because they are on the same indifference curve. Topic: Indifference curve Skill: Level 3: Using models Section: Chapter 13 Appendix Status: Old AACSB: Analytical thinking

7) What is the marginal rate of substitution and how does it relate to an indifference curve? Answer: The marginal rate of substitution is the rate at which a person will give up the good measured along the y-axis in order to get more of the good measured along the x-axis. The marginal rate of substitution equals the magnitude of the slope of the indifference curve. Because the indifference curve is not linear, the marginal rate of substitution changes as the consumer moves along the indifference curve. In particular, as more of the good measured along the x-axis is consumed, its marginal rate of substitution diminishes. In general, as more of a good is consumed, its marginal rate of substitution decreases. Topic: Marginal rate of substitution Skill: Level 3: Using models Section: Chapter 13 Appendix Status: Old AACSB: Analytical thinking 8) "The marginal rate of substitution of the good measured along the x-axis increases as a consumer moves downward along an indifference curve." Is the previous statement correct or not? Answer: The statement is incorrect because the marginal rate of substitution decreases as a consumer moves downward along an indifference curve. Topic: Diminishing marginal rate of substitution Skill: Level 2: Using definitions Section: Chapter 13 Appendix Status: Old AACSB: Reflective thinking 9) "As Mike consumes more dates over the course of a day, it is likely that his marginal rate of substitution of dates for other goods will rise." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The principle of diminishing marginal rate of substitution means that as Mike consumes more dates, he is willing to give up less other goods in order to get an additional date. Topic: Diminishing marginal rate of substitution Skill: Level 2: Using definitions Section: Chapter 13 Appendix Status: Old AACSB: Reflective thinking

10) The figure above shows one of Bob's indifference curves for CDs and books. a. Is the indifference curve steeper at point a or point b? b. What is Bob's marginal rate of substitution at point a? c. What is Bob's marginal rate of substitution at point b? Answer: a. The indifference curve is steeper at point a. b. The marginal rate of substitution at point a is 5 CDs per book, the slope of the line that just touches the indifference curve at this one point. c. The marginal rate of substitution at point b is 1 1/2 CDs per book, the slope of the line that just touches the indifference curve at this one point. Topic: Marginal rate of substitution Skill: Level 3: Using models Section: Chapter 13 Appendix Status: Old AACSB: Analytical thinking 11) In an indifference curve/budget line framework, how does a consumer decide which of all possible combinations of goods to purchase? Answer: The consumer will select the combination of goods and services that he or she most prefers and which he or she can afford to buy. Taking the latter consideration first, the consumer will buy a combination of goods and services that lie upon the budget line because all of these combinations are affordable. From the combinations that lie upon the budget line, the consumer will select the combination that is on the highest indifference curve because this is the combination that is most preferred. Topic: Consumer equilibrium Skill: Level 3: Using models Section: Chapter 13 Appendix Status: Old AACSB: Written and oral communication 126 Copyright © 2021 Pearson Education, Inc.

12) Describe the consumer equilibrium in the indifference curve/budget line model. Answer: A consumer equilibrium occurs when the consumer is ∙ spending his or her entire income (is on the budget line), ∙ and is on the highest attainable indifference curve (is consuming the "best" point on the budget line). The equilibrium occurs at the point where the budget line just touches the highest indifference curve at one point. At this point, the budget line and indifference curve have the same slope, so the marginal rate of substitution (the slope of the indifference curve) is equal to the relative price (the slope of the budget line). Topic: Consumer equilibrium Skill: Level 3: Using models Section: Chapter 13 Appendix Status: Old AACSB: Written and oral communication 13) Mary likes to consume either pizza or spaghetti. She has $48 to spend on these meals. a. One week the price of pizza is $8 and the price of spaghetti is $6. Mary uses the indifference curve analysis she learned in microeconomics to decide how much of each type of meal to buy. She puts pizza on the vertical axis and spaghetti on the horizontal axis. What is the marginal rate of substitution at the combination of pizza and spaghetti that Mary chooses? b. The next week, the price of pizza is $6 and the price of spaghetti is $8 so Mary adjusts her consumption combination to maximize her total utility. What is her marginal rate of substitution now? Answer: a. The marginal rate of substitution is equal to the slope of the budget line. Given the price of pizza, Maria can buy 6 pizzas and, given the price of spaghetti, Maria can buy 8 spaghetti meals. Hence the slope of the budget line equals (6 pizza ÷ 8 spaghetti meals) = 3/4 of a pizza per spaghetti meal, which is the same as Mary's marginal rate of substitution at her consumer equilibrium point. b. This question is answered similarly to part (a), and so the marginal rate of substitution is 1 1/3 of a pizza per spaghetti meal. Topic: Consumer equilibrium, marginal rate of substitution Skill: Level 4: Applying models Section: Chapter 13 Appendix Status: Old AACSB: Analytical thinking

14) The figure above gives a consumer's budget line and two indifference curves. a. At which point is the marginal rate of substitution greater than the relative price? b. At which point is the marginal rate of substitution less than the relative price? c. Which point represents the consumer equilibrium? Answer: a. The marginal rate of substitution is greater than the relative price at point a. b. The marginal rate of substitution is less than the relative price at point c. c. The consumer equilibrium occurs at point b. Topic: Consumer equilibrium, marginal rate of substitution Skill: Level 4: Applying models Section: Chapter 13 Appendix Status: Old AACSB: Analytical thinking 15) "Every point on a demand curve represents a consumer equilibrium in the indifference curve model." Explain why the previous statement is correct or not. Answer: The statement is correct. The demand curve is derived using the indifference curve/budget line diagram. Hence every point on the demand curve is the result of a consumer equilibrium in the indifference curve/budget line diagram. Topic: Deriving the demand curve Skill: Level 4: Applying models Section: Chapter 13 Appendix Status: Old AACSB: Written and oral communication

16) George has a $600 annual entertainment budget that he uses to buy trips to the movies and dinners at local restaurants. The figure above shows indifference curves and budget lines for these two goods. The price of a movie is $15. a. Along budget line BL1, what is the price of a dinner? b. What combination of dinners and movies will George select along budget line BL1? c. Budget line BL2 represents a change in the price of dinners from that along BL1. What is the new price of dinners along this budget line? d. What combination of dinners and movies will George select along budget line BL2? e. Use the information in this problem to give two points on George's demand curve for dinners. Answer: a. George can buy 20 dinners and his income is $600, so the price of a dinner is $30. b. George will buy 20 movies and 10 dinners because this combination is on his budget line, and hence is affordable, as well as on the highest attainable indifference curve, and hence is the "best" combination. c. If George spends all his income on dinners, he can purchase 40. Therefore the price of a dinner must be $15 (= $600 income/40 dinners = $15 per dinner). d. George will buy 20 movies and 20 dinners because this combination is on his budget line, and hence is affordable, as well as on the highest attainable indifference curve, and hence is the "best" combination. e. One point on George's demand curve for dinners is a price of $30 per dinner and a quantity demanded of 10 dinners (from part b). Another point is a price of $15 per dinner and a quantity demanded of 20 dinners (from part d). Topic: Deriving the demand curve Skill: Level 4: Applying models Section: Chapter 13 Appendix Status: Old AACSB: Analytical thinking

Foundations of Microeconomics, 9e (Bade) Chapter 14 Production and Cost 14.1 Economic Cost and Profit 1) The primary goal of a business firm is to A) promote fairness. B) make a quality product. C) promote workforce job satisfaction. D) maximize profit. E) increase its production. Answer: D Topic: Firm's goal Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 2) As a firm, Apple's goal is to A) maximize profit. B) develop new products. C) maximize sales. D) maximize revenue. E) maximize production. Answer: A Topic: Firm's goal Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Application of knowledge 3) A firm's fundamental goal is A) different for each firm. B) to make a quality product. C) to maximize profit. D) to gain market share. E) to decrease its employment of workers in order to cut its costs. Answer: C Topic: Firm's goal Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

4) Accountants calculate A) economic depreciation as part of the firm's cost. B) depreciation using Internal Revenue Service rules. C) the opportunity cost of all the resources the firm uses. D) all the firm's implicit costs but only a few of its explicit costs. E) All of the above answers are correct. Answer: B Topic: Accounting cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 5) John fishes for a living. Last year, he sold $100,000 of fish. Bait, nets and other fishing supplies cost John $10,000 and he paid $40,000 in salaries to his helpers. Depreciation on his boat and other equipment, as calculated using IRS rules, was $15,000. What was John's profit as would be calculated by an accountant? A) $165,000 B) $100,000 C) $65,000 D) $35,000 E) None of the above answers is correct. Answer: D Topic: Accounting profit Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking 6) Lauren runs a chili restaurant in San Francisco. Her total revenue last year equaled $111,000. The rent on her restaurant totaled $48,000. Her labor costs totaled $43,000. Her materials, food and other variable costs totaled $19,000. To Lauren's accountant, Lauren A) incurred a loss of $1,000. B) earned a profit of $1,000. C) incurred a loss of $111,000. D) earned a profit of $111,000. E) had a total cost equal to $91,000. Answer: B Topic: Accounting cost Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking

7) Lauren runs a chili restaurant in San Francisco. Her total revenue last year was $110,000. The rent on her restaurant was $48,000, her labor costs were $42,000, and her materials, food and other variable costs were $20,000. Lauren could have worked as a biologist and earned $50,000 per year. An economist calculates her implicit costs as A) $150,000. B) $63,000. C) $50,000. D) $110,000. E) $0 because Lauren did not work as a biologist. Answer: C Topic: Opportunity cost Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking 8) When an economist uses the term "cost" referring to a firm, the economist refers to the A) price of the good to the consumer. B) explicit cost of producing a good or service but not the implicit cost of producing a good or service. C) implicit cost of producing a good or service but not the explicit cost of producing a good or service. D) opportunity cost of producing a good or service, which includes both implicit and explicit cost. E) cost that can be actually verified and measured. Answer: D Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 9) From a firm's viewpoint, opportunity cost is the A) best alternative use customers can find for the firm's output. B) cost the firm must pay for the factors of production it employs to attract them from their best alternative use. C) accounting cost of resources. D) price a firm can charge for its output. E) cost of acquiring the opportunity to sell to its customers. Answer: B Topic: Opportunity cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

10) A firm has explicit costs of $110,000 and total revenue of $120,000. Which of the following is TRUE about the firm? A) The firm might be making an economic profit but we need more information about implicit costs to know for sure. B) The firm is definitely making an economic profit because it must be minimizing its opportunity cost. C) The firm is incurring an economic loss if implicit costs are $10,000. D) The firm is making a normal profit if implicit costs are $0. E) The firm may be making an economic profit but only if implicit costs are negative. Answer: A Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking 11) The cost that a firm pays in money to hire a resource is referred to as ________ cost. A) a minimized B) a maximized C) an explicit D) an implicit E) a total Answer: C Topic: Explicit cost Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 12) A cost paid in money is A) not an opportunity cost. B) an implicit cost and an opportunity cost. C) an explicit cost and an opportunity cost. D) not an accounting cost. E) an explicit cost but not an opportunity cost. Answer: C Topic: Explicit cost Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

13) Which of the following is an explicit cost in Jim's business venture? A) the salary Jim could have earned at another job B) the interest Jim does not earn because he invested his savings in his business C) the wages Jim pays his workers D) Jim's normal profit E) Answers A, B, and D are correct. Answer: C Topic: Explicit cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 14) Darryl runs a ranch in Jackson, Wyoming. The interest on the debt he incurred to buy his ranch totals $3,000 per year. For Darryl, the interest is A) an implicit cost. B) an explicit cost. C) his normal cost. D) his normal profit. E) part of his economic profit. Answer: B Topic: Explicit cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 15) Which of the following is an explicit cost of production? A) wages paid to workers B) the electric bill C) purchases of raw material D) Only answers A and B are explicit costs because the purchases of raw material is only an opportunity cost. E) Answers A, B, and C are all correct. Answer: E Topic: Explicit cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

16) When Ford hires Ernst and Young Consulting to help Ford redesign its marketing, Ford's payment to Ernst and Young is classified as A) an explicit cost. B) depreciation. C) an implicit cost. D) normal profit. E) economic profit. Answer: A Topic: Explicit cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 17) A cost incurred in the production of a good or service and for which the firm does not need to make a direct monetary payment, is referred to as ________ cost. A) a minimized B) a maximized C) an explicit D) an implicit E) an invisible Answer: D Topic: Implicit cost Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 18) ________ cost is defined as a cost of production that does not entail a direct money payment. A) An explicit B) An implicit C) A total D) A fixed E) A marginal Answer: B Topic: Implicit cost Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

19) If a business owner decided to expand her business but rather than borrowing money from a bank used her own funds, then A) she would be unable to earn a normal profit. B) there is no cost associated with the expansion. C) she would forego the opportunity to earn interest on the money. D) the amount of her funds she used is an explicit cost. E) the amount of her funds she used is part of her normal profit. Answer: C Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 20) Which of the following is an implicit cost? i. wages paid to workers ii. the normal profit iii. the electric bill A) i only B) ii only C) i and ii D) ii and iii E) Neither i, ii, nor iii Answer: B Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 21) Which of the following is an example of an implicit cost? A) rent on a building B) the cost of fertilizer for a farmer C) the economic depreciation of capital equipment the business owns D) the cost of fuel and materials. E) wages paid to workers Answer: C Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

22) Which of the following is an implicit cost in Jim's business venture? i. the salary Jim could have earned at another job ii. the interest Jim must pay on the loan he incurred to help open his business iii. the interest Jim lost when he used his savings to help open his business A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: D Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 23) Which of the following are correct statements about implicit and explicit costs? i. Normal profit is an implicit cost. ii. Economic depreciation is an explicit cost. iii. Wages are an explicit cost. A) ii and iii B) i and iii C) iii only D) i, ii, and iii E) i only Answer: B Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 24) The opportunity cost of owning and using a firm's capital is defined as the capital's A) variable cost. B) fixed cost. C) economic depreciation. D) nonpayment depreciation. E) explicit cost. Answer: C Topic: Economic depreciation Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

25) Economic depreciation is the A) fall in value of the firm's capital, calculating using IRS rules. B) opportunity cost of owning and using the firm's capital, measured as the change in market value. C) decrease in the value of finished goods and services that are held in inventories prior to being sold. D) term given to a fall in a company's stock price. E) name given to how accountants calculate the depreciation of the company's capital. Answer: B Topic: Economic depreciation Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 26) Suppose Billy owns a hair salon in Dallas. He has one large hair dryer for which he paid $1,000. If he can sell the dryer one year later for $800, his total economic depreciation equals A) $1,000. B) $200. C) $800. D) $1,800. E) None of the above answers is correct. Answer: B Topic: Economic depreciation Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking 27) A firm pays $50,000 for a machine that is used in production for one year, after which it is sold for $40,000 to another firm. The $10,000 difference is A) an explicit cost of production. B) economic depreciation, an implicit cost of production. C) normal profit. D) not counted as an economic cost of production. E) not an opportunity cost because it is not actually paid. Answer: B Topic: Economic depreciation Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

28) Interest is considered a(n) A) explicit cost when the firm pays a bank to borrow money. B) implicit cost when the firm owner uses his or her own funds to buy capital. C) return to entrepreneurship if the firm owner uses her own funds to buy capital. D) form of depreciation if the cost of borrowing increases. E) Both answers A and B are true. Answer: E Topic: Interest Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Application of knowledge 29) Normal profit is a(n) ________ cost because ________. A) implicit; it represents the cost of not running another firm B) explicit; a firm must pay income taxes on its profit C) implicit; it represents the cost of economic depreciation D) accounting; wages are considered an explicit cost E) depreciation; the equipment the firm owns wears out over time Answer: A Topic: Normal profit Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Application of knowledge 30) In economics, a "normal profit" is the return to A) labor. B) capital. C) land. D) entrepreneurship. E) Answers B and D are correct. Answer: D Topic: Normal profit Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

31) The return to entrepreneurship is known as A) economic profit. B) normal profit. C) opportunity revenue. D) normal revenue. E) explicit profit. Answer: B Topic: Normal profit Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 32) A normal profit is defined as A) total revenue minus explicit costs. B) the same thing as accounting profit. C) the return to entrepreneurship. D) total revenue minus implicit costs. E) the economic profit minus the implicit costs. Answer: C Topic: Normal profit Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 33) Normal profit is A) part of the firm's opportunity costs. B) the same as economic profits. C) part of the firm's explicit costs. D) Answers A and B are correct. E) Answers A and C are correct. Answer: A Topic: Normal profit Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

34) A normal profit is A) part of a firm's opportunity cost. B) equal to total revenue minus total opportunity cost. C) the same as economic profit. D) the same as accounting profit. E) almost always zero if the company is run efficiently. Answer: A Topic: Normal profit Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 35) A firm's total revenue minus its total opportunity cost is called its A) accounting profit. B) normal profit. C) economic profit. D) abnormal profit. E) entrepreneur's profit. Answer: C Topic: Economic profit Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 36) Economic profit equals total revenue minus total A) explicit costs. B) opportunity costs. C) implicit costs. D) accounting costs. E) entrepreneur's costs. Answer: B Topic: Economic profit Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

37) Which of the following is TRUE? A) Profit as calculated by accountants and economic profit are not necessarily equal. B) Profit as calculated by accountants is always smaller than economic profit. C) Economic profit ignores implicit costs. D) The Internal Revenue Service taxes the firm's economic profit but not its normal profit. E) The Internal Revenue Service taxes the firm's normal profit but not its economic profit. Answer: A Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 38) April quit her job as an accountant at Ernst and Young, where she was paid $45,000 per year. She started her own landscaping business. She rents machines and tools for $50,000 and pays $10,000 as wages to her help. These are her only costs. April earned total revenue of $100,000. A) Her accountant calculates her profit as $40,000. B) She has an economic loss. C) Her explicit cost is $105,000. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking 39) Jennifer owns a pig farm near Salina, Kansas. Last year she earned $39,000 in total revenue while incurring $38,000 in explicit costs. She could have earned $27,000 as a teacher in Salina. These are all her revenue and costs. Therefore Jennifer earned an A) accounting profit of $1,000 but incurred an economic loss of $26,000. B) accounting profit of $1,000 but incurred an economic loss of $65,000. C) accounting profit of $1,000 but incurred an economic loss of $38,000. D) economic profit of $1,000. E) None of the above answers is correct. Answer: A Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking

40) Suppose a firm's total revenue is $1,000,000. The firm has incurred explicit costs of $750,000. There is also $50,000 of forgone wages by the owner, $10,000 of forgone interest by the owner, $3,000 worth of economic depreciation, and $20,000 worth of normal profit. What is the firm's economic profit? A) $250,000 B) $200,000 C) $190,000 D) $167,000 E) $180,000 Answer: D Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking 41) Dr. Khan starts his own dental practice after quitting his $150,000 job at The Mall Dental Clinic. His revenues for the first year are $500,000. He paid $90,000 in rent for the dental office, $60,000 for his office manager's salary, $24,000 for the dental hygienist, $150,000 for insurance, and $6,000 for other miscellaneous costs. The normal profit from running his business is $20,000. A) His accounting profit is $350,000. B) His economic profit is $150,000. C) His economic profit is zero. D) His accounting profit is zero. E) None of the above answers is correct. Answer: C Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking

42) Dr. Khan starts his own dental practice after quitting his $150,000 job at The Mall Dental Clinic. His revenues for the first year are $500,000. He paid $90,000 in rent for the dental office, $60,000 for his office manager's salary, $24,000 for the dental hygienist, $150,000 for insurance, and $6,000 for other miscellaneous costs. The normal profit from running his business is $20,000. A) His explicit costs are $330,000. B) His implicit costs are $170,000. C) His economic profit is zero. D) Only answers A and C are correct. E) Answers A, B, and C are correct. Answer: E Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking 43) Suppose that a firm earned $500,000 in total revenue. At the same time, it incurred labor costs of $200,000; economic depreciation of $50,000; normal profit of $75,000; interest paid to the bank of $25,000; and used other factors of production that cost $100,000. The economic profit earned by the firm equals A) $275,000. B) $175,000. C) $50,000. D) $200,000. E) $500,000. Answer: C Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking

44) Bill is an economics professor who earns $40,000 teaching but decides to leave and fulfill his dream of catering barbecues. During his first year of barbecuing he earned total revenue of $60,000. He spent $30,000 on food and supplies. He also paid his wife $10,000 to help serve food. The normal profit for an entrepreneur running a barbecue business is $3,000. He also rented an industrial grill/fry truck for $12,000. An accountant would conclude that Bill's profit was A) $30,000. B) $20,000. C) $8,000. D) -$2,000. E) $40,000. Answer: C Topic: Accounting profit Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking 45) Bill is an economics professor who earns $37,000 teaching but decides to leave and fulfill his dream of catering barbecues. During his year of barbecuing he earned total revenue of $60,000. He spent $30,000 on food and supplies. He also paid his wife $10,000 to help serve food. The normal profit for an entrepreneur running a barbecue business is $3,000. Bill also rented an industrial grill/fry truck for $12,000. Bill had an economic A) profit of $20,000. B) loss of -$32,000. C) loss of -$42,000. D) profit of $28,000. E) profit of zero. Answer: B Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking 46) The paramount goal of a firm is to A) maximize profit. B) maximize sales. C) maximize total revenue. D) minimize costs. E) force its competitors into bankruptcy. Answer: A Topic: Firm's goal Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 16 Copyright © 2021 Pearson Education, Inc.

47) For a business, opportunity cost measures A) only the cost of labor and materials. B) only the implicit costs of the business. C) the cost of all the factors of production the firm employs. D) only the explicit costs the firm must pay. E) all of the firm's costs including its normal profit AND its economic profit. Answer: C Topic: Opportunity cost Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 48) Costs paid in money to hire a resource is A) normal profit. B) an implicit cost. C) an explicit cost. D) an alternative-use cost. E) economic profit. Answer: C Topic: Explicit cost Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 49) Which of the following is an example of an implicit cost? A) wages paid to employees B) interest paid to a bank on a building loan C) the cost of using capital an owner donates to the business D) dollars paid to a supplier for materials used in production E) liability insurance payments made only once a year Answer: C Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking

50) The opportunity cost of a firm using its own capital is A) economic depreciation. B) self ownership depreciation. C) economic loss. D) normal loss. E) capital loss. Answer: A Topic: Normal profit Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 51) The difference between a firm's total revenue and its total cost is its ________ profit. A) explicit B) normal C) economic D) accounting E) excess Answer: C Topic: Economic profit Skill: Level 1: Definition Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 14.2 Short-Run Production 1) The short run is the time frame A) during which the quantities of all resources are fixed. B) that is less than a year. C) during which the quantities of some resources are fixed. D) during which the quantities of all resources are variable. E) during which all costs are implicit costs. Answer: C Topic: Short run Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

2) The short run is A) less than one year. B) the time frame in which all resources are fixed. C) the time frame in which some resources are fixed. D) the time frame in which output is fixed. E) a time frame short enough so that some costs are explicit costs. Answer: C Topic: Short run Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 3) Austin owns the Fruit Bowl food truck. Which of the following would be short run decisions for Austin? i. how much fruit to buy ii. how many workers to hire iii. installing a new stove in his truck A) i and ii B) i, ii and iii C) i only D) ii only E) ii and iii only Answer: A Topic: Short-run decisions Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Application of knowledge 4) The short run is a time period that is A) equal to a day. B) too short to change the amount of labor hired. C) too short to change the size of the firm's plant. D) long enough to change the size of the firm's plant. E) too short to change the amount of ANY resource the firm employs. Answer: C Topic: Short run Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

5) To produce more output in the short run, a firm must employ more of A) all its resources. B) its fixed resources. C) its variable resources. D) the least costly resources regardless of whether they are fixed or variable. E) Firms cannot produce more output in the short run. Answer: C Topic: Short run Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 6) Which of the following is a list of fixed inputs for a hospital? A) bandages, casts, and other materials B) antibiotics, pain medication, and other prescription drugs C) the emergency room, intensive care unit, and other facilities D) the nurses, receptionists, and other employees E) the lobby, the doctors, and the electricity it uses Answer: C Topic: Fixed input Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 7) The long run is a time period that is A) five years or longer. B) long enough to change the amount of labor employed. C) long enough to change the size of the firm's plant and all other inputs. D) long enough to change the amount of labor employed but not to change the size of the plant. E) None of the above answers describes the long run. Answer: C Topic: Long run Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

8) The long run is defined as A) any time after six months. B) any time after one year. C) the period of time when all resources are fixed. D) the period of time when most (more than 50 percent) resources are variable. E) the period of time when all resources are variable. Answer: E Topic: Long run Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 9) The long run is a time period in which A) some of the firm's resources are fixed. B) all of the firm's resources are fixed. C) all of the firm's resources are variable. D) the firm cannot increase its output. E) all costs become explicit costs. Answer: C Topic: Long run Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 10) In the long run, A) some resources are fixed. B) all resources are variable. C) output cannot be varied. D) all resources are fixed. E) Both answers B and C are correct. Answer: B Topic: Long run Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

11) In the long run, the firm ________ change the number of workers it employs and ________ change the size of its plant. A) can; can B) can; cannot C) cannot; can D) cannot; cannot E) In order to answer the question, more information is needed about how long the long run is. Answer: A Topic: Long run Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 12) The total product curve shows the relationship between total product and A) cost. B) the quantity of labor. C) the average product. D) the marginal product. E) the marginal cost. Answer: B Topic: Total product curve Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 13) Moving along the total product curve, which of the following is held constant? A) quantity of labor B) total product C) technology D) total cost E) None of the above answers is correct. Answer: C Topic: Total product curve Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

14) Which of the following statements correctly describes a total product curve? A) Points above the total produce curve are efficient. B) The curve shows that output always increases as labor employed increases. C) The curve separates attainable outputs from unattainable outputs. D) The curve shows minimum levels of output. E) The curve first falls, reaches a minimum, and then rises. Answer: C Topic: Total product curve Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

15) The figure shows the total product curve for the Fruit Bowl food truck. When labor increases from 1 worker to 2 workers, total product increases to ________ meals and marginal product equals ________ bowls. A) 10; 5 B) 5; 10 C) 2; 2 D) 10; 2 E) 2; 5 Answer: A Topic: Total product curve Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Application of knowledge 23 Copyright © 2021 Pearson Education, Inc.

16) The figure shows the total product curve for the Fruit Bowl food truck. If the food truck increases production from 10 to 17 meals per hour, the marginal product is in the range where it ________ and the marginal product is ________ the average product. A) increases; greater than B) increases; less than C) decreases; greater than D) increases; is equal to E) does not change; is equal to Answer: A Topic: Marginal product and average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 17) The figure shows the total product curve for the Fruit Bowl food truck. If production increases from 19 to 20 meals per hour, the marginal product is in the range where it ________ and the marginal product ________ the average product. A) decreases; is greater than B) increases; is less than C) increases; is greater than D) reaches a maximum; equals E) decreases; is less than Answer: E Topic: Marginal product and average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 18) The figure shows the total product curve for the Fruit Bowl food truck. As the food truck hires ________ workers, the marginal product(s) ________. A) up to 3; are increasing B) up to 3; are decreasing C) between 3 and 5; are increasing D) between 3 and 5; equal to the average product E) over 4; are greater than the average product Answer: A Topic: Marginal product and average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

19) The marginal product of labor is the change in A) total cost from employing one more worker. B) total revenue from employing one more worker. C) average product from employing one more worker. D) total output from employing one more worker. E) total output divided by the change in cost from employing one more worker. Answer: D Topic: Marginal product Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 20) The marginal product of labor equals the change in ________ from a one-unit increase in the quantity of labor. A) total product B) average product C) total cost D) the slope of the average product curve E) the wage rate Answer: A Topic: Marginal product Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 21) The marginal product of labor is A) total product divided by labor. B) the change in total product divided by the increase in labor. C) a measure of labor. D) output that does not meet quality specifications. E) total product minus the quantity of labor. Answer: B Topic: Marginal product Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

22) When the slope of the total product curve is steep, the marginal product is A) zero. B) negative. C) high. D) low. E) not defined. Answer: C Topic: Marginal product Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 23) At the Punjab Bakery, two workers can decorate 14 cakes in an hour and three workers can decorate 18 cakes in an hour. The marginal product of the third worker is A) 18 cakes, and the average product for three workers is 6 cakes. B) 9 cakes and is equal to the average product. C) 4 cakes, and the average product for three workers is 6 cakes. D) 32 cakes, and the average product for three workers is 9 cakes. E) 6 cakes, and the average product for three workers is also 6 cakes. Answer: C Topic: Marginal product Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 24) Jill runs a factory that makes lie detectors in Little Rock, Arkansas. This month, Jill's 34 workers produced 690 machines. Suppose Jill adds one more worker and, as a result, her factory's output increases to 700. Jill's marginal product of labor from the last worker hired equals A) 10. B) 20. C) 690. D) 700. E) None of the above answers is correct. Answer: A Topic: Marginal product Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

25) If 9 workers can produce 1,550 units of output and 10 workers can produce 1,700 units of output, then the marginal product of the 10th worker is A) 1,700 units. B) 1,550 units. C) 150 units. D) 170 units. E) 155 units. Answer: C Topic: Marginal product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 26) Increasing marginal returns ALWAYS occurs when the A) marginal product of an additional worker exceeds the marginal product of the previous worker. B) average product of an additional worker exceeds the average product of the previous worker. C) marginal product of an additional worker is less than the marginal product of the previous worker. D) average product of an additional worker is less than the average product of the previous worker. E) marginal product of an additional worker exceeds the average product of the previous worker. Answer: A Topic: Increasing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking Quantity of Labor (workers) Total Product (units per hour)

0 0

1 2

2 5

3 9

4 5 6 15 18 17

27) The table above shows the total product schedule for The X Firm. Increasing marginal returns occur until the ________ worker because ________. A) 4th; the marginal product of the 4th worker exceeds the 3rd worker, but not the 5th worker B) 5th; output is maximized C) 5th; output declines with the 6th worker D) 3rd; the average product of labor is also increasing E) 4th; the average product of labor is also increasing Answer: A Topic: Increasing marginal returns Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 27 Copyright © 2021 Pearson Education, Inc.

28) The table above shows the total product schedule for The X Firm. Decreasing marginal returns occur with the ________ worker because ________. A) 5th; the marginal product of labor for the 5th worker is less than the marginal product of the 4th worker B) 5th; the average product of labor is also declining C) 4th; output reaches is maximum D) 6th; output starts to decline E) 6th; the marginal product of labor is greater than the average product of labor Answer: A Topic: Decreasing marginal returns Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 29) The table above shows the total product schedule for The X Firm. The average product of labor is maximized at ________ workers because ________. A) 4; productivity is maximized when the 4th worker is employed B) 3; output starts to decrease with the 4th worker C) 5; output is maximized with the 5th worker D) 4; the marginal product of labor is increasing with the 4th worker E) 5; the APL exceeds the MPL for the 5th worker Answer: A Topic: Average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 30) Jeremiah runs a bullfrog farm in Frogville, Oklahoma. Jeremiah notices that each additional worker he employs adds more to the total output than does the previous worker. Jeremiah must be A) experiencing increasing marginal returns to labor. B) producing at a point where the average product of labor decreases as more workers are employed. C) producing at a point below his total product curve. D) mistaken because the law of decreasing returns points out that it cannot be the case that the marginal product increases as more workers are employed. E) producing at a point where the average product of labor exceeds the marginal product of labor. Answer: A Topic: Increasing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 28 Copyright © 2021 Pearson Education, Inc.

31) Increasing marginal returns to labor A) occur when a particularly efficient worker is employed. B) describe the portion of a total product curve where the marginal product is negative. C) mean that two workers produce less than twice the output of one worker. D) are the result of specialization and division of labor in the production process. E) occur only when there are increasing marginal returns to capital. Answer: D Topic: Increasing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 32) When the marginal product of an additional worker is less than the marginal product of the previous worker, there are ________ returns to labor. A) increasing total B) decreasing total C) increasing marginal D) decreasing marginal E) constant average Answer: D Topic: Decreasing marginal returns Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 33) Decreasing marginal returns A) can be avoided if a firm watches costs. B) affect all firms, but at different production levels. C) affect all firms at the same level of production. D) disappear when the firm produces a large enough level of output. E) mean that the average product of labor starts as a negative number and then becomes positive. Answer: B Topic: Decreasing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

34) Decreasing marginal returns occur in the short run as more labor is hired to work in a fixed sized plant because A) less efficient and less productive workers are hired. B) adding more workers exhausts the possible gains from specialization. C) the entrepreneur does not know how to manage more workers. D) each worker will produce more than the worker previously hired. E) the plant becomes less specialized. Answer: B Topic: Decreasing marginal returns Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 35) The law of decreasing returns states that as a firm uses more of a A) fixed input, with a given quantity of variable inputs, the marginal product of the fixed input eventually decreases. B) variable input, total output will increase indefinitely. C) variable input, with a given quantity of fixed inputs, the marginal product of the variable input eventually decreases. D) variable input, output will begin to fall immediately. E) fixed input and a variable input, the marginal product of the fixed input and the marginal product of the variable input both decrease. Answer: C Topic: Law of decreasing returns Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 36) Average product is equal to A) marginal product + total product. B) total product ÷ marginal product. C) total product ÷ quantity of labor. D) total product × quantity of labor. E) marginal product × quantity of labor. Answer: C Topic: Average product Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

37) Jill runs a factory that makes lie detectors in Little Rock, Arkansas. This month, Jill's 34 workers produced 680 machines. Jill's average product of labor equaled ________ lie detectors per worker. A) 680 B) 34 C) 23 D) 20 E) None of the above answers is correct. Answer: D Topic: Average product Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 38) If 10 workers can produce 1,500 units of output and 11 workers can produce 1,600 units of output, then the average product of 11 workers is A) 1,600 units. B) 1,500 units. C) 145.5 units. D) 100 units. E) 136.4 units. Answer: C Topic: Average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 39) Denise owns a plant that produces watch parts in Ohio. Denise noticed that when she hired the last worker, that worker's marginal product exceeded the marginal product of the previous worker. As a result, when the last worker was hired, Denise's average product of labor A) decreased. B) increased. C) did not change. D) perhaps changed, but there is not enough information to determine whether or not it did change. E) equals the marginal product of labor. Answer: B Topic: Average product Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

40) Kenya owns a lawn mowing company. His total product schedule is in the above table. The marginal product of the fourth worker is ________ lawns mowed per week. A) 80 B) 25 C) 20 D) 5 E) 320 Answer: D Topic: Marginal product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 41) Kenya owns a lawn mowing company. His total product schedule is in the above table. When 4 workers are employed, the average product is ________ lawns mowed per week. A) 80 B) 25 C) 20 D) 5 E) 320 Answer: C Topic: Average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

42) Kenya owns a lawn mowing company. His total product schedule is in the above table. Decreasing marginal returns first occur with the A) first worker. B) second worker. C) third worker. D) fourth worker. E) fifth worker. Answer: B Topic: Decreasing marginal returns Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

43) The above table shows the total product schedule for Hair Today, a hair styling salon. Based on the table, the marginal product for Hair Today A) never reaches a maximum. B) decreases after the 1st worker. C) reaches a maximum with the 4th worker. D) reaches a maximum with the 3rd worker. E) reaches a maximum with the 5th worker. Answer: D Topic: Marginal product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

44) The above table shows the total product schedule for Hair Today, a hair styling salon. The average product when four workers are hired is A) 10 hair stylings. B) 15 hair stylings. C) 20 hair stylings. D) 240 hair stylings. E) the same as when five workers are hired. Answer: B Topic: Average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 45) Which of the following is correct about marginal and average products? A) When the marginal product is increasing, the average product must be increasing. B) When the marginal product exceeds the average product, the average product must be increasing. C) When the average product is increasing, the marginal product must be decreasing. D) When the marginal product is decreasing, the average product must be decreasing. E) When the marginal product is increasing, the average product must be decreasing. Answer: B Topic: Marginal and average product Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 46) When the average product is at its maximum A) the marginal product is increasing as output increases. B) the marginal product is negative. C) it is equal to the marginal product. D) total product is also at its maximum. E) total product is at its minimum. Answer: C Topic: Marginal and average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

47) Under which of the following sets of circumstances is it DEFINITELY the case that the average product increases as more labor is hired? A) Total product increases as more labor is hired. B) The marginal product is equal to the average product. C) The marginal product is positive. D) The marginal product is greater than the average product. E) The marginal product is less than the average product. Answer: D Topic: Marginal and average product Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 48) The average product is the greatest in the short run when the A) total product is maximized. B) marginal product is equal to zero. C) marginal product is maximized. D) marginal product is equal to the average product. E) marginal product is greater than the average product. Answer: D Topic: Marginal and average product Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

49) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. The total product schedule shows A) increasing marginal returns when the 6th worker is hired. B) decreasing marginal returns when the 1st worker is hired. C) first increasing and then decreasing marginal returns. D) output first increases then increases. E) only decreasing marginal returns. Answer: C Topic: Total product schedule Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 50) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. Increasing marginal returns A) end when the fourth worker is hired. B) occur at all levels of employment. C) occur as long as output increases. D) end when the second worker is hired. E) never occur. Answer: A Topic: Increasing marginal returns Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

51) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. Decreasing marginal returns start to occur after the ________ worker is hired. A) first B) fourth C) fifth D) sixth E) third Answer: C Topic: Decreasing marginal returns Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 52) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. When the 4th worker is hired, the ________ product of labor equals ________ lawns mowed. A) average; 60 B) average; 3.75 C) marginal; 3.75 D) marginal; 0 E) marginal; 15 Answer: B Topic: Average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 53) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. The average product of labor ________ when the 7th worker is hired. A) reaches its maximum B) equals 1 lawn mowed C) equals 28 lawns mowed D) equals 4 lawns mowed E) equals 2 lawns mowed Answer: D Topic: Average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

54) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. When the ________ worker is hired, the average product of labor ________ the marginal product of labor. A) 4th; exceeds B) 5th; exceeds C) 6th; exceeds D) 7th; is less than E) 7th; equals Answer: C Topic: Marginal and average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 55) The table above shows the total product schedule for Rick's Lawn Service, a yard care company. When does the average product of labor equal the marginal product of labor? A) between the 4th and 5th workers B) at the 5th worker C) between the 5th and 6th workers D) between the 6th and 7th workers E) between 0 workers and the 3rd worker Answer: D Topic: Marginal and average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 56) The short run is a time period during which A) some of the firm's resources are fixed. B) all of the firm's resources are fixed. C) all of the firm's resources are variable. D) the fixed cost equals zero. E) the firm cannot increase its output. Answer: A Topic: Short run Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

57) In the short run, firms increase output A) only by increasing the size of their plant. B) only by decreasing the size of their plant. C) only by increasing the amount of labor used. D) only by decreasing the amount of labor used. E) either increasing the amount of labor used or increasing the size of their plant. Answer: C Topic: Short run Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 58) Which of the following is correct? A) The short run for a firm can be longer than the long run for the same firm. B) The short run is the same for all firms. C) The long run is the time frame in which the quantities of all resources can be varied. D) The long run is the time frame in which all resources are fixed. E) The long run does not exist for some firms. Answer: C Topic: Long run Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 59) Marginal product equals A) the total product produced by a certain amount of labor. B) the change in total product that results from a one-unit increase in the quantity of labor employed. C) total product divided by the quantity of labor. D) the amount of labor needed to produce an increase in production. E) total product minus the quantity of labor. Answer: B Topic: Marginal product Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

60) If 6 workers can wash 42 cars a day and 7 workers can wash 50 cars a day, then the marginal product of the 7th worker equals A) 7.1 cars a day. B) 7 cars a day. C) 42 cars a day. D) 50 cars a day. E) 8 cars a day. Answer: E Topic: Marginal product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 61) Increasing marginal returns occur when the A) average product of an additional worker is less than the average product of the previous worker. B) marginal product of an additional worker exceeds the marginal product of the previous worker. C) marginal product of labor is less than the average product of labor. D) total output of the firm is at its maximum. E) total product curve is horizontal. Answer: B Topic: Increasing marginal returns Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking 62) If 25 workers can pick 100 flats of strawberries per hour, then average product is A) 100 flats per hour. B) 125 flats per hour. C) 75 flats per hour. D) 4 flats per hour. E) More information is needed about how many flats 24 workers can pick. Answer: D Topic: Average product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

14.3 Short-Run Cost 1) Total cost includes A) the cost of variable resources only. B) the cost of fixed resources only. C) the cost of both variable and fixed resources. D) the cost of neither variable nor fixed resources. E) all explicit costs and all the implicit costs that actually must be paid using money. Answer: C Topic: Total cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 2) Chuck owns a factory that produces leather footballs. His total fixed cost equaled $86,000 last year. His total cost equaled $286,000 last year. Hence Chuck's A) total variable cost was zero. B) incurred an economic loss. C) total variable cost equaled $200,000. D) total variable cost equaled $372,000. E) None of the above answers is correct. Answer: C Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 3) If Melissa owns a software company that incurs no fixed costs, then A) her total cost equals her total variable cost. B) she will earn an economic profit. C) her total variable cost is less than her total cost. D) her total cost equals zero. E) her marginal cost must equal zero. Answer: A Topic: Total cost Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

4) In the short run, a firm cannot change the amount of capital it uses. Therefore the cost of capital is a A) short-run cost. B) variable cost. C) productivity cost. D) fixed cost. E) marginal cost. Answer: D Topic: Total fixed cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 5) The cost that does NOT change as output changes is A) total fixed cost. B) average fixed cost. C) total variable cost. D) average variable cost. E) marginal cost. Answer: A Topic: Total fixed cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 6) Which of the following costs can be positive when output is zero? A) average variable cost B) total variable cost C) marginal cost D) total fixed cost E) None of the above because when output is zero there are no costs. Answer: D Topic: Total fixed cost Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

7) Which of the following is a fixed cost for ACME manufacturing? A) wages paid to labor B) the annual fire and theft insurance premiums C) the utility bill D) raw material costs E) the cost of shipping its product to market Answer: B Topic: Total fixed cost Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 8) Because the amount of labor a firm employs can be changed, the cost of labor is known as A) minimum cost. B) variable cost. C) maximum cost. D) fixed cost. E) an unavoidable cost. Answer: B Topic: Total variable cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 9) If a firm does NOT produce any output, its A) total fixed cost must be zero. B) economic profit must be positive. C) total variable cost must be zero. D) total costs must be zero. E) marginal cost must be zero. Answer: C Topic: Total variable cost Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

10) In the short run, total variable cost A) includes the cost of capital. B) includes the cost of labor. C) includes both the cost of capital and of labor. D) does not change when production changes. E) is positive when output is zero. Answer: B Topic: Total variable cost Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 11) The total variable cost curve ________ because ________ as output increases. A) slopes upward; variable cost increases B) slopes upward; marginal cost increases C) slopes downward; variable cost increases D) slopes downward; marginal cost increases E) is horizontal; fixed cost does not change Answer: A Topic: Total variable cost Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 12) Marginal cost equals A) total cost minus total variable cost. B) total fixed cost divided by total output. C) total variable cost divided by total output. D) the change in total cost that results from a one-unit increase in output. E) the change in fixed cost that results from a one-unit increase in output. Answer: D Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

13) The change in cost that results from a one-unit increase in output is called the A) average fixed cost. B) per-unit variable cost. C) per-unit total cost. D) marginal cost. E) average cost change. Answer: D Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 14) As a typical firm increases its output, its marginal cost A) is constant. B) decreases at first and then increases. C) increases at first and then decreases. D) decreases. E) is negative at first and then positive. Answer: B Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 15) When marginal cost is positive, total cost is ________ as output increases. A) increasing B) decreasing C) constant D) negative E) undefined Answer: A Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

16) If total fixed cost increases, which of the following will NOT change? A) total cost B) average fixed cost C) marginal cost D) average total cost E) ALL costs increase when total fixed cost increases. Answer: C Topic: Marginal cost Skill: Level 4: Applying models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 17) Scott owns a law-enforcement training operation in Boise, Idaho. He employs three trainers. The last trainer Scott hired increased Scott's total cost by $466 per week even though the trainer brought in only one new client. Hence Scott's A) total variable cost equals $466. B) marginal cost of the last client equals $466. C) marginal cost of the last worker equals $233. D) total variable cost equals $233. E) total fixed cost of the last client equals $466. Answer: B Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

OUTPUT 0 1 2 3 4 5

Total Cost $100 $140 $160 $200 $240 $330

Fixed Cost $100 $100 $100 $100 $100 $100

Variable Cost

Average Average Variable Cost Total Cost

$40 $60 $100 $140 $230

$40 $30 $33.33 $35 $46

$140 $80 $67 $60 $66

18) The table above gives the cost schedule for The X Firm. The data show that The X Firm's ________ curve is ________. A) ATC; U-shaped because the firm fixed costs are spread over larger amounts of output and the firm experiences decreasing marginal returns B) AFC; U-shaped because the firm spreads its fixed costs over larger and large amounts of output C) AVC; always declining because costs are divided across ever-increasing amounts of output D) MC; U-shaped because explicit costs exceed implicit costs E) ATC; U-shaped because output increases as costs increase Answer: A Topic: Average total cost curve Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

Labor (workers)

Output (bikes)

0 1 2 3 4

0 20 50 60 64

Total Total fixed variable cost costs (dollars) (dollars) 200 100

Total cost (dollars)

19) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total cost of producing 50 bikes? A) $100 B) $200 C) $300 D) $400 E) $500 Answer: D Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 20) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total fixed cost of producing 64 bikes? A) $200 B) $300 C) $400 D) $500 E) $600 Answer: A Topic: Total fixed cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

21) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total variable cost of producing 60 bikes? A) $200 B) $300 C) $400 D) $500 E) None of the above answers are correct. Answer: B Topic: Total variable cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

22) The Jerry-Berry Ice Cream Shoppe's total cost schedule is in the above table. Based on the table, which of the following is correct? A) The total fixed cost is $1. B) The average fixed cost of 1 gallon is $1.00. C) The average variable cost of 2 gallons of ice cream is $1.00 per gallon. D) Only answers A and B are correct. E) Answers A, B, and C are correct. Answer: E Topic: Costs Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

23) The Jerry-Berry Ice Cream Shoppe's total cost schedule is in the above table. Based on the table, the marginal cost of producing the fourth gallon of ice cream is A) $2. B) $3. C) $5. D) $8. E) $32. Answer: B Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

24) Paulette owns a pizza parlor. Her total cost schedule is in the above table. Her total fixed cost is equal to A) $20. B) $35. C) $79. D) $85. E) Some amount, but more information is needed to determine her fixed cost. Answer: A Topic: Total fixed cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

25) Paulette owns a pizza parlor. Her total cost schedule is in the above table. Her total variable cost of producing four pizzas per hour is A) $20. B) $49. C) $51. D) $71. E) Some amount, but more information is needed to determine this total variable cost. Answer: C Topic: Total fixed cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 26) Paulette owns a pizza parlor. Her total cost schedule is in the above table. Her marginal cost of producing the fifth pizza is A) $8. B) between $8.01 and $10.00. C) between $10.01 and $14.00. D) between $14.01 and $78.00. E) more than $78.01. Answer: A Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

27) In the above figure, curve A is the ________ curve and curve B is the ________ curve. A) total variable cost; total fixed cost B) total cost; total fixed cost C) total fixed cost; total variable cost D) total cost; total variable cost E) total variable cost; total cost Answer: D Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 28) In the above figure, curve A is the ________ curve and curve C is the ________ curve. A) total variable cost; total fixed cost B) total cost; total fixed cost C) total fixed cost; total variable cost D) total cost; total variable cost E) total variable cost; total cost Answer: B Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

29) Average variable cost equals A) fixed cost divided by output. B) total variable cost divided by output. C) marginal cost divided by output. D) marginal cost plus fixed cost. E) marginal cost multiplied by output. Answer: B Topic: Average variable cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

30) The graph shows the total cost for Phil's Phone Repair. The average total cost to repair ________ phones is ________. A) 5; $24.88 B) 5; $21.33 C) 5; $6.80 D) 4; $6.33 E) 4; $24.88 Answer: A Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Application of knowledge

31) The graph shows the total cost curve for Phil's Phone Repair. The total fixed cost of repairing ________ phones is ________. A) 5; $90 B) 6; $3 C) 5; $128 D) 5; $24.88 E) More information is needed to answer the question. Answer: A Topic: Total fixed cost Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Application of knowledge 32) Average total cost is equal to A) average fixed cost + average variable cost. B) total cost ÷ quantity. C) the change in total cost when output changes by one unit. D) Answers A and B are correct. E) Answers A and C are correct. Answer: D Topic: Average total cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

33) The figure shows the cost curves for Phil's Phone Repair, a cell phone repair firm. When output is ________ repaired phones, average total cost is ________. A) below 12; increasing B) more than 12; increasing C) between 10 and 12; less than marginal cost D) greater than 5; constant E) less than 5; increasing Answer: B Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Application of knowledge 34) The figure shows the cost curves for Phil's Phone Repair, a cell phone repair firm. The figure shows marginal cost ________ which explains why ________. A) is decreasing up until 5 units; average total cost decreases B) is less than average total cost up until 12 units; average total cost decreases C) is greater than average total cost; average variable cost decreases D) is greater than average total cost when more than 12 phones are repaired; average total cost increases E) both B and D are correct Answer: E Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Application of knowledge

35) The figure shows the cost curves for Phil's Phone Repair, a cell phone repair firm. If Phil increases his workers' wages, ________ curve(s) will shift ________. A) the MC, ATC and AVC; upward B) only the MC; upward C) only the AVC; upward D) the AVC and ATC; downward as production falls E) the MC, AVC and ATC; downward as production falls Answer: A Topic: Cost curves Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Application of knowledge 36) The figure shows the cost curves for Phil's Phone Repair, a cell phone repair firm. Using this information, we know that the AVERAGE PRODUCT of repairing phones reaches A) a minimum when 10 phones are repaired each hour. B) equals the average of cost of repairing phones. C) a maximum when 10 phones are repaired each hour. D) a minimum when between 5 and 10 phones are repaired. E) a maximum when more that 12 phones are repaired. Answer: C Topic: Average product Skill: Level 5: Critical thinking Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 37) Average total cost equals A) the change in total cost divided by the change in output. B) total fixed cost divided by output. C) average fixed cost plus average variable cost. D) total cost minus total variable cost. E) average fixed cost plus average variable cost plus marginal cost. Answer: C Topic: Average total cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

38) Which of the following always decreases when output increases? A) total fixed cost B) marginal cost C) average variable cost D) average fixed cost E) total cost Answer: D Topic: Average fixed cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 39) The average fixed cost curve A) is always positively sloped. B) is U-shaped. C) has an upside-down U shape. D) is always negatively sloped. E) is horizontal. Answer: D Topic: Average fixed cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 40) The total product is 10 units. The average total cost is $30 and the average fixed cost is $10. What is the amount of the TOTAL variable cost? A) $20 B) $200 C) $300 D) $10 E) It is impossible to determine with the information given. Answer: B Topic: Average variable cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

41) If average variable costs increase as output increases, then A) total fixed cost must be increasing also. B) marginal cost must be greater than average variable cost. C) total cost must be constant. D) output must be zero. E) average total cost must be increasing also. Answer: B Topic: MC and AVC Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 42) An insurance agent rents a building and has a three-year lease. An increase in the rent for the building increases the agent's A) total cost and average variable cost. B) total variable cost and average variable cost. C) total fixed cost and total variable cost. D) total fixed cost and average fixed cost. E) total variable cost and total cost. Answer: D Topic: Average costs Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

43) The table above shows a total product schedule. Suppose that labor costs $20 per worker and fixed costs are $60. The total variable cost of producing 80 units equals A) less than $50. B) more than $50 and less than $70. C) more than $70 and less than $90. D) more than $90 and less than $120. E) more than $120. Answer: C Topic: Total variable cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 44) The table above shows a total product schedule. Suppose that labor costs $20 per worker and fixed costs are $60. The total cost of producing 80 units equals A) less than $5. B) more than $5 and less than $110. C) more than $110 and less than $120. D) more than $120 and less than $150. E) more than $150. Answer: D Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

45) The table above shows a total product schedule. Suppose that labor costs $20 per worker and fixed costs are $60. The average variable cost of producing 80 units equals ________ per unit. A) $0.75 B) $1.00 C) $1.75 D) $20 E) $0.25 Answer: B Topic: Average variable cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 46) The table above shows a total product schedule. Suppose that labor costs $20 per worker and fixed costs are $60. The average total cost of producing 80 units equals ________ per unit. A) $0.75 B) $1.00 C) $1.75 D) $60 E) $0.25 Answer: C Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

47) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 2 workers, her total cost equals A) $1,200. B) $300. C) $10.00. D) $12.00. E) $600. Answer: A Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 48) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 2 workers, her average total cost equals A) $2,400. B) $300. C) $10.00. D) $12.00. E) $1,200. Answer: D Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

49) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 2 workers, her average variable cost equals A) $2,400. B) $300. C) $6.00. D) $10.00. E) $600. Answer: C Topic: Average variable cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 50) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 2 workers, her average fixed cost equals A) $600. B) $6.00. C) $7.50. D) $10.00. E) $2,400. Answer: B Topic: Average fixed cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 51) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 6 workers, her total cost equals A) $2,400. B) $300. C) $7.50. D) $10.00. E) $1,800. Answer: A Topic: Total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 62 Copyright © 2021 Pearson Education, Inc.

52) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 6 workers, her average total cost equals A) $2,400. B) $300. C) $7.50. D) $10.00. E) $4,200. Answer: D Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 53) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 6 workers, her average variable cost equals A) $2,400. B) $300. C) $7.50. D) $10.00. E) $1,800. Answer: C Topic: Average variable cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 54) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 6 workers, her average fixed cost equals A) $600. B) $2.50. C) $7.50. D) $10.00. E) $6.00. Answer: B Topic: Average fixed cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 63 Copyright © 2021 Pearson Education, Inc.

Labor (workers) 0 5 10 15 20

Output (frijoles) 0 1,000 3,000 4,000 4,500

Total cost (dollars) 1,000 3,000 5,000 7,000 9,000

55) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. What is the total fixed cost of producing 4,500 frijoles? A) $1,000 B) $8,000 C) $9,000 D) $2,000 E) More information is needed to determine the answer. Answer: A Topic: Total fixed cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 56) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. Between what two levels of output does the marginal cost of producing Fiery Frijoles first begin to rise? A) 0 and 1,000 B) 1,000 and 3,000 C) 3,000 and 4,000 D) 4,000 and 4,500 E) None of the above answers is correct. Answer: C Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

57) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. What is the average variable cost of producing 1,000 frijoles? A) $1 B) $2 C) $3 D) $3,000 E) More information is needed to determine the answer. Answer: B Topic: Average variable cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 58) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. What is the average total cost of producing 4,500 frijoles? A) $2 B) $225 C) $9,000 D) $8,000 E) More information is needed to determine the answer. Answer: A Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 59) The production and cost information provided in the table above for Flaming Fernando's, a restaurant that sells Fiery Frijoles, is for the A) short run because there are no variable costs. B) short run because there is a fixed cost. C) long run because there are no variable costs. D) long run because there are no fixed costs. E) short run AND long run because the total cost increases as production increases. Answer: B Topic: Short run and long run Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

60) The vertical distance between total cost curve and total variable cost curve is equal to A) average fixed cost. B) total fixed cost. C) average variable cost. D) average total cost. E) marginal cost. Answer: B Topic: Cost curves Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 61) The U-shaped average total cost curve is A) a result of firms' wanting to find the output level where cost is at its minimum. B) unrealistic because average total cost always increases as output increases. C) the result of average fixed cost falling and decreasing marginal returns as output increases. D) a result of constant marginal returns. E) a result of increasing marginal returns. Answer: C Topic: Cost curves Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 62) The U-shape of the average variable, average total, and marginal cost curves reflects A) increasing marginal returns. B) decreasing marginal returns. C) both increasing and decreasing marginal returns. D) decreasing marginal product. E) the point that implicit costs become a smaller fraction of total cost as output increases. Answer: C Topic: Cost curves Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

63) The short-run average total cost, average variable cost, and marginal cost curves are all Ushaped because of i. constant total fixed cost. ii. increasing and then decreasing marginal returns as more labor is hired. iii. economies and diseconomies of scale as the plant size increases. A) only i B) only ii C) i and iii D) ii and iii E) i, ii, and iii Answer: B Topic: Cost curves Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 64) In a graph of a typical firm's AFC, ATC, and AVC curves, the A) AVC curve lies above the ATC curve. B) ATC curve lies below the AFC curve. C) distance between the ATC curve and the AVC curve equals the AFC. D) distance between the AVC curve and the AFC curve equals the ATC. E) AVC curve crosses the MC curve at the point where the MC is at its minimum. Answer: C Topic: Cost curves Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 65) As we observe the cost curves graph, we see that the A) MC curve intersects the ATC curve at its maximum. B) MC curve cannot be U-shaped. C) ATC curve always has a negative slope. D) MC curve intersects the AVC curve and ATC curve at their minimums. E) MC constantly falls as output increases. Answer: D Topic: Cost curves Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

66) In a figure showing the average total cost curve and the average variable cost curve, the vertical distance between the two curves is equal to the A) marginal cost. B) average fixed cost. C) total fixed cost. D) total variable cost. E) average marginal cost. Answer: B Topic: Cost curves Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 67) The vertical distance between the total cost curve and the total variable cost curve ________ as output increases and the vertical distance between the average total cost curve and average variable cost curve ________ as output increases. A) is constant; decreases B) decreases; is constant C) increases; decreases D) decreases; increases E) decreases; decreases Answer: A Topic: Cost curves Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 68) The marginal cost curve is U-shaped. Over the range of output for which the marginal cost is falling as output increases, the marginal product is A) increasing. B) decreasing. C) constant. D) probably changing, but there is no stable relationship between the marginal cost and the marginal product. E) not defined. Answer: A Topic: MC and MP Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

69) The relationship between the MP and MC curves is A) over the range where the MP curve has a negative slope, the MC curve also has a negative slope. B) there is no predictable relationship. C) over the range where the MC curve has a positive slope, the MP curve also has a positive slope. D) over the range where the MP curve has a positive slope, the MC curve has a negative slope. E) that the MP is not defined when the MC curve has a negative slope. Answer: D Topic: MC and MP Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 70) If marginal cost increases when output increases, then A) marginal product must decrease when output increases. B) average fixed cost is constant. C) total cost is constant. D) average variable cost must increase when output increases. E) average total cost must decrease when output increases. Answer: A Topic: MC and MP Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 71) If another worker is hired with a marginal product greater than the previously hired worker, which of the following will be TRUE? A) total costs will decrease B) fixed costs will decrease C) marginal cost will increase D) marginal cost will decrease E) average fixed costs will increase Answer: D Topic: MC and MP Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

72) When the marginal product is increasing as the quantity increases, then as the quantity increases the A) average product is decreasing. B) marginal cost is decreasing. C) total cost is decreasing. D) total product is decreasing. E) fixed cost is increasing. Answer: B Topic: MC and MP Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 73) If we know the amount of total cost, average total cost, average variable cost, and marginal cost for each level of output, how can we find the level of output where the marginal product is the greatest? A) It is the output for which the marginal cost equals average variable cost. B) It is the output for which the total cost is maximized. C) It is the output for which the marginal cost is minimized. D) It is the output for which the marginal cost equals average total cost. E) There is no way to find where marginal product is the greatest knowing only cost data. Answer: C Topic: MC and MP Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 74) Cost curves shift if i. technology changes. ii. the prices of factors of production change. iii. productivity changes. A) only i B) i and iii C) only ii D) i and ii E) i, ii, and iii Answer: E Topic: Shifts in the cost curves Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

75) An increase in the price of labor (a variable resource) shifts A) all cost curves upward. B) the variable cost curves upward but leaves the fixed cost curves unchanged. C) the fixed cost curves upward but leaves the variable cost curves unchanged. D) the marginal cost curve rightward. E) none of the cost curves. Answer: B Topic: Shifts in the cost curves, prices of factors of production Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 76) Total cost is equal to the sum of A) total revenue and total cost. B) total variable cost and total product. C) total variable cost and total fixed cost. D) total fixed cost and total product. E) the marginal cost plus the total fixed cost plus the total variable cost. Answer: C Topic: Total cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 77) Total fixed cost is the cost of A) labor. B) production. C) a firm's fixed factors of production. D) only implicit factors of production. E) only explicit factors of production. Answer: C Topic: Total fixed cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

78) Jay set up his hot dog stand near the business district. His total variable cost includes the A) annual insurance for the hot dog stand. B) cost of buying the hot dog stand. C) cost of the hot dogs and condiments. D) interest he pays on the funds he borrowed to pay for advertising. E) revenue he gets when he sells his first hot dog each day. Answer: C Topic: Total variable cost Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 79) Marginal cost is equal to A) the total cost of a firm's production. B) total cost minus fixed cost. C) a cost that is not related to the quantity produced. D) the change in total cost that results from a one-unit increase in output. E) the change in fixed cost that results from a one-unit increase in output. Answer: D Topic: Marginal cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 80) To produce 10 shirts, the total cost is $80; to produce 11 shirts, the total cost is $99. The marginal cost of the 11th shirt is equal to A) $8. B) $9. C) $80. D) $99. E) $19. Answer: E Topic: Marginal cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

81) Average total cost equals A) marginal cost divided by output. B) average fixed cost plus average variable cost. C) total fixed cost plus total variable cost. D) marginal cost plus opportunity cost. E) marginal cost multiplied by the quantity of output. Answer: B Topic: Average total cost Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 82) To produce 10 shirts, the total cost is $80; to produce 11 shirts, the total cost is $99. The average total cost of the 11th shirt is equal to A) $8. B) $9. C) $80. D) $99. E) $19. Answer: B Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 83) One of the major reasons for the U-shaped average total cost curve is the fact that A) there are increasing returns from labor regardless of the number of workers employed. B) there eventually are decreasing returns from labor as more workers are employed. C) prices fall as output increases. D) the average fixed cost increases as more output is produced. E) the variable cost decreases as more output is produced. Answer: B Topic: Cost curves Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking

14.4 Long-Run Cost 1) Which of the following statements is TRUE? A) In the long run, the average cost curve is always downward sloping. B) In the long run, the quantities of all inputs are fixed. C) In the long run, the firm's fixed costs are greater than its variable costs. D) In the long run, all costs are variable costs. E) In the long run, the total variable cost equals the total fixed cost. Answer: D Topic: Long run Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 2) Which of the following is FALSE? A) Long-run average variable costs equal long-run average total costs. B) Fixed costs increase in the long run. C) As a firm produces more output, eventually it experiences diseconomies of scale. D) In the long run, both the amount of capital and labor used by the firm can be changed. E) In the long run, the firm has no fixed inputs. Answer: B Topic: Long run Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 3) In the long run A) all inputs can be varied. B) all inputs are fixed. C) some inputs are variable and other inputs are fixed. D) output is fixed. E) total variable cost cannot be changed. Answer: A Topic: Long run Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking

4) Which of the following is TRUE in the long run? A) Total cost equals fixed cost. B) Total cost is constant. C) All costs are variable. D) Marginal cost equals zero. E) None of the above is true in the long run. Answer: C Topic: Long-run average cost Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 5) When a firm's long-run average total cost falls as its output increases, the firm is experiencing A) economies of scale. B) diseconomies of scale. C) constant returns to scale. D) decreasing marginal returns. E) decreasing cost of marginal returns. Answer: A Topic: Economies of scale Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 6) As output increases, economies of scale occur when the A) long-run average cost increases. B) long-run average cost decreases. C) short-run average total cost decreases. D) long-run average cost stays constant. E) long-run fixed cost decreases. Answer: B Topic: Economies of scale Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking

7) If a firm increases its output and its average cost decreases, the firm is experiencing which of the following? A) increasing marginal returns B) diseconomies of scale C) economies of scale D) random luck E) decreasing cost of marginal returns Answer: C Topic: Economies of scale Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 8) The main source of economies of scale is A) reductions in the price of factors of production. B) greater specialization of both labor and capital. C) increasing average costs. D) decreasing marginal product. E) the ability to hire less labor. Answer: B Topic: Economies of scale Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 9) The main sources of economies of scale are A) increasing marginal cost and decreasing marginal product. B) specialization of resources such as labor and capital. C) caused by the difficulty of coordinating and controlling large enterprises. D) decreasing marginal cost and increasing marginal product. E) an increase in a firm's bargaining power to lower the wage rate and the cost of capital as the firm's output increases. Answer: B Topic: Economies of scale Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking

10) Economies of scale can occur as a result of which of the following? A) increasing marginal returns as the firm increases its size B) lower fixed cost as the firm increases its size C) management difficulties as the firm increases its size D) greater specialization of labor and capital as the firm increases its size E) increased total cost when the firm increases its size Answer: D Topic: Economies of scale Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 11) In the long run, if 1,000 units are produced at a cost of $8,000 and 1,200 units at a cost of $9,200, then over this range of output there are A) constant economies of scale. B) constant returns to scale. C) diseconomies of scale. D) economies of scale. E) constant diseconomies of scale. Answer: D Topic: Economies of scale Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking 12) Diseconomies of scale is A) a short run phenomenon. B) the result of decreasing marginal returns. C) a long run phenomenon. D) the result of increasing marginal returns. E) possible only when the firm's plant size is fixed. Answer: C Topic: Diseconomies of scale Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking

13) A firm decreases its scale of operation and discovers that its long-run average costs decrease. Which of the following does this indicate? A) Labor's marginal product has increased. B) Diseconomies of scale were absent in the larger plant. C) The firm's scale initially was so large that it experienced diseconomies of scale. D) The firm's scale initially was too small to experience economies of scale. E) Its long-run marginal cost was smaller with the larger plant than with the smaller plant. Answer: C Topic: Diseconomies of scale Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 14) Diseconomies of scale is a result of A) mismanagement. B) difficulties of coordinating and controlling a large enterprise. C) specialization of labor, capital, and management. D) technological progress. E) larger fixed costs as the firm's production increases. Answer: B Topic: Diseconomies of scale Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 15) When a firm becomes so large it is difficult to coordinate and control, it is most likely that A) economies of scale have begun. B) diseconomies of scale have begun. C) average total cost begins to fall. D) long-run average costs become negative. E) there are increasing marginal returns to increasing the firm's plant size. Answer: B Topic: Diseconomies of scale Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking

16) The long run average cost curve A) is the sum of a firm's short run average cost curves. B) shows the lowest average cost facing a firm as it increases output changing both its plant and labor force. C) initially rises when output increases and then falls when output increases. D) always falls as output increases. E) always rises as output increases. Answer: B Topic: Long-run average cost curve Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 17) What does the long-run average cost curve show? A) the interaction between average fixed cost and marginal cost B) the lowest average cost to produce each output level in the long run C) the distinction between long-run fixed and long-run variable costs D) the lowest average marginal cost of producing each output level at any time. E) Answers A, B, and C are correct. Answer: B Topic: Long-run average cost curve Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 18) The long-run average cost curve is U-shaped because of which of the following? A) decreasing marginal returns as more labor is hired B) constant fixed costs as output is increased C) economies and diseconomies of scale D) increasing marginal returns as more labor is hired E) decreasing average fixed costs as output is increased Answer: C Topic: Long-run average cost curve Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking

19) The long-run average cost curve A) is an upside down U-shape. B) is constructed using the short-run marginal cost curves. C) shows economies and diseconomies of scale. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: C Topic: Long-run average cost curve Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 20) The portion of the long-run average cost curve in which economies of scale are experienced shows that as output increases, the A) average total cost decreases. B) average total cost increases. C) marginal cost increases. D) marginal cost decreases. E) average variable cost is constant and the average fixed cost decreases. Answer: A Topic: Long-run average cost curve Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 21) If a company triples its output and its average cost decreases, then the firm is definitely experiencing A) diseconomies of scale. B) decreasing marginal returns. C) increasing marginal returns. D) economies of scale. E) Both answers C and D are correct. Answer: D Topic: Long-run average cost curve Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking

22) When the long-run average cost curve is downward sloping A) economies of scale are present. B) diseconomies of scale are present. C) the firm experiences constant returns to scale. D) the average fixed cost curve must be upward sloping. E) The premise of the question is wrong because long-run average cost curves never slope downward. Answer: A Topic: Long-run average cost curve Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 23) The main source of economies of scale is A) better management. B) constant returns to plant size. C) specialization. D) long-run cost curves eventually sloping downward. E) increases in the labor force not matched by increases in the plant size. Answer: C Topic: Economies of scale Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 24) Diseconomies of scale can occur as a result of which of the following? A) increasing marginal returns as the firm increases its size B) lower total fixed cost as the firm increases its size C) management difficulties as the firm increases its size D) greater specialization of labor and capital as the firm increases its size E) increases in the labor force not matched by increases in the plant Answer: C Topic: Diseconomies of scale Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking

25) In the long run, constant returns to scale necessarily occur when the firm increases its production and the firm's A) total cost increases. B) total cost does not change. C) average total cost increases. D) average total cost does not change. E) production increases by more than does the firm's total cost. Answer: D Topic: Constant returns to scale Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 26) A firm's long-run average cost curve shows the ________ average cost at which it is possible to produce each output when the firm has had ________ time to change both its labor force and its plant. A) highest; sufficient B) lowest; sufficient C) lowest; insufficient D) highest; insufficient E) average; sufficient Answer: B Topic: Long-run average cost curve Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 27) Economies of scale and diseconomies of scale explain A) cost behavior in the short run. B) profit maximization in the long run. C) the U-shape of the long-run average cost curve. D) the U-shape of the short-run average total cost curve. E) the U-shape of the marginal cost curves. Answer: C Topic: Long-run average cost curve Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking

28) Consider a Walmart supercenter and a 7-Eleven store. In the long run A) Walmart or 7-Eleven may have economies of scale depending on how many customers are served. B) Walmart will definitely have lower average costs because supercenters serve many more customers. C) The 7-Eleven store will definitely have lower average costs because their small stores are cheaper to build. D) Walmart's average total cost will decline faster than the 7-Eleven store and experience diseconomies of scale. E) The 7-Eleven store's average total cost will be lower than Walmart's and always experience economies of scale. Answer: A Topic: Eye on Retailers' Cost Skill: Level 4: Applying models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

29) The graph shows long run costs for a firm. The firm experiences economies of scale A) up until 1,000 units are produced. B) once production exceeds 9,000 units. C) once production exceeds 5,000 units. D) only after 1,000 units are produced. E) when average costs are minimized at 5,000 units. Answer: A Topic: Economies of scale Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Application of knowledge

30) The graph shows long run costs for a firm. If the firm produces ________ units, it will experience ________. A) less than 1,000; diseconomies of scale; average costs decrease B) 5,000; diseconomies of scale because average variable costs decrease C) more than 9,000; diseconomies of scale because managing larger firms results in higher costs D) more than 9,000; economies of scale because fixed costs are spread over large quantities E) less than 9,000; a diminishing marginal product of labor Answer: C Topic: Diseconomies of scale Skill: Level 4: Applying models Section: Checkpoint 14.4 Status: Old AACSB: Application of knowledge 14.5 Chapter Figures

The figure above shows a firm's total product curve. 1) Which of the points show efficient production points? A) all points above the TP curve B) all points on the TP curve C) all the darkened points below the TP curve D) all the points above AND on the TP curve E) all the darkened points below AND on the TP curve Answer: B Topic: Total product curve Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 84 Copyright © 2021 Pearson Education, Inc.

The figure above shows some of a firm's cost curves. 2) Based on the figure above, curve A is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) total variable cost curve. E) total fixed cost curve. Answer: B Topic: Total cost Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 3) Based on the figure above, curve B is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) total variable cost curve. E) total fixed cost curve. Answer: D Topic: Total cost Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 85 Copyright © 2021 Pearson Education, Inc.

4) Based on the figure above, curve C is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) total variable cost curve. E) total fixed cost curve. Answer: E Topic: Total cost Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

The figure above shows some of a firm's cost curves. 5) Based on the figure above, curve A is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) average variable cost curve. E) average fixed cost curve. Answer: E Topic: Average total cost Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 86 Copyright © 2021 Pearson Education, Inc.

6) Based on the figure above, curve B is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) average variable cost curve. E) average fixed cost curve. Answer: D Topic: Average variable cost Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 7) Based on the figure above, curve C is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) average variable cost curve. E) average fixed cost curve. Answer: C Topic: Average total cost Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 8) Based on the figure above, curve D is the firm's A) marginal cost curve. B) total cost curve. C) average total cost curve. D) average variable cost curve. E) average fixed cost curve. Answer: A Topic: Marginal cost Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

9) A firm's rent is a fixed cost. If the rent increases, then in the figure above ________ upward. A) only curve A shifts B) only curve B shifts C) only curve C shifts D) both curves A and C shift E) both curves B and C shift Answer: D Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 10) A firm's utility bill is a variable cost. If the cost of utilities increases, then in the figure above ________ upward. A) only curve A shifts B) only curve B shifts C) only curve C shifts D) both curves A and C shift E) both curves B and C shift Answer: E Topic: Average total cost Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

The figure above shows a firm's average total cost and marginal cost curves. 11) Based on the figure above, the firm's marginal product curve slopes upward at levels of output between ________ and the firm's average product curve slopes upward at levels of output between ________. A) 4.0 and 7.0; 4.0 and 7.0 B) 0 and 7.0; 4.0 and 7.0 C) 4.0 and 7.0; 0 and 4.0 D) 0 and 4.0; 0 and 7.0 E) More information is needed to answer the question. Answer: D Topic: Cost curves Skill: Level 4: Applying models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

14.6 Integrative Questions

1) The table above shows A) a total product schedule. B) the market for labor. C) a production possibility frontier. D) a supply schedule. E) a demand for labor schedule. Answer: A Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking 2) Which of the following variables do you need to know to calculate marginal cost? i. change in total cost ii. marginal product of labor iii. change in quantity of labor used iv. change in output A) i and ii B) i and iv C) ii and iv D) i, iii, and iv E) only ii Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

3) The average product curve A) initially falls then rises. B) rises as average variable cost increases. C) initially rises and then falls. D) shows how productivity changes as output changes. E) intersects the marginal cost curve when the average product curve is at its maximum. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 4) Which of the following contributes to increasing marginal returns? A) decreasing implicit costs B) increasing explicit costs C) specialization of labor D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 5) The law of decreasing returns applies to A) the long-run average cost curve. B) average total cost. C) diseconomies of scale. D) changes in a variable input with a given quantity of fixed inputs. E) changes in a fixed input with a given quantity of variable inputs. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

6) Once production has reached the maximum average product of labor, if production increases then A) average fixed cost rises. B) total costs decrease. C) total product decreases. D) decreasing marginal returns occur. E) the plant size must be increased. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 7) As output increases, average total cost decreases A) constantly. B) as the average product of labor decreases. C) initially and then starts to increase. D) in the long run and the short run. E) as long as average fixed cost decreases. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 8) Marginal cost A) is the difference between total cost and total fixed cost. B) increases as the marginal product of labor increases. C) decreases as the average product of labor increases. D) is the change in total cost arising from a one-unit increase in output. E) equals the change in variable cost divided by the change in fixed cost when output increases by one unit. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

9) Which of the following curves are U-shaped? i. average variable cost curve ii. average fixed cost curve iii. average total cost curve A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) only ii Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 10) The marginal cost curve intersects the ________ curves at their ________ points. A) average total cost and average fixed cost; minimum B) average product and marginal product; maximum C) average variable cost and total variable cost; maximum D) average total cost and average variable cost; minimum E) average product and marginal product; minimum Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 11) If the average product of labor curve is rising i. the average variable cost curve is falling. ii. the marginal cost curve is definitely falling. iii. the marginal product curve has reached its maximum. A) i and iii B) i only C) ii and iii D) i, ii, and iii E) ii only Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

14.7 Essay: Economic Cost and Profit 1) Jake opens a pig farm in Idaho. To start his farm, he uses his entire $50,000 of savings from his savings account. The bank was paying him $2,500 interest on his saving. Explain why the $2,500 is one of Jake's costs. Answer: When Jake provides the $50,000 to finance his farm's operations, he forgoes the $2,500 in interest. Thus the opportunity cost of the $50,000 is the interest income forgone and so the $2,500 is an implicit cost of running the farm. Topic: Implicit cost Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Written and oral communication 2) What is a normal profit? Is it part of the firm's opportunity costs, total revenue, or neither? Answer: The normal profit is the return to entrepreneurship. It is part of the firm's opportunity costs. Topic: Normal profit Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Reflective thinking 3) What is the difference between a normal profit and an economic profit? Answer: A normal profit is the return to entrepreneurship and is part of the opportunity cost of operating a business. An economic profit is the difference between the firm's total revenue and its total opportunity cost. Because the normal profit is part of the firm's opportunity cost, an economic profit is a profit above and beyond a normal profit. If the firm earns an economic profit, the entrepreneur running the firm receives the normal profit plus the economic profit. Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 14.1 Status: Old AACSB: Written and oral communication

4) Professor Rush decided to quit teaching economics and opens a shoe store out at the mall. He gave up an annual income of $50,000 to open the store. A year after opening the shoe store, the total revenue for the year was $200,000. Rush's expenses were $30,000 for labor, rent was $18,000, and utilities were $1,200. He also had to purchase new shoes from manufacturers, at a cost of $60,000, which was financed by cashing in his savings of $60,000 that had been in a bank earning 8 percent per year. The normal profit from operating a shoe store in the mall is $20,000. Determine Professor Rush's explicit costs, implicit costs, and economic profit. Answer: The explicit costs are the cost of labor, the rent, the utilities, and the cost of the shoes. Thus the explicit cost equals $30,000 + $18,000 + $1,200 + $60,000 = $109,200. The implicit costs are the forgone income from the job he quit, the forgone interest, and the normal profit. The forgone interest is (8 percent) × ($60,000) = $4,800, so the total implicit costs equals $50,000 + $4,800 + $20,000 = $74,800. The economic profit equals the total revenue minus the total opportunity cost and the total opportunity cost equals the sum of the explicit and implicit costs. Therefore the total opportunity cost is $109,200 + $74,800 = $184,000. Thus the economic profit = $200,000 - $184,000 = $16,000. Topic: Costs and economic profit Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking 5) Jessica is a young doctor who has just started her own practice. Her previous position paid her $80,000 a year. For office space, she uses a building which she owns and which she has rented in the past for $40,000 a year. Her total revenue from her new practice is $250,000. She pays $50,000 to other firms for materials and supplies, and she pays $40,000 in wages to her office nurse. Assume that Jessica's building and equipment do not depreciate and that her normal profit is $20,000. a. Which of Jessica's costs are explicit costs and what is their total? b. Which of Jessica's costs are implicit costs and what is their total? c. What is the opportunity cost of all factors of production employed by Jessica? d. What is Jessica's economic profit? Answer: a. Jessica's explicit costs are the wages and the amount she paid to other firms for material and supplies. Hence her explicit costs equal $40,000 + $50,000 = $90,000. b. Jessica's implicit costs are her forgone wages, the forgone rent on her building, and her normal profit. Hence her implicit costs equal $80,000 + $40,000 + $20,000 = $140,000. c. The opportunity cost equals the sum of explicit costs plus implicit costs, so Jessica's opportunity cost equals $90,000 + $140,000 = $230,000. d. Economic profit equals total revenue minus total opportunity cost, or $250,000 - $230,000 = $20,000. Topic: Costs and economic profit Skill: Level 3: Using models Section: Checkpoint 14.1 Status: Old AACSB: Analytical thinking

14.8 Essay: Short-Run Production 1) What resources can a firm change in the short run? In the long run? Answer: In the short run, the firm can change its variable inputs. These would be inputs such as labor. The firm cannot change its fixed inputs, such as its capital stock. The inputs the firm cannot change are called its plant. In the long run, the firm can change all of its inputs. Indeed, the long run is defined as the period of time long enough so that the firm can change all of its inputs. Topic: Short run and long run Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication 2) What do economists mean when they say that a firm's plant is fixed? Answer: The phrase that a "firm's plant is fixed" refers to the fact that, in the short run, there are some resources that are fixed, that is, the quantity employed cannot be changed. These resources, which include factors such as the firm's capital, are collectively referred to as the firm's plant. Topic: Short run, plant Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication 3) What is the difference between decreasing marginal returns and negative marginal returns? Answer: Decreasing marginal returns occur when the marginal product of an additional worker is less than the marginal product of the previous worker. In this case, if the marginal product of the new worker is positive, the additional worker adds to total product, but adds less than did the previous worker. Negative marginal returns occur when an additional worker actually DECREASES total product. Topic: Marginal returns Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication 4) What does the average product of labor equal? Answer: The average product of labor equals the total product (the total output) divided by the quantity of labor. Topic: Average product Skill: Level 1: Definition Section: Checkpoint 14.2 Status: Old AACSB: Reflective thinking

5) "If the marginal product of labor curve slopes downward, then the average product of labor curve necessarily must slope downward." Explain whether the previous statement is correct or incorrect? Answer: The statement is incorrect. The relationship between the marginal product and average product of labor is that when the marginal product of labor exceeds the average product of labor, the average product of labor curve slopes upward and when the marginal product of labor is less than the average product of labor, the average product of labor curve slopes downward. So, even if the marginal product of labor curve slopes downward, as long as it is above the average product of labor curve, the average product of labor curve slopes upward. Topic: Marginal product and average product Skill: Level 2: Using definitions Section: Checkpoint 14.2 Status: Old AACSB: Written and oral communication

6) The above table has the total product schedule for Jesse's Lawn Service. a. In the figure, label the axes and then graph the total product curve.

b. Find the average product for the different amounts of employment.

Answer:

a. The figure graphs the total product curve. b. The average product when 1 worker is employed is 3 lawns mowed per day; when 2 workers are employed, it is 4 lawns per day; when 3 workers are employed, it is 5 lawns per day; when 4 workers are employed, it is 5 lawns per day; and when 5 workers are employed, it is 4.2 lawns per day. Topic: Total product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

7) Ajax Manufacturing has a fixed scale of plant with the levels of total product given in the table for different levels of labor. Complete the table by calculating the average product and marginal product.

Answer:

The completed table is above. Topic: Short-run production Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking

8) The above table shows the total product schedule for Hair Today, a hair styling salon. a. What is the first worker's marginal product? The second worker? The third worker? The fourth worker? The fifth worker? b. Over what range of workers is there increasing marginal returns? Over what range is there decreasing marginal returns? Answer: a. The first worker's marginal product is 10 hair stylings. The second worker's marginal product is 15 hair stylings. The third worker's marginal product is 20 hair stylings. The fourth worker's marginal product is 15 hair stylings. The fifth worker's marginal product is 10 hair stylings. b. There are increasing marginal returns for the first 3 workers. After the third worker, there are decreasing marginal returns. Topic: Marginal product Skill: Level 3: Using models Section: Checkpoint 14.2 Status: Old AACSB: Analytical thinking 14.9 Essay: Short-Run Cost 1) Jake is a corn farmer in Nebraska. He rents his land on a long-term lease for $250,000 a year. He pays his farm hands $128,000 a year. Is his rent a fixed cost or a variable cost? Are the wages he pays his workers a fixed cost or a variable cost? Briefly explain your answers. Answer: Jake's rent is a fixed cost. He is renting his land on a long-term lease and so the land is a fixed input. The wages Jake pays are a variable cost. Labor is a variable input so the wages are a variable cost. Topic: Fixed cost, variable cost Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

2) "In the short run, even when output is zero, the firm still has some variable costs it must pay." Is the statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. When output is zero, there are no variable costs because there are no variable inputs being employed. However, in the short run there might be fixed resources, in which case the firm would still have some fixed costs it must pay. Topic: Fixed cost, variable cost Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication 3) When plotted against the total output, what does the total fixed cost curve look like? Answer: The total fixed cost curve is a horizontal straight line, indicating that at any level of output the total fixed cost does not change as output changes. Topic: Fixed cost curve Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 4) Downsizing is the practice of laying off workers in an attempt to decrease average total cost. Can laying off workers decrease average total cost? Is it possible for the firm to downsize and have its average total cost increase? Explain your answer. Answer: Yes, downsizing by laying off workers can decrease the firm's average total cost. And it is possible for a firm to downsize and increase its average total cost. Suppose that the firm initially is producing more output than the level that minimizes average total cost. In this case, downsizing by laying off workers decreases the amount of output the firm produces and the firm can move along its average total cost curve to a lower average total cost. However, the firm can lay off too many workers. If it lays off too many workers, it decreases its output so much that it moves along its average total cost curve enough that its average total costs wind up higher than they were initially. Topic: Average total cost curve Skill: Level 4: Applying models Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication 5) How do we calculate average fixed cost and why does average fixed cost fall as output increases? Answer: Average fixed cost is calculated by dividing total fixed cost by the quantity of output. Because TOTAL fixed cost stays the same for all levels of output, as the quantity produced increases, the AVERAGE fixed cost decreases. Topic: Average fixed cost Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 102 Copyright © 2021 Pearson Education, Inc.

6) The average total cost curve is U-shaped. At the quantity of output where average total cost is at its minimum, is the marginal cost curve above the average total cost curve, below the average total cost curve, or intersecting the average total cost curve? Answer: When the average total cost is at its minimum, the average total cost equals the marginal cost. Therefore at the quantity of output where the average total cost is at its minimum, the marginal cost curve intersects the average total cost curve. Topic: Marginal cost and average total cost curve Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication 7) Which average cost curves are U-shaped? Answer: Both the average total cost and the average variable cost curves are U-shaped. The only average cost curve that is not U-shaped is the average fixed cost curve. Topic: Why the average total cost curve is U-shaped Skill: Level 1: Definition Section: Checkpoint 14.3 Status: Old AACSB: Reflective thinking 8) What is the relationship between the marginal product of labor and the marginal cost? Answer: Initially, as each additional unit of labor is employed, the marginal product of labor increases. The cost of each worker is the same--the wage rate. Because each worker's cost is the same, but each additional worker produces more output than the previous worker, the cost of producing an additional unit of output decreases. The cost of producing an additional unit of output is the marginal cost. Therefore when the marginal product of labor is increasing, the marginal cost is decreasing. At some point, the marginal product of labor will reach a peak, at which level of output marginal cost is minimized. After that amount of output, the marginal product of an additional worker starts to decrease. When the marginal product decreases, the marginal cost increases; each worker costs the same to hire, but an additional worker produces less output than the previous worker. Therefore when the marginal product of labor is decreasing, the marginal cost is increasing. Topic: MP and MC Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

9) Explain how new technologies, which increase productivity, affect the average variable cost, average total cost, and marginal cost curves. Answer: A technological change that increases productivity shifts the total product, average product, and the marginal product curves upward. Because the new technologies enable existing inputs to produce more output, this effect means that the average variable cost, average total cost, and marginal cost curves shift downward, reflecting the decrease in average and marginal costs. However, the new technologies often need to use more capital and less labor. In this case, the firm's fixed cost increases and its variable cost decreases. The increase in fixed cost leads to an increase in total cost while the decrease in variable cost leads to a decrease in total cost. Although the net effect is ambiguous, generally the total cost increases at low levels of output and decreases at higher levels of output. In this case, the average total cost curve shifts upward at lower levels of output and shifts downward at higher levels of output. Topic: Shifts in the cost curves, technology Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication 10) When the Rent-A-Limo Company negotiates its new labor contract it finds that the wages it must pay drivers have increased. How does this wage hike affect the Rent-A-Limo Company's average fixed cost, average variable cost, average total cost, and marginal cost? Answer: The drivers' wages are a variable cost because the number of drivers needed varies with how many limousines are rented. The increase in wages will have no effect on the average fixed cost but the average variable cost will increase. The increase in average variable cost leads to an increase in the average total cost and an increase in the marginal cost. Topic: Shifts in the cost curves, prices of factors of production Skill: Level 2: Using definitions Section: Checkpoint 14.3 Status: Old AACSB: Written and oral communication

11) The table above has the total product schedule for an imaginary good called a widget. Each unit of labor costs $25 and the total cost of capital is $100. a. Use this information to complete the table. In the table, TFC is the total fixed cost, TVC is the total variable cost, TC is the total cost, AFC is the average fixed cost, AVC is the average variable cost, ATC is the average total cost, and MC is the marginal cost.

b. Suppose that labor becomes twice as expensive (so that one unit of labor now costs $50) but nothing else changes. Complete the above table with the new cost schedules. If you plotted the cost curves, how would the increased wage rate affect the cost curves?

Answer:

a. The completed table is above. All the costs in dollars.

b. The completed table is above. All the costs are in dollars. There would be no change in the total fixed and average fixed cost curves because the fixed cost did not change. The total cost, total variable cost, average total cost, average variable cost, and marginal cost curves would all shift upward. Topic: Short-run costs Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

12) This month, the local widget factory produced 100 widgets. The total variable cost of production was $500 and the average total cost of production was $8. a. What is the total cost? b. What is the total fixed cost? c. What is the average fixed cost? d. What is the average variable cost? Answer: a. Total cost can be calculated as average total cost times output, which is $8 × 100 = $800. b. Total fixed cost equals total cost minus total variable cost. The total cost from part (a) is $800. The total variable cost is $500. Therefore the total fixed cost is $800 - $500 = $300. c. Average fixed cost equals total fixed cost divided by output, which is $300 ÷ 100 = $3. d. Average variable cost equals total variable cost divided by output. The total variable cost from part (b) is $500, so the average variable cost is $500 ÷ 100 = $5. Topic: Short-run costs Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

13) Acme produces rocket shoes for use by slow coyotes. Acme's total cost schedule is given in the table below. Acme's total fixed cost is $12. Complete the table. (In the table, TFC is the total fixed cost, TVC is the total variable cost, AFC is the average fixed cost, AVC is the average variable cost, and ATC is the average total cost.)

Answer:

The completed table is above. Topic: Short-run costs Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

14) Rufus runs a skunk-skinning service in West Virginia. He employs skinners at a wage rate of $240 a week for each one. He leases the shack where his workers work for $200 per week. The rent is fixed for the next two years. Last week his 10 employees managed to skin a total of 300 skunks. a. What is the average product of labor for Rufus's company? b. What is Rufus' total variable cost per week? c. What is the average variable cost for Rufus's company? d. If Rufus adds his brother Jethro to his staff, at a wage rate of $240 a week, and his company can now skin 310 skunks per week, what is Rufus's new average variable cost? Answer: a. The average product of labor is 30 skunks skinned per worker. b. The total variable cost per week is $2,400. c. The average variable cost is $8 per skunk skin. d. The new total variable cost is $2,640. Hence the new average variable cost is $8.52 per skunk skin. Topic: Short-run costs Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

15) The above table gives the total cost schedule for oil changes at the local Jiffy Lube. a. What is Jiffy Lube's total fixed cost? b. What is the total variable cost of 2 oil changes? c. What is the average variable cost of 4 oil changes? d. What is the average fixed cost of 2 oil changes? e. What is the marginal cost of the 3rd oil change? Answer: a. The total fixed cost is $10. At zero output, the total variable cost is $0, so the entire cost, $10, must be the fixed cost. b. The total variable cost of 2 oil changes is $25. The total cost, TC, is $35 and from part (a) the total fixed cost, TFC, is $10. The total variable cost, TVC, is equal to TC - TFC or $35 - $10 = $25. c. The average variable cost for 4 oil changes is $17.50. Start similarly to part (b) by calculating that the total variable cost, TVC, for 4 oil changes is $70. Then, the average variable cost, AVC, equals the total variable cost divided by output, or TVC ÷ Q. In this case, the AVC is equal to $70 ÷ 4 = $17.50. d. The average fixed cost of 2 oil changes is $5. The average fixed cost, AFC, equals the total fixed cost divided by output, or TFC ÷ Q. From part (a), the total fixed cost is $10, so the average fixed cost equals $10 ÷ 2 = $5. e. The marginal cost is $15. Marginal cost is defined as the change in the total cost that results from a one-unit increase in output. The total cost of 2 oil changes is $35 and the total cost of 3 oil changes is $50. Therefore the change in the total cost is $15, which is the marginal cost. Topic: Short-run costs Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

16) Suppose the local newspaper hires students to fold and bag newspapers for delivery and pays them $20 per shift. Five students can fold and bag 300 newspapers per shift. The fourth student added 50 newspapers to total output. The cost of the capital the firm uses is fixed at $50 per shift. a. Is the newspaper operating in the long run or short run? Why? b. What is the average product of 5 students? c. Calculate the total fixed cost, total variable cost, and total costs of folding and bagging 300 newspapers. d. Calculate the average fixed cost, average variable cost, and average total costs of folding and bagging 300 newspapers. e. What is the marginal cost of one of the 50 newspapers folded and bagged by the fourth student? Answer: a. The firm is operating in the short run because its capital cost is fixed. b. Average product equals 300 ÷ 5 = 60 newspapers per shift. c. Total fixed cost = $50, total variable cost = 5 × $20 = $100, and so total cost = $50 + $100 = $150. d. Average fixed cost = $50 ÷ 300 = $0.17, average variable cost = $100 ÷ 300 = $0.33, and average total cost = $150 ÷ 300 = $0.50 (alternatively, average total cost = average fixed cost + average variable cost = $0.17 + $0.33 = $0.50). e. Marginal cost = change in total cost divided by change in output, or $20 ÷ 50 = $0.40. Topic: Production and cost Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking

17) Draw an average total cost curve, an average variable cost, and a marginal cost curve all on the same graph. Make sure to correctly label the axes. What relationship must exist between the marginal cost curve and the average total cost and average variable cost curves? Answer:

Typical cost curves are above. The average variable cost curve, AVC, and average total cost curve, ATC, are U-shaped. The marginal cost curve, MC, intersects the AVC curve and ATC curve at their minimum points. Topic: Short-run cost curves Skill: Level 3: Using models Section: Checkpoint 14.3 Status: Old AACSB: Analytical thinking 14.10 Essay: Long-Run Cost 1) In the long run all costs are variable costs. Why? Answer: The long run is defined as the time frame over which all resources can be varied. The costs of the variable inputs are the variable costs. Taken together, these definitions imply that in the long run all inputs are variable inputs so all costs are variable costs. Topic: Long-run costs Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Written and oral communication

2) Which curve shows the lowest average total cost at which it is possible to produce each output when the firm has time to change both its labor force and plant size? Answer: The long-run average cost curve shows the lowest average total cost at which it is possible to produce each output when the firm has had time to change all its inputs. Topic: Long-run average cost curve Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking 3) What is the long-run average cost curve? What are the three ranges of output and in what order do they occur? Briefly define each of the three ranges. Answer: The long-run average cost curve shows the lowest average cost at which it is possible to produce each output when the firm has time to change both its labor force and its plant size. The long-run average cost curve is U-shaped and shows three possible production ranges. In order, these ranges are: economies of scale, constant returns to scale, and diseconomies of scale. Economies of scale are when a firm increases its output and its average total cost decreases. Constant returns to scale are when a firm increases its output and its average total cost does not change. Finally, diseconomies of scale are when a firm increases its output and its average total cost increases. Topic: Long-run average cost curve Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Written and oral communication

4) Are the short-run average total cost curve and the long-run average cost both U-shaped for the same reasons? If so, carefully explain these reasons. If not, explain why each curve is U-shaped. Answer: The curves are U-shaped for quite different reasons. In the short run, the firm's plant, that is, its capital, is fixed. Therefore the only way to increase output is by increasing the quantity of the variable resource, labor. Initially as labor increases, there are gains from specialization and division of labor, which leads the marginal product to rise and the average total cost to fall as more workers are employed. Eventually, however, the firm runs up against its capital constraint and workers must share tools and building space. As this happens, decreasing marginal returns begin and average total cost eventually begins to rise. In the long run, both labor and capital are variable. As a firm expands its use of both resources and thereby increases its output, gains from specialization of both labor and capital cause average total costs to fall. Eventually, however, the business becomes so large it is difficult to coordinate and control. When this happens, long-run average total cost begins to rise. Thus the short-run average total cost is U-shaped because more workers must make do with the same amount of plant. The long-run average cost curve is U-shaped because the very scale of the firm's operations makes it difficult to control efficiently and effectively. Topic: Long-run and short-run average cost curves Skill: Level 4: Applying models Section: Checkpoint 14.4 Status: Old AACSB: Written and oral communication 5) What are economies of scale? What is the main source of economies of scale? Answer: Economies of scale are features of the firm's technology so that when the firm increases its output its average total cost decreases. Economies of scale result because of specialization. When a firm increases its plant size, the capital can be more specialized and hence produce more output than less specialized, more generalized capital. Similarly, when a firm increases its labor force, it can hire more specialists, each of whom is better at doing his or her assigned task than a less specialized individual. As a result of specialization, the firm's average total cost decreases. Topic: Economies of scale Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Written and oral communication

6) What are diseconomies of scale and why might they occur? Answer: Diseconomies of scale are features of the firm's technology so that when the firm increases its output its average total cost rises. Diseconomies of scale can arise from the sheer size of a firm. As a firm grows larger, it becomes increasingly more difficult to manage. Communicating information up and down the management hierarchy as well as communicating between managers and workers on the same level becomes more costly. In this case, the firm experiences diseconomies of scale, that is, its long-run average cost increases as it expands the scale of its operation by producing yet more output. Topic: Diseconomies of scale Skill: Level 1: Definition Section: Checkpoint 14.4 Status: Old AACSB: Written and oral communication 7) A firm increases its output and its average total costs remain unchanged. Is the firm experiencing increasing returns to scale, constant returns to scale, or decreasing returns to scale? Answer: The firm is experiencing constant returns to scale. Topic: Constant returns to scale Skill: Level 2: Using definitions Section: Checkpoint 14.4 Status: Old AACSB: Reflective thinking

8) Jones Production started business with a small scale plant. Fortunately for Smith, the owner of Jones Production, the business grew rapidly. The table below gives the total costs and the associated output for each year. a. Complete the table by finding the average cost for each scale.

b. Over what range of total product (output) did Jones Production experience economies of scale, constant returns to scale, and diseconomies of scale? Answer:

a. The completed table is above. b. There are economies of scale from 100 to 500 units of output, constant returns to scale from 500 to 1,000 units of output, and diseconomies of scale from 1,000 to 2,500 units of output. Topic: Long-run average cost Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

9) Ayanna grows herbs. Last year she grew 2,000 pounds of herbs in a year while using 250 square feet of land and 1 worker. This year she doubled her land to 500 square feet, doubled her workers to 2, and grew 4,500 pounds of herbs. She sells her rare, organic herbs for $50 a pound. She pays her a worker $25,000 a year and rents her land for $100 per square foot for a year. These are her only costs. a. What was Ayanna's total cost last year and this year? b. What was Ayanna's average total cost last year and this year? c. Did Ayanna experience economies or diseconomies of scale? Answer: a. Ayanna's total cost last year was $50,000 and her total cost this year is $100,000. b. Ayanna's average total cost last year was $25 a pound and her average total cost this year is $22.22 a pound. c. Ayanna's average total cost decreased so she experienced economies of scale. Topic: Economies of scale Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

10) The above figure represents the average total cost curves of a wheat farmer. a. Which average total cost curve has the lowest average total cost of producing 30,000 bushels of wheat? b. Over what range of output is the farmer experiencing economies of scale? c. Over what range of output is the farmer experiencing diseconomies of scale? d. Which average total cost curve has the lowest possible average cost of production? e. Which average total cost curve represents the largest plant? Answer: a. ATC3 has the lowest average total cost to produce 30,000 bushels of wheat. b. The farmer is experiencing economies of scale between 0 to 30,000 bushels of wheat. c. The farmer is experiencing diseconomies of scale for more than 30,000 bushels of wheat. d. ATC3 has the lowest possible average total cost, which occurs at 30,000 bushels of wheat. e. ATC4 represents the largest plant. Topic: Long-run average cost curve Skill: Level 3: Using models Section: Checkpoint 14.4 Status: Old AACSB: Analytical thinking

Foundations of Microeconomics, 9e (Bade) Chapter 15 Perfect Competition 15.1 A Firm's Profit-Maximizing Choices 1) A market with a large number of sellers A) can only be a perfectly competitive market. B) might be an oligopoly or a perfectly competitive market. C) might be a monopolistically competitive or a perfectly competitive market. D) might be a perfectly competitive, monopolistically competitive, oligopoly, or monopoly market. E) can only be a monopolistically competitive market. Answer: C Topic: Market types Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 2) What is the difference between perfect competition and monopolistic competition? A) Perfect competition has a large number of small firms while monopolistic competition does not. B) Perfect competition has barriers to entry while monopolistic competition does not. C) Perfect competition has no barriers to entry, while monopolistic competition does. D) In perfect competition, firms produce identical goods, while in monopolistic competition, firms produce slightly different goods. E) In monopolistic competition, firms produce identical goods, while in perfect competition, firms produce slightly different goods. Answer: D Topic: Market types Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 3) A perfectly competitive firm A) sells a product that has perfect substitutes. B) has a perfectly inelastic demand. C) has a perfectly elastic supply. D) Answers A and B are correct. E) Answers A and C are correct. Answer: A Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 1 Copyright © 2021 Pearson Education, Inc.

4) In which market structure do firms exist in very large numbers, each firm produces an identical product, and there is freedom of entry and exit? A) monopoly B) oligopoly C) only perfect competition D) only monopolistic competition E) both perfect competition and monopolistic competition Answer: C Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 5) The characteristics that describe a perfectly competitive industry include A) many firms selling an identical product. B) one firm selling to many buyers. C) many firms selling a slightly differentiated product. D) a few firms selling to many buyers. E) None of the above answers is correct. Answer: A Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 6) The ________ market is an example of ________ type of market. A) corn; a perfectly competitive B) mattress; a monopoly C) car insurance; an oligopoly D) airplane manufacturing; a monopolistically competitive E) cell phone; a perfectly competitive Answer: A Topic: Perfect competition Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Application of knowledge

7) In part, perfect competition arises if i. each firm's minimum efficient scale is large relative to demand. ii. each firm produces a good or service identical to those produced by its many competitors. iii. there are significant barriers to entry. A) i only B) ii only C) i and ii D) iii only E) ii and iii Answer: B Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 8) In which of the following market types do all firms sell products so identical that buyers do NOT care from which firm they buy? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly E) perfect competition and monopolistic competition Answer: A Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 9) Each firm in a perfectly competitive industry A) produces a good that is slightly different from that of the other firms. B) produces a good that is identical to that of the other firms. C) attains economies of scale so that its efficient size is large compared to the market as a whole. D) has control over at least one unique resource to separate themselves from their competitors. E) has an important influence on the market price of the good or service being produced. Answer: B Topic: Perfect competition, definition Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

10) A market in which many firms sell identical products is A) a monopoly. B) an oligopoly. C) only perfectly competition. D) only monopolistic competition. E) both perfect competition and monopolistic competition. Answer: C Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 11) One requirement for an industry to be perfectly competitive is that in the industry there A) are a few firms who control the market. B) are many firms for whom the efficient scale of production is small. C) is one firm that sells a product with no close substitutes. D) are many firms selling different products. E) is a barrier to entry that makes the entry of new firms difficult. Answer: B Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 12) One requirement for an industry to be perfectly competitive is that A) there are no restrictions on entry into or exit from the market. B) there are multiple restrictions on entry into or exit from the market. C) there are many firms selling different products. D) sellers and buyers have imperfect information about prices. E) many firms sell slightly different products. Answer: A Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

13) One requirement for an industry to be perfectly competitive is that A) sellers and buyers have imperfect information about prices. B) established firms have no advantage over new firms. C) established firms have a significant advantage over new firms. D) different firms produce widely different products. E) many firms produce slightly different products. Answer: B Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 14) A perfectly competitive market arises when A) the market demand is small relative to the output of a firm. B) there are many buyers but few sellers. C) the market demand is very large relative to the output of one seller. D) a firm has control over a unique resource. E) each of the many firms produces a slightly different product. Answer: C Topic: Perfect competition, definition Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 15) Perfect competition is characterized by all of the following EXCEPT A) a large number of buyers and sellers. B) no restrictions on entry into or exit from the industry. C) considerable advertising by individual firms. D) buyers and sellers are well informed about prices. E) firms produce an identical product. Answer: C Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

16) Which of the following is the best example of a perfectly competitive market? A) farming B) diamonds C) athletic shoes D) soft drinks E) electricity distribution Answer: A Topic: Perfect competition, definition Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 17) Which of the following market types has the fewest number of firms? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly E) perfect competition and monopolistic competition Answer: D Topic: Monopoly, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 18) A monopoly occurs when A) each of many firms produces a product that is slightly different from that of the other firms. B) one firm sells a good that has no close substitutes and a barrier blocks entry for other firms. C) there are many firms producing the same product. D) a few firms control the market. E) one firm is larger than the many other firms that make an identical product. Answer: B Topic: Monopoly, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

19) In which market structure does one firm sell a good or service with no close substitutes and there is a barrier blocking the entry of new firms? A) only monopoly B) only oligopoly C) perfect competition D) monopolistic competition E) either monopoly or oligopoly Answer: A Topic: Monopoly, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 20) When one firm sells a good or service that has no close substitutes and a barrier blocks the entry of new firms, what type of market is this? A) perfect competition B) only monopoly C) oligopoly D) only monopolistic competition E) either monopoly or monopolistic competition Answer: B Topic: Monopoly, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 21) ________ a large number of firms competing by making similar but slightly different products. A) Monopoly requires B) Perfect competition requires C) Monopolistic competition requires D) Oligopoly requires E) Both perfect competition and monopolistic competition require Answer: C Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

22) A market is classified as monopolistically competitive when A) there is a barrier that blocks entry by other firms. B) a small number of firms compete. C) many firms produce the same product. D) many firms produce a slightly differentiated product. E) there is one firm that sells a good or service with no close substitutes. Answer: D Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 23) In which market structure is there a large number of firms producing slightly differentiated products? A) monopoly B) oligopoly C) only perfect competition D) only monopolistic competition E) either perfect competition or monopolistic competition Answer: D Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 24) A market is classified as an oligopoly when A) a few firms compete. B) many firms produce a slightly differentiated product. C) no matter how many firms are in the market, a barrier blocks entry by other new firms. D) many firms produce the same product. E) only one firm sells a product with no close substitutes. Answer: A Topic: Oligopoly, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

25) Which of the following market types has only a few competing firms? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly E) perfect competition and monopolistic competition Answer: C Topic: Oligopoly, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 26) In which market structure are there a small number of firms competing? A) only monopoly B) only oligopoly C) perfect competition D) monopolistic competition E) either monopoly or oligopoly Answer: B Topic: Oligopoly, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 27) A market is ________ when a small number of firms compete. A) a monopoly B) perfectly competitive C) monopolistically competitive D) an oligopoly E) either monopolistically competitive or an oligopoly Answer: D Topic: Oligopoly, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

28) The U.S. oil industry has only a few firms in it, so an economists is likely to describe the industry as A) a monopoly. B) an oligopoly. C) perfectly competitive. D) monopolistically competitive. E) Both answers C and D can be correct. Answer: B Topic: Market types Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 29) The firm's over-riding objective is to A) earn a normal profit. B) maximize normal profit. C) maximize economic profit. D) maximize total revenue. E) avoid an economic loss. Answer: C Topic: Firm's goal Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 30) Normal profit is A) the same thing as economic profit. B) the return to entrepreneurship. C) total revenue minus the total opportunity cost of production. D) the point of profit when total revenue is maximized. E) part of the firm's total revenue. Answer: B Topic: Normal profit Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

31) In a perfectly competitive market, the type of decision a firm has to make is different in the short run than in the long run. Which of the following is an example of a perfectly competitive firm's short-run decision? A) the profit-maximizing level of output B) how much to spend on advertising and sales promotion C) what price to charge buyers for the product D) whether or not to enter or exit an industry E) whether or not to change its plant size Answer: A Topic: Short-run decisions Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 32) To maximize its profit, in the short run a perfectly competitive firm decides A) what price to charge for its product. B) what quantity of output to produce. C) whether to exit the market. D) whether to increase the size of its plant. E) how much advertising it should undertake. Answer: B Topic: Short-run decisions Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 33) A perfectly competitive firm can A) sell all of its output at the prevailing market price. B) set a higher price to customers who are willing to pay more. C) raise its price in order to increase its total revenue. D) sell additional output only by lowering its price. E) usually not sell all the output it produces, but still "over-produces" because there are some periods when it can sell the extra output at very profitable prices. Answer: A Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

34) In a perfectly competitive market, one farmer's barley is A) completely different from another farmer's barley. B) a perfect substitute for another farmer's barley. C) a monopolized product in that farmer's local market. D) a monopolized product in the national market. E) slightly different from another farmer's barley. Answer: B Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 35) A firm in perfect competition is a price taker because A) there are no good substitutes for its good. B) many other firms produce identical products. C) it is very large. D) its demand curves are downward sloping. E) its demand curve is vertical at the profit-maximizing quantity. Answer: B Topic: Price takers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 36) The price charged by a perfectly competitive firm is A) the same as the market price. B) different than the price charged by competing firms. C) lower the more the firm produces. D) higher the more the firm produces. E) indeterminate. Answer: A Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

37) For a perfectly competitive firm, the price of its good is equal to the firm's marginal revenue because A) information about price changes is hard to come by for small sellers. B) price and marginal revenue are the same economic concepts. C) individual perfectly competitive firms cannot influence the market price by changing their output. D) the firm's total revenue cannot be changed by anything the firms can do. E) there are only a small number of firms in the market. Answer: C Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 38) A large number of sellers all selling an identical product implies which of the following? A) market chaos B) the inability of any seller to change the price of the product C) large losses incurred by all sellers D) horizontal market supply curves E) vertical market supply curves Answer: B Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 39) A firm that is a price taker faces A) an elastic supply curve. B) an inelastic supply curve. C) a perfectly elastic demand curve. D) a perfectly inelastic demand curve. E) an elastic but not perfectly elastic demand curve. Answer: C Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

40) We know that a perfectly competitive firm is a price taker because A) its MC curve slopes upward. B) its ATC curve is U-shaped. C) its demand curve is horizontal. D) MC and ATC are equal at the profit-maximizing amount of output. E) it has no supply curve. Answer: C Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 41) Suppose Pat's Paints is a perfectly competitive firm. If Pat's Paints' marginal revenue equals $5 per can, and Pat decides to sell 100 cans of paint, Pat's total revenue equals A) $5. B) $100. C) $500. D) $20. E) Information on the price of a can of paint is needed to answer the question. Answer: C Topic: Price takers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 42) If a firm in a perfectly competitive market faces an equilibrium price of $5, its marginal revenue A) will be greater than $5. B) will be less than $5. C) maybe either greater or less than $5. D) will also be $5. E) will be any amount but $5. Answer: D Topic: Price takers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

43) If demand for a seller's product is perfectly elastic, which of the following is TRUE? i. The firm will sell no output if it sets the price its product above the market price. ii. There are many perfect substitutes for the seller's product. iii. The firm will sell no output if it sets the price its product below the market price. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: D Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 44) Cynthia is an Oklahoma wheat farmer. The demand for her wheat is A) perfectly inelastic. B) inelastic but not perfectly inelastic. C) elastic but not perfectly elastic. D) perfectly elastic. E) unit elastic. Answer: D Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 45) Because perfectly competitive firms are price takers, each firm faces a demand that is A) perfectly inelastic. B) perfectly elastic. C) highly inelastic but never is it perfectly inelastic. D) unit elastic. E) highly elastic but never is it perfectly elastic. Answer: B Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

46) If a perfectly competitive firm raised the price of its product A) its profits would increase. B) the quantity of output it sells decreases to zero. C) rival firms will follow suit and raise their prices also. D) the firm will be forced to advertise more. E) its total revenue would rise but its total cost would rise by more. Answer: B Topic: Demand Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 47) If the wheat industry is perfectly competitive with a market price of $4 per bushel and Farmer Brown charged $5 per bushel, how many bushels would Farmer Brown sell? A) some, but fewer than he would at a price of $4 B) more than he would at a price of $4 C) just as many as he would at a price of $4 D) none E) More information is needed about the prices charged by the other wheat farmers. Answer: D Topic: Demand Skill: Level 4: Applying models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 48) How does the demand for any one seller's product in perfect competition compare to the market demand for that product? A) They are identical. B) The demand for any one seller is proportionally smaller but otherwise identical to the market demand. C) The demand for any one seller's product is perfectly elastic while the market demand curve is downward sloping. D) There is no demand for any one seller's competitively sold product. E) The demand for any one seller's product is not perfectly elastic while the market demand is perfectly elastic. Answer: C Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

49) For the perfectly competitive broccoli producers in California, the MARKET demand curve for broccoli is A) a horizontal line. B) downward sloping. C) nonexistent. D) upward sloping. E) the same as the demand curve each firm faces. Answer: B Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 50) The market demand curve in a perfectly competitive market is ________ and the demand curve for a perfectly competitive firm's output is ________. A) downward sloping; downward sloping B) downward sloping; horizontal C) horizontal; downward sloping D) horizontal; horizontal E) downward sloping; upward sloping Answer: B Topic: Demand Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 51) Elsie is a perfectly competitive dairy farmer. The market price of milk was $2.40 but just fell to $2.20 a gallon. Elsie A) can sell as much milk as she wants at $2.20 a gallon. B) will have to charge some customers $2.40 a gallon to stay in business. C) will produce the same amount of milk at both prices. D) can sell more at the lower price because the quantity demanded is higher at lower prices. E) will be able to charge her initial customers $2.40 a gallon. Answer: A Topic: Demand Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

52) For a perfectly competitive palm tree nursery in South Carolina, the total revenue curve is A) downward sloping. B) a horizontal line. C) upward sloping. D) U-shaped. E) undefined because the firm is perfectly competitive. Answer: C Topic: Total revenue Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 53) If the market price of a product is $14 and all sellers are price takers, then which of the following is correct? A) Each seller's total revenue line is graphed as an upward-sloping straight line. B) The demand curve for each seller's product is a downward-sloping straight line. C) Each seller can earn more total revenue by raising the price he or she charges above $14. D) The demand curve for each seller's product is a downward-sloping but not necessarily a straight line. E) Each seller's total revenue is graphed as an upside-down U-shaped curve. Answer: A Topic: Total revenue Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 54) Marginal revenue is A) the change in total revenue from a one-unit increase in the quantity sold. B) another name for total revenue. C) the change in total cost from producing an additional unit of output. D) the economic profit from producing an additional unit of output. E) less than price for a perfectly competitive firm. Answer: A Topic: Marginal revenue Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

55) A firm's marginal revenue is A) the change in total revenue that results from a one-unit increase in the quantity sold. B) total revenue minus total cost. C) the change in total revenue minus the change in total cost. D) the change in total revenue that results from an increase in the demand for the good or service. E) less than the market price for a perfectly competitive firm. Answer: A Topic: Marginal revenue Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 56) For a perfectly competitive firm, marginal revenue is A) less than the price. B) greater than the price. C) equal to the price. D) equal to the change in profit from selling one more unit. E) undefined because the firm's demand curve is horizontal. Answer: C Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 57) In perfect competition, marginal revenue A) increases as more is sold. B) decreases as more is sold. C) is equal to the market price. D) is zero. E) is always greater than marginal cost. Answer: C Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

58) For a perfectly competitive firm, the market price of a good is A) a given which the firm cannot change. B) determined by the firm in order to maximize its profit. C) equal to the firm's marginal revenue. D) Answers A and B are correct. E) Answers A and C are correct. Answer: E Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 59) The marginal revenue curve for a perfectly competitive firm is A) horizontal. B) vertical. C) upward sloping. D) downward sloping. E) a straight line coming out of the origin with a 45 degree slope. Answer: A Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

60) In the above, a marginal revenue curve for a perfectly competitive firm is shown in Figure A) W. B) X. C) Y. D) Z. E) X and Figure Z. Answer: D Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 61) As a perfectly competitive firm produces more and more of a good, its economic profit A) constantly increases. B) constantly decreases. C) first decreases, then increases. D) first increases, then decreases. E) does not change. Answer: D Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 21 Copyright © 2021 Pearson Education, Inc.

62) As a perfectly competitive firm's output increases, its total revenue ________ and its total cost ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; increases Answer: A Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 63) In a perfectly competitive industry, when a firm is producing so that its total revenue equals its total cost, the firm is A) making an economic profit. B) incurring an economic loss. C) making zero economic profit. D) definitely not maximizing its profit. E) None of the above answers is correct because the relationship between total revenue and total cost has nothing to do with the firm's profit or loss. Answer: C Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 64) For a syrup producer in central Vermont, profit is maximized at the level of output for which A) total revenue exceeds total cost by the largest amount. B) total revenue exceeds total cost by the smallest amount. C) total revenue is maximized. D) total ost is minimized. E) total revenue equals total cost. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Revised AACSB: Reflective thinking

65) A firm maximizes its profit by producing the amount of output such that A) marginal revenue equals marginal cost. B) marginal revenue exceeds marginal cost by some amount. C) marginal revenue is maximized. D) marginal cost is minimized. E) marginal revenue exceeds marginal cost by the maximum amount possible. Answer: A Topic: Profit maximization Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 66) For a perfectly competitive firm, profit maximization occurs when output is such that A) total revenue (TR) is maximized. B) total cost (TC) is minimized. C) marginal revenue (MR) = marginal cost (MC). D) average total cost (ATC) is minimized. E) total revenue (TR) equals total cost (TC). Answer: C Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 67) A perfectly competitive firm will maximize profit when the quantity produced is such that the A) firm's total revenue is equal to total cost. B) firm's marginal revenue is equal to the price. C) firm's marginal revenue is equal to its marginal cost. D) price exceeds the firm's marginal cost by as much as possible. E) firm's marginal revenue exceeds its marginal cost by the maximum amount possible. Answer: C Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

68) For a perfectly competitive firm, profit is maximized at the output level where i. total revenue exceeds total cost by the largest amount. ii. marginal revenue equals marginal cost. iii. price equals marginal cost. A) i only B) ii only C) ii and iii D) i and ii E) i, ii, and iii Answer: E Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 69) If a perfectly competitive wheat farmer is maximizing its profit and then increases its output, the farmer's A) total revenue increases, but total cost rises by more so that the farmer's total profit decreases. B) total revenue decreases and total cost increases, both thereby decreasing the farmer's total profit. C) total revenue does not change but total cost increases, thereby decreasing the farmer's total profit. D) marginal revenue increases, but so does marginal cost, so that the farmer's total profit increases. E) total revenue and total cost both rise, but the effect on the farmer's total profit is uncertain. Answer: A Topic: Profit maximization Skill: Level 4: Applying models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 70) To increase its profit, a perfectly competitive firm will produce more output when A) price is greater than average fixed cost. B) price is greater than marginal cost. C) marginal cost is less than average total cost. D) average variable cost is greater than average fixed cost. E) price is greater than average variable cost. Answer: B Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

71) In a perfectly competitive market, the market price is $23. At the current level of output, a firm has a marginal cost of $28. What should the firm do? A) produce a larger output to make more profit B) nothing, it is currently maximizing profit C) produce less output to make more profit D) shut down E) raise the price of its product Answer: C Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 72) A perfectly competitive firm is producing at the quantity where marginal cost is $6 and average total cost is $4. The price of the good is $5. To maximize its profit, this firm should A) raise its price. B) lower its price. C) increase its output. D) decrease its output. E) increase the price it charges for its product. Answer: D Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 73) Suppose that a perfectly competitive firm's marginal revenue equals $12 when it sells 10 units of output. If the marginal cost of producing the 10th unit is $14, to maximize its profit the firm should A) do nothing because it is already maximizing its profit. B) decrease its production. C) increase its production. D) shut down. E) increase the price it charges for its product. Answer: B Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

74) Shama is producing candles in a perfectly competitive market. When she produces 500 candles, her total cost is $250. If she produces one additional candle, her total cost increases to $260. In order to maximize her profit, she should produce the additional candle A) if the market price for a candle is $12. B) only if the market price exceeds $260 for a candle. C) only if the market price exceeds $250 for a candle. D) if the market price for a candle exceeds $0.50. E) if her price exceeds her average total cost. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 75) Jennifer's Bakery Shop produces baked goods in a perfectly competitive market. If Jennifer decides to produce her 100th batch of cookies, the marginal cost is $120. She can sell this batch of cookies at a market price of $110. To maximize her profit, Jennifer should A) not produce this additional batch. B) produce this batch of cookies because they will help lower her average fixed cost. C) charge $120 for this batch. D) shut down. E) produce this batch of cookies because their MR exceeds their MC. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 76) Henry, a perfectly competitive lime grower in Southern California, notices that the market price of limes is greater than his marginal cost. What should Henry do? A) expand his output to increase profits B) shut down and incur a loss equal to his total fixed cost C) advertise his limes to be able to sell more output D) look for the output level where marginal revenue minus marginal cost is maximized E) shut down and earn no profit but also incur no loss Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

77) Jerry's Jellybean Factory produces 2,000 pounds of jellybeans per month and sells them in a perfectly competitive market. The marginal cost is $3 per pound, the average variable cost is $2 per pound, and the beans sell for $4 per pound. Jerry A) is maximizing profit. B) is incurring an economic loss and should shut down. C) could increase his profit by producing more beans. D) could increase his profit by producing fewer beans. E) could increase his profit by raising the price of his beans. Answer: C Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 78) If a perfectly competitive firm's marginal revenue is greater than its marginal cost, as it increases its output, its profit ________ and the price it can charge for its product ________. A) increases; does not change B) decreases; falls C) increases; falls D) decreases; rises E) decreases; does not change Answer: A Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 79) Mark owns a cattle ranch near Hugo, Oklahoma. Mark is currently producing beef at an output level where marginal revenue exceeds marginal cost. In order to maximize his profit, Mark should A) not change his output. B) decrease his output. C) increase his output. D) shut down his ranch. E) probably change his output, but more information is needed to determine if he should increase, decrease, or not change it. Answer: C Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

80) During the winter, theme parks in Orlando close earlier than in the summer. The reason the theme parks close early during the winter is because during that season the marginal revenue from staying open later is ________ the marginal cost. A) greater than B) less than C) equal to D) zero compared to E) not comparable to Answer: B Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 81) A perfectly competitive firm is earning an economic profit when total fixed costs increase. Assuming the firm does not shut down, in the short run the firm will A) charge a higher price. B) produce more output so the extra revenue will cover the increased costs. C) produce less output to decrease total costs. D) continue producing the same quantity as before but will make less economic profit. E) continue producing the same quantity as before and continue making the same economic profit as before. Answer: D Topic: Profit maximization Skill: Level 4: Applying models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

82) The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. When Omar produces 2 bushels of rutabagas, his total profit equals A) $0. B) $20. C) $28. D) -$8. E) $48. Answer: D Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 83) The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. Omar's total profit is maximized when he produces ________ bushels of rutabagas. A) 3 B) 5 C) 6 D) 8 E) 7 Answer: B Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

84) The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. When Omar maximizes his profit, Omar's profit equals A) $80. B) $11. C) $30. D) $16. E) $105. Answer: D Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

85) The above figure illustrates a perfectly competitive firm. Curve A represents the A) MR curve. B) ATC curve. C) MC curve. D) AVC curve. E) AFC curve. Answer: A Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

86) The above figure illustrates a perfectly competitive firm. Curve B represents the A) MR curve. B) ATC curve. C) MC curve. D) AVC curve. E) AFC curve. Answer: C Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 87) The above figure illustrates a perfectly competitive firm. Curve C represents the A) MR curve. B) ATC curve. C) MC curve. D) market demand curve. E) AFC curve. Answer: B Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

88) The above figure illustrates a perfectly competitive firm. If the market price is $40 a unit, to maximize its profit (or minimize its loss) the firm should A) shut down. B) produce more than 10 and less than 30 units. C) produce 30 units. D) produce more than 30 units and less than 40 units. E) produce 40 units. Answer: E Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 89) The above figure illustrates a perfectly competitive firm. If the market price is $10 a unit, to maximize its profit (or minimize its loss) the firm should A) shut down. B) produce between 10 and less than 30 units. C) produce 30 units. D) produce more than 30 units and less than 40 units. E) produce 40 units. Answer: A Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

90) If a firm shuts down, it A) makes zero economic profit. B) incurs an economic loss equal to its total variable cost. C) incurs an economic loss equal to its total fixed cost. D) makes a normal profit. E) might make an economic profit, zero economic profit, or incur an economic loss. Answer: C Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 91) If a struggling perfectly competitive furniture store in Detroit shuts down, it incurs an economic loss equal to its A) marginal cost. B) total fixed cost. C) total variable cost. D) average variable cost. E) average total cost. Answer: B Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 92) A perfectly competitive firm will shut down when the price is just below the minimum point on the A) average fixed cost curve. B) average total cost curve. C) marginal cost curve. D) average variable cost curve. E) marginal revenue curve. Answer: D Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

93) Under which of the following conditions will a profit-maximizing perfectly competitive firm shut down in the short run? A) when it is making a normal profit B) whenever its marginal cost is less than its marginal revenue C) when the price is less than its minimum average variable cost D) whenever its total cost is greater than its total revenue E) when the price is less than its minimum average total cost Answer: C Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 94) A perfectly competitive firm will continue to operate in the short run when the market price is below its average total cost if the A) marginal revenue is greater than marginal cost. B) price is at least equal to the minimum average variable cost. C) total fixed costs are less than total revenue. D) marginal cost is minimized. E) price is also less than the minimum average variable cost. Answer: B Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 95) If the price is less than a perfectly competitive firm's minimum average variable cost, the firm A) makes an economic profit. B) operates and incurs an economic loss equal to total fixed cost. C) operates and incurs an economic loss equal to average variable cost. D) shuts down and incurs an economic loss equal to total fixed cost. E) shuts down and incurs an economic loss equal to average variable cost. Answer: D Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

96) Which of the following is TRUE if a firm shuts down? i. The price is less than minimum average variable cost. ii. The firm is able to avoid an economic loss. iii. The firm incurs a loss equal to its total variable cost. A) i only B) i and ii C) i and iii D) iii only E) ii only Answer: A Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 97) If the market price is $50 for a unit of a good produced in a perfectly competitive market and the firm's minimum average variable cost is $52, then to maximize its profit (or minimize its loss) the firm should A) definitely produce the unit. B) shut down. C) not produce the unit but remain open. D) not produce the unit. Whether the firm should shut down or remain open cannot be determined without more information. E) produce the unit only if the price exceeds the average fixed cost. Answer: B Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 98) Suppose a perfectly competitive firm's minimum average variable cost is $3 when it produces 50. If the price is $2 and the firm's marginal cost is $2, the firm should A) continue to produce, but produce more than 50. B) continue to produce 50. C) continue to produce, but produce less than 50. D) shut down. E) continue to operate, but to determine the amount of production needs more information than is given. Answer: D Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 35 Copyright © 2021 Pearson Education, Inc.

99) Under what conditions would a perfectly competitive cotton farmer who is incurring an economic loss temporarily stay in business? A) if the total revenue exceeds the total fixed cost B) if the total revenue exceeds the total variable cost C) if the total revenue is positive D) if the total revenue is increasing E) if the marginal revenue exceeds the price Answer: B Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 100) The largest loss a profit-maximizing perfectly competitive firm can incur in the short run equals its A) average variable cost multiplied by output. B) total fixed cost. C) marginal cost multiplied by the number of units produced. D) average total cost multiplied by the number of units produced. E) total variable cost. Answer: B Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 101) The rutabaga market is perfectly competitive and the price of a ton of rutabagas rises. As a result, Rudy, a rutabaga farmer, will A) decrease his output of rutabagas. B) not change his output of rutabagas because Rudy's firm is a price taker. C) increase his output of rutabagas. D) at first decrease and then increase his output of rutabagas. E) probably change his output of rutabagas, but more information is needed about the change in the marginal revenue of a ton of rutabagas. Answer: C Topic: Firm's short-run supply curve Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

102) A perfectly competitive firm's short-run supply curve is A) horizontal at the market price. B) its total cost curve above the AVC. C) its marginal cost curve below the marginal revenue curve. D) its marginal cost curve above the AVC curve. E) its marginal revenue curve below the ATC curve. Answer: D Topic: Firm's short-run supply curve Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 103) The firm's supply curve is its A) marginal cost curve above the average variable cost curve. B) marginal cost curve below the average variable cost curve. C) average variable cost curve above the marginal cost curve. D) average total cost curve above the marginal cost curve. E) marginal revenue curve above the average total cost curve. Answer: A Topic: Firm's short-run supply curve Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 104) Which of the following will increase a perfectly competitive seller's short-run supply and shift the firm's short-run supply curve rightward? A) an increase in the market price B) a decrease in average fixed costs C) a decrease in marginal cost D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: C Topic: Firm's short-run supply curve Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

105) The four market types are A) perfect competition, imperfect competition, monopoly, and oligopoly. B) oligopoly, monopsony, monopoly, and imperfect competition. C) perfect competition, monopoly, monopolistic competition, and oligopoly. D) oligopoly, oligopolistic competition, monopoly, and perfect competition. E) perfect competition, imperfect competition, monopoly, and duopoly. Answer: C Topic: Market types Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 106) A requirement of perfect competition is that i. many firms sell an identical product to many buyers. ii. there are no restrictions on entry into (or exit from) the market, and established firms have no advantage over new firms. iii. sellers and buyers are well informed about prices. A) i only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Perfect competition, definition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 107) A perfectly competitive firm is a price taker because A) many other firms produce the same product. B) only one firm produces the product. C) many firms produce a slightly differentiated product. D) a few firms compete. E) it faces a vertical demand curve. Answer: A Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

108) The demand curve faced by a perfectly competitive firm is A) horizontal. B) vertical. C) downward sloping. D) upward sloping. E) U-shaped. Answer: A Topic: Demand Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 109) For a perfectly competitive corn grower in Nebraska, the marginal revenue curve is A) downward sloping. B) the same as its demand curve. C) upward sloping. D) U-shaped. E) vertical at the profit maximizing quantity of production. Answer: B Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 110) A perfectly competitive firm maximizes its profit by producing at the point where A) total revenue equals total cost. B) marginal revenue is equal to marginal cost. C) total revenue is equal to marginal revenue. D) total cost is at its minimum. E) total revenue is at its maximum. Answer: B Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking

111) If the market price is lower than a perfectly competitive firm's average total cost, the firm will A) immediately shut down. B) continue to produce if the price exceeds the average fixed cost. C) continue to produce if the price exceeds the average variable cost. D) shut down if the price exceeds the average fixed cost. E) shut down if the price is less than the average fixed cost. Answer: C Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 112) One part of a perfectly competitive trout farm's supply curve is its A) marginal cost curve below the shutdown point. B) entire marginal cost curve. C) marginal cost curve above the shutdown point. D) average variable cost curve above the shutdown point. E) marginal revenue curve above the demand curve. Answer: C Topic: Firm's short-run supply curve Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

113) Use the figure above to answer this question. We know the figure shows ________ market because the ________. A) a perfectly competitive; marginal revenue curve is horizontal B) an oligopoly; average total cost is U-shaped C) a perfectly competitive; average total cost is U-shaped D) a monopolistically competitive; marginal revenue curve is horizontal E) a monopoly; marginal cost curve is U-shaped Answer: A Topic: Perfect competition Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Application of knowledge 114) Use the figure above to answer this question. If the firm is maximizing profit, it will produce ________ units and make an economic profit of ________. A) 1,000; $4,000 B) 1,200; $3,600 C) 1,000; $10,000 D) 1,200; $12,000 E) 1,400; $10,000 Answer: B Topic: Perfect competition Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Application of knowledge

115) Use the figure above to answer this question. If the firm produces ________ units, total cost will equal ________. A) 1,200; $12,000 B) 1,000; $10,000 C) 1,200; $3,600 D) 1,000; $6,000 E) 1,200; $8,400 Answer: E Topic: Perfect competition Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Application of knowledge 116) Use the figure above to answer this question. Which of the following is TRUE regarding the firm's its supply decision? A) We cannot determine the shut down point without more information. B) The shut down point is 1,000 units. C) The shut down point is 1,200 units. D) Shut down occurs if the price falls to $7. E) The shut down point is greater than 1,400 units as average total cost reaches a maximum. Answer: A Topic: Shut down point Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Application of knowledge 15.2 Output, Price, and Profit in the Short Run 1) The market supply in the short run for the perfectly competitive industry is A) the same as each producer's supply. B) the sum of the supply schedules of all firms. C) divided up according to each firm's selling price. D) set at the maximum price a buyer will pay for one unit. E) equal to the average of each firm's supply schedule. Answer: B Topic: Market supply Skill: Level 1: Definition Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

2) If there are 1,000 identical rice farmers who are each willing to supply 200 bushels of rice at $2 per bushel, what price and quantity combination is a point on the market supply curve for rice? A) $2 and 200 bushels B) $2 and 200,000 bushels C) $2,000 and 200,000 bushels D) $2,000 and 1,000 bushels E) $2 and 1,000 farmers Answer: B Topic: Market supply Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 3) In the short run, a perfectly competitive firm ________ make an economic profit and ________ incur an economic loss. A) might; will never B) will never; might C) might; might D) will never; will never E) will definitely; will never Answer: C Topic: Short-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking 4) In the short run, a perfectly competitive firm A) can make only zero economic profit. B) can possibly make an economic profit or possibly incur an economic loss. C) produces the level of output that sets the average total cost equal to the market price. D) can vary all its inputs. E) can change only its fixed inputs. Answer: B Topic: Short-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

5) In the short run, a perfectly competitive firm can experience which of the following? i. an economic profit ii. an economic loss but it continues to stay open iii. an economic loss equal to its total fixed cost when it shuts down A) only i B) i and ii C) i and iii D) ii and iii E) i, ii, and iii Answer: E Topic: Short-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking 6) If a perfectly competitive seller is maximizing profit and is making zero economic profit, which of the following will this seller do? A) go to work in the next-best earning opportunity B) shut down, with a loss equal to total fixed cost C) continue at the current output, making zero economic profit D) increase production in order to make an economic profit E) remain open but decrease production in order to make an economic profit Answer: C Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking 7) If a perfectly competitive firm finds that the price exceeds its ATC, then the firm A) will raise its price to increase its economic profit. B) will lower its price to increase its economic profit. C) is making an economic profit. D) is incurring an economic loss. E) is making zero economic profit. Answer: C Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

8) For a perfectly competitive sugar producer in Haiti, a short-run economic profit will occur if the price of each ton of sugar sold is A) greater than the average total cost of producing sugar. B) equal to the average total cost of producing sugar. C) less than the average total cost of producing sugar. D) rising as more sugar is sold. E) greater than the marginal revenue of each ton of sugar. Answer: A Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking 9) If Henry, a perfectly competitive lime grower in Southern California, can sell his limes at a price greater than his average total cost, Henry will A) incur an economic loss. B) incur an accounting loss. C) have an incentive to shut down. D) make an economic profit. E) make zero economic profit. Answer: D Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking 10) If a perfectly competitive firm's average total cost is less than the price, then the firm A) incurs an economic loss. B) makes an economic profit. C) makes zero economic profit. D) makes either zero economic profit or an economic profit depending on whether the marginal revenue is equal to or greater than the price. E) None of the above answers is correct because the relationship between the price and average total cost has nothing to do with the firm's profit. Answer: B Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

11) If the market price is $50 per unit for a good produced in a perfectly competitive market and the firm's average total cost is $52, then the firm A) incurs an economic loss of $2 per unit. B) makes an economic profit of $2 per unit. C) makes zero economic profit. D) incurs a total economic loss of $52. E) More information is needed to determine the firm's economic profit or loss per unit. Answer: A Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 12) Peter's Pencils is a perfectly competitive company producing pencils. Suppose Peter is producing 1,000 pencils an hour. If the total cost of 1,000 pencils is $500, the market price per pencil is $2, and the marginal cost is $2, then Peter A) makes an economic profit because marginal revenue is equal to marginal cost at this output level. B) should decrease his output to increase his profit. C) is maximizing his profit and is making an economic profit. D) should increase his output to increase his profit. E) is not maximizing his profit but is making zero economic profit anyway. Answer: C Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 13) Suppose that marginal revenue for a perfectly competitive firm is $20. When the firm produces 10 units, its marginal cost is $20, its average total cost is $22, and its average variable cost is $17. Then to maximize its profit in the short run, the firm A) should stay open and incur an economic loss of $20. B) must increase its output to increase its profit. C) must decrease its output to increase its profit. D) should shut down. E) should not change its production because it is already maximizing its profit and is making an economic profit. Answer: A Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

14) A perfectly competitive firm is producing 50 units of output, which it sells at the market price of $23 per unit. The firm's average total cost is $20. What is the firm's total revenue? A) $23 B) $150 C) $1,000 D) $1,150 E) $20 Answer: D Topic: Economic profit, total revenue Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 15) A perfectly competitive firm is producing 50 units of output and selling at the market price of $23. The firm's average total cost is $20. What is the firm's total cost? A) $23 B) $150 C) $1,000 D) $1,150 E) $20 Answer: C Topic: Economic profit, total cost Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 16) A perfectly competitive firm is producing 50 units of output and selling at the market price of $23. The firm's average total cost is $20. What is the firm's economic profit? A) $23 B) $150 C) $1,000 D) $1,150 E) $50 Answer: B Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

17) For a perfectly competitive syrup producer whose average total cost curve does not change, an economic profit could turn into an economic loss if the A) market demand for syrup decreases. B) marginal cost curve shifts downward. C) market demand for syrup does not change. D) market demand for syrup increases. E) price of syrup rises. Answer: A Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking 18) For a perfectly competitive rancher in Wyoming, if the price does not change, an economic profit could turn into an economic loss if the A) average total cost curve shifts downward. B) average total cost curve does not change. C) average total cost curve shifts upward. D) marginal cost curve shifts downward. E) average fixed cost decreases. Answer: C Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 19) A perfectly competitive firm should shut down in the short-run if price falls below the minimum of A) marginal cost. B) marginal revenue. C) average total cost. D) fixed costs. E) average variable costs. Answer: E Topic: Economic loss Skill: Level 1: Definition Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

20) Computer memory chips are produced on wafers, each wafer having many separate chips that are separated and sold. The above table shows costs for a perfectly competitive producer of computer memory chips. If the market price of a wafer is $2,400 dollars, how many wafers will the firm produce? A) 0 B) 4 or 5 C) 3 or 4 D) 1 or 2 E) 6 Answer: B Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 21) Computer memory chips are produced on wafers, each wafer having many separate chips that are separated and sold. The above table shows costs for a perfectly competitive producer of computer memory chips. If the market price of a wafer is $2,400 dollars, the firm is A) making zero economic profit. B) making an economic profit of $12,000 an hour. C) incurring an economic loss of $2,800 an hour. D) incurring an economic loss of $2,000 an hour. E) making an economic profit of $2,400 an hour. Answer: D Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

22) Computer memory chips are produced on wafers, each wafer having many separate chips that are separated and sold. The above table shows costs for a perfectly competitive producer of computer memory chips. This firm will produce as long as the market price of a wafer is above A) $1,300. B) $1,400. C) $7,900. D) $2,800. E) $9,800. Answer: A Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

23) The above figure shows a perfectly competitive firm. If the market price is $15, the firm A) is incurring an economic loss. B) is making an economic profit. C) is making zero economic profit. D) will immediately shut down. E) might shut down but more information is needed about the AVC. Answer: B Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

24) The above figure shows a perfectly competitive firm. If the market price is $10, the firm A) is incurring an economic loss. B) is making an economic profit. C) is making zero economic profit. D) will immediately shut down. E) might shut down but more information is needed about the AVC. Answer: C Topic: Normal profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 25) The above figure shows a perfectly competitive firm. If the market price is $5, the firm A) is making an economic profit. B) is making zero economic profit. C) will immediately shut down. D) will not shut down. E) might shut down but more information is needed about the AVC. Answer: E Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

26) The above figure shows a perfectly competitive firm. If the market price is more than $20 per unit, the firm A) will definitely shut down to minimize its losses. B) will stay open to produce and will make zero economic profit. C) will stay open to produce and will incur an economic loss. D) will stay open to produce and will make an economic profit. E) might shut down but more information is needed about the fixed cost. Answer: D Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 27) The above figure shows a perfectly competitive firm. If the market price is $20 per unit, the firm A) will definitely shut down to minimize its losses. B) will stay open to produce and will make zero economic profit. C) will stay open to produce and will incur an economic loss. D) will stay open to produce and will make an economic profit. E) might shut down but more information is needed about the fixed cost. Answer: B Topic: Normal profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

28) The above figure shows a perfectly competitive firm. If the market price is $15 per unit, the firm A) will definitely shut down to minimize its losses. B) will stay open to produce and will make zero economic profit. C) will stay open to produce and will incur an economic loss. D) will stay open to produce and will make an economic profit. E) might shut down but more information is needed about the fixed cost. Answer: C Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 29) The above figure shows a perfectly competitive firm. If the market price is $5 per unit, the firm A) will definitely shut down to minimize its losses. B) will stay open to produce and will make zero economic profit. C) will stay open to produce and will incur an economic loss. D) will stay open to produce and will make an economic profit. E) might shut down but more information is needed about the fixed cost. Answer: A Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

30) The figure above shows a perfectly competitive firm. If the market price is $40 per unit, then the firm produces ________ units and makes an economic profit that is ________. A) more than 45; more than $400 B) 40; more than $400 C) 40; less than $400 D) 30; equal to zero E) 30; more than $250 Answer: B Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 31) The figure above shows a perfectly competitive firm. If the market price is $20 per unit, then the firm produces ________ units and makes an economic profit that is ________. A) more than 30; more than $100 B) 30; more than $100 C) 20; less than $400 D) 0; zero E) 30; zero Answer: E Topic: Normal profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

32) Bill owns a lawn-care company in Windermere, Florida, whose cost curves are illustrated in the above figure. The market equilibrium price in this perfectly competitive market equals $32 per lawn mowed. At this price, how many lawns will Bill mow per week? A) more than 10 and less than 30 B) 30 C) 40 D) 50 E) 0 Answer: C Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 33) Bill owns a lawn-care company in Windermere, Florida, whose cost curves are illustrated in the above figure. The market equilibrium price in this perfectly competitive market equals $32 per lawn mowed. Bill's average total cost curve is ATC, so his TOTAL cost of production equals A) $0 because Bill shuts down. B) more than $0 and less than $1,200 per week. C) more than $1,200 and less than $1,400 per week. D) more than $1,400 per week and less than $1,800 per week. E) more than $1,800 per week. Answer: B Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 55 Copyright © 2021 Pearson Education, Inc.

34) Bill owns a lawn-care company in Windermere, Florida, Florida, whose cost curves are illustrated in the above figure. The market equilibrium price in this perfectly competitive market equals $32 per lawn mowed. If Bill's average total cost curve is ATC, his total economic ________ equals ________. A) loss; $800 per week B) profit; $1,280 per week C) profit; $480 per week D) loss; $1,280 per week E) profit; $32 per week Answer: C Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 35) If the market supply curve and market demand curve for a good intersect at 600,000 units and there are 10,000 identical firms in the market, then each firm is producing A) 600,000 units. B) 60,000,000,000 units. C) 60,000 units. D) 60 units. E) 10,000 units. Answer: D Topic: Market supply Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 36) In the short run, a perfectly competitive firm A) must make an economic profit. B) must incur an economic loss. C) must make zero economic profit. D) might make an economic profit, zero economic profit, or incur an economic loss. E) None of the above answers is correct. Answer: D Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

37) A perfectly competitive firm definitely makes an economic profit in the short run if price is A) equal to marginal cost. B) equal to average total cost. C) greater than average total cost. D) greater than marginal cost. E) greater than average variable cost. Answer: C Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking 38) If a perfectly competitive firm is maximizing its profit and is making an economic profit, which of the following is correct? i. Price equals marginal revenue. ii. Marginal revenue equals marginal cost. iii. Price is greater than average total cost. A) i only B) i and ii only C) ii and iii only D) i and iii only E) i, ii, and iii Answer: E Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking 39) The market for watermelons in Alabama is perfectly competitive. A watermelon producer making zero economic profit could make an economic profit if the A) average total cost of selling watermelons does not change. B) average total cost of selling watermelons rises. C) average total cost of selling watermelons falls. D) marginal cost of selling watermelons does not change. E) marginal cost of selling watermelons rises. Answer: C Topic: Economic profit Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

40) Juan's Software Service Company is in a perfectly competitive market. Juan has total fixed cost of $25,000, average variable cost for 1,000 service calls is $45, and marginal revenue is $75. Juan's makes 1,000 service calls a month. What is his economic profit? A) $5,000 B) $25,000 C) $45,000 D) $75,000 E) $50,000 Answer: A Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 41) If a perfectly competitive firm finds that price is less than its ATC, then the firm A) will raise its price to increase its economic profit. B) will lower its price to increase its economic profit. C) is making an economic profit. D) is incurring an economic loss. E) is making zero economic profit. Answer: D Topic: Economic loss Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking 42) A perfectly competitive furniture-rental firm in Phoenix incurs an economic loss if the average total cost of each rental is A) greater than the marginal revenue of each rental. B) less than the marginal revenue of each rental. C) equal to the marginal revenue of each rental. D) equal to the price of each rental. E) greater than the average variable cost of each rental. Answer: A Topic: Economic loss Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

43) Consider a perfectly competitive market experiencing good times. In the short run, the equilibrium price will ________ and firms will earn a(n) ________. A) increase; economic profit as the new price exceeds average total cost B) increase; normal profit as the new price exceeds average total cost C) decrease; economic loss as new firms enter the industry D) decrease; economic profit as firms exit the industry E) may increase or decrease; normal profit depending on their costs Answer: A Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

44) Use the figure above to answer this question. Consider a perfectly competitive market experiencing good times. Figure ________ shows a firm maximizing profit in the short run because it produces ________ units and makes an economic profit of ________. A) A; 100; $2 per unit B) A; 90; $3 per unit C) B; 100; $10 per unit D) C; 100; $3 per unit E) C; 110; $2 per unit Answer: A Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Revised AACSB: Analytical thinking

45) Use the figure above to answer this question. Figure ________ shows a short-run equilibrium in good times because the firm makes a(n) ________. A) A; economic profit B) A; normal profit C) B; normal profit D) B; economic loss E) C; normal profit Answer: A Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 46) Use the figure above to answer this question. Consider a perfectly competitive firm in a short run equilibrium. Figure ________ shows a firm in bad times because the firm makes a(n) ________. A) C; economic loss of $3 per unit if the firm decides to operate B) A; economic loss of $4 so it must close C) B; economic loss of $3 per unit D) B; economic profit because the price exceeds average variable cost E) C; normal profit and can stay open in the long run Answer: A Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Revised AACSB: Analytical thinking 47) Use the figure above to answer this question. Consider a perfectly competitive firm in a short run equilibrium. Figure ________ shows a firm in bad times because the firm produces ________ units and makes a(n) ________. A) A; 100; economic loss B) A; 110; economic loss C) B; 90; economic profit D) C; 100; economic loss E) C; 100; normal profit Answer: D Topic: Short-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Revised AACSB: Analytical thinking

48) Suppose a perfectly competitive firm is incurring an economic loss. Consequently, the i. firm's average total cost exceeds the price. ii. firm's economic loss equals its total fixed cost. iii. firm cannot maximize profit. A) i and ii only B) i only C) i, ii and iii D) iii only E) ii and iii Answer: B Topic: Short-run equilibrium Skill: Level 5: Critical thinking Section: Checkpoint 15.2 Status: Old AACSB: Application of knowledge 49) If perfectly competitive firms are entering or exiting a market, it must be TRUE that the market A) is in the short run. B) is in the long run. C) is in the short run only if the firms' economic profits equal $0. D) is in the long run only if the firms' economic profits are positive. E) is in a long-run equilibrium because average variable costs are no longer relevant. Answer: A Topic: Short-run equilibrium Skill: Level 5: Critical thinking Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 15.3 Output, Price, and Profit in the Long Run 1) When new firms enter the perfectly competitive Miami bagel market, the market A) supply curve shifts leftward. B) supply curve does not change. C) demand curve shifts rightward. D) supply curve shifts rightward. E) demand curve shifts leftward. Answer: D Topic: Entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

2) If new firms enter a perfectly competitive industry, the market supply A) does not change. B) becomes more price elastic. C) becomes more price inelastic. D) increases. E) decreases because each firm produces less than before the entry. Answer: D Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 3) Alice, Bud, and Celia can produce rubber bands in a perfectly competitive market. If they enter the market, the minimum average total cost for a bundle of rubber bands, for the three of them is $2, $3, and $4, respectively. If the market price is $2.10 per bundle, then A) all three of them will enter the market. B) only Alice will enter the market. C) Alice and Bud will enter the market. D) Bud and Celia will enter the market. E) Alice and Celia will enter the market. Answer: B Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 4) Suppose a perfectly competitive market is in long-run equilibrium and then there is a permanent increase in the demand for that product. The new long-run equilibrium will have A) fewer firms in the market. B) more firms in the market. C) the same number of firms in the market. D) probably a different number of firms, but it is not possible to determine if there will be more or fewer firms. E) a permanent decrease in supply. Answer: B Topic: Long-run equilibrium, entry Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Analytical thinking

5) When firms in a perfectly competitive market are earning an economic profit, in the long run A) no new firms will enter the market. B) new firms will enter the market. C) firms will exit the market. D) the long-run average cost curve shifts downward. E) the initial firms continue to earn an economic profit. Answer: B Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 6) When all firms in a perfectly competitive market are earning ________, we can state that the market is in a ________ equilibrium. A) a normal profit; long-run B) an economic profit; long-run C) a normal profit; short-run D) an economic profit; short-run E) A and D are correct. Answer: E Topic: Long-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Application of knowledge

7) The figure shows a perfectly competitive market that was in a long-run equilibrium on demand curve D0. Due to a permanent change in demand to D1, existing firms will begin to make an economic ________ which will result in ________ the market. A) loss; new firms entering B) profit; existing firms exiting C) profit; new firms entering D) loss; some existing firms exiting E) loss; all remaining firms exiting Answer: C Topic: Long-run equilibrium, entry and exit Skill: Level 4: Applying models Section: Checkpoint 15.3 Status: Old AACSB: Application of knowledge 8) The graph shows a perfectly competitive market that was in a long-run equilibrium on demand curve D0. Due to a permanent change in demand to D2, the price in the market will ________ causing existing firms to ________ which means that ________ the market. A) decrease; incur an economic loss; some firms will exit B) decrease; earn a larger economic profit; new firms will enter C) increase; earn a smaller economic profit; new firms will enter D) decrease; earn a smaller economic profit; new firms will enter E) increase; earn a larger economic profit; some firms will exit Answer: A Topic: Long-run equilibrium, entry and exit Skill: Level 4: Applying models Section: Checkpoint 15.3 Status: Old AACSB: Application of knowledge

9) Consider a perfectly competitive market that was in a long-run equilibrium when a permanent increase in demand occurs. Which of the following will occur as a result? i. The existing firms will start to earn an economic profit. ii. New firms will be motivated to enter the market. iii. Some firms that cannot meet the new demand will exit the market. A) i, ii and iii B) i and ii only C) ii and iii only D) iii only E) i and iii Answer: B Topic: Long-run equilibrium, entry and exit Skill: Level 4: Applying models Section: Checkpoint 15.3 Status: Old AACSB: Application of knowledge 10) If perfectly competitive lawn care firms are making an economic profit, then A) wages will be bid up until the economic profit are gone. B) the firms must be superior and will continue to make an economic profit. C) new firms will enter the industry. D) they are not equating marginal revenue to marginal cost. E) government regulation will be imposed to decrease their profit. Answer: C Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 11) If perfectly competitive firms are making an economic profit, then A) the market must be in long-run equilibrium but cannot be in a short-run equilibrium. B) some firms will exit the market. C) new firms will enter the market. D) the market might be in a long-run equilibrium but not a short-run equilibrium. E) the market cannot be in either a short-run or a long-run equilibrium. Answer: C Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

12) The corn market is perfectly competitive, with thousands of corn farmers. In the 2010s, the price of corn soared so that new farmers entered the corn market. Initially, entry ________ the economic profit of the initial corn farmers and in the long run the initial corn farmers ________. A) increased; made an even greater economic profit than initially B) decreased; made zero economic profit C) increased; made zero economic profit D) decreased; incurred an economic loss E) increased; made an economic profit Answer: B Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 13) If firms in a perfectly competitive industry are earning an economic profit, then in the ________, firms will ________ the industry. A) short run; enter B) long run; enter C) short run; exit D) long run; exit E) More information about the firms' costs and the price of the product is needed to determine if firms enter or exit the industry. Answer: B Topic: Long-run equilibrium, entry Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 14) When new firms enter a perfectly competitive market, the market supply curve shifts ________ and the price ________. A) rightward; falls B) rightward; rises C) leftward; falls D) leftward; rises E) rightward; does not change Answer: A Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

15) When firms in a perfectly competitive market incur economic losses, exit by some firms means the market supply will A) increase. B) decrease. C) not change. D) become vertical. E) become the same as the individual producers' supplies. Answer: B Topic: Exit Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 16) To eliminate losses in a perfectly competitive market, firms exit the industry. This exit results in A) an increase in market supply. B) a decrease in market supply. C) an increase in market demand. D) a decrease in market demand. E) a decrease in BOTH the market supply and the market demand. Answer: B Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 17) Suppose a perfectly competitive market is in short-run equilibrium. Firms that are incurring a ________ economic loss ________. A) persistent; increase their output to increase their profit B) temporary; exit the industry C) temporary; decrease their production but definitely stay open D) persistent; exit the industry and shift the market supply curve leftward E) persistent; exit the industry and shift the market supply curve rightward Answer: D Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

18) In the long run, existing firms exit a perfectly competitive market A) only if economic profits are zero. B) if they make a positive economic profit. C) if normal profits are greater than zero. D) only if they incur an economic loss. E) if they either make a normal profit or if they incur an economic loss. Answer: D Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 19) In the LONG RUN, perfectly competitive firms will exit the market if the price is A) higher than average variable cost. B) equal to average total cost. C) less than average total cost. D) equal to average fixed cost. E) equal to marginal revenue. Answer: C Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 20) A perfectly competitive market is in equilibrium and then demand decreases. The decrease in demand means the market price will ________ and eventually there will be ________. A) rise; entry by new firms B) fall; exit by existing firms C) fall; entry by new firms D) rise; exit by existing firms E) fall; neither entry nor exit because the market is perfectly competitive Answer: B Topic: Long-run equilibrium, exit Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

21) Catfish farming is a perfectly competitive industry. Catfish farmers suffered tremendous economic losses in the late 2000s. As a result A) some new catfish farmers entered the market. B) some catfish farmers exited the market. C) no catfish farmers entered or exited this market. D) the supply of catfish increased in 2010. E) new demanders entered the market after some firms had exited. Answer: B Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 22) Keith is a perfectly competitive carnation grower. The market price is $2 per dozen carnations. Keith's average total cost to grow carnations is $2.50 per dozen. In the long run, Keith will A) raise his price to more than $2.50 per dozen carnations. B) raise his price to $2.50 per dozen carnations. C) exit the industry if the price and his costs do not change. D) incur an economic loss. E) continue to make an economic profit. Answer: C Topic: Long-run equilibrium, exit Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 23) If concerns about mad-cow disease impose economic losses on the perfectly competitive cattle ranchers, exit by the ranchers combined with no further changes in the demand for beef will force the price of beef to A) decrease. B) not change. C) increase. D) fluctuate, with the trend being lower prices. E) probably change, but more information about the market supply of beef is needed to answer the question. Answer: C Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Analytical thinking

24) Suppose a perfectly competitive market is in a short-run equilibrium. If some firms exit the market, the profit of the remaining firms ________; if some firms enter the market, the profit of each existing firm ________. A) decreases; is unchanged B) increases; decreases C) increases; is unchanged D) is unchanged; is unchanged E) decreases; increases Answer: B Topic: Long-run equilibrium, entry and exit Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 25) In the long run, perfectly competitive firms produce at the output level that has the minimum A) marginal cost. B) average total cost. C) average variable cost. D) average fixed cost. E) total revenue. Answer: B Topic: Long-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 26) In a perfectly competitive industry i. entry by new firms shifts the market supply curve rightward. ii. exit by existing firms shifts the market supply curve leftward. iii. at all times existing firms make only zero economic profit. A) ii and iii B) ii only C) i and iii D) i and ii E) i, ii, and iii Answer: D Topic: Long-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

27) If it does not shut down, a perfectly competitive firm produces where marginal cost is equal to the marginal revenue A) only in the short run. B) only in the long run. C) always to maximize its profit. D) only if it is not possible to produce where price equals average variable cost. E) only if it is not possible to produce where price is greater than average total cost. Answer: C Topic: Long-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 28) In the long run, a perfectly competitive firm makes A) a positive economic profit. B) zero economic profit. C) negative economic profit, that is, an economic loss. D) zero accounting profit. E) either a positive economic profit or a normal profit. Answer: B Topic: Long-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 29) In the long run, a perfectly competitive firm will A) be able to make an economic profit. B) produce but incur an economic loss. C) make zero economic profit. D) not produce and will incur an economic loss equal to its total fixed cost. E) not produce but not incur an economic loss. Answer: C Topic: Long-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

30) In the long run, a perfectly competitive firm A) can make either an economic profit or a normal profit. B) incurs an economic loss. C) makes zero economic profit. D) can make an economic profit, zero economic profit, or incur an economic loss. E) makes an economic profit. Answer: C Topic: Long-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 31) The cranberry market is perfectly competitive. Reports that consuming cranberries can lead to improved health result in a permanent increase in the demand for cranberries and an immediate upward jump in the price of cranberries. As time passes, the price of cranberries ________ and the initial firms' economic ________. A) falls; profit will be eliminated B) rises still higher; loss will be eliminated C) rises still higher; profit will not change D) falls; loss will be increased E) falls; profit will not change Answer: A Topic: Long-run equilibrium Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 32) Suppose a perfectly competitive market is in long-run equilibrium with a price of $12. Then there is a permanent increase in demand. As a result, in the short run the market price ________ and in the long run the number of firms ________ and the price is ________ the price was in the short run. A) rises; does not change; is equal to B) rises; increases; higher than C) rises; does not change; lower than D) falls; decreases; is equal to E) rises; increases; lower than Answer: E Topic: External economies Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

33) If perfectly competitive firms are maximizing their profit and are making an economic profit, the market ________ in a short-run equilibrium and ________ in a long-run equilibrium. A) is; is B) is; is not C) is not; is D) is not; is not E) is; might be Answer: B Topic: Permanent change in demand Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 34) A market is initially in a long-run equilibrium and there is a permanent increase in demand. After the new long-run equilibrium is reached, there A) are more firms in the market. B) are fewer firms in the market. C) are the same number of firms in the market. D) probably is a different number of firms in the market, but more information is needed to determine if the number of firms rises, falls, or perhaps does not change. E) is no change in the market. Answer: A Topic: Permanent change in demand Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 35) A permanent decrease in demand definitely A) shifts a firm's average total cost curve downward. B) creates diseconomies for individual firms. C) lowers the market price. D) decreases the number of firms in the industry. E) shifts a firm's average total cost curve upward. Answer: D Topic: Permanent change in demand Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

36) The rutabaga market is perfectly competitive. Research is published claiming that eating rutabagas leads to gaining weight and so the demand for rutabagas permanently decreases. The permanent decrease in demand results in a A) lower price, economic losses by rutabaga farmers, and entry into the market. B) lower price, economic losses by rutabaga farmers, and exit from the market. C) higher price, economic profits for rutabaga farmers, and entry into the market. D) higher price, economic losses by rutabaga farmers, and exit from the market. E) lower price, economic profits for rutabaga farmers, and entry into the market. Answer: B Topic: Permanent change in demand Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Analytical thinking 37) Technological change A) usually requires an investment in a new plant. B) is implemented in the short run. C) almost always increases the costs of production. D) almost always increases the variable costs of production. E) cannot help a firm to earn an economic profit in either the short run or the long run. Answer: A Topic: Technological change Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 38) When a firm adopts new technology, generally its A) cost curves shift upward. B) cost curves shift downward. C) cost curves are unaffected. D) supply curve shifts leftward. E) production permanently decreases. Answer: B Topic: Technological change Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

39) In a market undergoing technological change, firms that A) adopt the new technology temporarily incur an economic loss. B) adopt the new technology temporarily make an economic profit. C) do not adopt the new technology temporarily make an economic profit. D) do not adopt the new technology increase their market share. E) do not adopt the new technology continue to make a normal profit. Answer: B Topic: Technological change Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 40) If the technology associated with producing fiber-optic cable continues to advance, over time the cost of producing fiber-optic cable will A) decrease, firms that use the new technology will make an economic profit, and in the long run new firms will enter the market. B) decrease, firms that use the new technology will incur an economic loss, and in the long run some firms will exit the industry. C) increase, firms that use the new technology will make an economic profit, and in the long run new firms will enter the market. D) increase, firms that use the new technology will incur an economic loss, and in the long run some firms will exit the industry. E) decrease, firms that do not use the new technology will make an economic profit, and in the long run new firms will enter the market. Answer: A Topic: Technological change Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

41) Technology reduces the average cost of production, so in the long run i. perfectly competitive firms produce at a lower average cost. ii. the market p rice of the good falls. iii. firms with older plants either exit the market or adopt the new technology. A) i only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Technological change Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 42) Technological change allows perfectly competitive firms to ________ and leads to ________. A) lower their costs; lower prices for consumers B) raise their prices; higher prices for consumers C) lower their costs; higher prices so the firms can earn economic profits in the long run D) raise their costs; higher prices and maximum profits in the long run E) lower their costs; deadweight loss Answer: A Topic: Technological change Skill: Level 5: Critical thinking Section: Checkpoint 15.3 Status: Old AACSB: Analytical thinking 43) Suppose the cost of a CD is $20. As online retailers enter the market with new technology, the price of CDs ________, and traditional music stores find that ________. A) decreases; their AVC exceeds the new lower price and they exit the industry B) decreases; their ATC curve shifts lower and their profit increases C) increases; they compete with online retailers at the new higher price D) increases; their costs have risen due to the new technology E) decreases; they compete with online retailers with higher profits Answer: A Topic: Eye on Record Stores Skill: Level 5: Critical thinking Section: Checkpoint 15.3 Status: Old AACSB: Analytical thinking

44) In the long run, new firms enter a perfectly competitive market when A) normal profit is greater than zero. B) economic profit is equal to zero. C) normal profit is equal to zero. D) economic profit is greater than zero. E) the existing firms are weak because they are incurring economic losses. Answer: D Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 45) If perfectly competitive firms are making an economic profit, the economic profit A) attracts entry by more firms, which lowers the price. B) can be earned both in the short run and the long run. C) is less than the normal profit. D) leads to a decrease in market demand. E) generally leads to firms exiting as they seek higher profit in other markets. Answer: A Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 46) If perfectly competitive firms are making an economic profit, then A) the market is in its long-run equilibrium. B) new firms enter the market and the equilibrium profit of the firms already in the market decreases. C) new firms enter the market and the equilibrium profit of the firms already in the market increases. D) firms exit the market and the economic profit of the surviving firms in the market decreases. E) firms exit the market and the economic profit of the surviving firms in the market increases. Answer: B Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

47) As a result of firms leaving the perfectly competitive frozen yogurt market in the early 2010s, the market A) supply curve shifted leftward. B) supply curve did not change. C) demand curve shifted rightward. D) supply curve shifted rightward. E) demand curve shifted leftward. Answer: A Topic: Exit Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 48) Firms exit a competitive market when they incur an economic loss. In the long run, this exit means that the economic losses of the surviving firms A) increase. B) decrease until they equal zero. C) decrease until economic profits are earned. D) do not change. E) might change but more information is needed about what happens to the price of the good as the firms exit. Answer: B Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 49) If firms in a perfectly competitive market are incurring economic losses, then as time passes firms ________ and the market ________. A) enter; demand curve shifts leftward B) enter; supply curve shifts rightward C) exit; demand curve shifts leftward D) exit; supply curve shifts rightward E) exit; supply curve shifts leftward Answer: E Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking

50) In the long run, a firm in a perfectly competitive market will A) make zero economic profit, so that its owners earn a normal profit. B) make zero normal profit but its owners will make an economic profit. C) remove all competitors and become a monopolistically competitive firm. D) incur an economic normal loss but not earn a positive economic profit. E) remove all competitors and become a monopoly. Answer: A Topic: Long-run equilibrium Skill: Level 1: Definition Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 51) Technological change brings a ________ to firms that adopt the new technology. A) permanent economic profit B) temporary economic profit C) permanent economic loss D) temporary economic loss E) temporary normal profit Answer: B Topic: Technological change Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 52) Perfect competition ________ an efficient outcome because ________. A) achieves; total surplus is maximized B) achieves; marginal benefit equals marginal cost C) does not achieve; firms do not get to choose their price D) does not achieve; firms produce goods with perfect substitutes E) Both A and B are correct. Answer: E Topic: Efficient equilibrium Skill: Level 5: Critical thinking Section: Checkpoint 15.3 Status: Old AACSB: Analytical thinking

53) In a perfectly competitive market, a(n) ________ occurs because ________. A) efficient outcome; total surplus is maximized B) deadweight loss; firms minimize average minimum cost C) efficient outcome; the fair rules condition is met D) deadweight loss; firms must be price takers E) deadweight loss; total surplus is minimized Answer: A Topic: Efficient equilibrium Skill: Level 5: Critical thinking Section: Checkpoint 15.3 Status: Old AACSB: Analytical thinking 54) Perfect competition ________ a fair outcome ________. A) achieves; because both the fair rules and fair results conditions are met B) achieves; because total surplus is maximized C) does not achieve; because entrepreneurs only earn a normal profit D) does not achieve; because firms must be price takers E) may achieve; if average total costs are minimized Answer: A Topic: Fairness Skill: Level 5: Critical thinking Section: Checkpoint 15.3 Status: Old AACSB: Analytical thinking

15.4 Chapter Figures

The figure above shows a firm's total revenue and total cost curves. 1) Based on the figure above, when the firm maximizes its profit, it produces ________ cans per day. A) 0 B) more than 0 and less than 5 C) 5 or more but less than 10 D) 10 E) more than 10 Answer: D Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 2) To maximize its profit, the firm in the figure above produces ________ cans per day and ________. A) 0; incurs an economic loss of less than $20 B) between 3 to 5 cans; earns a normal profit C) 10; earns an economic profit of $2.90 D) 10; earns an economic profit of $29 E) more than 10; earns an economic profit Answer: D Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

The figure above shows a firm's marginal revenue and marginal cost curves. 3) Based on the figure above, the price of a can is $8; if the price increased to $12, then the firm would A) produce zero cans. B) decrease the amount of cans produces it but not to zero. C) not change the amount of cans it produces. D) increase the amount of cans it produces. E) More information is needed to determine what action the firm will take. Answer: D Topic: Profit maximization Skill: Level 4: Applying models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 4) Suppose the firm's marginal cost of producing a can increases by $1 per can. Then, based on the figure above, the firm would A) produce zero cans. B) decrease the amount of cans it produces but not to zero cans. C) not change the amount of cans it produces. D) increase the amount of cans it produces. E) More information is needed to determine what action the firm will take. Answer: B Topic: Profit maximization Skill: Level 4: Applying models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 82 Copyright © 2021 Pearson Education, Inc.

The figure above shows the cost curves and marginal revenue curve for a perfectly competitive firm. 5) Based on the figure above, what is the price of a can? A) $0. B) $3.00 per can C) $5.14 per can D) None of the above prices is correct. E) More information is needed to determine the price of a can. Answer: B Topic: Perfect competition, definition Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 6) Based on the figure above, if the firm produces 7 cans per day, the firm ________ maximizing its profit and is ________. A) is; incurring an economic loss B) is; making a normal profit C) is; making an economic profit D) is not; incurring an economic loss E) is not; making a normal profit Answer: A Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 83 Copyright © 2021 Pearson Education, Inc.

7) Suppose the price of a can was $5.14. In this case, to maximize its profit, the firm illustrated in the figure above would A) increase its production and would make an economic profit. B) not change its production and would make a normal profit. C) not change its production and would make an economic profit. D) increase its production and would incur an economic loss. E) not change its production and would incur an economic loss. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 8) The firm in the figure above is ________ that is equal to ________. A) making an economic profit; $5.14 × 7 B) making an economic profit; $3.00 × 7 C) incurring an economic loss; $5.14 × 7 D) incurring an economic loss; ($5.14 - $3.00) × 7 E) making an economic profit; ($5.14 - $3.00) × 7 Answer: D Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

The figure above shows some of a firm's cost curves and its marginal revenue curve. 9) Based on the figure above, what is the price of a can? A) $0 B) $8.00 per can C) $5.10 per can D) None of the above prices is correct. E) More information is needed to determine the price of a can. Answer: B Topic: Perfect competition, definition Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 10) Based on the figure above, if the firm produces 10 cans per day, the firm ________ maximizing its profit and is ________. A) is; incurring an economic loss B) is; making zero economic profit C) is; making an economic profit D) is not; incurring an economic loss E) is not; making zero economic profit Answer: C Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

11) Suppose the price of a can was $5.10. In this case, to maximize its profit, the firm illustrated in the figure above would A) decrease its production and would make an economic profit. B) not change its production and would make zero economic profit. C) not change its production and would make an economic profit. D) decrease its production and would incur an economic loss. E) not change its production and would incur an economic loss. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 12) The firm in the figure above has a total cost equal to A) $5.10 × 10. B) $8.00 × 10. C) ($5.10 - $8.00) × 10. D) ($8.00 - $5.10) × 10. E) None of the above answers is correct because more information is needed. Answer: A Topic: Total cost Skill: Level 4: Applying models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 13) The firm in the figure above has a total revenue equal to A) $5.10 × 10. B) $8.00 × 10. C) ($5.10 - $8.00) × 10. D) ($8.00 - $5.10) × 10. E) None of the above answers is correct because more information is needed. Answer: B Topic: Total revenue Skill: Level 4: Applying models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

14) The firm in the figure above is ________ that is equal to ________. A) making an economic profit; $8.00 × 10 B) making an economic profit; $5.10 × 10 C) incurring an economic loss; $5.10 × 10 D) incurring an economic loss; ($8.00 - $5.10) × 10 E) making an economic profit; ($8.00 - $5.10) × 10 Answer: E Topic: Economic profit Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

The above figure shows some a firm's cost curves and its marginal revenue curve. 15) Based on the figure above, what is the price of a can? A) $0 B) $3.00 per can C) $5.15 per can D) None of the above prices is correct. E) More information is needed to determine the price of a can. Answer: B Topic: Perfect competition, definition Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

16) Based on the figure above, if the firm produces 7 cans per day, the firm ________ maximizing its profit and is ________. A) is; incurring an economic loss B) is; making zero economic profit C) is; making an economic profit D) is not; incurring an economic loss E) is not; making zero economic profit Answer: A Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 17) Suppose the price of a can was $5.14. In this case, to maximize its profit the firm illustrated in the figure above would A) increase its production and would make an economic profit. B) not change its production and would make zero economic profit. C) not change its production and would make an economic profit. D) increase its production and would incur an economic loss. E) not change its production and would incur an economic loss. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 18) The price for the shutdown point is A) $5.14. B) between $3.01 and $5.13. C) $3.00. D) between $0 and $2.99. E) greater than $5.15. Answer: D Topic: Shut down Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

19) The firm in the figure above has a total cost equal to A) $5.14 × 7. B) $3.00 × 7. C) ($5.14 - $3.00) × 7. D) ($3.00 - $5.14) × 7. E) None of the above answers is correct because more information is needed. Answer: A Topic: Total cost Skill: Level 4: Applying models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 20) The firm in the figure above has a total revenue equal to A) $5.14 × 7. B) $3.00 × 7. C) ($5.14 - $3.00) × 7. D) ($3.00 - $5.14) × 7. E) None of the above answers is correct because more information is needed. Answer: B Topic: Total revenue Skill: Level 4: Applying models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking 21) The firm in the figure above is ________ that is equal to ________. A) making an economic profit; $5.14 × 7 B) making an economic profit; $3.00 × 7 C) incurring an economic loss; $5.14 × 7 D) incurring an economic loss; ($5.14 - $3.00) × 7 E) making an economic profit; ($5.14 - $3.00) × 7 Answer: D Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

15.5 Integrative Questions 1) Consider a short-run equilibrium in a perfectly competitive market. Suppose that the firms' average total cost and marginal cost schedules differ. In the short run A) all firms in the market must be able to make an economic profit. B) all firms produce equal amounts of output. C) some firms might incur an economic loss, but still produce output. D) some firms might make an economic profit and, as a result, shut down. E) all firms in the market must be able to make either positive or zero economic profit. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

2) The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC0, each produces 20 units, and the market price of the good is $16 per unit, then A) the firms make an economic profit of $8 per unit. B) firms will enter the industry and the number of firms increases. C) the firms' ATC curves will eventually shift to become the same as ATC1. D) firms will exit the industry and the number of firms decreases. E) Both answers A and B are correct. Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking 90 Copyright © 2021 Pearson Education, Inc.

3) The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC2, each produces 40 units, and the market price of the good is $20 per unit, then A) the firms incur an economic loss of $12 per unit. B) firms will enter the industry and the number of firms increases. C) the firms' ATC curves will eventually shift to become the same as ATC1. D) firms will exit the industry and the number of firms decreases. E) Both answers A and D are correct. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking 4) The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC1, each produce 30 units, and the market price of the good is $16 per unit, then the firms A) make zero economic profit and firms neither enter nor exit the industry. B) make zero economic profit and so some firms exit the industry. C) incur an economic loss and so some firms exit the industry. D) incur an economic loss and so new firms enter the industry. E) make an economic profit and new firms enter the industry. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking 5) The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC1, each produce 30 units, and the market price of the good is $16 per unit, then the firms A) make zero economic profit and new firms enter the market. B) make zero economic profit and no firms enter or exit the market. C) make zero economic profit and some firms exit the market. D) incur an economic loss and some firms exit the market. E) make an economic profit and new firms enter the market. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Analytical thinking 91 Copyright © 2021 Pearson Education, Inc.

6) If firms in a perfectly competitive industry are earning an economic profit and new firms enter the industry, then A) consumer surplus decreases. B) the existing firms' economic profit decreases. C) there must be external benefits to consumption of the good. D) the new firms must incur an economic loss. E) Both answers A and B are correct. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 7) Suppose that each of 8,000 firms in a perfectly competitive industry produces 1,000 units of a good and maximizes profits when the price of the good is $10. If there is a permanent increase in demand, in the short run each firm produces ________ 1,000 units and in the long run the number of firms is ________ 8,000. A) more than; more than B) less than; more than C) less than; less than D) more than; less than E) exactly; more than Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 8) Suppose that each of 10,000 perfectly competitive firm in an industry produces 1,000 units of a good and earns an economic profit when the price of the good is $10. In the long run, definitely A) each firm increases its production above 1,000 units. B) the number of firms is more than 10,000. C) consumer surplus decreases. D) producer surplus increases. E) the number of firms is less than 10,000. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

15.6 Essay: A Firm's Profit-Maximizing Choices 1) Is the number of sellers in the market the only thing that is different in each of the four market types economists study? Answer: No, the number of sellers is not the only factor that differs; the degree of similarity of each firm's product also plays a role. For instance, in a perfectly competitive market, each firm sells an identical product whereas in a monopolistically competitive market, each firm sells a slightly different product. Topic: Market types Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication 2) Why do you never see firms in a perfectly competitive market advertise their product? Answer: Advertising has costs and benefits for the typical firm. The cost is the expense of running the advertising and the forgone value of the next best use of the firm's funds. The benefit of advertising is the increased probability that the firm can increase the demand for its good or service. Therein lies the problem for perfectly competitive firms. Perfectly competitive firms sell an identical product. Who is going to believe an asparagus farmer in California that runs a television ad proclaiming that her asparagus is better than other farmers? If demand is not increased by the ad, which is likely, the only thing that is certain is that the farmer's costs have increased. Along with the higher costs comes decreased profit and an increased likelihood of going out of business. Topic: Market types Skill: Level 5: Critical thinking Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication 3) What are the four types of markets? Give a brief description of each type. Answer: The four types of markets are perfect competition, monopoly, monopolistic competition, and oligopoly. ∙ Perfect competition has many firms selling identical products to many buyers, with no barriers to entry or exit. ∙ Monopoly has one firm selling a good with no close substitutes and a barrier that blocks the entry of new firms. ∙ Monopolistic competition has many firms making similar but not identical products with no barriers to entry or exit. ∙ Oligopoly has a small number of generally large firms producing either identical or differentiated products. Topic: Market types Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 93 Copyright © 2021 Pearson Education, Inc.

4) What four conditions define a perfectly competitive market? Answer: The four conditions are that: a. many firms sell an identical product to many buyers. b. there are no restrictions on entry into (or exit from) the market. c. established firms have no advantage over new firms. d. sellers and buyers are well informed about prices. Topic: Perfect competition Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 5) "Perfectly competitive firms have total control over the price they set for their product." Explain why the previous statement is correct or incorrect. Answer: The statement is incorrect. Perfectly competitive firms are price takers, which means that they have no control over the price of their product. They must "take" the price given to them by the market as a whole, that is, they must take the price determined by the market demand and market supply. Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication 6) Does a perfectly competitive producer have any incentive to lower its price so it is below the current market price? Explain your answer Answer: A perfectly competitive producer has no incentive to lower its price because the producer can sell all he or she produces at the going market price. In this case, a producer will not lower the price he or she charges because no additional sales can be garnered. Hence it is nonsensical to undercut the market price because the lower price means lower revenue and hence lower profit. Topic: Price takers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication

7) Why are perfectly competitive ranchers in Montana price takers? Answer: Because one farmer's beef is identical to another farmer's, each farmer's beef is a perfect substitute for all other farmers' beef. In addition, there are over one million ranchers in the United States. As a result, no individual rancher can impact the market price by increasing or decreasing production. Therefore each rancher faces a perfectly elastic demand. Each can sell all of the beef desired at the market price, but not one penny more. Once the market sets the price, the rancher must take as given whatever the price might be. Topic: Price takers Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication 8) "A perfectly competitive firm is called a price maker because all the firms together must make the market price." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is false. A perfectly competitive firm is called a "price taker" because the firm must take whatever price the market determines. Any single firm's actions cannot affect the market price. Topic: Price takers Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication 9) If a perfectly competitive firm manufacturing chairs produces 100 more chairs, what happens to the market price of a chair? Answer: The price will not change. Any one perfectly competitive firm is such a small part of the market that a change in its output has virtually no effect on the price. This result is why the firm's marginal revenue equals its price: No matter how much (or how little) the firm produces, the marginal revenue from one more unit always equals the price of the product. Topic: Price takers Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication 10) Pineapple growing is a perfectly competitive industry. How does the market demand curve for pineapples compare to the demand curve for an individual pineapple grower? Answer: The market demand curve for pineapples is downward sloping. The demand curve for an individual pineapple grower is a horizontal line. In other words, the demand faced by an individual grower is perfectly elastic whereas the market demand is not perfectly elastic. Topic: Demand Skill: Level 1: Definition Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 95 Copyright © 2021 Pearson Education, Inc.

11) What is the shape of the demand curve faced by the perfectly competitive firm, and why? Answer: The demand curve faced by a perfectly competitive firm is horizontal, that is, the demand is perfectly elastic. A perfectly competitive firm is one of many sellers in the market that produce identical products. A single firm's output is small relative to the market demand so the firm cannot influence the market price by increasing or decreasing its output. It can sell any quantity it chooses at the going price. Hence the firm's demand curve is a horizontal line at the market price. Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication 12) Why does the profit-maximizing level of production occur at the point where marginal revenue equals marginal cost? Answer: If a firm produces at a level where marginal revenue is greater than marginal cost, more profit could be gained by increasing output. Why? Because the added revenue (the marginal revenue) from producing another unit exceeds the added cost (the marginal cost) of producing the unit. Therefore the firm should increase production until no more additional profit can be earned, which occurs where marginal revenue equals marginal cost. Similarly, if a firm produces at a level where marginal cost exceeds marginal revenue, the firm's profit would rise by decreasing output. In this case, the saved costs (the marginal cost) exceed the lost revenue (the marginal revenue). Therefore the firm should decrease production until the point at which marginal cost equals marginal revenue. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication 13) If the market price faced by a perfectly competitive firm increases, in the short run how does the firm respond? Answer: If the market price rises, a perfectly competitive firm increases its output. Essentially the firm moves upward along its marginal cost curve, thereby increasing the quantity the firm will supply. Topic: Firm's short-run supply curve Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication

14) What is a perfectly competitive firm's short-run supply curve? Answer: A perfectly competitive firm's short-run supply curve is its marginal cost curve above the minimum average variable cost. Topic: Firm's short-run supply curve Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Reflective thinking 15) If the price received by a perfectly competitive firm is less than its average variable cost, what will the firm do in the short run? Why? Answer: If the price is less than the average variable cost, the firm will shut down in the short run. By shutting down, the firm will incur an economic loss equal to its fixed cost. Whereas if the firm operated, its economic loss would be larger. Therefore the firm minimizes its loss by shutting down. Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication 16) Will a perfectly competitive firm ever produce in the short run even though it is suffering an economic loss? Answer: Yes, a perfectly competitive firm will continue to produce even though it is suffering an economic loss if the price exceeds the minimum average variable cost. In this case, even though the firm has an economic loss, if it shut down, its economic loss would be larger. Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication 17) What must be the case if a perfectly competitive firm's economic loss is less by shutting down rather than by producing and selling some output? Answer: If a firm's economic loss is greater when it produces and sells some output than when it shuts down, it is the case that the price of the product is less than the average variable cost. When the price is less than the average variable cost, the firm's economic loss is less if it shuts down than if it produces and sells output. Topic: Shut down Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Written and oral communication

18) Pete is a perfectly competitive rose grower. The above table gives quantities and the price for which Pete can sell his roses. a. What is Pete's total revenue if he sells 1 dozen roses? 2 dozen roses? 3 dozen roses? 4 dozen roses? b. What is the marginal revenue of the 2nd dozen roses sold? Of the 3rd dozen? Of the 4th dozen? Answer: a. The total revenue when 1 dozen roses is sold is $12. When Pete sells 2 dozen roses, the total revenue is $24. When 3 dozen roses are sold, the total revenue is $36. And the total revenue when 4 dozen roses are sold is $48. b. The marginal revenue is always $12 per dozen roses. Topic: Total revenue, marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

19) Farmer Brown produces corn in a perfectly competitive market. Farmer Brown produces and sells 500 bushels of corn. The market supply and demand curves are illustrated in the above figure. a. What is Farmer Brown's total revenue? b. What is Farmer Brown's marginal revenue? Answer: a. Total revenue = price × quantity. The price is determined by the intersection of the demand and supply curves, $6 a bushel. As a result, Farmer Brown's total revenue is $6 × 500 = $3,000. b. For a perfectly competitive firm, the marginal revenue equals the price, so Farmer Brown's marginal revenue is $6. Topic: Total revenue, marginal revenue Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

20) The table below gives Amy's total cost schedule for producing holiday wreaths. Amy is a perfect competitor and can sell each wreath for $9. a. Complete the table by calculating Amy's total revenue and her profit or loss schedule.

b. When Amy is producing 4 wreaths, what is her total cost? What is her total revenue? What is her economic profit or economic loss? c. What number of wreaths maximizes Amy's profit? Answer:

a. The completed table is above. b. When Amy is producing 4 wreaths, her total cost is $28, her total revenue is $36, and her economic profit is $8. c. Amy can produce 6 or 7 wreaths, with a maximum economic profit of $14. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

21) Jimmy grows corn. His total revenue and total cost are in the above table. What quantity of corn maximizes his profit and what is his profit? What is the marginal revenue and marginal cost at this quantity? Answer: Jimmy's profit is greatest if he grows either 40,000 or 50,000 bushels of corn. His (economic) profit at either amount is $10,000 a week. Between 40,000 and 50,000 bushels of corn, Jimmy's marginal revenue is $30,000, or $3 per bushel and his marginal cost is $30,000, or $3 per bushel. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

22) The above table gives the quantity of output and the total cost for a perfectly competitive firm that can sell all of its output at $9 per unit. a. Find the profit maximizing level of output for this firm. b. How much economic profit is the firm making? Answer:

a. Total revenue equals price times quantity sold. We can find the total revenue for this firm because the market price is a constant $9. The total revenue schedule is given in the table above. The total profit (or loss) equals total revenue minus total cost. The last column shows that the total profit is largest if either 2 or 3 units are produced. b. When the firm produces either 2 or 3 units of output, the total economic profit is $6. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

23) The table below shows the total cost schedule for a perfectly competitive firm. The market price is $250 per unit. Complete the table.

Answer:

The completed table is above. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

24) Acme is a perfectly competitive firm. It has the total cost schedule given in the above table. Acme's product sells for $8.00 per unit. What amount of output is the most profitable and what is Acme's economic profit or economic loss? Answer: Acme's profit-maximizing level of output is 7 units. Acme's total economic profit equals its revenue, $56.00 ($8.00 per unit × 7 units), minus its total cost, $49.80 at this level of output, or $56.00 - $49.80 = $6.20. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

25) Acme is a perfectly competitive firm. It has the cost schedules given in the above table and has a fixed cost of $12.00. The price of Acme's product is $14.20. What is Acme's most profitable amount of output? What is Acme's total economic profit or loss? Answer: The profit maximizing level of output is either 7 or 8 units. Acme's total economic profit is the economic profit per unit times the number of units produced. The economic profit per unit equals the price minus the average total cost. To calculate average total cost, note that when Acme produces 8 units, the average variable cost per unit is $6.50 and the average fixed cost is $1.50, so Acme's average total cost equals $8.00. Thus Acme makes an economic profit of $14.20 - $8.00 = $6.20 per unit. Hence Acme's total economic profit is ($6.20) × (8 units) = $49.60. Acme's total economic profit when it makes 7 units is (except for rounding) identical. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 26) Acme is a perfectly competitive firm. It has the cost schedules given in the above table and has a fixed cost of $12.00. The price of Acme's product is $4.00. What is Acme's most profitable amount of output? What is Acme's total economic profit or loss? Answer: Acme's most profitable (which means, in this case, minimum loss) is output of 0 units. The price is below Acme's minimum average variable cost, so Acme shuts down. Acme's economic loss equals its fixed costs, $12.00. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

27) The above figure illustrates a perfectly competitive wheat farmer. a. What will be the firm's profit-maximizing price and output? b. When the farmer produces 25,000 bushels of wheat, the difference between the firm's average total cost and the price is at its maximum. Explain why this amount of wheat either is or is not the profit-maximizing quantity. Answer: a. The firm will maximize its profits by producing where its marginal revenue equals its marginal cost, or 30,000 bushels of wheat. The price will equal the marginal revenue, $3.00 a bushel. b. At 25,000 bushels, the difference between average cost and price (which is the average revenue) is indeed at the maximum, but choosing 25,000 will maximize the profit per bushel of wheat, not the TOTAL profit. The firm is interested in maximizing the total profit not the profit per bushel. At 30,000 bushels of wheat, the total profit is maximized because this is the amount of output where the difference between total revenue and total cost is at a maximum. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking

28) The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what price does the wheat farmer shut down? Answer: The wheat farmer shuts down if the price is less than the minimum average variable cost. So in the figure, the wheat farmer shuts down if the price is less than $2 per bushel. Topic: Shut down point Skill: Level 3: Using models Section: Checkpoint 15.1 Status: Old AACSB: Analytical thinking 15.7 Essay: Output, Price, and Profit in the Short Run 1) Can a perfectly competitive firm make an economic profit in the short run? Can it incur an economic loss? Answer: In the short run, a perfectly competitive firm can make an economic profit or incur an economic loss. Indeed, the firm also can make a normal profit in the short run. Basically, any profit or loss outcome is possible in the short run. Topic: Economic profit, economic loss Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking

2) If the market price is less than a perfectly competitive firm's average total cost, what sort of profit or loss is the firm earning? Answer: If the price is less than the average total cost, the firm is incurring an economic loss. Topic: Economic loss Skill: Level 3: Using models Section: Checkpoint 15.2 Status: Old AACSB: Reflective thinking 3) What is the relationship between the price, P, and the average total cost, ATC, for a firm in perfect competition that makes an economic profit? That makes zero economic profit? That incurs an economic loss? Answer: If the price is greater than the average total cost, P > ATC, the firm makes an economic profit. If the price equals the average total cost, P = ATC, the firm makes zero economic profit. If the price is less than the average total cost, P < ATC, the firm incurs an economic loss. Topic: Economic profit, economic loss Skill: Level 2: Using definitions Section: Checkpoint 15.2 Status: Old AACSB: Written and oral communication 4) John keeps beehives and sells 100 quarts of honey per month. The honey market is perfectly competitive, and the price of a quart of honey is $10. John has an average variable cost of $5 and an average fixed cost of $3. At 100 quarts per month, John's marginal cost is $10. a. Is John maximizing his profit? If not, what should John do? b. Calculate John's total revenue, total cost, and total economic profit or economic loss when he produces 100 quarts of honey. Answer: a. Yes, John is maximizing his profit because marginal revenue (price) equals marginal cost. b. Total revenue equals price times quantity = $10 × 100 = $1,000. Total cost equals average total cost times quantity = ($5 + $3) × 100 = $800. Economic profit equals total revenue minus total cost = $1,000 - $800 = $200. Topic: Economic profit Skill: Level 4: Applying models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

5) The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what price(s) does the wheat farmer earn an economic profit? Earn a normal profit? Incur an economic loss? How many bushels of wheat does the farmer produce if the price is $3 per bushel? If the price is $0.50 per bushel? Answer: At any price that exceeds the minimum of the average total cost the farmer makes an economic profit. So the farmer makes an economic profit if the price is greater than $2 per bushel. The farmer makes zero economic profit if the price equals the minimum total cost. So the farmer makes zero economic profit if the price is $2 per bushel. Finally, the farmer incurs an economic loss if the price is less than the minimum average total cost. So the farmer incurs an economic loss if the price is less than $2 per bushel. If the price is $3 per bushel, the farmer produces 30,000 bushels of wheat per year. If the price is $0.50 per bushel, the farmer has shut down because the price is less than the minimum average variable cost and so the farmer produces 0 bushels per year. Topic: Economic profit Skill: Level 4: Applying models Section: Checkpoint 15.2 Status: Old AACSB: Analytical thinking

15.8 Essay: Output, Price, and Profit in the Long Run 1) "For a perfectly competitive market, an economic profit attracts new firms. But when these firms enter the market, the price falls and the economic profit is eliminated." Are the previous statements correct or incorrect? What is the long-run profit or loss outcome for firms in a perfectly competitive market? Answer: The statements are correct. As the statements point out, in the long run the economic profit of perfectly competitive firms is eliminated by entry. Similarly, an economic loss will be eliminated by exit. Therefore the long-run equilibrium profit for a perfectly competitive firm is a normal profit. Topic: Entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 2) In the long run, perfectly competitive firms cannot make an economic profit. Why? Answer: An economic profit attracts entry by new firms. As new firms enter the market, the market supply increases and the market supply curve shifts rightward. The increase in supply decreases the price. And, as the price falls, the economic profit is eliminated. Topic: Long-run equilibrium, entry Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Reflective thinking 3) The U-pick berry market is perfectly competitive. Suppose that all U-pick blueberry farms have the same cost curves and all are making an economic profit. What happens as time passes? What is the long-run equilibrium outcome? Answer: The presence of economic profit attracts new firms into the U-pick blueberry market. As the new firms (the new farmers) enter the market, the supply of U-pick blueberries increases. The increase in the supply drives the price lower and decreases the economic profits of the existing farmers. New farmers continue to enter the market as long as there is the possibility of an economic profit. Eventually enough new firms enter so that the price is driven so low that the economic profit is eliminated. All the firms make zero economic profit, which will keep them in business but will provide no incentive for new firms to enter the market. At this point, the longrun equilibrium has been reached. Topic: Long-run equilibrium, entry Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

4) When will new firms enter a perfectly competitive market? When does entry stop? Answer: New firms will enter a perfectly competitive market as long as the existing firms are making an economic profit. Essentially the new firms enter in order to make an economic profit themselves. Entry will stop when it is no longer possible to make an economic profit, which occurs when the existing firms are making zero economic profit. Topic: Long-run equilibrium, entry Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication 5) Describe how economic losses are eliminated in a perfectly competitive industry. Answer: If firms are incurring economic losses, some will exit in the long run. When firms exit, the market supply decreases and the market supply curve shifts leftward. When supply decreases, the price rises. As the price rises, the surviving firms increase production and their economic losses are eliminated. Topic: Long-run equilibrium, exit Skill: Level 2: Using definitions Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication 6) Pumpkin growing is a perfectly competitive industry. Suppose that pumpkin growers are all incurring an economic loss. What happens as time passes? What is the long-run equilibrium outcome? Answer: Because the firms are incurring an economic loss, as time passes some firms will exit the market, perhaps by switching to other crops, or perhaps by closing entirely. As farmers leave the market, the supply of pumpkins decreases. The supply curve shifts leftward and the price of a pumpkin rises. As the price rises, the economic losses of the remaining firms decrease. Eventually enough farmers leave the market so that the price rises sufficiently so that the remaining firms make zero economic profit and no longer incur an economic loss. At that point, the long-run equilibrium is reached because there is no further incentive for any firms to leave the market. Topic: Long-run equilibrium, exit Skill: Level 4: Applying models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

7) Suppose a farmer raising beef is making a normal profit. Then, because of a scare about mad cow disease, the demand for beef decreases drastically. What happens to the profits of the beef farmer in the short run and in the long run? Answer: In the short run, the fall in beef prices will decrease the farmer's profits. With the fall in price, the farmer will incur an economic loss. If the price is high enough so the revenue covers the farmer's variable costs, the farmer will continue to operate. In the long run, if demand continues to remain depressed, some farmers will exit the market until the remaining farmers earn a normal profit once again. Topic: Long-run equilibrium, exit Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication 8) How does a decrease in the demand for wheat ultimately lead to normal profits for wheat growers in the long run? Answer: If the demand for wheat decreases, the price of wheat falls and many wheat farmers incur economic losses. These losses lead to some farmers shutting down their operations. As these farmers exit the market, the supply of wheat decreases. A decrease in the supply of wheat pushes wheat prices back up. The process of exit and rising prices continues until finally the price of wheat rises enough so that the surviving wheat farmers are earning a normal profit. At this time, which occurs in the long run, the economic losses have disappeared and no further exit occurs. The wheat market is back in its long-run equilibrium. Topic: Long-run equilibrium, exit Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication 9) Entry by competitive firms decreases the market price, while exit by competitive firms increases the market price. Explain why firms enter or exit an industry and why these price changes occur. Answer: Competitive firms will enter an industry where economic profits exist in an attempt to make an economic profit. As new firms enter, the supply increases and the supply curve for the product shifts rightward. The increase in supply drives the price lower. Firms exit an industry when economic losses are incurred. As they leave, supply decreases and the supply curve shifts leftward. The decrease in the supply forces the price higher. Entry and exit continue until the remaining firms in the industry are making zero economic profit. Topic: Long-run equilibrium, entry and exit Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

10) In the long run, a perfectly competitive firm makes zero economic profit. What incentive does the firm have to stay in business if it is making zero economic profit? Answer: Zero economic profits do not mean no profit whatsoever. The owners of the firm are still making a normal profit. A normal profit compensates the firm's owners enough to keep the firm in business because it is equal to the owner's opportunity cost. Hence the firm has the incentive to stay in business. Topic: Long-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication 11) With regard to its profits and losses, how is the short run different from the long run for a perfectly competitive firm? Answer: The firm can make an economic profit, incur an economic loss in the short run, or make zero economic profit in the short run. In the long run, however, the only possible outcome is making zero economic profit. An economic profit attracts entry by new firms and economic losses lead to exit by some firms. Thus, after entry or exit is complete in the long run, the remaining firms will earn zero economic profit. Topic: Long-run equilibrium Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication 12) During the middle of the 2010s, the price of gasoline soared and there was a movement to switch to fuels made from a mixture of gasoline and ethanol. Ethanol can be made from corn. The price of corn skyrocketed and then, after a couple of years, the price decreased. What might have led to these price changes in the corn market? Answer: There are thousands upon thousands of corn farmers in the United States. In the middle of the 2010s, high gasoline prices led to movement to incorporate ethanol into gasoline. Ethanol can be made from corn so the demand for corn increased. As a result of the increase in market demand for corn, the price of corn increased dramatically. Corn farmers were getting a high price and making large economic profits. In the long run, unable to prevent the flow of information to prospective corn farmers, the word got out that economic profit was possible in this arena. Over time, more farmers switched to growing corn, so more corn farmers entered the market, which led to a large increase in the supply of corn. As supply increased, the price of corn dropped. Thus the higher price was the short-run result of an increase in demand. The falling price reflected the adjustment to the long-run equilibrium, as new corn farmers entered the market. Topic: Long-run equilibrium Skill: Level 5: Critical thinking Section: Checkpoint 15.3 Status: Old AACSB: Written and oral communication

13) The above figure shows the cost curves of a profit-maximizing perfectly competitive firm. If the price equals $7, a. how much will the firm produce? b. how much is the firm's average total, average variable, and marginal costs? c. how much is the firm's total, total variable, and total fixed costs? d. how much is the firm's total revenue and economic profit? e. what will happen in this market in the long run? Answer: a. The firm will produce 40 units of output because that is where the marginal revenue equals the marginal cost. b. The firm's average total cost equals $4, its average variable cost equals $3, and its marginal cost equals $7. c. The firm's total cost is $160 (= $4 × 40), its total variable cost is $120 (= $3 × 40), and its total fixed cost is $40 (= $160 - $120). d. The firm's total revenue is $280 (= $7 × 40) and its economic profit is $120 (= $280 - $160). e. In the long run, firms will enter the market in response to the economic profit. The market supply curve will shift rightward, the price will fall, and the economic profit will be eliminated. Topic: Long-run equilibrium, entry Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Analytical thinking

14) American restaurants receive their supply of baby back-ribs from American farms and from farms in Denmark. In the figures above, the left diagram shows the perfectly competitive market for baby back ribs in the United States. The right figure shows the situation at Premium Standard Farm in Kansas, one of the many U.S. farms supplying these ribs. Now assume that the United States imposes a ban on European meat in response to the foot-andmouth disease that has infected livestock in Europe. (Which the United States did a few years ago.) In particular, suppose that the U.S. ban decreases the supply by 40 tons a year. Using the figure on the left, show the impact of this ban on the baby back rib market. Using the figure on the right, show the impact on Premium Standard Farm in Kansas.

Answer:

The ban on European meat decreases the supply of baby back ribs and shifts the supply curve leftward, as shown by the shift from S1 to S2. The price rises to $4 a pound. As the figure on the right shows, the MR curve for the Premium Standard Farm will shift upward, from MR1 to MR2. As a result, the farm increases its production to 40,000 pounds of ribs. Because the price exceeds the average total cost, the Premium Standard Farm makes an economic profit. Topic: Long-run equilibrium, exit Skill: Level 3: Using models Section: Checkpoint 15.3 Status: Old AACSB: Analytical thinking 116 Copyright © 2021 Pearson Education, Inc.

15) Suppose the bobby pin industry is perfectly competitive. The price of a packet of bobby pins is $2.00. Pins and Needles, Inc. is a firm in this industry and is producing 1,000 packets of bobby pins per day at the point where the MC = MR. The average cost of production at this output level is $1.50 per packet. a. What is the marginal cost of the 1,000th packet? b. Is this firm making an economic profit, zero economic profit, or an economic loss? How much? c. Is the firm in long-run equilibrium? Why or why not? Answer: a. The price per packet is $2, which is also the Pins and Needles' marginal revenue. The marginal cost of the 1,000th packet is equal to marginal revenue, so for Pins and Needles the marginal cost is $2 per packet. b. The firm is making a $0.50 economic profit per unit (which equals the price minus the average total cost). Because Pins and Needles produces 1,000 packets, its total economic profit is $500. c. The firm is making an economic profit, so it is not in long-run equilibrium. In the long run, a perfectly competitive firm cannot make an economic profit. The only outcome possible in the long run is zero economic profit. Topic: Long-run equilibrium Skill: Level 4: Applying models Section: Checkpoint 15.3 Status: Old AACSB: Analytical thinking

Foundations of Microeconomics, 9e (Bade) Chapter 16 Monopoly 16.1 Monopoly and How it Arises 1) A major characteristic of monopoly is A) a single seller of a product. B) multiple sellers of a product. C) two sellers of a product. D) a few sellers of differentiated products. E) a few sellers of an identical product. Answer: A Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 2) A monopoly is a market with A) many suppliers each producing an identical product. B) no barriers to entry. C) many substitutes. D) one supplier. E) many suppliers each producing a slightly different product. Answer: D Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 3) The good produced by a monopoly A) has perfect substitutes. B) has no substitutes at all. C) has no close substitutes. D) can be easily duplicated. E) must be unable to be resold. Answer: C Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

4) One of the requirements for a monopoly is that A) the products are high priced. B) there are several close substitutes for the product. C) there is a product with no close substitutes. D) the product cannot be produced by small firms. E) there is no barrier to entry. Answer: C Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 5) We define a monopoly as a market as a market with A) one supplier and no barriers to entry. B) one supplier and which has barriers to entry. C) many suppliers with no barriers to entry. D) many suppliers and which has barriers to entry. E) a few suppliers and which has barriers to entry. Answer: B Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Revised AACSB: Reflective thinking 6) Which of the following is a characteristic of monopoly? A) The firm faces competition from many other firms. B) The firm produces a product that has many close substitutes. C) There are barriers to enter the market. D) The firm's demand is perfectly elastic. E) The firm produces a product identical to that produced by its many competitors. Answer: C Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

7) A monopoly produces a product ________ and there ________ barriers to entry into the market. A) identical to its many competitors; are B) with no close substitutes; are C) identical to its many competitors; are no D) with no close substitutes; are no E) slightly different from those of its many competitors; are Answer: B Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 8) A monopoly A) is not protected by barriers to entry. B) produces a good with no close substitutes. C) faces a downward-sloping demand curve. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: E Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 9) A monopoly A) must determine the price it will charge. B) faces extensive competition from firms making close substitutes. C) cannot price discriminate because such a pricing strategy is illegal in the United States. D) has no control over the price it can charge. E) Both answers B and C are correct. Answer: A Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

10) A major characteristic of monopoly is that A) no barriers to entry exist. B) the product is identical to that produced by other companies. C) a barrier to entry keeps out competitors. D) competition is intense. E) a few firms compete with each other. Answer: C Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 11) Which of the following firms is most likely to be a monopoly? A) local restaurant B) local distributor of natural gas C) local grocery store D) clothing store E) local bank Answer: B Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Revised AACSB: Reflective thinking 12) An example of a monopoly would be A) one of many U.S. wheat farmers. B) one of the few U.S. auto makers. C) AT&T cell phone service. D) the local water company. E) Taco Bell. Answer: D Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

13) Which of the following describes a barrier to entry? A) something that establishes a barrier to expanding output B) anything that protects a firm from the arrival of new competitors C) a government regulation that bars a monopoly from earning an economic profit D) firms already in the market incurring economic losses so that no new firm wants to enter the market E) Firms are legally prohibited from exiting the market in order to enter another market. Answer: B Topic: Monopoly, barriers to entry Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 14) Your local water company is a considered A) a natural monopoly and will be regulated. B) an oligopoly and will be able to charge a price greater than marginal cost. C) monopoly and will not be able to charge a price greater than marginal revenue. D) perfect competition because everyone needs tap water. E) monopolistic competition and will be able to charge a price greater than marginal cost. Answer: A Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Application of knowledge

15) The graph shows the the LRAC facing a ________ where ________ of scale exist when 5 million units are produced. A) monopoly; diseconomies B) natural monopoly; diseconomies C) natural monopoly; economies D) oligopoly; economies E) oligopoly; diseconomies Answer: C Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking 16) The graph shows that ________ can meet the market demand at a cost of ________ per unit when ________ million units are produced. A) one firm; 10 cents; 5 B) one firm; 20 cents; 3 C) 3 firms; 10 cents; 5 D) 5 firms; 10 cents; 1 E) 5 firms; 20 cents; 5 Answer: A Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

17) A barrier to entry is A) the economic term for diseconomies of scale. B) illegal in most markets. C) anything that protects a firm from the arrival of new competitors. D) a factor that increases competition because firms must continue to operate in the market in which they were founded. E) the same as rent seeking. Answer: C Topic: Monopoly, barriers to entry Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 18) A natural barrier to entry is defined as a barrier that arises because of A) technology that allows one firm to meet the entire market demand at lower average total cost than could two or more firms. B) patents or licenses that exclude others from producing a good or service. C) many firms producing the good and thereby allowing choice for all consumers. D) anticompetitive practices by a firm that keep other firms from producing. E) one firm owning a key natural resource. Answer: A Topic: Monopoly, barriers to entry Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 19) Natural barriers to entry arise when, over the relevant range of output, there A) are diseconomies of scale. B) are constant returns to scale. C) are several firms who produce at the lowest average cost. D) are economies of scale. E) is one firm that owns a key natural resource. Answer: D Topic: Monopoly, barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

20) A natural monopoly exists when A) diseconomies of scale exist in an industry. B) one firm can supply an entire market at a lower average total cost than can two or more firms. C) a firm can engage in price discrimination. D) the producers in an industry have formed a cartel. E) a monopoly firm faces a horizontal demand curve. Answer: B Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 21) If a single firm can meet the entire market demand at a lower average total cost than a larger number of smaller firms, the single firm is A) price discriminating. B) a natural monopoly. C) a legal monopoly. D) efficient when profit maximizing. E) an ownership-of-the-market monopoly. Answer: B Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 22) A natural monopoly is one that arises from A) patent law. B) economies of scale. C) copyright law. D) any government-imposed barrier to entry. E) mergers. Answer: B Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

23) A natural monopoly A) arises as a result of legal barriers to entry. B) occurs when one firm controls a natural resource. C) arises when one firm can meet the entire market demand at a lower average total cost than two or more firms. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: C Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 24) Which of the following would create a natural monopoly? A) ownership of all the available units of a necessary input B) an exclusive right granted to supply a good or service C) requirement of a government license before the firm can sell the good or service D) technology enabling a single firm to produce at a lower average total cost than two or more firms E) a patent granted the producer of the good or service Answer: D Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 25) If the technology for producing a good enables one firm to meet the entire market demand at a lower average total cost than two or more firms could, then that firm has A) patented the market. B) a natural monopoly. C) increasing average total costs. D) a legal barrier to entry. E) a discriminatory monopoly. Answer: B Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

26) For a natural monopoly, economies of scale A) exist along the long-run average cost curve at least until it crosses the market demand curve. B) and diseconomies of scale exist along the long-run average cost curve at least until it crosses the market demand curve. C) lead to a legal barrier to entry. D) as well as constant returns to scale and diseconomies of scale exist along the long-run average cost curve at least until it crosses the market demand curve. E) are totally absent. Answer: A Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 27) A natural monopoly arises when A) one firm controls the supply of a unique resource. B) a firm has many small firms that it can control. C) there are firms which act together as a monopoly. D) the long-run average cost curve slopes downward as it crosses the demand curve. E) one firm naturally convinces the government to limit competition in the market. Answer: D Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 28) A natural monopoly's average cost curve i. intersects the demand curve while the average cost curve slopes downward. ii. reaches its minimum before it intersects the demand curve. iii. intersects the demand curve below the intersection of the marginal cost curve and the demand curve. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: A Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

29) The long-run average cost curve of a natural monopoly A) is positively sloped until it crosses the demand curve. B) intersects the demand curve while it is negative sloped. C) intersects the demand curve while it is positively sloped. D) is the natural monopoly's supply curve. E) is the same as the natural monopoly's demand curve. Answer: B Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 30) Which of the following is an example of a natural monopoly? A) the Pittsburgh Penguins hockey team, a National Hockey League team B) Ford Motors, the large automobile producing company C) Florida Power and Light, an electric utility in Florida D) Sony, the Japanese producer of the PS4 E) JCPenney, the large department store chain Answer: C Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Revised AACSB: Reflective thinking 31) Which of the following is an example of a natural monopoly? A) the trademark protecting Gatorade B) the talents of Tom Hanks C) the local water company D) the patent on an Intel processor E) De Beers' ownership of a large fraction of the world's diamonds Answer: C Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

32) Which of the following goods is the best example of a natural monopoly? A) distribution of electricity B) diamonds C) home delivery of packages D) a patented good E) blouses Answer: A Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Revised AACSB: Reflective thinking 33) Which of the following is the best example of a natural monopoly? A) ownership of the only ferry across Puget Sound for twenty miles B) the United States Postal Service C) the cable television company in your hometown D) owning the only licensed taxicab in town E) producing a patented drug Answer: C Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 34) Ownership of a necessary input creates what type of barrier to entry? A) legal barrier to entry B) natural barrier to entry C) a public franchise D) a government license E) ownership barrier to entry Answer: E Topic: Ownership barrier to entry Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

35) Which of the following is a legal barrier to entry? i. public franchise ii. government license iii. patent A) iii only B) i and iii C) ii and iii D) i, ii, and iii E) i and ii Answer: D Topic: Legal barriers to entry Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 36) A monopoly will arise if A) two out of three of a town's pizzerias go out of business and only one new pizzeria opens. B) the town council passes a law granting Nick's Pizza the exclusive right to operate in that town. C) Papa Joe's Pizza becomes the largest pizza producer in town and Nick's Pizza stays small in size. D) several big pizza chains force several small pizzerias out of business. E) people decide they like pizza more than before so some pizzeria's gain new customers. Answer: B Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 37) Which of the following can be a barrier to entry? i. ownership of a necessary input ii. requiring a government license iii. large diseconomies of scale A) i only B) ii only C) i and iii D) i and ii E) i, ii, and iii Answer: D Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 13 Copyright © 2021 Pearson Education, Inc.

38) Which barrier to entry is an exclusive right granted to the author or composer of a literary, musical, dramatic or artistic work? A) patent B) copyright C) public franchise D) government license E) natural barrier Answer: B Topic: Legal barriers to entry Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 39) The U.S. Postal Service has a monopoly over first-class mail service because A) the government has granted this agency a public franchise. B) stamps are copyrighted. C) stamps are trademarked. D) stamps are patented. E) it owns a vital resource, namely all mailboxes. Answer: A Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 40) The U.S. Postal Service's monopoly on first-class mail service is the result of A) a natural monopoly. B) a patent. C) a public franchise. D) a government license. E) an ownership barrier to entry. Answer: C Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

41) The makers of the movie The Lion King have some monopoly power over this film because the A) movie is patented. B) name "The Lion King" is trademarked. C) movie is protected by copyright law. D) government has issued the maker of this movie a public franchise. E) owner never price discriminated in marketing the movie. Answer: C Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Revised AACSB: Reflective thinking 42) Patents i. encourage the invention of new products and production methods. ii. generally discourage innovation. iii. are exclusive rights granted to the inventor of a product or service. A) i only B) ii only C) ii and iii D) i and iii E) i, ii, and iii Answer: D Topic: Legal barriers to entry Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 43) Patents A) are granted only to competitive firms and not monopolies. B) require that monopolies increase the amount they produce. C) increase the incentive to capture economies of scale. D) increase the incentive to innovate. E) grant the holder a monopoly that lasts forever. Answer: D Topic: Gains from monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

44) Patents A) are a legal barrier to entry. B) remove legal barriers to entry. C) create economies of scale. D) decrease the incentive to innovate. E) are prohibited in the United States. Answer: A Topic: Gains from monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 45) To encourage invention and innovation, the government provides A) patents. B) public franchises. C) government licenses. D) natural monopolies. E) easily obtained ownership barriers to entry. Answer: A Topic: Legal barriers to entry Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 46) Which of the following is NOT correct about patents? A) Patents encourage invention of new products. B) Patents stimulate innovation. C) A patent is a barrier to entry. D) Patents enable a firm to be a permanent monopoly. E) Patents are granted to the inventor of a product or service. Answer: D Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

47) Which of the following is an example of a person or firm that is most likely to have been granted a public franchise? A) medical doctor B) taxi cab driver C) the local pizza parlor D) the local telephone company E) the local Honda dealership Answer: D Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 48) In States where the government runs liquor stores, the monopoly results from A) economies of scale. B) legal restrictions. C) control of an essential resource. D) patents. E) public fear. Answer: B Topic: Legal barriers to entry Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 49) Which of the following statements is correct? A) Monopolies are guaranteed to earn an economic profit. B) The market demand and the firm's demand are the same for a monopoly. C) Monopolies have perfectly inelastic demand for the product sold. D) Because a monopoly is the only firm in the market, its supply curve is the same as the market demand curve. E) Because a monopoly is the only firm in the market, its marginal revenue curve must be the same as the market demand curve. Answer: B Topic: Price strategies Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

50) A monopoly is A) a price taker. B) able to ignore the demand for its product when setting its price. C) able to set the price for its product. D) able to earn only a normal profit in the long run. E) a firm with no marginal revenue curve. Answer: C Topic: Price strategies Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 51) If a monopoly wants to sell a larger quantity, it must A) set a higher price. B) maintain the current price. C) set a lower price. D) implement new technology. E) increase the barrier to entry that protects it. Answer: C Topic: Price strategies Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 52) A gas station in the mountains of Oregon has a monopoly over the retail gas market within a 50-mile radius. The station decides not to price discriminate. As a result, all consumers will pay A) the highest price each consumer is willing to pay. B) the lowest price possible. C) a single price. D) multiple prices. E) a price that depends on their willingness to pay. Answer: C Topic: Price strategies, single price Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

53) A single-price monopoly A) sets a single, different price for each consumer. B) sets a single price for all consumers. C) asks each consumer what single price they would be willing to pay. D) sets a single, different price for each of two different groups. E) sells each unit of its output for the single, highest price that the buyer of that unit is willing to pay. Answer: B Topic: Price strategies, single price Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 54) A price-discriminating monopoly is a monopoly that A) sells its output at a single price to all of its customers. B) sells different units of a good or service at different prices. C) has control over the resources used to produce the product. D) has a license to sell the product. E) illegally charges different customers different prices for the good it produces. Answer: B Topic: Price strategies, price discrimination Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 55) Price discrimination occurs when a firm A) charges customers different prices for different goods. B) is able to sell different units of a good at different prices. C) charges customers the same price for different goods. D) can determine which of the many market equilibrium prices it will charge. E) has a marginal cost curve that is horizontal. Answer: B Topic: Price strategies, price discrimination Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

56) Price discrimination is A) always illegal in the United States. B) defined as charging the same price to all consumers. C) defined as charging different prices for different units. D) setting the price to minimize the quantity sold. E) Both answers A and C are correct. Answer: C Topic: Price strategies, price discrimination Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 57) A ________ monopoly sells different units of its good or service for ________. A) price-discriminating; different prices B) price-discriminating; the same price C) single-price; the same price D) single-price; different prices E) Both Answers A and C are correct. Answer: E Topic: Price strategies, price discrimination Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 58) To be able to price discriminate, a firm must A) have a public franchise. B) be a natural monopoly. C) be able to prevent resales of its good. D) have a patent. E) have an ownership barrier to entry. Answer: C Topic: Price strategies, price discrimination Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

59) Which of the following statements is correct? A) Any firm can price discriminate. B) Only firms that sell high-priced products can price discriminate. C) In order to price discriminate, a firm must sell a good or service that cannot be resold. D) In order to price discriminate, the firms must sell a low-priced product. E) Price discrimination is always illegal. Answer: C Topic: Price strategies, price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 60) Price discrimination is prevented in situations where A) customers can resell the good. B) firms have monopolies. C) there are legal barriers to entry. D) there are no close substitutes for the good or service. E) customers have different willingnesses to pay for the good. Answer: A Topic: Price strategies, price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 61) In order for a hotel to successfully price discriminate so that senior citizens are given a discount, the hotel must be able to A) offset the economic loss from charging senior citizens a lower price by lowering the marginal cost of renting rooms to senior citizens. B) lower its prices to younger customers too. C) prevent senior citizens from reselling their rooms to younger customers. D) shift its demand curve rightward. E) determine if a senior citizen can pay a higher price. Answer: C Topic: Price strategies, price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

62) Which of the following is an example of price discrimination? A) UPS charges more if a package is sent from New York to Hawaii and less if it is sent from New York to New Jersey. B) Frank's Furniture shop charges no delivery fee for furniture delivered within Dutchess County but charges $40 delivery fee outside of the county. C) Albert pays 25 percent less on prescription drugs because he is a senior citizen. D) Only answers A and B are correct. E) Answers A, B, and C are all correct. Answer: C Topic: Price strategies, price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 63) Firms that can effectively price discriminate A) can be either perfectly competitive firms or monopolies. B) can prevent the resale of their products. C) have only one class of buyers, buyers willing to pay a high price. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: B Topic: Price strategies, price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 64) A monopoly market has A) a few firms. B) a single firm. C) two dominating firms in the market. D) only two firms in it. E) some unspecified number of firms in it. Answer: B Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

65) Two types of barriers to entry are called ________ barriers to entry and ________ barriers to entry. A) legal; illegal B) natural; legal C) natural; illegal D) natural; rent seeking E) ownership; rent seeking Answer: B Topic: Monopoly, barriers to entry Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 66) A natural monopoly is one that arises from A) patent law. B) copyright law. C) a firm buying all of a natural resource. D) economies of scale. E) ownership of a natural resource. Answer: D Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 67) A legal barrier is created when a firm A) has economies of scale, which allow it to produce at a lower cost than two or more firms. B) is granted a public franchise, government license, patent, or copyright. C) produces a unique product or service. D) produces a standardized product or service. E) has an ownership barrier to entry. Answer: B Topic: Legal barriers to entry Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

68) Pizza producers charge one price for a single pizza and almost give away a second one. This is an example of A) monopoly. B) a barrier to entry. C) behavior that is not profit-maximizing. D) price discrimination. E) rent seeking. Answer: D Topic: Price strategies, price discrimination Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 69) A ________ between price and quantity sold because ________. A) monopoly faces a tradeoff; to sell a larger quantity, it must lower its price B) monopoly does not face a tradeoff; it controls market entry and can sell at any price and any quantity C) natural monopoly faces a tradeoff; it can always price discriminate D) natural monopoly does not face a tradeoff; it is a price maker E) perfectly competitive firm faces a tradeoff; it is a price taker Answer: A Topic: Price strategies Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking 70) A ________ can price discriminate if, in part, it ________. A) natural monopoly; is the only seller of a good or service B) monopoly; can prevent resales of its product C) monopoly; is the only seller of a good or service D) perfectly competitive firm; can sell goods at a lower price than a monopoly E) perfectly competitive firm; changes from a price taker to a price maker Answer: B Topic: Price strategies, price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

16.2 Single-Price Monopoly 1) The demand curve for a monopoly is A) horizontal because the demand is perfectly elastic. B) downward sloping. C) vertical because the demand is perfectly inelastic. D) upward sloping. E) undefined because it is the only supplier in the market. Answer: B Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 2) If a monopoly wants to sell a greater quantity of output, it must A) lower its price. B) raise its price. C) tell consumers to buy more because it's a monopolist. D) raise its marginal cost. E) change its fixed costs. Answer: A Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 3) A single-price monopoly A) must practice price discrimination. B) can lower its price for only a few select consumers if it wants to increase its sales. C) will set its price equal to a consumer's willingness to pay. D) must lower the price for all customers if it wants to increase its sales. E) is able to raise its price as high as it wants and consumers must still buy from it because it is a monopoly. Answer: D Topic: Demand Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

4) Total revenue is equal to A) the change in price resulting from a one-unit increase in quantity sold. B) the amount people will buy at a given price. C) the change in the quantity sold when you change the price by one unit. D) price multiplied by the quantity sold. E) the price at which the good or service is sold. Answer: D Topic: Total revenue Skill: Level 1: Definition Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 5) For a monopoly, marginal revenue is equal to A) the amount people buy at a given price. B) the amount people buy between two prices. C) the change in total revenue brought about by a one-unit increase in quantity sold. D) the price multiplied by the quantity sold. E) the price of the product. Answer: C Topic: Marginal revenue Skill: Level 1: Definition Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 6) For a single-price monopoly, price is A) equal to marginal revenue. B) greater than marginal revenue. C) less than marginal revenue because the firm must lower its price in order to sell another unit of output. D) less than marginal revenue because the firm cannot increase its total revenue when the demand curve is downward sloping. E) equal to zero because the firm is not a price taker. Answer: B Topic: Price and marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

7) Which of the following is ALWAYS true for a single-price monopolist? A) P > MR B) P < MR C) P = MR D) P = elasticity of demand E) None of the above answers is correct because none of them is ALWAYS true. Answer: A Topic: Price and marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 8) For a single-price monopolist, why is marginal revenue less than price? A) Because the firm is a price taker. B) To sell another unit, the price must be lowered. C) Demand is elastic when another unit is sold. D) Demand is inelastic when another unit is sold. E) The question is false because marginal revenue is always equal to price. Answer: B Topic: Price and marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 9) A monopoly will never operate on the ________ portion of its demand curve because there an increase in price ________ total revenue and ________ total cost thereby increasing the firm's total profit. A) elastic; decreases; increases B) unit elastic; does not change; increases C) inelastic; increases; decreases D) inelastic; increases; increases E) inelastic; decreases; decreases Answer: C Topic: Elasticity and total revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Application of knowledge

10) The marginal revenue for a single-price monopoly with a downward-sloping demand curve A) is less than the price. B) is greater than the price. C) is equal to the price. D) might be more than, less than, or equal to the price, depending on whether the slope of the demand curve exceeds 1.0 in magnitude. E) might be more than, less than, or equal to the price, depending on whether the price elasticity of demand exceeds 1.0 in magnitude. Answer: A Topic: Price and marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 11) A single-price monopoly faces a linear demand curve. If the marginal revenue for the second unit is $20, then the marginal revenue for the A) first unit is less than $20. B) third unit is less than $20. C) third unit is more than $20. D) third unit is also $20. E) more information is needed to determine if the marginal revenue for the third unit is more than, less than, or equal to $20. Answer: B Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 12) A single-price monopoly can sell 2 units for $8.50 per unit. In order to sell 3 units, the price must be $8.00 per unit. The marginal revenue from selling the third unit is A) $24.00. B) $8.50. C) $7.00. D) $6.50. E) $17.00. Answer: C Topic: Marginal revenue Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

13) A single-price monopoly can sell 10 units of its product at a price of $45 each but to sell 11 units, the monopoly must cut the price to $44. What is the marginal revenue of the extra unit sold? A) $484 B) $450 C) $44 D) $34 E) -$1 Answer: D Topic: Marginal revenue Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 14) Suppose a monopoly can sell 10 units of output for $21. In order to sell 11 units of output, the price must fall to $20. What is the marginal revenue of the 11th unit? A) $41 B) $20 C) $10 D) $1 E) $220 Answer: C Topic: Marginal revenue Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 15) Suppose a single-price monopoly sells 3 units of a good at $20 per unit. If the monopoly sells 4 units, the total revenue increases to $72. What is the marginal revenue of the fourth unit? A) $52 B) $18 C) $60 D) $12 E) $20 Answer: D Topic: Marginal revenue Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

16) Suppose a single-price monopoly sells 3 units of a good at $20 per unit. If the monopoly sells 4 units, the total revenue increases to $72. What price is being charged for 4 units? A) $52 each B) $18 each C) $60 each D) $12 each E) $20 each Answer: B Topic: Total revenue Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

Price (dollars per haircut) 5 10 15 20 25 30

Quantity demanded (haircuts per day) 50 40 30 20 10 0

17) Christy's Haircuts, the sole supplier of haircuts in a small town, faces the demand schedule shown in the table above. What is Christy's marginal revenue from the 25th haircut? A) zero B) $5.00 C) $17.50 D) $50.00 Answer: B Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

18) Christy's Haircuts, the sole supplier of haircuts in a small town, faces the demand schedule shown in the table above. What is Christy's marginal revenue from the 35th haircut? A) zero B) -$5.00 C) $5.00 D) $12.50 Answer: B Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking Quantity (units) 1 2 3 4 5 6

Price (dollars per unit) 8 7 6 5 4 3

19) The table above gives the demand for a monopolist's output. Between which two quantities is marginal revenue equal to 0? A) 4 and 5 B) 3 and 4 C) 2 and 3 D) 1 and 2 Answer: A Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 20) The table above gives the demand for a monopolist's output. Between which two quantities is demand elastic? A) 6 and 5 B) 5 and 4 C) 4 and 3 D) 3 and 2 Answer: A Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 31 Copyright © 2021 Pearson Education, Inc.

21) The table above gives the demand for a monopolist's output. What is the total revenue in when 3 units of output are produced? A) $21 B) $20 C) $18 D) $6 Answer: C Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 22) The table above gives the demand for a monopolist's output. What is the marginal revenue when output is increased from 5 to 6 units? A) $18 B) $4 C) $3 D) -$2 Answer: D Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 23) The table above gives the demand for a monopolist's output. What is the marginal revenue when output is increased from 2 to 3 units? A) $18 B) $4 C) $7 D) $6 Answer: B Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

24) The demand curve facing a single-price monopoly A) lies below the marginal revenue curve. B) lies above the marginal revenue curve. C) is the same as only the marginal revenue curve. D) is the same as only the marginal cost curve. E) is the same as both the marginal revenue curve and the marginal cost curve. Answer: B Topic: Marginal revenue curve Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 25) A single-price monopoly has a marginal revenue curve that is A) horizontal and equal to price. B) lies below the demand curve. C) upward sloping and is the same as its supply curve. D) lies above the demand curve. E) vertical at the profit-maximizing quantity. Answer: B Topic: Marginal revenue curve Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Revised AACSB: Reflective thinking 26) If Microsoft is a monopoly and currently charges prices where its demand is elastic, then Microsoft's marginal revenue is A) negative. B) positive. C) zero. D) minimized. E) undefined. Answer: B Topic: Marginal revenue and elasticity Skill: Level 1: Definition Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

27) When marginal revenue is positive, total revenue ________ when output increases and demand is ________. A) decreases; elastic B) decreases; inelastic C) increases; elastic D) increases; inelastic E) does not change; unit elastic Answer: C Topic: Marginal revenue and elasticity Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 28) The relationship between marginal revenue and elasticity is A) when demand is elastic, marginal revenue is positive and when demand is inelastic, marginal revenue is negative. B) whenever the elasticity is positive, marginal revenue is positive. C) whenever the elasticity is negative, marginal revenue is positive. D) when demand is elastic, marginal revenue is negative and when demand is inelastic, marginal revenue is positive. E) that total revenue equals zero at the quantity for which the demand is unit elastic. Answer: A Topic: Marginal revenue and elasticity Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 29) If total revenue falls when output increases, marginal revenue is A) positive. B) negative. C) zero. D) greater than total revenue. E) elastic. Answer: B Topic: Marginal revenue and total revenue Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

30) If the Boston Red Sox baseball team is currently charging a ticket price where its demand is inelastic, then the Red Sox's marginal revenue is A) negative. B) positive. C) zero. D) maximized. E) undefined. Answer: A Topic: Marginal revenue and elasticity Skill: Level 1: Definition Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 31) Allegiant Air holds a natural monopoly on most of the routes it serves in the United States. Allegiant Air's marginal revenue will ________ when its total revenue ________. A) equal $0; is maximized B) be negative; is maximized C) be positive; is maximized D) inelastic; is increasing E) elastic; is increasing Answer: A Topic: Marginal revenue and total revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 32) Allegiant Air holds a natural monopoly on most of the routes it serves in the United States. Allegiant Air ________ operate on the ________ portion of its demand curve when total revenue is ________. A) will always; elastic; increasing B) will usually; elastic; decreasing C) will never; elastic; increasing D) will always; inelastic; increasing E) will never; inelastic; increasing Answer: A Topic: Marginal revenue and total revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

33) Use the figure above to answer this question. Mary is the only veterinarian in a small town. To maximize her profit, Mary will choose to treat ________ animals per hour and charge ________ per customer in order to ________. A) 4; $50; maximize profit B) 6; $20; maximize profit C) 6; $30; minimize average total cost D) 4; $50; operate on the inelastic portion of her demand curve E) 6; $20; minimize cost in order to attract more customers Answer: A Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 34) Use the figure above to answer this question. Mary is the only veterinarian in a small town and rents a space for her practice. If Mary's landlord decided to charge ________ per hour in rent, Mary would ________. A) $20 more; earn $0 economic profit B) $20 more; still earn an economic profit because she is a monopolist C) $30 more; earn $0 economic profit D) $10 less; raise her prices and earn a higher profit E) $30 more; operate on the inelastic portion of her demand curve Answer: A Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 36 Copyright © 2021 Pearson Education, Inc.

35) If the single restaurant in an Eastern Kentucky town is currently charging a price for its ham and eggs where the demand is unit elastic, its marginal revenue for ham and eggs is A) negative. B) positive. C) zero. D) maximized. E) undefined. Answer: C Topic: Marginal revenue and elasticity Skill: Level 1: Definition Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 36) Suppose that along a linear demand curve, the elasticity of demand is equal to 1 when the price is $4 and the quantity is 100 units. Then the A) total revenue is at its maximum when 100 units are produced. B) marginal revenue is positive at 100 units. C) marginal revenue is negative at 100 units. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: A Topic: Marginal revenue and elasticity Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 37) Suppose that along a linear demand curve, the elasticity of demand is equal to 1 when the price is $4 and the quantity is 100 units. Then the A) marginal revenue is negative when output exceeds 100 units. B) elasticity of demand is less than 1 when output exceeds 100 units. C) marginal revenue is 0 when output equals 100 units. D) Only answers A and B are correct. E) Answers A, B, and C are correct. Answer: E Topic: Marginal revenue and elasticity Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

38) The above table gives the demand schedule for a monopoly. The demand is elastic at all prices between A) $6 and $1. B) $5 and $1. C) $3 and $1. D) $6 and $4. E) $4 and $3. Answer: D Topic: Marginal revenue and elasticity Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 39) The above table gives the demand schedule for a monopoly. The demand is inelastic over the entire price range between A) $6 and $1. B) $5 and $1. C) $3 and $1. D) $6 and $4. E) $4 and $3. Answer: C Topic: Marginal revenue and elasticity Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

40) To maximize its profit, a single-price monopoly produces the amount of output so that its marginal revenue A) equals zero. B) equals its marginal cost. C) exceeds its marginal cost but not necessarily by as much as possible. D) is less than its marginal cost. E) exceeds its marginal cost by as much as possible. Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 1: Definition Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 41) The maximum profit for a single-price monopoly is found when the firm produces the level of output so that A) marginal revenue equals marginal cost. B) price equals marginal cost. C) it can charge the highest possible price. D) marginal revenue exceeds marginal cost by as much as possible. E) total revenue equals total cost. Answer: A Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 42) To maximize its profit, a perfectly competitive firm produces so that ________ and a singleprice monopoly produces so that ________. A) MR = MC; MR > MC B) MR > MC; MR = MC C) MR = MC; MR = MC D) MR > MC; MR > MC E) P = ATC; P = ATC Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

43) In order to maximize its profit, a single-price monopoly produces the amount of output so that A) P = MC. B) MR = MC. C) P = MC - MR. D) P = MR. E) P = ATC. Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 44) Which of the following is ALWAYS true when a single-price monopolist maximizes its profit? A) P = MC B) P = MR C) MR = MC D) MC = ATC E) P > ATC Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 45) Which of the following is NOT correct about a single-price monopoly? A) Maximum profit is found where demand is the most inelastic. B) Marginal revenue is negative when demand is inelastic. C) Marginal revenue is positive when demand is elastic. D) To sell more output, the firm must lower its price. E) To maximize its profit, the firm produces so that marginal revenue equals marginal cost. Answer: A Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

46) Which of the following is correct for a single-price monopoly? i. The firm can determine the quantity it produces and the price it charges. ii. It would never profitably produce output in the inelastic range of its demand. iii. Its marginal revenue is less than price. A) i only B) i and iii C) ii only D) ii and iii E) i, ii, and iii Answer: E Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 47) Suppose that a monopoly is currently producing the quantity at which marginal revenue is less than marginal cost. The monopoly can increase its profit by A) shutting down. B) lowering its price and increasing its output. C) raising its price and decreasing its output. D) lowering its price and decreasing its output. E) not changing its price and increasing its output. Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 48) Mylan Pharmaceuticals holds a patent on the EpiPen - designed to inject epinephrine into shock victims. In 2016, Mylan received criticism for charging $600 for this life-saving drug. The market for EpiPens is considered ________ which means that the price of an Epipen ________ its marginal cost. A) a monopoly; is greater than B) perfect competition; equals C) a monopoly; equals D) monopolistic competition; is greater than E) an oligopoly; equals Answer: A Topic: Monopoly, definition Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Application of knowledge

49) Mylan Pharmaceuticals holds a patent on the EpiPen - designed to inject epinephrine into shock victims. In 2016, Mylan received criticism for charging $600 for this life-saving drug. Mylan's patent is a ________ Mylan to charge a price ________. A) legal barrier to entry and forces; equal to marginal revenue B) legal barrier to entry and allows; greater than marginal cost C) natural barrier to entry and allows; greater than marginal cost D) ownership barrier to entry and forces; equal to marginal cost E) natural barrier to entry and forces; greater than marginal revenue Answer: B Topic: Monopoly, definition Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Application of knowledge 50) A single-price monopoly is producing at an output level where marginal revenue is $15, marginal cost is $13, and price is $20. This monopoly is A) not maximizing its profit and should decrease output to increase its profit. B) not maximizing its profit and should increase output to increase its profit. C) maximizing its profit but should shut down. D) maximizing its profit and should not shut down. E) maximizing its profit but still should decrease output to earn even more profit. Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

51) The above table gives the demand schedule for a single-price monopoly. The marginal revenue first becomes negative when going from A) 1 unit to 2 units. B) 2 units to 3 units. C) 3 units to 4 units. D) 4 units to 5 units. E) None of the above; the total revenue is always positive so the marginal revenue must always be positive. Answer: D Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 52) The above table gives the demand schedule for a single-price monopoly. If the marginal cost is $3, the profit maximizing output for the monopoly will be between A) 1 to 2 units. B) 2 to 3 units. C) 3 to 4 units. D) 4 to 5 units. E) Exactly 5 units. Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

53) Suppose the Busy Bee Caf is the monopoly producer of hamburgers in Hugo, Oklahoma. The above figure represents the demand, marginal revenue, and marginal cost curves for this establishment. What quantity will the Busy Bee produce to maximize its profit? A) 20 hamburgers per hour B) 30 hamburgers per hour C) 50 hamburgers per hour D) 0 hamburgers per hour. E) 10 hamburgers per hour Answer: A Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 54) Suppose the Busy Bee Caf is the monopoly producer of hamburgers in Hugo, Oklahoma. The above figure represents the demand, marginal revenue, and marginal cost curves for this establishment. What price will the Busy Bee charge to maximize its profit? A) $5.00 for a hamburger B) $3.00 for a hamburger C) $2.00 for a hamburger D) $1.00 for a hamburger E) $4.00 for a hamburger Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 44 Copyright © 2021 Pearson Education, Inc.

55) Suppose the Busy Bee Caf is the monopoly producer of hamburgers in Hugo, Oklahoma. The above figure represents the demand, marginal revenue, and marginal cost curves for this establishment. In order to maximize profit, the Busy Bee produces ________ hamburgers per hour and sets a price of ________ per hamburger. A) 20; $3.00 B) 20; $1.00 C) 30; $2.00 D) 30; $4.00 E) 50; $5.00 Answer: A Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 56) Suppose the Busy Bee Caf is the monopoly producer of hamburgers in Hugo, Oklahoma. The above figure represents the demand, marginal revenue, and marginal cost curves for this establishment. If the Busy Bee produces 40 hamburgers per hour, then A) marginal revenue will exceed marginal cost. B) profit will be maximized. C) marginal revenue will be negative. D) marginal revenue will be maximized. E) both the marginal revenue and the price will be negative. Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

57) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot Pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, he produces ________ pillows per hour. A) 1,000 B) 3,000 C) 4,000 D) 0 E) 2,000 Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 58) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot Pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, the price per pillow is A) $70. B) $60. C) $40. D) $100. E) $30. Answer: A Topic: Single-price monopoly, profit maximization Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 46 Copyright © 2021 Pearson Education, Inc.

59) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, the difference between marginal cost and price A) $0. B) $40. C) $60. D) $30. E) $20. Answer: D Topic: Single-price monopoly, profit maximization Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 60) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, the price is ________ per pillow and the marginal cost is ________ per pillow. A) $60; $60 B) $60; $40 C) $70; $60 D) $70; $40 E) $100; $40 Answer: D Topic: Single-price monopoly, profit maximization Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 61) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, his total economic profit is A) $60. B) $405. C) $0. D) $210,000. E) unknown because more information is needed to determine Paul's profit. Answer: E Topic: Single-price monopoly, profit maximization Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 47 Copyright © 2021 Pearson Education, Inc.

62) In the above figure, the profit-maximizing output for this single-price monopoly is ________ units and the price is ________. A) 200; $10 B) 300; $20 C) 500; $50 D) 200; $30 E) 300; $30 Answer: D Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 63) A single-price monopoly has marginal revenue and marginal cost equal to $19 at 15 units of output where the price on the demand curve is $38. At what price will this firm sell the output? A) $19 B) $38 C) $285 D) $570 E) There is not enough information given to answer the question. Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

64) A single-price monopoly has marginal cost of $23 and marginal revenue of $28. Which of the following is definitely correct? A) It is maximizing profit. B) To increase profit, it should produce less. C) To increase profit, it should produce more. D) It should shut down. E) It is making an economic profit. Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 65) A profit-maximizing output for a single-price monopoly is determined by the intersection of the ________ curves and the profit-maximizing price is found on the ________ curve. A) marginal cost and marginal revenue; marginal revenue B) marginal cost and marginal revenue; demand C) total revenue and total cost; total revenue D) marginal cost and average total cost; demand E) demand and supply; supply Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 66) For a single-price monopoly A) if marginal cost exceeds marginal revenue, profit will increase if output decreases. B) if marginal revenue exceeds marginal cost, profit will increase if output decreases. C) there are several different price and output combinations that maximize profit. D) marginal revenue will be greater than price if demand is elastic. E) marginal revenue will be greater than price if demand is inelastic. Answer: A Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

67) A single-price monopoly has marginal revenue and marginal cost equal to $19 at 15 units of output where the price on the demand curve is $38. At this output, average total cost is $15. What is the total profit earned? A) $225 B) $285 C) $345 D) $570 E) $19 Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 68) A single-price monopoly has marginal revenue and marginal cost equal to $19 at 15 units of output where the price on the demand curve is $38. What is the firm's total revenue? A) $38 B) $285 C) $570 D) $19 E) There is not enough information given to answer the question. Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 69) If a single-price monopoly is making a large economic profit, what keeps other firms from competing away the profit? A) There are barriers to entry. B) The monopoly must be keeping the amount earned secret. C) The market must be too small. D) The existing firm's ATC must be too large to allow competitors to enter and earn an economic profit. E) Nothing, other firms will enter and will compete away the profit. Answer: A Topic: Single-price monopoly, long run Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

70) In contrast to competitive firms, single-price monopolies A) do not have to worry about market demand. B) sell only if demand is inelastic. C) can never incur a loss. D) can make an economic profit indefinitely. E) must take the price that is determined by the market demand and market supply. Answer: D Topic: Single-price monopoly, long run Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 71) A monopolist can make an economic profit in the long run because of A) the relatively elastic demand for its product. B) the relatively inelastic demand for its product. C) the firm's price setting behavior. D) barriers to entry. E) the fact that the firm produces where MR = MC. Answer: D Topic: Single-price monopoly, long run Skill: Level 1: Definition Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 72) Why can a monopoly make an economic profit in the long run? A) because there are close substitutes for the firm's product B) because the firm is protected by barriers to entry C) because the firm produces where MR = MC D) because P > MR E) ALL of the above are reasons why a monopoly can make an economic profit in the long run. Answer: B Topic: Single-price monopoly, long run Skill: Level 1: Definition Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

73) For a single-price monopoly, price is A) greater than marginal revenue. B) one half of marginal revenue. C) equal to marginal revenue. D) unrelated to marginal revenue. E) always less than average total cost when the firm maximizes its profit. Answer: A Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 74) A single-price monopoly can sell 1 unit for $9.00. To sell 2 units, the price must be $8.50 per unit. The marginal revenue from selling the second unit is A) $17.50. B) $17.00. C) $8.50. D) $8.00. E) $9.00. Answer: D Topic: Marginal revenue Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 75) When demand is elastic, marginal revenue is A) positive. B) negative. C) zero. D) increasing as output increases. E) undefined. Answer: A Topic: Marginal revenue and elasticity Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking

76) To maximize its profit, a single-price monopoly produces the quantity at which A) the difference between marginal revenue and marginal cost is as large as possible. B) marginal revenue equals marginal cost. C) average total cost is at its minimum. D) the marginal cost curve intersects the demand curve. E) the marginal revenue curve intersects the horizontal axis. Answer: B Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 77) Once a monopoly has determined how much it produces, it will charge a price that A) is determined by the intersection of the marginal cost and average total cost curves. B) minimizes marginal cost. C) is determined by its demand curve. D) is independent of the amount produced. E) is equal to its average total cost. Answer: C Topic: Single-price monopoly, profit maximization Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

78) Use the figure above to answer this question. Pam gives the only piano lessons in town. In order to maximize profit, Pam should give ________ lessons per day. A) 2 B) 4 C) 5 D) 6 E) 12 Answer: B Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Application of knowledge 79) Use the figure above to answer this question. Pam gives the only piano lessons in town. In order to maximize profit, Pam should give ________ per day and charge ________ per lesson. A) 4; $40 B) 2; $50 C) 4; $20 D) 4; $30 E) 6; $30 Answer: A Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Application of knowledge

80) Use the figure above to answer this question. Pam gives the only piano lessons in town. In order to maximize profit, Pam should charge ________ per lesson and will earn a total economic profit of ________. A) $30; $30 B) $40; $160 C) $40; $40 D) $20; $80 E) $30; $0 Answer: C Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Application of knowledge 16.3 Monopoly and Competition Compared 1) Assume someone organizes all farms in the nation into a monopoly. What is the monopoly's marginal cost curve? A) It is a horizontal line at the competitive industry's price. B) It is a vertical line at the formerly competitive industry's quantity. C) It is a vertical line at the monopoly's chosen output level. D) It is the formerly competitive industry's supply curve. E) It is the same as the formally competitive industry's average total cost curve. Answer: D Topic: Monopoly and competition compared Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 2) Assume someone organizes all farms in the nation into a single-price monopoly. What is the monopoly's marginal revenue curve? A) It is a horizontal line at the competitive industry's price. B) It is a line that lies below the new monopoly's demand curve. C) It is a vertical line at the monopoly's chosen output level. D) It is identical to the demand curve for the monopolist's output. E) It is a line that lies above the new monopoly's demand curve. Answer: B Topic: Monopoly and competition compared Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

3) Compared to a perfectly competitive industry, a single-price monopoly produces A) more output. B) less output. C) the same output. D) some amount that might be more, less, or the same depending on whether the monopoly's marginal revenue curve lies above, below, or on its demand curve. E) some amount that might be more, less, or the same depending on whether the monopoly's marginal cost curve lies above, below, or on its marginal revenue curve. Answer: B Topic: Monopoly and competition compared, output Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 4) Assume someone organizes all farms in the nation into a single-price monopoly. As a result, the amount of food produced A) remains constant. B) decreases. C) increases. D) might increase or decrease depending on whether the demand for food is elastic or inelastic. E) might increase or decrease depending on whether the monopoly's marginal revenue curve lies below or above its demand curve. Answer: B Topic: Monopoly and competition compared, output Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 5) Compared to a perfectly competitive market, a single-price monopoly sets A) a lower price. B) the same price. C) a higher price. D) a price that might be higher, lower, or the same depending on whether the monopoly's marginal revenue curve lies above, below, or on its demand curve. E) a price that might be higher, lower, or the same depending on whether the monopoly's marginal cost curve lies above, below, or on its marginal revenue curve. Answer: C Topic: Monopoly and competition compared, price Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

6) Assume someone organizes all farms in the nation into a single-price monopoly. As a result, the price consumers pay for food A) does not change, that is, it remains constant. B) falls. C) rises. D) might rise or fall depending on whether the demand for food is elastic or inelastic. E) might rise or fall depending on whether the monopoly's marginal revenue curve lies above or below its demand curve. Answer: C Topic: Monopoly and competition compared, price Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 7) If we compare a perfectly competitive market to a single-price monopoly with the same costs, the monopoly sells A) the same quantity at a higher price. B) a smaller quantity at a higher price. C) a larger quantity at a lower price. D) a larger quantity at a higher price. E) a smaller quantity at the same price. Answer: B Topic: Monopoly and competition compared, output and price Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 8) When compared to a perfectly competitive market, a single-price monopoly with the same costs produces ________ output and charges ________ price. A) a larger; a lower B) a smaller; a lower C) the same; a higher D) a smaller; a higher E) a smaller; the same Answer: D Topic: Monopoly and competition compared, output and price Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

9) A single-price monopoly transfers A) consumer surplus to producers. B) producer surplus to consumers. C) economic profit to consumers. D) economic profit to the government. E) economic profit to deadweight loss. Answer: A Topic: Monopoly and competition compared, surpluses Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 10) Assume someone organizes all farms in the nation into a monopoly. As a result, consumer surplus will A) not change. B) increase. C) decrease. D) either increase, decrease, or not change depending if the monopoly's marginal revenue curve lies below, above, or is the same as its demand curve. E) None of the above answers is correct because the effect on consumer surplus depends on whether the monopoly is a single-price or a price-discriminating monopoly. Answer: C Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 11) Assume someone organizes all farms in the nation into a monopoly. Which of the following occurs? i. Consumer surplus decreases. ii. Economic profit increases. iii. A deadweight loss is created. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

12) When a perfectly competitive industry is taken over by a monopoly, some consumer surplus is transferred to the monopolist in the form of A) marginal cost. B) economic profit. C) deadweight loss. D) taxes. E) average variable cost. Answer: B Topic: Monopoly and competition compared, surpluses Skill: Level 4: Applying models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 13) Which of the following statements is FALSE? A) A perfectly competitive market produces more output and charges a lower price than a monopoly. B) A perfectly competitive firm produces where MR = MC but a monopoly produces where MR > MC. C) In a perfectly competitive market, the price is equal to the marginal cost, but in a market with a single-price monopoly, price exceeds marginal cost. D) The consumer surplus is smaller for a market with a monopoly than for a perfectly competitive market. E) In the long run, a monopoly can earn a larger economic profit than can a perfectly competitive firm. Answer: B Topic: Monopoly and competition compared Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

14) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the price of a pound of steak is A) $4. B) $8. C) $12. D) $20. E) $2. Answer: B Topic: Monopoly and competition compared, price Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 15) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is a monopoly, the price of a pound of steak is A) $4. B) $8. C) $12. D) $20. E) $2. Answer: C Topic: Monopoly and competition compared, price Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 60 Copyright © 2021 Pearson Education, Inc.

16) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the price of a pound of steak is ________ and when it is a monopoly, the price of a pound of steak is ________. A) $4; $20 B) $8; $4 C) $8; $12 D) $4; $8 E) $4; $12 Answer: C Topic: Monopoly and competition compared, price Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 17) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the quantity of steak is A) 2,000 pounds. B) 3,000 pounds. C) 4,000 pounds. D) 5,000 pounds. E) less than 2,000 pounds. Answer: B Topic: Monopoly and competition compared, output Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 18) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is a monopoly, the quantity of steak is A) 2,000 pounds. B) 3,000 pounds. C) 4,000 pounds. D) 5,000 pounds. E) less than 2,000 pounds. Answer: A Topic: Monopoly and competition compared, output Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 61 Copyright © 2021 Pearson Education, Inc.

19) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the quantity of steak is ________ pounds, and when the market is a monopoly, the quantity of steak is ________ pounds. A) 2,000; 4,000 B) 3,000; 2,000 C) 4,000; 4,000 D) 5,000; 3,000 E) 4,000; less than 2,000 pounds Answer: B Topic: Monopoly and competition compared, output Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

20) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a monopoly producer of pillows stuffed with parrot feathers. When Paul maximizes his profit, Paul produces ________ pillows per hour, and if the market was perfectly competitive, ________ pillows per hour would be produced. A) 0; 4,000 B) 3,000; 4,000 C) 4,000; 4,000 D) 3,000; 3,000 E) 0; 3,000 Answer: B Topic: Monopoly and competition compared Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

21) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's Parrot pillows, a monopoly producer of pillows stuffed with parrot feathers. When the pillow market is a monopoly, the price of a pillow is ________, and if the pillow market is perfectly competitive, the price of a pillow is ________. A) $40; $20 B) $70; $60 C) $40; $60 D) $60; $40 E) $100; $40 Answer: B Topic: Monopoly and competition compared Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

22) The figure above shows the demand curve, marginal revenue curve, and marginal cost curve. The amount of consumer surplus when the market has a monopoly producer is A) ace. B) abf. C) bcd. D) bcef. E) acd. Answer: B Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 64 Copyright © 2021 Pearson Education, Inc.

23) The figure above shows the demand curve, marginal revenue curve, and marginal cost curve. The amount of consumer surplus when the market has a monopoly producer is ________ and the amount of consumer surplus when the market is perfectly competitive is ________. A) abf; ace B) abf; bcd C) ace; bcd D) ace; abf E) bcd; ace Answer: A Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 24) The figure above shows the demand curve, marginal revenue curve, and marginal cost curve. The deadweight loss when the market has a monopoly producer is A) ace. B) abf. C) bcd. D) bcef. E) acd. Answer: C Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

25) In the above figure, a perfectly competitive market will have a price of ________, and a single-price monopoly will have a price of ________. A) P1 and quantity of Q1; P2 and quantity of Q2 B) P2 and quantity of Q2; P1 and quantity of Q1 C) P3 and quantity of Q3; P1 and quantity of Q1 D) P2 and quantity of Q2; P3 and quantity of Q1 E) P2 and quantity of Q1; P1 and quantity of Q1 Answer: B Topic: Monopoly and competition compared, output and price Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 26) In the above figure, for a single-price monopoly the consumer surplus is equal to the area A) abP1. B) acP2. C) bce. D) bed. E) cQ20P2. Answer: A Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

27) In the above figure, for a single-price monopoly the deadweight loss is equal to the area A) abP1. B) acP2. C) bce. D) bed. E) P1beP3. Answer: C Topic: Is monopoly efficient? Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 28) Comparing a perfectly competitive market to a single-price monopoly with the same costs, we see that A) both markets are equally efficient in their use of resources. B) the monopoly market always is more efficient in the use of resources. C) the perfectly competitive market achieves efficiency in resource use while the monopoly market does not. D) the monopoly market achieves efficiency in resource use while perfectly competitive market does not. E) None of the above answers is correct because comparing a perfectly competitive market to a monopoly is impossible. Answer: C Topic: Is monopoly efficient? Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 29) A monopoly creates a deadweight loss because the monopoly A) sets a price that is too low. B) makes a normal profit. C) does not maximize profit. D) produces less than the efficient quantity. E) produces more than the efficient quantity. Answer: D Topic: Is monopoly efficient? Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

30) Monopolies are inefficient because, at the profit-maximizing output level A) MC = MR. B) MC does not equal MR. C) MB = MC. D) MB does not equal MC. E) P = ATC. Answer: D Topic: Is monopoly efficient? Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 31) Compared to a similar perfectly competitive industry, a single-price monopoly A) creates a deadweight loss and decreases economic profit. B) produces more output. C) creates a deadweight loss and decreases consumer surplus. D) is more efficient because there is no wasteful competition. E) sets a lower price because there is less competition. Answer: C Topic: Is monopoly efficient? Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

32) Use the figure above to answer this question. If the market is operating efficiently A) 1,000 units will be produced and no deadweight loss will occur. B) 800 units will be produced and profits will be maximized. C) consumers will pay $30 per unit. D) consumers will pay $20 per unit and a deadweight loss will occur. E) both A and C are correct. Answer: E Topic: Monopoly and competition compared, output and price Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Application of knowledge 33) Use the figure above to answer this question. If a monopoly maximized profit A) 800 units will be produced and a deadweight loss equal to area ABC will occur. B) 1,000 units will be produced and a deadweight loss equal to area ABC will occur. C) 1,000 units will be produced and there is no deadweight loss. D) 800 units will be produced and a deadweight loss equal to area EFB will occur. E) 1,000 units will be produced and a deadweight loss equal to area FBGA occurs. Answer: A Topic: Monopoly and competition compared, deadweight loss Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Application of knowledge

34) Use the figure above to answer this question. If a monopoly controls the market and maximizes profit, the firm chooses price and output equal to ________. If the market operates competitively, price and output equal ________. A) $30 and 1,000 units; $40 and 800 units B) $40 and 800 units; $30 and 1,000 units C) $40 and 800 units; $30 and 800 units D) $20 and 1,000 units; $40 and 1,000 units E) $30 and 800 units; $40 and 1,000 units Answer: B Topic: Monopoly and competition compared, output and price Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Application of knowledge 35) In a monopoly, producers ________ and consumers ________. A) gain; lose B) lose; lose C) lose; gain D) gain; gain E) gain; do not gain or lose Answer: A Topic: Is monopoly fair? Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 36) If a perfectly competitive industry becomes a monopoly and the costs do not change, which of the following allocation of costs and benefits applies? A) The producer benefits, but consumers and society are harmed. B) The producer and society are harmed, but consumers benefit. C) The producer and society benefit, but consumers are harmed. D) The producer is harmed, but consumers and society benefit. E) The producer, consumers, and society all benefit. Answer: A Topic: Is monopoly fair? Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

37) Several firms want to be the only horse carriage service in a small tourist town and must pay the city for a license to operate as a monopoly. Competition among the potential firms will result in A) bidding up the price of the license so that the winning firm makes $0 economic profit. B) the winning firm making an economic profit because it will be a price maker. C) the winning firm making an economic profit because it will have no competition. D) the winning firm making an economic profit because rent seeking cannot occur. E) a $0 economic profit because monopolies are illegal. Answer: A Topic: Rent seeking Skill: Level 5: Critical thinking Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 38) The Seattle Mariners baseball team has a monopoly on major league baseball in the Northwest. If the Mariners could be purchased by anyone with enough money, we could argue that this purchase is fair according to the A) fair rules test. B) fair results test. C) fair price test. D) fair output test. E) allocative fairness test. Answer: A Topic: Is monopoly fair? Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 39) Rent seeking is the act of obtaining special treatment by ________ to create ________. A) a monopoly; consumer surplus B) the government; economic profit C) consumers; a monopoly D) the government; consumer surplus E) competitive producers; a monopoly Answer: B Topic: Rent seeking Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

40) Rent seeking is defined as A) charging higher prices for an apartment. B) the act of obtaining special treatment by the government to create an economic profit. C) charging a price below marginal cost. D) selling a greater quantity than is profitable. E) charging different prices for different units of the good or service. Answer: B Topic: Rent seeking Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 41) Rent seeking A) is the act of obtaining special treatment by the government to create economic profit. B) is the attempt to get rent from tardy renters. C) occurs when landlords advertise for apartments and other property for rent. D) is an attempt to sell a property and capture economic profit. E) occurs when a firm charges different prices for different units of its good or service. Answer: A Topic: Rent seeking Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 42) If a producer wants a monopoly with a legal barrier to entry, how can this be done? i. The producer can spend funds lobbying to attain passage of the legal barrier to entry. ii. The producer can purchase an existing monopoly. iii. The producer can make rent seeking expenditures. A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) None of the above are ways to acquire a monopoly with a legal barrier to entry. Answer: D Topic: Rent seeking Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

43) Competition among rent seekers results in A) higher rents. B) firms earning normal profits. C) firms setting lower prices. D) lower costs. E) all competing firms earning an economic profit. Answer: B Topic: Rent-seeking equilibrium Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 44) When a rent-seeking equilibrium is reached, the A) economic profit is maximized. B) economic profit is eliminated by legislation. C) economic profit is eliminated. D) consumer surplus is greater than without rent seeking. E) consumer surplus is eliminated. Answer: C Topic: Rent-seeking equilibrium Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 45) If a perfectly competitive industry is taken over by a single firm that operates as a singleprice monopoly, the price will ________ and the quantity will ________. A) fall; decrease B) fall; increase C) rise; decrease D) rise; increase E) not change; decrease Answer: C Topic: Monopoly and competition compared, output and price Skill: Level 4: Applying models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

46) Comparing single-price monopoly to perfect competition, monopoly A) increases the amount of consumer surplus. B) has the same amount of consumer surplus. C) has no consumer surplus. D) decreases the amount of consumer surplus. E) decreases the amount of economic profit. Answer: D Topic: Monopoly and competition compared, surpluses Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 47) Is a single-price monopoly efficient? A) Yes, because it creates a deadweight loss. B) No, because it creates a deadweight loss. C) Yes, because consumers gain and producers lose some of their surpluses. D) Yes, because consumers lose and producers gain some of their surpluses. E) Yes, because it produces the quantity at which MR = MC. Answer: B Topic: Is monopoly efficient? Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 48) Monopolies ________ fair and ________ efficient. A) are always; are not B) might be; are always C) might be; might be D) are always; are always E) are never; are always Answer: C Topic: Is monopoly fair? Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking

49) In equilibrium, rent seeking eliminates the A) deadweight loss. B) economic profit. C) consumer surplus. D) demand for the product. E) opportunity to price discriminate. Answer: B Topic: Rent-seeking equilibrium Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Reflective thinking 16.4 Price Discrimination 1) To be able to price discriminate, a firm must A) lower prices for all customers. B) raise prices for all customers. C) be able to identify and separate different types of buyers. D) sell a product that can be resold. E) Both answers B and C are correct. Answer: C Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 2) Which of the following must exist for a firm to engage in price discrimination? A) The firm must be able to identify and separate its buyers into different classes, and the lowprice buyers cannot resell the product to the high-price buyers. B) The firm must face an inelastic demand. C) The firm must be able to realize economies of scale. D) The firm must have no more than one class of buyer. E) The firm must be a natural monopoly. Answer: A Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking

3) A price-discriminating monopoly charges A) the same price to every buyer for the same product. B) a different price to different types of buyers for the same product, even though there are no differences in costs. C) a different price to different buyers, because the costs are different. D) different prices to buyers for different products. E) each customer a price that equals the marginal cost of serving that customer. Answer: B Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 4) Price discrimination is possible, in part, because A) costs of production vary as output increases. B) monopolies are regulated. C) monopolies don't profit maximize. D) the willingness to pay can vary among groups of buyers. E) monopolies face horizontal demand curves. Answer: D Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 5) Arnie's Airlines is a monopoly airline that is able to price discriminate. If Arnie's decides to price discriminate, then A) Arnie's profit decreases. B) consumer surplus decreases. C) Arnie's revenues decrease. D) Arnie's sells fewer tickets. E) Arnie's will see all of his tickets at a single price. Answer: B Topic: Price discrimination Skill: Level 3: Using models Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking

6) With price discrimination, a monopoly A) converts consumer surplus into economic profit. B) converts producer surplus into economic profit. C) can charge a single price to all customers. D) produces less output than if it does not price discriminate. E) converts consumer surplus into deadweight loss. Answer: A Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 7) One way a monopoly can convert additional consumer surplus into economic profit is to A) lower prices. B) raise prices. C) price discriminate. D) become more competitive. E) produce where price equals average total cost. Answer: C Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 8) An airline company A) cannot price discriminate because it is against the law. B) price discriminates by charging higher prices to business travelers. C) price discriminates by charging lower prices to business travelers. D) price discriminates even though its profits are lower because competition forces it to do so. E) has fewer customers because it price discriminates than it would have if it did not price discriminate. Answer: B Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking

9) A price-discriminating monopoly A) sells a larger quantity than it would if it were a single-price monopoly. B) is illegal. C) cannot offer discounts. D) cannot control the price of its product. E) makes a smaller economic profit than it would if it were a single-price monopoly. Answer: A Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 10) Compared to setting a single price, if a firm can price discriminate it A) makes a larger economic profit. B) makes a lower economic profit. C) makes zero economic profit. D) has no change in its economic profit from when it set a single price. E) might increase, decrease, or not change its economic profit depending on whether as a singleprice monopoly its marginal revenue curve was above, below, or the same as its demand curve. Answer: A Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 11) The key idea behind price discrimination is to convert consumer surplus into A) a barrier to entry. B) economic profit. C) deadweight loss. D) monopoly power. E) total cost. Answer: B Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking

12) If a firm successfully price discriminates, it increases i. consumer surplus. ii. deadweight loss. iii. economic profit. A) i only B) ii only C) iii only D) i and iii E) i and ii Answer: C Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 13) Arnie's Airlines is a monopoly airline that is able to price discriminate. If Arnie's decides to price discriminate, then A) Arnie's profit increases. B) consumer surplus increases. C) Arnie's revenues decrease. D) Arnie's sells fewer tickets. E) Arnie can no longer set a price that depends upon the buyer's willingness to pay. Answer: A Topic: Price discrimination Skill: Level 3: Using models Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 14) Arnie's Airlines decides to offer different fares to different customers for the same trip. Arnie's price discriminates because Arnie A) wants to convert consumer surplus to deadweight loss. B) wants to help some buyers with lower fares. C) has different costs for the same flight. D) wants to convert consumer surplus to economic profit. E) wants to convert producer surplus to consumer surplus. Answer: D Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking

15) Which of the following is TRUE regarding price discrimination? i. It converts consumer surplus to economic profit. ii. A price discriminator must be a monopoly. iii. To be able to price discriminate, the firm must be able to identify different types of buyers. A) i and ii B) i and iii C) ii and iii D) ii only E) i, ii, and iii Answer: B Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 16) Compared to the situation in which it sets a single price, a monopoly that price discriminates ________ its economic profit and ________ its output. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: A Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 17) A "buy one, get one for half price" promotion is an example of A) price discriminating among units of a good. B) price discriminating among groups of buyers. C) a legal monopoly. D) a natural monopoly. E) marketing by a perfectly competitive firm designed to increase the firm's sales. Answer: A Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking

18) Why do publishers print the first edition of a book by a popular author in hard cover and not in paperback? A) Hard cover books are long lasting and paperbacks can rip easily. B) Readers who want to read the book as soon as it comes out will be willing to pay a higher price compared to those who can wait for the paperback edition. C) A hardcover is the publishers' way of rewarding the avid readers. D) Publishers are not sure of the demand. E) Publishers cannot price discriminate. Answer: B Topic: Price discrimination Skill: Level 5: Critical thinking Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 19) Which of the following statements about price discrimination is FALSE? A) Price discrimination is a method for a seller to capture some consumer surplus. B) Compared to a single-price monopoly, the number of units sold increases when a monopoly price discriminates. C) Charging less for a second pizza that is identical to the first is an example of price discrimination. D) Price discrimination increases a monopoly's profit. E) All forms of price discrimination are illegal. Answer: E Topic: Price discrimination Skill: Level 3: Using models Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 20) If a firm is able to convert every dollar of consumer surplus to economic profit, the firm has achieved A) discrimination among units of a good. B) discrimination between groups of buyers. C) perfect price discrimination. D) perfect cost minimization. E) the normal amount of economic profit. Answer: C Topic: Perfect price discrimination Skill: Level 1: Definition Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking

21) With perfect price discrimination, a monopoly can extract the ________ price each customer is willing to pay and thereby obtain the entire ________ surplus. A) maximum; consumer B) minimum; producer C) maximum; producer D) minimum; consumer E) None of the above answers is correct. Answer: A Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 22) When a firm is able to engage in perfect price discrimination, its marginal revenue curve A) lies below its demand curve. B) is the same as its demand curve. C) lies above its demand curve. D) is the same as its supply curve. E) is undefined because it does not exist. Answer: B Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 23) If a monopoly can perfectly price discriminate, then its marginal revenue curve will be A) the same as its demand curve. B) the same as its supply curve. C) the same as its marginal cost curve. D) a vertical line at the profit-maximizing quantity of output. E) undefined because it does not exist. Answer: A Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking

24) Under which of the following does a monopoly's demand curve become its marginal revenue curve? A) all types of monopoly B) only single-price monopoly C) only perfect price discrimination D) only price discrimination on the basis of the number of units purchased E) any monopoly that price discriminates Answer: C Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 25) With perfect price discrimination ________, and production is expanded until marginal revenue equals ________. A) the firm's demand curve becomes its marginal revenue curve; marginal cost B) the firm's demand curve becomes its marginal revenue curve; average total cost C) the firm's marginal revenue curve bisects the angle with which demand intersects the priceaxis; marginal cost D) the firm's marginal revenue curve bisects the angle with which demand intersects the priceaxis; average total cost E) economic profit is maximized when the lowest price equals marginal cost; average total cost Answer: A Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 26) Compared to a single-price monopoly, when a monopoly can perfectly price discriminate, the deadweight loss A) increases. B) decreases. C) remains the same. D) becomes infinite. E) probably changes, but more information is needed to determine if it increases, decreases, or remains constant. Answer: B Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking

27) With perfect price discrimination, the level of output A) exceeds the efficient quantity. B) is the same as the amount produced by any monopoly that price discriminates. C) is the same as the amount produced in a perfectly competitive market. D) equals the amount produced by a single-price monopoly. E) is unknown. Answer: C Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 28) Under which of the following is consumer surplus zero? A) all types of monopoly B) only single-price monopoly C) only perfectly price-discriminating monopoly D) only price discrimination on the basis of the number of units purchased E) perfect competition Answer: C Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 29) The deadweight loss with perfect price discrimination is A) equal to the deadweight loss of a single-price monopoly. B) sometimes less than and sometimes more than the deadweight loss of a single-price monopoly. C) more than the deadweight loss of a single-price monopoly. D) zero. E) larger than the deadweight loss with perfect competition. Answer: D Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking

30) Which of the following industries is most likely closest to achieving perfect price discrimination? A) the airline industry B) the wheat industry C) the textbook industry D) the toilet paper industry E) the soft drink industry Answer: A Topic: Eye on the U.S. economy, airline price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 31) Which of the following must a firm be able to do to successfully price discriminate? i. divide buyers into different groups according to their willingness to pay ii. prevent resale of the good or service iii. identify into which group (high willingness to pay or low willingness to pay) a buyer falls A) ii only B) i and ii C) i and iii D) iii only E) i, ii, and iii Answer: E Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 32) Which of the following is (are) price discrimination? i. charging different prices based on differences in production cost ii. charging business flyers a higher airfare than tourists iii. charging more for the first pizza than the second A) i only B) ii only C) ii and iii D) i and iii E) i, ii, and iii Answer: C Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking

33) When a monopoly price discriminates, it A) increases the amount of consumer surplus. B) decreases its economic profit. C) converts consumer surplus into economic profit. D) converts economic profit into consumer surplus. E) has no effect on the deadweight loss in the market. Answer: C Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 34) If a monopoly is able to perfectly price discriminate, then consumer surplus is A) equal to zero. B) maximized. C) unchanged from what it is with a single-price monopoly. D) unchanged from what it is in a perfectly competitive industry. E) not zero but is less than with a single-price monopoly. Answer: A Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 35) With perfect price discrimination, the quantity of output produced by a monopoly is ________ the quantity produced by a perfectly competitive industry. A) greater than but not equal to B) less than C) equal to but not greater than D) not comparable to E) either greater than or equal to Answer: C Topic: Perfect price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Analytical thinking

16.5 Monopoly Regulation 1) ________ natural monopolies is a commonly used, potential solution to the problems presented by natural monopolies. A) Breaking up firms that are B) Regulating C) Outlawing price discrimination by D) Refusing to grant patents to E) Giving incentives to firms to become Answer: B Topic: Regulation Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 2) The social interest theory of regulation is defined as the A) use of regulations to maximize firms' profits. B) use of regulations to assure an efficient use of resources. C) removal of regulations on business activities. D) implementation and removal of regulations on the cable TV industry. E) use of rate of return regulation. Answer: B Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 3) The social interest theory of regulation is that A) regulators help producers maximize economic profit. B) regulation seeks to increase the government's revenue. C) regulation causes producers to produce at a point where they are earning normal profits. D) regulation seeks an efficient use of resources. E) regulation focuses on the consumers' interests and ignores producers' interests. Answer: D Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

4) The social interest theory of regulation assumes that A) regulation is against the public interest. B) the public is indifferent to regulation. C) regulation seeks an efficient use of resources. D) the public cares deeply about regulation. E) regulators are captured by the firms being regulated. Answer: C Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 5) The social interest theory of regulation asserts that regulation A) seeks an efficient use of resources. B) is aimed at keeping prices as low as possible. C) helps firms maximize economic profit. D) of a natural monopoly must be done using rate of return regulation. E) does not work for society as well as would allowing the firms freedom from regulation. Answer: A Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 6) Who receives benefits if regulation works according to social interest theory? A) the entire economy B) cohesive interest groups C) everyone not in the cohesive interest group D) the regulators E) It is impossible to determine who benefits. Answer: A Topic: Social interest theory Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

7) Under the social interest theory of regulation, the goal of regulating natural monopolies is A) to provide a larger, though not maximum, profit for the firms. B) to use average cost pricing. C) to provide an outcome similar to the competitive outcome. D) to provide a the maximum profit for the firms. E) None of the above answers is correct. Answer: C Topic: Social interest theory Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 8) Capture theory is A) an economic theory of regulation. B) a model about perfect competition. C) the same as the public interest theory. D) the theory that regulators capture firms' attention by dictating a very low price. E) a theory that explains behavior of competitive firms. Answer: A Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 9) The theory that regulation helps producers to maximize profit is the A) social interest theory. B) consumer surplus theory. C) antitrust theory. D) capture theory. E) oligopoly theory of regulatory bodies. Answer: D Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

10) The capture theory of regulation is that regulations A) help producers maximize their economic profit. B) mean producers incur an economic loss. C) result in diseconomies of scale. D) benefit society, not producers. E) benefit the regulators, not the producers or the consumers. Answer: A Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Revised AACSB: Reflective thinking 11) The capture theory of regulation assumes that regulation benefits A) producers. B) consumers. C) government. D) the general public. E) the regulators. Answer: A Topic: Capture theory Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 12) The capture theory of regulation predicts that A) regulation helps producers to maximize profits. B) regulators capture the firm's economic profit and transfer it to consumers as consumer surplus. C) regulators eliminate the deadweight loss a monopoly can create. D) resources are used efficiently. E) regulators capture the firm's economic profit and transfer it to themselves. Answer: A Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

13) The capture theory of regulation is defined as A) the use of regulations to assure the efficient use of resources. B) the constant reapplication of regulation on the cable TV industry. C) the use of regulation to assist producers to maximize profits. D) the removal of regulations on business activities. E) regulation that focuses on consumers' interests and ignores producers' interests. Answer: C Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 14) Suppose that a regulatory agency helps producers maximize economic profit. This type of regulation coincides with A) a natural monopoly. B) a marginal cost pricing rule. C) an average cost pricing rule. D) the capture theory of regulation. E) the social interest theory of regulation. Answer: D Topic: Capture theory Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 15) The capture theory of regulation predicts that regulations bring ________ to producers and impose ________ on any individual consumer. A) small benefits; small costs B) small benefits; large costs C) large benefits; small costs D) large benefits; large costs E) large benefits; no costs Answer: C Topic: Capture theory Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

16) When economies of scale exist so that one firm can meet the entire market demand at a lower average total cost than two or more firms A) a natural monopoly develops. B) the monopoly encounters competition. C) economic profit is reduced to zero. D) the monopoly converts all of the consumer surplus into economic profit. E) there is always the opportunity to price discriminate. Answer: A Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 17) A firm that is a natural monopoly A) can supply the entire market at a lower average total cost than two or more firms. B) has very small fixed costs and very large marginal costs. C) is infrequently regulated because having one firm serve the market is economically sound. D) cannot make an economic profit if it is not regulated because it must serve a very large customer base. E) produces the efficient quantity of output when it is not regulated. Answer: A Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 18) A natural monopoly A) sells to a single buyer. B) sets price equal to marginal revenue. C) is a firm than can supply the market at lower average total cost than two or more firms. D) produces a natural resource. E) faces a horizontal demand curve. Answer: C Topic: Natural monopoly Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

19) Today, you might be buying from a regulated natural monopoly when you purchase A) a car, a truck, or a bicycle. B) a computer, a phone, or a camera. C) natural gas or electricity. D) a house, a condominium, or a plot of land. E) food in a grocery store or in a restaurant. Answer: C Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 20) Fixed costs are ________ in a natural monopoly, so average total cost ________ as output increases. A) large; increases B) large; decreases C) small; increases D) small; decreases E) nonexistent; decreases Answer: B Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 21) A marginal cost pricing rule for a natural monopoly sets marginal cost equal to A) minimum average variable cost. B) price. C) average cost. D) marginal revenue. E) the smaller of price or marginal revenue. Answer: B Topic: Natural monopoly, marginal cost pricing rule Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Revised AACSB: Reflective thinking

22) For a regulated natural monopoly, the marginal cost pricing rule is a rule that sets price ________ marginal cost and achieves an ________ amount of output. A) equal to; efficient B) above; inefficient C) below; efficient D) equal to; inefficient E) above; efficient Answer: A Topic: Natural monopoly, marginal cost pricing rule Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 23) How should a natural monopoly be regulated under the social interest theory of regulation? A) by setting price equal to the average cost of production B) by allowing a price that maximizes the profit of the natural monopoly C) by using a marginal cost pricing rule D) by subsidizing other producers to compete with the monopoly E) by using rate of return regulation Answer: C Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 24) The outcome of regulating a natural monopoly using the marginal cost pricing rule is A) that the firm makes a normal profit. B) that the firm maximizes its profit. C) that consumer surplus is less than what it would be if the firm maximized its profit. D) an efficient level of production. E) that the firm makes an economic profit. Answer: D Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

25) For a natural monopoly, the efficient quantity is produced when the firm is regulated so that A) P = ATC. B) P > ATC. C) P = MC. D) P > MC. E) P < MC. Answer: C Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 26) If a natural monopoly is regulated using A) a marginal cost pricing rule, the firm maximizes its profit. B) an average cost pricing rule, the firm incurs an economic loss. C) a total cost pricing rule, the firm will exit the industry. D) a marginal cost pricing rule, the firm incurs an economic loss. E) an average cost pricing rule, the firm maximizes its profit. Answer: D Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 27) Under a marginal cost pricing rule, a natural monopoly A) makes a reasonable profit. B) makes an economic profit. C) earns accounting profits, but breaks even in economic terms. D) incurs an economic loss. E) makes a normal profit, but it cannot be determined whether or not it makes an accounting profit. Answer: D Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

28) A natural monopoly that is regulated to set price equal to marginal cost A) makes an economic profit. B) makes zero economic profit. C) incurs an economic loss. D) could make an economic loss, an economic profit, or zero economic profit. E) makes zero normal profit. Answer: C Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 29) Which of the following explains why the marginal cost pricing rule results in an economic loss for a natural monopoly? A) The ATC curve is downward sloping throughout the relevant range, therefore the MC is lower than the ATC. B) The demand curve is downward sloping, therefore price falls as quantity increases. C) The MC is constant and equal to price. D) Because output is determined by setting MC equal to the price, consumer surplus is maximized. E) The firm's MR is always less than its price. Answer: A Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 30) Regulated natural monopolies can obey a marginal cost pricing rule and still make a normal profit by engaging in A) least cost pricing and average cost pricing. B) price discrimination and two-part tariff pricing. C) zero profit pricing. D) profit-maximizing pricing. E) None of the above answers is correct because a natural monopoly regulated using a marginal cost pricing rule always incurs an economic loss. Answer: B Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

31) Which of the following is an example of a two-part tariff? A) price discrimination based on the buyers' willingness to pay B) charging a hookup fee plus a monthly charge equal to marginal cost C) higher sales tax on specific products D) different prices based on the cost of production and quantity bought E) A regulated firm uses marginal cost pricing for some customers and average cost pricing for other customers. Answer: B Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 32) One way a company can cover its costs and, at the same time, obey a marginal cost pricing rule is by A) choosing output levels according to the profit-maximizing rule. B) using price discrimination. C) increasing production. D) decreasing production. E) decreasing its marginal cost but not changing its average total cost. Answer: B Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 33) If a regulatory agency sets the price equal to marginal cost for a natural monopoly, the A) government might have to provide a subsidy to the firm to keep it in business. B) price is the same as the unregulated monopoly price. C) firm makes an economic profit, though not the maximum economic profit. D) firm makes the maximum economic profit. E) firm makes zero economic profit. Answer: A Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

34) What problem is caused by subsidizing a natural monopoly regulated using a marginal cost pricing rule? A) The regulated firm ends up earning an economic profit. B) Consumers pay too much for the product of the monopoly. C) This policy is a two-part tariff, which creates inefficiency. D) The taxes required to gain the revenue used as the subsidy result in a deadweight loss that subtracts from gains in efficiency which result from use of the marginal cost pricing rule. E) The regulated firm goes out of business if it is subsidized. Answer: D Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 35) With a natural monopoly A) no regulation is necessary because it is a natural monopoly. B) regulation takes the form of forcing competition from new firms. C) regulation takes the form of forcing the company out of business. D) regulation can take the form of average cost pricing to allow coverage of costs. E) regulation takes the form of breaking the company into several competing firms. Answer: D Topic: Natural monopoly, average cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 36) When a firm is regulated so it uses an average cost pricing rule, the price A) exceeds average total cost. B) equals marginal cost. C) is less than marginal cost. D) equals average total cost. E) equals marginal revenue. Answer: D Topic: Natural monopoly, average cost pricing rule Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

37) For a natural monopoly to cover its total cost, its price must equal its A) average total cost. B) marginal cost. C) demand. D) total fixed cost. E) marginal revenue. Answer: A Topic: Natural monopoly, average cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 38) When used with a natural monopoly, an average cost pricing rule results in A) the efficient level of output. B) economic losses for the firm. C) the need for government to subsidize the natural monopoly. D) zero economic profit for the firm. E) the firm making an economic profit. Answer: D Topic: Natural monopoly, average cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 39) With an average cost pricing rule, the quantity produced by the natural monopoly is ________ the quantity produced with a marginal cost pricing rule. A) greater than B) less than C) equal to D) greater than in the long run and less than in the short run than E) not comparable to Answer: B Topic: Natural monopoly, average cost pricing rule Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

40) A natural monopoly's output is less if it is regulated with A) a marginal cost pricing rule than if it is unregulated. B) an average cost pricing rule than if it is unregulated. C) an average cost pricing rule than if it is regulated with a marginal cost pricing rule. D) a marginal cost pricing rule than if it is regulated with an average cost pricing rule. E) More information about the firm's demand is needed to determine how its output depends on what regulation it faces. Answer: C Topic: Natural monopoly, marginal cost and average cost pricing rules Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 41) If we compare regulating a natural monopoly using a marginal cost pricing rule to using an average cost pricing rule, we see that output is A) greater with marginal cost pricing, but average cost pricing allows for costs to be covered. B) the same under both cases, but the profit is greater with average cost pricing. C) greater under average cost pricing, but profits are greater with marginal cost pricing. D) the same but profits are greater with marginal cost pricing. E) greater with marginal cost pricing, and the firm's profit is larger with marginal cost pricing. Answer: A Topic: Natural monopoly, marginal cost and average cost pricing rules Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 42) Gene's Car Wash is a natural monopoly. To wash 100 cars a week, if Gene is unregulated, he would charge a price of $10. Gene's average total cost for washing 100 cars is $8, his average variable cost is $6, and his marginal cost is $4. If Gene is regulated using a marginal cost pricing rule, the price he is allowed to charge to wash 100 cars is A) $10. B) $8. C) $6. D) $4. E) $400. Answer: D Topic: Natural monopoly, marginal cost and average cost pricing rules Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking

43) Gene's Car Wash is a natural monopoly. To wash 100 cars a week, if Gene is unregulated, he would charge a price of $10. Gene's average total cost for washing 100 cars is $8, his average variable cost is $6, and his marginal cost is $4. If Gene is regulated using an average cost pricing rule, the price he is allowed to charge to wash 100 cars is A) $10. B) $8. C) $6. D) $4. E) $400. Answer: B Topic: Natural monopoly, marginal cost and average cost pricing rules Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking

44) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC is left unregulated, how many households in Oakland are served? A) 20,000 B) 30,000 C) 40,000 D) 50,000 E) 10,000 Answer: A Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking

45) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC is left unregulated, what is the price of cable television in Oakland? A) $40 B) $30 C) $20 D) $10 E) $50 Answer: B Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking 46) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under a marginal cost pricing rule, how many households in Oakland are served? A) 20,000 B) 30,000 C) 40,000 D) 50,000 E) 10,000 Answer: C Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking 47) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under a marginal cost pricing rule, what is the price of cable television in Oakland? A) $40 B) $30 C) $20 D) $10 E) $0 Answer: D Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking 103 Copyright © 2021 Pearson Education, Inc.

48) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under an average cost pricing rule, how many households in Oakland are served? A) 20,000 B) 30,000 C) 40,000 D) 50,000 E) None of the above answers is correct. Answer: B Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking 49) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under an average cost pricing rule, what is the price of cable television in Oakland? A) $40 B) $30 C) $20 D) $10 E) $50 Answer: C Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking

50) The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC) is the sole provider of cable television to the residents of this Central Florida community. Compared to a marginal cost pricing rule, under an average cost pricing rule, TWC ________ output by ________ households. A) increases; 20,000 B) decreases; 10,000 C) increases; 30,000 D) decreases; 50,000 E) decreases; 40,000 Answer: B Topic: Natural monopoly, marginal cost and average cost pricing rules Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking 51) Rate of return regulation is designed to allow a natural monopoly to A) make an economic profit. B) make zero economic profit. C) underestimate its average cost. D) compete with any firm entering the market. E) make zero normal profit. Answer: B Topic: Natural monopoly, rate of return regulation Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 52) When a regulatory agency uses rate of return regulation, the A) agency is able to eliminate the deadweight loss. B) firm's managers have an incentive to inflate the firm's costs. C) regulated firm's profit must be maximized for the market to be efficient. D) regulated firm must receive a government subsidy. E) the agency is using a form of marginal cost pricing. Answer: B Topic: Natural monopoly, rate of return regulation Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

53) Managers of a natural monopoly regulated using rate of return regulation have an incentive to A) exaggerate the firm's costs. B) underestimate the firm's costs. C) minimize the monopoly's deadweight loss. D) make zero economic profit. E) exaggerate the firm's profit. Answer: A Topic: Natural monopoly, rate of return regulation Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 54) A natural monopoly A) faces more competition after regulation. B) might exaggerate its costs if it is regulated using rate of return regulation. C) might falsely minimize its costs if it is regulated using rate of return regulation. D) might falsely minimize its costs if it is regulated using a marginal cost pricing rule. E) is allowed to maximize its profit under a marginal cost pricing rule. Answer: B Topic: Natural monopoly, rate of return regulation Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 55) One of the tendencies that is common among firms regulated using rate of return regulation is to A) increase production to an inefficient level. B) inflate the costs of production. C) incur an economic loss. D) understate the costs of production. E) overstate their total revenue. Answer: B Topic: Natural monopoly, rate of return regulation Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

56) When regulated using rate of return regulation, who benefits from the practice of some natural monopolies to count sumptuous offices, free baseball tickets, golf excursions, and limousines as costs of production? A) stockholders B) managers of the monopoly C) customers of the monopoly D) regulators of the industry E) None of the above answers is correct. Answer: B Topic: Natural monopoly, rate of return regulation Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 57) Price cap regulation is defined as regulation that A) imposes a price ceiling on the regulated firm. B) encourages firms to exaggerate costs to increase profits. C) uses marginal cost pricing to ensure efficient output. D) uses average cost pricing to ensure costs are covered. E) is essentially the same as rate of return regulation. Answer: A Topic: Price cap regulation Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 58) Price cap regulation is regulation that A) is a marginal cost pricing rule. B) is an average cost pricing rule. C) imposes a price ceiling on the regulated firm. D) has the same incentive effects as does rate of return regulation. E) is the same as allowing the firm to operate as if it was totally unregulated. Answer: C Topic: Price cap regulation Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

59) Price cap regulation A) does not provide incentives to firms to minimize their costs because firms cannot change prices. B) sets the maximum price these firms can charge. C) gives firms the incentive to exaggerate their costs. D) Both answers A and C are correct. E) Both answers A and B are correct. Answer: B Topic: Price cap regulation Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 60) Price cap regulation involves A) setting the monopoly's price equal to its average total cost. B) setting the monopoly's price equal to its profit-maximizing price. C) setting a maximum price the monopoly may charge. D) assuming a natural monopoly will not charge a higher than profit-maximizing price. E) setting the monopoly's price equal to its marginal cost. Answer: C Topic: Price cap regulation Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 61) The process of price cap regulation includes which of the following? i. a price ceiling ii. marginal cost pricing iii. average cost pricing A) i only B) ii only C) i and ii D) ii and iii E) i and iii Answer: A Topic: Price cap regulation Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

62) Under earnings-sharing regulation, if a firm's profits ________ above a certain level, they must be shared with the firm's ________. A) rise; customers B) fall; customers C) rise; suppliers D) fall; suppliers E) rise; competitors Answer: A Topic: Earnings sharing regulation Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 63) Earning-sharing regulation involves A) setting the monopoly's price equal to its average total cost. B) requiring that the monopoly share its profits with its customers if the profits rise above a certain level. C) setting a maximum price the monopoly may charge and maintaining it for many years. D) assuming a natural monopoly will not charge a higher than profit-maximizing price. E) setting the monopoly's price equal to its marginal cost. Answer: B Topic: Earnings sharing regulation Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 64) The theory that regulation seeks an efficient use of resources is the A) social interest theory. B) producer surplus theory. C) consumer surplus theory. D) capture theory. E) deadweight loss theory. Answer: A Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

65) Which of the following best describes the capture theory of regulation? i. Regulation seeks an efficient use of resources. ii. Regulation is aimed at keeping prices as low as possible. iii. Regulation helps firms maximize economic profit. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: C Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 66) At a level of output when regulators require a natural monopoly to set a price that is equal to marginal cost, the firm A) makes zero economic profit. B) makes an economic profit. C) incurs an economic loss. D) makes a normal-economic profit. E) makes either zero economic profit or an economic profit, depending on whether the firm's average total cost equals or is less than its marginal cost. Answer: C Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 67) If a natural monopoly is told to set price equal to average cost, then the firm A) is not able to set marginal revenue equal to marginal cost. B) automatically also sets price equal to marginal cost. C) will make a substantial economic profit. D) will incur an economic loss. E) sets a price that is lower than its marginal cost. Answer: A Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

16.6 Chapter Figures

The figure above shows a firm's demand and average total cost curves. 1) The situation in the figure above creates a barrier to entry for a second firm because i. a second firm that produced as many kilowatt-hours as the first firm would see the market price fall beneath its cost and would incur an economic loss. ii. a second firm that produced fewer kilowatt-hours than the first firm would have to charge a higher price and would not gain many customers. iii. the first firm's average total cost curve indicates it has been given a patent for the product. A) i only B) ii only C) iii only D) i and ii E) i and iii Answer: D Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Analytical thinking

The figure above shows a monopoly's total revenue and total cost curves. 2) Using the figure above, which of the following statements is (are) correct? i. MR = MC when 3 haircuts are produced. ii. If the firm charges each customer the same price for a haircut, the price of a haircut is $42. iii. The firm's MC equals $30. A) i only B) ii only C) i and ii D) i and iii E) None of the above is correct. Answer: A Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

3) Using the figure above, which of the following statements are correct? i. MR = MC = $42 when 3 haircuts are produced. ii. If the firm charges each customer the same price for a haircut, the price of a haircut is $14. iii. The firm's economic profit is $12. A) i only B) ii only C) i and ii D) i and iii E) i, ii, and iii Answer: D Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking 4) Using the figure above, which of the following statements are correct? i. When 3 haircuts are produced, the firm's ATC is $10. ii. If the firm charges each customer the same price for a haircut, the price of a haircut is $14. iii. The firm is NOT a perfect competitor. A) i only B) ii only C) i and ii D) i and iii E) i, ii, and iii Answer: E Topic: Monopolistic competition, output and price Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

The above figure shows a market. 5) If the market was a monopoly, the quantity would be ________ and the price would be ________; if the market tis perfectly competitive, the quantity would be ________ and the price would be ________. A) Q1; P1; Q2; P2 B) Q2; P1; Q1; P2 C) Q1; P1; Q2; P1 D) Q1; P2; Q2; P1 E) Q1; P2; Q1; P1 Answer: D Topic: Monopoly and competition compared Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

6) The figure above shows that monopoly is ________ because it produces a level of output at which ________. A) inefficient; marginal benefit equals marginal cost B) efficient; marginal benefit equals marginal cost C) efficient; marginal benefit exceeds marginal cost D) inefficient; marginal benefit exceeds marginal cost E) efficient; producer surplus is maximized Answer: D Topic: Monopoly and competition compared Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 7) If the market in the figure above is a profit-maximizing single-price monopoly, consumer surplus is the area A) ABH. B) BFGH. C) ACG. D) BCD. E) ACE. Answer: A Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 8) If the market in the figure above is perfectly competitive, consumer surplus is the area A) ABH. B) BFGH. C) ACG. D) BCD. E) ACE. Answer: C Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

9) If the market in the figure above is a profit-maximizing single-price monopoly, the deadweight loss is the area A) ABH. B) BFGH. C) ACG. D) BCD. E) ACE. Answer: D Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 10) If the market in the figure above is a profit-maximizing single-price monopoly, the producer surplus is the area A) ABH. B) BFGH. C) ACG. D) BDEH. E) ACE. Answer: D Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking 11) If the market in the figure above changes from perfectly competitive to a profit-maximizing single-price monopoly, the amount of the gain in producer surplus is the area A) ABH. B) BFGH. C) ACG. D) BDEH. E) ACE. Answer: B Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

The figure above shows a natural monopoly regulated using a marginal cost pricing rule. 12) In the figure above, an A) efficient output results, but the firm incurs a loss per household which must be subsidized in some way. B) inefficient output results, though the firm covers its costs. C) efficient output results, though marginal costs exceed average total costs. D) inefficient output results because the firm cannot cover its costs. E) efficient output results because consumer surplus is maximized. Answer: A Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking 13) In the figure above, the length of the double sided arrow is the A) consumer surplus. B) deadweight loss. C) producer surplus. D) economic loss per unit. E) economic profit. Answer: D Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking 117 Copyright © 2021 Pearson Education, Inc.

14) In the figure above, the dark triangle is the A) consumer surplus. B) deadweight loss. C) producer surplus. D) total cost. E) economic profit. Answer: A Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking

The figure above shows a natural monopoly. 15) In the figure above, if the firm is regulated using an average cost pricing rule, the firm A) avoids an economic loss, but produces less than the efficient quantity and creates a deadweight loss. B) incurs an economic loss, but produces the efficient quantity and creates a deadweight loss. C) avoids an economic loss, is able to produce the efficient quantity, and therefore avoids creating a deadweight loss. D) avoids an economic loss, produces the efficient quantity, and creates a deadweight loss. E) incurs an economic loss, produces the efficient quantity, and avoids creating a deadweight loss. Answer: A Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking

16) In the figure above, if the firm is regulated using an average cost pricing rule, the deadweight loss created is equal to the area of A) ABG. B) BEFG. C) BCFG. D) BCE. E) None of the above because there is no deadweight loss created. Answer: D Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking 17) In the figure above, if the firm is regulated using a marginal cost pricing rule, the deadweight loss created is equal to the area of A) ABG. B) BEFG. C) BCFG. D) BCE. E) None of the above because there is no deadweight loss created. Answer: E Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking 18) In the figure above, if the firm is regulated using an average cost pricing rule, the consumer surplus created is equal to the area of A) ABG. B) BEFG. C) BCFG. D) BCE. E) None of the above because there is no consumer surplus created. Answer: A Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking

19) In the figure above, if the firm is regulated using a marginal cost pricing rule, the consumer surplus created is equal to the area of A) ABG. B) ACF. C) BCFG. D) BCE. E) None of the above because there is no consumer surplus created. Answer: B Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking 20) In the figure above, if the firm is regulated using an average cost pricing rule, the economic loss created is equal to the area of A) ABG. B) BEFG. C) BCFG. D) BCE. E) None of the above because there is no economic loss created. Answer: E Topic: Natural monopoly, average cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking 16.7 Integrative Questions 1) A monopoly can arise when A) there are diseconomies of scale. B) there are barriers to entry and no close substitutes for the good being produced. C) a firm cannot price discriminate. D) firms engage in rent seeking. E) a firm must set MR equal to MC in order to maximize its profit. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

2) The total revenue test using the price elasticity of demand A) explains why monopolies will only operate on the elastic portion of their demand curve. B) explains why monopolies will only operate on the inelastic portion of their demand curves. C) demonstrates why a monopoly can earn an economic profit in the long run. D) determines whether a monopoly can perfectly price discriminate or not. E) cannot be used for a price discriminating monopoly. Answer: B Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 3) A monopoly definitely incurs an economic loss if A) it produces where its marginal revenue equals its marginal cost. B) its average total cost is greater than price. C) it cannot perfectly price discriminate. D) it price discriminates. E) The statement errs because a monopoly cannot incur an economic loss. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 4) A difference between a perfectly competitive industry and a monopoly is that A) in the long run, firms in a perfectly competitive industry make zero economic profit and a monopoly can make an economic profit. B) a firm in a perfectly competitive industry can perfectly price discriminate but a monopoly cannot. C) only monopolies have an incentive to maximize profit. D) perfectly competitive firms can have a public franchise. E) a barrier to entry protects perfectly competitive firms in the short run and protects a monopoly in the long run. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

5) If a monopoly engages in rent seeking i. its average total cost curve is lower than otherwise. ii. it might or might not make an economic profit depending on how many other competitors also are rent seeking. iii. it necessarily incurs an economic loss. A) i only B) ii only C) iii only D) i and ii E) i and iii Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 6) If a monopoly can perfectly price discriminate A) all the demanders pay one price. B) it minimizes its profit. C) it produces the same amount of output as would be produced if the market was a perfectly competitive industry. D) it produces less output than would be produced if the market was a perfectly competitive industry. E) it creates the same amount of consumer surplus as would be created if the market was a perfectly competitive industry. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 7) Which of the following is NOT a requirement for a firm to be able to price discriminate? A) monopoly power B) groups of customers with different willingness to pay for the good C) economies of scale D) ability to keep the members of different customer groups separate E) ability to prevent resales of the product by customers Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

8) Monopolies arise when there are A) many substitutes but there are no barriers to entry. B) no close substitutes and there are no barriers to entry. C) no close substitutes and there are barriers to entry. D) many substitutes and there barriers to entry. E) None of the above answers are correct because the existence of a monopoly has nothing to do with the presence or absence of barriers to entry. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 9) The assumption that regulation relentlessly seeks out deadweight loss and seeks to eliminate it is called the A) social interest theory of regulation. B) capture theory of regulation. C) Coase theory of regulation. D) socially optimal theory of regulation. E) predatory theory of regulation. Answer: A Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

10) The figure above shows a natural monopoly that the government must regulate. If the government uses ________, the firm produces ________ units per week. A) the HHI; 50 B) an average cost pricing rule; 30 C) rate of return regulation; 40 D) social interest regulation; 30 E) a marginal cost pricing rule; 20 Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 11) The figure above shows a natural monopoly that the government must regulate. Which of the following pairs most likely results in similar outcomes? A) marginal cost pricing and rate of return regulation B) marginal cost pricing and a two-part tariff C) average cost pricing and rate of return regulation D) predatory pricing and price caps E) marginal cost pricing and price cap regulation Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

16.8 Essay: Monopoly and How it Arises 1) What are the conditions that define a monopoly? Answer: There is only one firm producing a good or service with no close substitutes for the good or service sold and there are barriers to entry that prevent competing firms from entering the market. Topic: Monopoly Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 2) Describe the three general types of barriers. Answer: Barriers to entry can be divided into legal barriers, ownership barriers, natural barriers. Legal barriers occur when government action blocks competition in a market. For instance, the government could grant a public franchise, government license, patent, or copyright. In all cases, the government action prevents other firms from entering the market. Ownership barriers occur when a firm buys a significant portion of a natural resource. For instance, DeBeers controls over 80 percent of the world's diamond market. The last barrier to entry is a natural barrier. A natural barrier to entry occurs when economies of scale are so large that they make it possible for one firm to meet the entire market demand at a lower price than could two or more firms. In this case, the market will "naturally" evolve to become a monopoly as a larger firm uses its cost advantage to cut its price and drive its high-cost, smaller competitors out of business. Topic: Monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Written and oral communication 3) Are some monopolies created by government legislation that gives a firm the unique right to produce a good or service? Answer: Yes, some monopolies are created by government legislation, such as patent or copyright laws and the granting of public franchises. Monopolies that are created because of legal barriers to entry are called legal monopolies. Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking

4) What is a legal barrier to entry? Answer: A legal barrier to entry arises when entry is restricted because the government has granted a franchise, patent, license, or copyright to one person or firm. Topic: Legal barriers to entry Skill: Level 2: Using definitions Section: Checkpoint 16.1 Status: Old AACSB: Reflective thinking 5) Competition keeps prices lower for consumers. So why do we have patent laws? Answer: Patent laws are necessary to promote innovation. Without such laws an inventor might spend countless hours and a great deal of money developing a new product, put the product out into the market only to have a competitor copy it without incurring any of the time or costs to develop it. In the long run, this prospect would serve as a mighty disincentive to innovate and so would drastically reduce the supply of new products that come into the market. Topic: Legal barriers to entry Skill: Level 3: Using models Section: Checkpoint 16.1 Status: Old AACSB: Written and oral communication 6) What is price discrimination? Answer: A firm price discriminates when it sells different units of a good or service for different prices. For instance, a firm price discriminates when it sells its good or service to different people for different prices, such as when airlines charge different customers different fares for the same flight. A firm also price discriminates when it sells different units of its product to the same person for different prices, such as when an ice cream store charges a lower price for a second scoop of ice cream. Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 16.1 Status: Old AACSB: Written and oral communication

16.9 Essay: Single-Price Monopoly 1) A monopoly, unlike a perfect competitor, has total control in its market because it is the single producer. Why, then, must a single-price monopoly decrease its price if it wants to increase its output? Answer: Because the monopoly DOES control the market, the monopoly sets the price at the maximum level that sells all the output the monopoly produces. This maximum price is determined from the demand for the product. The downward sloping market demand curve shows that the only way to increase the quantity consumers will buy is to lower the price. As a result, when a monopoly wants to produce more output, demanders will not buy the additional output at the initial price. As the downward sloping demand curve indicates, in order to sell the extra production, the monopolist must lower its price. Topic: Demand Skill: Level 4: Applying models Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication 2) What is the relationship between the marginal revenue curve and the demand curve for a single-price monopoly? Answer: For a single-price monopoly, price exceeds marginal revenue. The price is obtained from the demand curve, so for a single-price monopoly, the marginal revenue curve lies below the demand curve. Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication 3) How does marginal revenue compare to price for a single-price monopoly? Answer: Marginal revenue is less than price. Topic: Marginal revenue Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 4) What does the marginal revenue equal when a monopoly's total revenue is maximized? What is the elasticity of demand when the total revenue is maximized? Answer: When the total revenue is at its maximum, the marginal revenue equals 0 and the elasticity of demand equals 1. Topic: Total revenue Skill: Level 2: Using definitions Section: Checkpoint 16.2 Status: Old AACSB: Reflective thinking 128 Copyright © 2021 Pearson Education, Inc.

5) A monopoly can set any price it wants. So why does it still produce at a point where MR = MC, just like a perfectly competitive firm? Answer: The point where MR = MC maximizes any firm's profit for the same reason it maximizes a perfectly competitive firm's profit. In particular, any unit for which MR > MC is a profitable unit to produce and so the firm wants to produce all of these units. As it increases its output, its total profit increases even as the difference between MR and MC shrinks. But as long as MR > MC, the unit is profitable and therefore is produced. Eventually the firm gets to the point where MR = MC. The firm does not want to go beyond this level of output, because for every unit beyond it MC > MR. Producing these units would lower the firm's profit. So, once it starts producing, the firm won't stop producing additional units of output before it reaches the level for which MR = MC. Then, once it reaches this point, it won't go beyond this amount. Therefore the condition MR = MC determines the profit maximizing level of output. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication 6) "A single-price monopoly will always charge a price that is on the elastic range of the demand for the monopoly's output." Explain why the previous statement is correct or incorrect. Answer: The statement is correct. Only when the demand is elastic is marginal revenue positive. (When demand is unit elastic, marginal revenue is zero and when demand is inelastic marginal revenue is negative.) Because marginal cost is always positive, a single-price monopoly will always produce in the elastic range of the demand because it produces where marginal cost equals marginal revenue. Hence the price that the monopoly sets will always be on the elastic range of the demand. Topic: Profit maximization, price Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication 7) Why will a profit-maximizing, single-price monopoly NEVER produce the amount of output that maximizes its total revenue? Answer: When total revenue is at its maximum, the demand is unit elastic and marginal revenue equals zero. However, to maximize its profit, a single-price monopoly produces so that its marginal revenue equals its marginal cost. If marginal revenue equals zero, then in order for this level of output to maximize the monopoly's profit, marginal cost also must equal zero. But marginal cost will never equal zero because to produce another unit always incurs some costs. Because marginal cost cannot equal zero, it is impossible for a profit-maximizing single-price monopoly to produce the amount of output that maximizes its total revenue. Topic: Profit maximization Skill: Level 5: Critical thinking Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication 129 Copyright © 2021 Pearson Education, Inc.

8) Can a monopoly make an economic profit in the long run? Explain your answer. Answer: A monopoly can make an economic profit in the long run. The fact that the monopoly is protected by a barrier to entry allows the firm to make an economic profit in the long run. If the monopoly is making an economic profit, other competitors want to enter the market but the barrier to entry keeps them out. Topic: Profit maximization, long run Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication 9) What kind of profit can a monopoly make in the short run? In the long run? Explain your answers. Answer: In the short run, a monopoly can make an economic profit, zero economic profit, or incur an economic loss. In other words, any sort of profit outcome is possible in the short run. In the long run, a monopoly can make an economic profit or zero economic profit. A monopoly will not incur an economic loss in the long run because it would shut down. The key result that differentiates it from firms in other types of markets is that a monopoly can make an economic profit in the long run. It can do so because there are barriers to entry. These barriers prevent other firms from entering the market and usurping part of the economic profit. Topic: Profit maximization, long run Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Written and oral communication

10) The table below gives a monopoly's demand schedule. Complete the table by calculating the total revenue and the marginal revenue.

Answer:

The completed table is above. Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

11) The table below gives a monopoly's demand schedule. Complete the table by calculating the total revenue and the marginal revenue.

Answer:

The completed table is above. Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

12) The demand schedule for a single-price monopoly is given in the table below. Calculate the marginal revenue.

Answer:

The completed table is above. Topic: Marginal revenue Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

13) The above figure represents the demand curve for Sue's Seafood, a seller of fresh fish. a. Over what range of output is demand elastic? b. Over what range of output is demand inelastic? c. What price maximizes total revenue? d. What is the price elasticity of demand at the revenue maximizing price? Answer: a. Demand is elastic from 0 to 20 pounds of fish. b. Demand is inelastic from 20 to 40 pounds of fish. c. Total revenue is maximized when the price is $8 a pound. d. Total revenue is maximized when demand is unit elastic. Topic: Marginal revenue and elasticity Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

14) A single-price monopoly has the demand and marginal cost schedules given in the above table. What is the profit-maximizing level of output and price? Answer: The profit-maximizing output is 3 units, because that is the quantity for which the marginal revenue equals the marginal cost. The price is $18 a unit. Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

15) In the figure below, draw and label the demand and cost curves of a monopoly. Identify the quantity a single-price monopoly will produce by labeling it Qm and identify the price by labeling it Pm.

Answer:

The completed figure is above. Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

16) Ron's Hamburger Joint is the only restaurant in town. The above figure represents Ron's cost, the market demand, and marginal revenue curves. Ron operates as a single-price monopoly. a. How many hamburgers does Ron produce? b. What price does Ron charge for a hamburger? c. What is Ron's total revenue? d. What is his total cost? e. What is Ron's economic profit? Answer: a. Ron produces 20 hamburgers per hour. b. The price is $6 for a hamburger. c. Ron's total revenue is $120 an hour. d. Ron's total cost is $80 an hour. e. Ron's economic profit is $40 an hour. Topic: Single-price monopoly, profit maximization Skill: Level 3: Using models Section: Checkpoint 16.2 Status: Old AACSB: Analytical thinking

16.10 Essay: Monopoly and Competition Compared 1) "A single-price monopoly charges a higher price and produces more output than a perfectly competitive industry." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is partially correct because a monopoly charges a higher price than is the case in a perfectly competitive industry. However the statement also is partially incorrect because the monopoly produces less output than is the case in a perfectly competitive industry. Topic: Monopoly and competition compared, output and price Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication 2) Compare the outcome in a market with a single-price monopoly to that in a perfectly competitive market. Answer: The monopoly charges a higher price and produces less output than in a perfectly competitive market. The monopoly creates a deadweight loss by producing less than the efficient quantity of output, whereas a perfectly competitive market produces the efficient quantity of output and so has no deadweight loss. The monopoly decreases consumer surplus and increases producer surplus from what they would be if the market is perfectly competitive. Topic: Monopoly and competition compared, output and price Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication 3) Explain how a single-price monopoly determines its output and price. Compare this process to how a perfectly competitive firm determines its output and price. Answer: Single-price monopolies follow the same profit-maximizing rule as perfectly competitive firms and set their output level where marginal revenue equals marginal cost. However, unlike perfectly competitive firms, monopolies have control over price and can charge as much as the market will bear; therefore, given the quantity they produce, the monopoly chooses its price from the market demand curve. Topic: Monopoly and competition compared, output and price Skill: Level 4: Applying models Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication 4) Which creates a larger deadweight loss, perfect competition or a single-price monopoly? Answer: The single-price monopoly creates a larger deadweight loss because perfect competition does not create a deadweight loss. Topic: Monopoly and competition compared, deadweight loss Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication 138 Copyright © 2021 Pearson Education, Inc.

5) How do the price, output, consumer surplus, economic profit, and total surplus for a singleprice monopoly compare to that of a competitive industry? Answer: For the monopoly, price is higher, output is lower, consumer surplus is less, economic profit is larger, and total surplus is smaller relative to a competitive industry. Topic: Monopoly and competition compared, surpluses Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication 6) "Compared to a competitive market, a single-price monopoly decreases the consumer surplus and increases the economic profit." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is correct. A single-price monopoly produces less than a competitive market and sets a higher price, both of which decrease the consumer surplus but increase the economic profit. Topic: Monopoly and competition compared, surpluses Skill: Level 2: Using definitions Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication 7) Suppose the government breaks up a single-price monopoly and turns it into a perfectly competitive industry. What will happen to price and the quantity produced? What will happen to the monopoly's economic profit and the deadweight loss associated with the monopoly? Answer: The price will fall and output will increase to the efficient level. The monopoly's economic profit will revert to the consumers as consumer surplus as the price falls and the quantity increases. The deadweight loss will be eliminated as output and the consumer surplus increase. Topic: Monopoly and competition compared, surpluses Skill: Level 4: Applying models Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication

8) What is rent seeking? How does rent seeking affect the deadweight loss from monopoly? Answer: Rent seeking is the act of obtaining special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from someone else. Often, rent seeking takes the form of lobbying to increase the economic profit of the lobbyist. Rent seeking increases the deadweight loss from monopoly. With rent seeking, not only does the monopoly create the (standard) deadweight loss, but also resources are used up in the process of rent seeking itself. Topic: Rent seeking Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication 9) "Because of rent seeking, a monopoly may end up earning a normal profit." Is the previous statement correct or incorrect? Why? Answer: The statement is correct. Competition among rent seekers might cause the successful person striving to create a monopoly to pay so much in order to create the monopoly that, when taking into account the cost of creating the monopoly, the person earns only a normal profit. Topic: Rent seeking Skill: Level 1: Definition Section: Checkpoint 16.3 Status: Old AACSB: Written and oral communication

10) The above figure represents a perfectly competitive industry that is taken over by a single firm and operated as a monopoly. a. What was the competitive price and quantity? b. What is the monopoly price and quantity? c. What area represents consumer surplus under perfect competition? d. What area represents consumer surplus under monopoly? e. What area represents the deadweight loss of monopoly? Answer: a. The competitive price was P2 and the competitive quantity was Q2. b. The monopoly price is P3 and the monopoly quantity is Q1. c. The consumer surplus with perfect competition is the area P4P2c. d. The consumer surplus with monopoly is the area P4P3a. e. The deadweight loss from the monopoly is the area abc. Topic: Monopoly and competition compared, surpluses Skill: Level 3: Using models Section: Checkpoint 16.3 Status: Old AACSB: Analytical thinking

16.11 Essay: Price Discrimination 1) Define price discrimination. What factors must be present in order for a firm to price discriminate? Why do firms price discriminate? Answer: Price discrimination is selling a good or service at a number of different prices. In order to price discriminate, the firm must be able to identify and separate different types of buyers. In particular, the firm must be able to identify which buyers are willing to pay a higher price than other buyers. And the firm must sell a product that cannot be resold. Therefore it must not be possible for a buyer who pays a low price to resell the product to a buyer who is willing to pay a higher price. Firms price discriminate because it increases their profit. By price discriminating the firm can charge a buyer a price that is closer to the maximum price the buyer is willing to pay. By setting the price closer to the maximum a buyer is willing to pay the firm can gain added total revenue and thereby added economic profit. Topic: Price discrimination Skill: Level 1: Definition Section: Checkpoint 16.4 Status: Old AACSB: Written and oral communication 2) Give an example of price discrimination. Answer: Price discrimination occurs when senior citizens get cheaper drugs, students get discounts at movies, or children under two can enter museums free. Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking 3) "Price discrimination allows a monopoly to increase its economic profit by capturing part of the consumer surplus and turning it into economic profit." Is the previous statement correct or incorrect? If the statement is correct, why is it important in understanding firms' behaviors? If it is incorrect, why is it incorrect? Answer: The statement is correct. The statement is important because it explains why firms want to price discriminate, namely because they can convert some of the consumer surplus into extra economic profit. Hence firms endeavor to price discriminate because if they can do so, they can increase their economic profit. Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Written and oral communication

4) Why do some firms price discriminate? Relate your answer to the common practice of public colleges charging lower tuition to in-state students and higher tuition to out-of-state students. Answer: Price discrimination helps businesses capture more consumer surplus and hence increase their economic profit. Basically the firm charges more to people who are willing to pay more. For a public college, out-of-state students will likely have a higher willingness to pay for attending that college because, by leaving their home state, they are demonstrating that they truly want to attend the college. If the college charged in-state residents the same tuition as out-ofstate residents, the college would miss the chance to maximize revenue from each group. Charging in-state residents the same high price as out-of-state residents would lead to a massive drop in quantity demanded and thus lower total revenue. By separating their customers based on differing demand conditions, the college earns more total revenue. Topic: Price discrimination Skill: Level 2: Using definitions Section: Checkpoint 16.4 Status: Old AACSB: Written and oral communication 5) Compare and contrast the effect of perfect competition to the effect of perfect price discrimination on: a. efficiency. b. consumer surplus. c. economic profit in the long run. Answer: a. Both perfect competition and perfect price discrimination create efficiency. b. Consumers receive consumer surplus with perfect competition. However, there is no consumer surplus with perfect price discrimination. c. Perfectly competitive firms cannot earn an economic profit in the long run. A perfectly price discriminating monopoly earns the maximum amount of economic profit. Topic: Perfect price discrimination Skill: Level 4: Applying models Section: Checkpoint 16.4 Status: Old AACSB: Written and oral communication 6) Which produces more output: a perfectly price discriminating monopoly or a single-price monopoly? Answer: The monopoly practicing perfect price discrimination produces more output. Indeed, a perfectly price discriminating monopoly produces the efficient level of output. Topic: Perfect price discrimination Skill: Level 3: Using models Section: Checkpoint 16.4 Status: Old AACSB: Reflective thinking

7) A monopolist has the market demand and marginal cost schedules given in the above table. If the monopoly can perfectly price discriminate, what is the profit-maximizing level of output and price? Answer: As a perfectly price discriminating monopoly, the profit-maximizing level of output is 4 units and the price ranges from $22 to $16 for each unit. Topic: Perfect price discrimination Skill: Level 3: Using models Section: Checkpoint 16.4 Status: Old AACSB: Analytical thinking

8) The above figure represents the cost, market demand, and marginal revenue curves for a monopoly. a. Indicate the price and quantity a single-price monopoly selects by labeling the price Pm and the quantity Qm. b. In the figure, lightly shade in the area that represents the single-price monopoly's economic profit. c. Indicate the quantity a perfectly price-discriminating monopoly selects by labeling it Qppd. d. In the figure, more darkly shade in the area that represents the additional economic profit the monopoly earns as a result of the perfect price discrimination.

Answer:

a. The price is labeled Pm and the quantity is labeled Qm. b. The single-price monopoly's economic profit is the lightly shaded rectangle. c. The quantity is labeled Qppd. d. The additional profit is the two darker areas in the figure. Topic: Perfect price discrimination Skill: Level 4: Applying models Section: Checkpoint 16.4 Status: Old AACSB: Analytical thinking 16.12 Essay: Monopoly Regulation 1) "Under the social interest theory of regulation, regulators attempt to maximize profits for the owners of the firms being regulated." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The social interest theory is the theory that regulators seek an efficient use of resources. The capture theory of regulation is the theory that regulators attempt to maximize the producers' economic profit. Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

2) What is the social interest theory of regulation? How does it differ from the capture theory of regulation? Answer: The social interest theory of regulation is that regulators seek an efficient use of resources. The capture theory asserts that producers "capture" the regulators so that the regulation is designed to help the producers maximize their economic profit. Topic: Social interest theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 3) "The theory that regulation seeks an efficient use of resources is called the capture theory of regulation." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The capture theory is the theory that the regulated producers "capture" the regulators and so the regulators help the producers maximize their economic profit. The theory that regulation seeks an efficient use of resources is the "social interest" theory. Topic: Capture theory Skill: Level 1: Definition Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 4) Describe the difference between social interest theory of regulation and the capture theory of regulation. Answer: Both are theories of regulation but they differ according to what they see as to the goal of the regulation. The social interest theory assumes that regulation that seeks an efficient use of resources. It asserts that the political process works to eliminate deadweight loss by using appropriate regulations. The capture theory proposes that producers bend the regulators to their will so that resources are not used efficiently because regulated market outcomes favor producers. Everyone else but producers bears the cost of this regulation. Because this cost is a small amount per person, no one finds it worthwhile to propose legislation to avoid it. Topic: Public interest, capture theory Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Written and oral communication

5) Why are water companies considered a natural monopoly? Answer: Once one water company incurs the cost of establishing a physical connection to one customers' home or place of business, the marginal cost of providing service falls rapidly over time as more and more service is provided. For instance, once a main pipe is buried under a street, adding additional customers on the street is relatively cheap. Economies of scale make it very cost prohibitive for another firm to enter the market, leaving one water company as the provider of the service in that area. Topic: Natural monopoly Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Written and oral communication 6) "If a natural monopoly is regulated using a marginal cost pricing rule, the firm makes zero economic profit." Is the previous statement correct or incorrect? Answer: The statement is incorrect. If a firm is regulated using a marginal cost pricing rule, the firm incurs an economic loss. Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 7) "If Michigan's electric utilities were allowed to use marginal cost pricing, it would lead to economic profits for these utilities." Is the previous statement correct or incorrect? Answer: The statement is incorrect. Imposing marginal cost pricing on natural monopolies results in the firms incurring economic losses not economic profits. Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 8) When a natural monopoly is regulated using a marginal cost pricing rule, what can you say about the firm's profit and the market's efficiency? Answer: Using a marginal cost pricing rule, the monopoly is incurring an economic loss. However, there is an efficient quantity of output produced so that the market is efficient with no deadweight loss. Topic: Natural monopoly, marginal cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

9) If a natural monopoly is regulated using the marginal cost pricing rule, how will that affect prices, outputs, profits, and the distribution of surpluses? What are the pros and cons to this method of regulation? Answer: The marginal cost pricing rule sets the regulated price equal to the price where the marginal cost curve intersects the demand curve. This price is lower than the monopoly price, and results in a higher level of output. The monopoly's economic profit is eliminated; in fact, this rule results in the firm making economic losses, as marginal cost is less than average total cost for a natural monopoly. Because output increases to the point where marginal cost equals price, consumer surplus is maximized. The advantage of this method of regulation is that it results in the efficient level of output. The disadvantage of this method is that means the firm will incur an economic loss. Unless subsidized by the government, allowed to price discriminate, or allowed to use a two-part tariff, the firm will eventually exit the industry, as no firm can operate at a loss in the long run. Topic: Natural monopoly, marginal cost pricing rule Skill: Level 4: Applying models Section: Checkpoint 16.5 Status: Old AACSB: Written and oral communication 10) What is an average cost pricing rule? Why do regulatory agencies use it for natural monopolies? Answer: Average cost pricing means that the firms will equate their price to their average total cost. It is used by regulatory agencies, because if a natural monopoly is forced to charge a perfectly competitive price (using a marginal cost pricing rule), the firm will not be able to cover its costs. Even if the firm is allowed to price discriminate or use a two-part tariff, it still might not be able to cover its losses. So average cost pricing is considered a second-best solution: it allows the natural monopoly to make a normal profit but does not allow it to set its price as high as it would were it unregulated. Topic: Natural monopoly, average cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Written and oral communication 11) "When electric utilities are regulated using an average cost pricing rule, they will earn zero economic profit." Is the previous statement correct or incorrect? Why? Answer: The statement is correct. An average cost pricing rule requires that the firm set its price equal to its average total cost. When price equals average total cost, the firm earns zero economic profit. Topic: Natural monopoly, average cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking

12) When a natural monopoly is regulated using an average cost pricing rule, what can you say about the firm's profit and the market's efficiency? Answer: Using an average cost pricing rule, the monopoly is earning zero economic profit. However, there is an inefficient quantity of output produced so that the market is inefficient and there is a deadweight loss. Topic: Natural monopoly, average cost pricing rule Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Reflective thinking 13) Electric utilities are often considered natural monopolies and are regulated. When would the price be highest: when the utility is not regulated, when it is regulated using an average cost pricing rule, or when it is regulated using a marginal cost pricing rule? When would its price be lowest? Answer: The price would be highest if the utility was left unregulated and could set the profitmaximizing price. The price is lowest if the utility is regulated using a marginal cost pricing rule. Topic: Natural monopoly, regulations Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Written and oral communication 14) Compare and contrast the marginal cost and average cost pricing rules for regulating natural monopolies. Answer: Marginal cost pricing sets the price equal to the marginal cost. It does so by determining the price using the intersection of the marginal cost curve and the demand curve. Marginal cost pricing results in an efficient level of output but the firm incurs an economic loss. Average cost pricing sets the price equal to the average total cost. It does so by determining the price using the intersection of the average cost curve and the demand curve. Average cost pricing results in an inefficient level of output and zero economic profit, that is, the owners' earn a normal profit. Topic: Natural monopoly, regulations Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Written and oral communication

15) What are a marginal cost pricing rule and an average cost pricing rule? What are the disadvantages and advantages of each? Answer: Natural monopolies can be regulated using a marginal cost pricing rule, so that the firm must set its price equal to its marginal cost, or by using an average cost pricing rule, so that the firm must set its price equal to its average total cost. The advantage of the marginal cost pricing rule is that the resulting output is efficient; the disadvantage is that the firm suffers an economic loss. The advantage of the average cost pricing rule is the firm earns zero economic profit; the disadvantage is that it produces an inefficient quantity of output. Topic: Natural monopoly, regulations Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Written and oral communication 16) Why do some utilities have an incentive to exaggerate their costs of production? Answer: Because utilities are generally allowed to charge prices that cover their average cost of production, a utility might want to incur higher than normal costs (maybe from lush carpets, hunting lodges, tickets to sporting events, and so forth). If the utility exaggerates its costs, the regulators are likely to simply order higher rates to cover the higher costs, and so the utility executives can enjoy benefits (the carpet, hunting lodge, sporting events) without incurring any personal costs. Topic: Natural monopoly, cost exaggeration Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Written and oral communication 17) What potential problem is there with rate of return pricing? Answer: The monopolist might exaggerate its costs and mislead the regulator. In this case, the regulator allows the firm to increase its price, so the monopolist has no incentive to operate efficiently and cost effectively. Topic: Natural monopoly, cost exaggeration Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Written and oral communication 18) How can managers of natural monopolies exaggerate their costs? Answer: By increasing on-the-job luxury items such as sumptuous office suites, limousines, golf competitions at expensive locations, company jets, and other non-necessary expenditures, the managers can exaggerate their costs over what is truly necessary to produce the product. Topic: Natural monopoly, cost exaggeration Skill: Level 2: Using definitions Section: Checkpoint 16.5 Status: Old AACSB: Written and oral communication 151 Copyright © 2021 Pearson Education, Inc.

19) Briefly describe and discuss the different ways a natural monopoly can be regulated: Marginal cost pricing, average cost pricing, rate of return regulation, and price cap regulation. Answer: Marginal cost pricing: The regulated price is set equal to marginal cost. In this case, the efficient quantity is produced so there is no deadweight loss. Consumer surplus is maximized. The firm incurs an economic loss unless it can raise revenues in an additional way, such as using price discrimination or a two-part tariff. Average cost pricing: The regulated price is set equal to average cost. While this form of regulation does not produce an efficient outcome, it allows firms to make a normal profit. There is a deadweight loss. Rate of return regulation: The regulated price enables a regulated firm to earn a specified target percent return on its capital. If a regulator could observe the firm's total cost and also know that the firm minimized total cost, the regulation would be the same as average cost pricing. In some cases, however, the firm is able to "capture" the regulator, which enables the firm to exaggerate it costs and so set its price and produce the amount of output that it would were it an unregulated monopoly. Price cap regulation: The regulator sets a price ceiling. The firm can charge any price it wants below the price cap and keep some or all of any economic profit it makes. This regulation induces the firm to operate efficiently and control costs. If the firm makes a profit that is too high, the regulator might impose earnings share regulation, which requires the firm to make refunds to customers when profits rise above a target level. Topic: Natural monopoly, regulations Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Written and oral communication

20) In the figure above, complete the graph of the electric utility company by adding the marginal revenue and marginal cost curves. Assume the marginal cost is constant at 4¢ per kilowatt-hour. Now discuss the marginal cost pricing rule and the average cost pricing rule regulators might use to regulate the firm. Be sure to state the price and quantity that are selected for each option. Also, what price and quantity does the firm select if it is not regulated? Answer:

The completed figure is above. Two methods regulators might use to regulate the firm are a marginal cost pricing rule and an average cost pricing rule. If the regulators use a marginal cost pricing rule, the firm must set its price equal to its marginal cost. In the figure, the firm sets a price of 4¢ a kilowatt-hour and produces 400 megawatts per hour. The firm produces the efficient quantity of output, but it incurs an economic loss because ATC > P. If the regulators use an average cost pricing rule, the firm must set its price equal to its average total cost. In the figure, the firm sets a price of 8¢ a kilowatt-hour and produces 300 megawatts per hour. In this case the firm covers its costs (so that it earns a normal profit) but it produces an inefficient amount of output. Finally, if the firm is allowed to maximize its profit, it produces where its MR = MC. So the firm produces 200 megawatts of power and, setting its price from its demand curve, charges a price of 12¢ per kilowatt-hour. Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking

21) The above figure shows the demand for cable and the cable company's cost of providing cable. a. What price and quantity will be produced if the company is unregulated and profit maximizes? b. What price and quantity will be produced if the company is regulated using the marginal cost pricing rule? c. What is the advantage of the marginal cost pricing rule? d. What price and quantity will be produced if the company is regulated using the average cost pricing rule? e. What is the advantage of the average cost pricing rule? Answer: a. The price will be $90 per month and the quantity will be 20,000 households. b. The price will be $30 per month and the quantity will be 40,000 households. c. This rule results in the efficient level of production. d. The price will be $60 per month and the quantity will be 30,000 households. e. This rule results in the firm making a normal profit. Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking

22) The above figure illustrates the market for electric power that is served by the one utility in Alberta, Canada. a. If the government did not regulate this utility, what would be the price of a kilowatt hour in this region and how much power would be generated? b. If the government regulates the utility and chooses an average cost pricing rule, what would be the price of a kilowatt hour and how much power would be generated? c. If the government regulates the utility and chooses a marginal cost pricing rule, what would be the price of a kilowatt hour and how much power would be generated? Answer: a. The price would be 12¢ a kilowatt hour and 20 megawatts per hour would be generated. b. The price would be 8¢ a kilowatt hour and 30 megawatts per hour would be generated. c. The price would be 4¢ a kilowatt hour and 40 megawatts per hour would be generated. Topic: Natural monopoly Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking

23) The above figure represents the cost and demand curves for a natural monopoly that is regulated using a marginal cost pricing rule. a. What is the quantity? b. What price is charged? c. What area represents the consumer surplus when the firm is regulated using a marginal cost pricing rule? d. What distance represents the firm's loss per unit when the firm is regulated using a marginal cost pricing rule? Answer: a. The quantity is the efficient quantity, Q3. b. The price is P2. c. When the firm is regulated using a marginal cost pricing rule, the consumer surplus is equal to the area of the triangle P1dP2. d. The loss per unit is the amount equal to the distance cd. Topic: Natural monopoly, marginal cost pricing rule Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking

24) The above figure shows the demand, marginal revenue, and cost curves for a natural monopoly. a. Which price and quantity is set if the capture theory is correct? b. If production is at the price and quantity specified in part (a), what area represents the economic profit? c. If production is at the price and quantity specified in part (a), what area represents the deadweight loss? d. If production is at the price and quantity specified in part (a), what area represents the consumer surplus? Answer: a. The profit-maximizing price and quantity are P2 and Q1. b. The economic profit equals the area of the rectangle P2abP3. c. The deadweight loss is the area of the triangle acd. d. The consumer surplus is the area of the triangle P1aP2. Topic: Capture theory Skill: Level 3: Using models Section: Checkpoint 16.5 Status: Old AACSB: Analytical thinking

Foundations of Microeconomics, 9e (Bade) Chapter 17 Monopolistic Competition 17.1 What Is Monopolistic Competition? 1) An industry with a large number of firms, differentiated products, and free entry and exit is called A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. E) monopolistic oligopoly. Answer: B Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 2) One characteristic of monopolistic competition is that it has A) many firms producing a slightly differentiated product. B) many firms producing identical goods. C) one firm producing a unique good. D) a few firms producing a slightly differentiated product. E) large barriers to entry. Answer: A Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 3) Which market structure is characterized by the following characteristics? i. a large number of firms compete ii. each firm produces a differentiated product iii. firms are free to enter and exit A) perfect competition B) duopoly C) oligopoly D) monopolistic competition E) monopoly Answer: D Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 1 Copyright © 2021 Pearson Education, Inc.

4) In monopolistic competition, each firm supplies a small part of the market. This occurs because A) there are barriers to entry. B) there are no barriers to exit. C) there are a large number of firms. D) firms produce differentiated products. E) there are a large number of buyers. Answer: C Topic: Monopolistic competition, definition Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 5) Monopolistic competition is a market structure in which A) firms face barriers to entry. B) a large number of firms compete. C) firms produce and sell an identical product. D) firms face perfectly elastic demand for their product. E) the firms have no ability to influence the price of their product. Answer: B Topic: Monopolistic competition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 6) Monopolistic competition is defined as a type of market structure in which A) many firms produce the good. B) firms produce a homogeneous good. C) there are barriers to entry. D) firms can make an economic profit in the long run. E) firms can easily enter the market but cannot easily exit from it. Answer: A Topic: Monopolistic competition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

7) What does monopolistic competition have in common with perfect competition? A) a large number of firms and freedom of entry and exit B) a standardized product C) product differentiation D) the ability to make an economic profit in the long run E) barriers to exit but no barriers to entry Answer: A Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 8) What does monopolistic competition have in common with monopoly? A) a large number of firms B) a downward-sloping demand curve C) the ability to collude with respect to price D) mutual interdependence E) barriers to entry Answer: B Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 9) If a large number of firms are competing, the market could be A) perfect competition or monopolistic competition. B) perfect competition or monopoly. C) monopolistic competition or oligopoly. D) monopolistic competition or monopoly. E) oligopoly or monopoly. Answer: A Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

10) In both monopolistic competition and perfect competition A) firms sell identical products. B) there is easy entry and exit. C) firms are price takers. D) firms face horizontal demand curves. E) the marginal revenue curve and the demand curve are the same. Answer: B Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 11) Which of the following is NOT a characteristic of monopolistic competition? A) few firms compete B) easy entry and exit C) small market share D) differentiated product E) no barriers to entry or exit Answer: A Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 12) A firm in monopolistic competition ________ influence its price and ________ influence the market average price. A) can; can B) can; cannot C) cannot; can D) cannot; cannot E) can; only in the short run can Answer: B Topic: Monopolistic competition, definition Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

13) The women's dress industry is monopolistically competitive because each firm has A) a large market share. B) a very small market share. C) no market share. D) no competition for their market share. E) struck a deal with the many other firms about what price will be charged. Answer: B Topic: Monopolistic competition, definition Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 14) It would be impossible for members of the fast-food industry to collude to fix prices because A) there are too many fast-food firms in the market. B) fast food is not durable. C) there are not enough fast-food firms in the market. D) the price of fast-food is too low. E) demanders would not buy from firms that collude. Answer: A Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 15) Because of the number of firms in monopolistic competition A) each firm has a large market share. B) it is possible for the firms to collude. C) no one firm can dominate the market. D) one firm has the ability to dictate market conditions. E) each firm must carefully monitor what its competitors do. Answer: C Topic: Monopolistic competition, definition Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

16) In an industry with a large number of firms A) each firm will produce a large quantity, relative to market demand. B) one firm will dominate the market. C) collusion is impossible. D) competition is eliminated. E) barriers to exit must exist. Answer: C Topic: Monopolistic competition, definition Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 17) The freedom of entry and exit in monopolistic competition means that firms A) enter the market when economic losses are being incurred. B) exit the market when economic profits are being made. C) enter the market when firms are making zero economic profit. D) can enter a market to compete for economic profits and leave when economic losses are being incurred. E) find it easy to permanently make an economic profit. Answer: D Topic: Monopolistic competition, definition Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 18) In monopolistic competition, the products of different sellers are A) identical. B) similar but slightly different. C) unique without any close or perfect substitutes. D) perfect substitutes. E) either identical or differentiated. Answer: B Topic: Product differentiation Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

19) A differentiated product has A) many perfect substitutes. B) no close substitutes. C) no substitutes of any kind. D) close but not perfect substitutes. E) many different complements. Answer: D Topic: Product differentiation Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 20) Product differentiation involves making a product that is A) slightly different from the products of competing firms. B) no different than the products of competing firms. C) very different from the products of competing firms. D) completely different from the products of competing firms. E) cheaper than the products of competing firms. Answer: A Topic: Product differentiation Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 21) Product differentiation means A) firms sell products that are very dissimilar. B) products sold by different firms are slightly different. C) charging a higher price to consumers with high willingness to pay. D) charging a lower price to consumers with low willingness to pay. E) that a single firm sells many different types of products. Answer: B Topic: Product differentiation Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

22) Which of the following is the best example of a differentiated product? A) beets in the local supermarket B) diamonds C) airlines D) running shoes E) electricity Answer: D Topic: Product differentiation Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 23) Because of product differentiation, firms A) do not have to compete because their products are unique. B) cannot compete on price. C) can compete on the basis of quality. D) are unable to compete by using advertising. E) must compete on only price. Answer: C Topic: Product differentiation Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 24) Which of the following is TRUE about monopolistic competition but FALSE about perfect competition? A) There are a large number of independently acting sellers. B) There are no barriers to entry. C) Firms can make an economic profit in the short run. D) Firms compete on their product's price as well as its quality and marketing. E) Firms cannot make an economic profit in the long run. Answer: D Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

25) Product differentiation allows a firm to compete with another firm on the basis of A) efficiency. B) elasticity. C) quality, price, and marketing. D) the level of output and the price. E) demand. Answer: C Topic: Product differentiation Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 26) In monopolistic competition, the presence of a large number of firms making a differentiated product means that A) each firm can set the price of its particular product. B) each firm must charge the same price. C) the price is established by collusive behavior. D) each firm must produce the same quantity. E) firms cannot compete with each other on the basis of price. Answer: A Topic: Monopolistic competition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 27) In monopolistic competition, a firm can set the price for its product because of A) easy entry and exit. B) economic profits. C) product differentiation. D) many competitors. E) the firm's upward sloping demand curve. Answer: C Topic: Monopolistic competition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

28) Firms in monopolistic competition have demand curves that are A) horizontal. B) vertical. C) downward sloping. D) upward sloping. E) U-shaped. Answer: C Topic: Monopolistic competition, demand curve Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 29) As a firm in monopolistic competition sets the price for its product, the firm faces a tradeoff between A) supply and demand. B) efficiency and equity. C) internal and external economies of scale. D) price and the quantity it can sell. E) its marginal revenue and its price. Answer: D Topic: Monopolistic competition, demand curve Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 30) An example of a firm in monopolistic competition is A) your local water company. B) the sole cable television company. C) the many Chinese restaurants in San Francisco. D) Kansas Power and Light, the sole provider of electricity in Kansas City. E) Shaniq, a wheat farmer. Answer: C Topic: Monopolistic competition, examples Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

31) Which of the following is the best example of a monopolistically competitive industry? A) land-based long distance telephone service B) wheat farming C) the local electricity producer D) manufacturing of shirts E) cable television Answer: D Topic: Monopolistic competition, examples Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 32) The United Company competes with many other firms each producing slightly different products. Firms freely enter and exit this industry. The type of industry United Company operates in is A) a monopoly. B) monopolistic competition. C) oligopoly. D) perfect competition. E) oligopolistic monopoly. Answer: B Topic: Monopolistic competition, examples Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 33) Concentration ratios A) refer to the concentration of customers in a certain area. B) measure whether the market is dominated by a small number of firms. C) measure the concentration of a large number of firms in a certain area. D) have high values for perfect competition. E) measure how concentrated a firm's sales are among certain types of goods. Answer: B Topic: Four-firm concentration ratio Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

34) The four-firm concentration ratio is the percentage of ________ accounted for by the four largest firms in an industry. A) profit B) supply C) total revenue D) total cost E) marginal cost Answer: C Topic: Four-firm concentration ratio Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 35) If you have found the percentage of the value of total revenue accounted for by the four largest firms in an industry, you have calculated the A) elasticity of demand. B) elasticity of supply. C) Herfindahl-Hirschman Index. D) four-firm concentration ratio. E) monopolistic concentration index. Answer: D Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Revised AACSB: Reflective thinking 36) If the four-firm concentration ratio of an industry is A) near 100, the industry is considered very competitive. B) less than 40, the industry is considered an oligopoly. C) over 40, the industry is considered monopolistic competition. D) less than 40, the industry is considered monopolistic competition. E) close to 0, the industry is considered a monopoly. Answer: D Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

37) Which of the following four-firm concentration ratios would be the best indication of a perfectly competitive industry? A) 2 percent B) 31 percent C) 78 percent D) 100 percent E) 50 percent Answer: A Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 38) Which of the following is correct? A) Monopoly has a four-firm concentration ratio of 100. B) Perfect competition has a four-firm concentration ratio near zero. C) Monopolistic competition has a four-firm concentration ratio of more than 40. D) Both answers A and B are correct. E) Both answers A and C are correct. Answer: D Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 39) If the four-firm concentration ratio equals 0.1 percent for the Mexican tomato industry, then this industry is best characterized as A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) either a monopoly or monopolistic competition. Answer: D Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

40) Which of the following four-firm concentration ratios is consistent with monopolistic competition? A) 100 percent B) 75 percent C) 25 percent D) 0 percent E) 91 percent Answer: C Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 41) Which of the following four-firm concentration ratios would be the best indicator of an oligopoly? A) 0.25 percent B) 31 percent C) 78 percent D) 100 percent E) 11 percent Answer: C Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 42) If the four-firm concentration ratio for the market for diapers is 73 percent, then this industry is best characterized as A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) either a monopoly or monopolistic competition. Answer: C Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

43) Which of the following four-firm concentration ratios would be the best indicator of a monopoly? A) 0.25 percent B) 31 percent C) 78 percent D) 100 percent E) 89 percent Answer: D Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

44) The table above shows the revenue figures for the top four firms along with a total for the remaining firms in the fast-food industry. What is the four-firm concentration ratio for the industry? A) 200 B) 20 percent C) 25 percent D) 80 percent E) 100 percent Answer: B Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

45) What is the four-firm concentration ratio if the four largest firms in an industry account for 5 percent, 6 percent, 7 percent, and 8 percent of total revenue? A) 26 percent B) 174 percent C) 1,680 D) There is enough information given to answer the question, but none of the answers above is correct. E) There is not enough information given to answer the question. Answer: A Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

Firm Firm 1 Firm 2 Firm 3 Firm 4

Sales (millions of dollars) 100 90 85 80

Other 50 firms

645

46) The table above shows the revenue figures for a(n) ________ market because its four-firm concentration ratio is ________ percent. A) competitive; 35.5 B) uncompetitive; 55 C) perfectly competitive; 15.5 D) concentrated; 55 E) perfectly competitive; 35.5 Answer: A Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

47) The square of the percentage market share of each firm summed over the 50 largest firms in a market is the A) elasticity of demand value. B) elasticity of supply value. C) Herfindahl-Hirschman Index. D) four-firm concentration ratio. E) fifty-firm concentration ratio. Answer: C Topic: Herfindahl-Hirschman Index Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 48) The Herfindahl-Hirschman Index measures market concentration in an industry by summing the square of the percentage market shares for A) the 4 largest firms. B) the 50 smallest firms. C) the 4 smallest firms. D) the 50 largest firms. E) all firms in the market. Answer: D Topic: Herfindahl-Hirschman Index Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 49) The Herfindahl-Hirschman Index is the ________ of the percentage market share of each firm summed over the largest 50 firms in a market. A) sum B) square C) square root D) cube E) negative Answer: B Topic: Herfindahl-Hirschman Index Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

50) If the Herfindahl-Hirschman Index in the market for single-use cameras equals 10,000, then the single-use camera industry is best characterized as A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) either a monopoly or monopolistic competition. Answer: A Topic: Herfindahl-Hirschman Index Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 51) If the HHI for the widget industry is 1,200, then the market structure is A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) impossible to determine. Answer: B Topic: Herfindahl-Hirschman Index Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 52) A market in which the Herfindahl-Hirschman Index exceeds 2,500 is considered to be A) competitive. B) not competitive. C) moderately competitive. D) purely competitive. E) either a monopoly or monopolistic competition. Answer: B Topic: Herfindahl-Hirschman Index Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Revised AACSB: Reflective thinking

53) When the Herfindahl-Hirschman Index for an industry is A) very small, the industry can be perfectly competitive. B) very large, the industry can be perfectly competitive. C) 10,000, the industry is perfectly competitive. D) very small, the industry can be a monopoly. E) above 5,000, the industry is considered not very competitive, and when it is below 5,000, the industry is considered very competitive. Answer: A Topic: Herfindahl-Hirschman Index Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 54) If there are four firms in an industry with market shares of 50 percent, 40 percent, 5 percent, and 5 percent, the Herfindahl-Hirschman Index is A) 100. B) 4,150. C) 25. D) 3,450. E) undefined because there are not 50 firms in the industry. Answer: B Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking 55) What is the Herfindahl-Hirschman Index if the four firms in an industry account have market shares of 62 percent, 15 percent, 15 percent, and 8 percent? A) 100 B) 4,358 C) 111,600 D) 2,822 E) 6,200 Answer: B Topic: Herfindahl-Hirschman Index Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

56) The three largest firms in an industry have market shares of 40 percent, 30 percent, and 2 percent. The remaining 47 firms in the industry each have a market share of 1 percent. The Herfindahl-Hirschman Index (HHI) for this industry is A) 2,551. B) 5,184. C) 24,061. D) 10,000. E) 3,013. Answer: A Topic: Herfindahl-Hirschman Index Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

57) Suppose there are 7 firms in the candy industry with the market shares shown above. What is the HHI for the industry? A) 1,850 B) 2,000 C) 6,400 D) 100 E) 20 Answer: B Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

58) A market is considered competitive if the Herfindahl-Hirschman Index (HHI) is ________ and its four-firm concentration ratio is ________. A) high; high B) high; low C) low; high D) low; low E) between 30 percent and 70 percent; greater than 5,000 Answer: D Topic: Herfindahl-Hirschman Index Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 59) The U.S. Justice Department A) scrutinizes any merger of firms in a market in which the four-firm concentration exceeds 25 percent. B) uses only the Herfindahl-Hirschman Index when considering whether to challenge a merger. C) is likely to challenge a merger if the Herfindahl-Hirschman Index exceeds 1,800. D) Answers A and B are correct. E) Answers B and C are correct. Answer: C Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 60) One problem with measures of market concentrations is that they do NOT A) account for barriers to entry. B) allow for all market types. C) account for the difficulty in collecting total revenue data. D) create meaningful comparisons across industries. E) accurately measure concentration in markets with fewer than 4 firms. Answer: A Topic: Limitations of concentrations ratios Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

61) In monopolistic competition there A) are many firms and many buyers. B) are several large firms. C) is one large firm. D) might be many, several, or one firm. E) are many firms but only a few buyers. Answer: A Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 62) A firm in monopolistic competition has a ________ market share and ________ influence the price of its good or service. A) large; can B) large; cannot C) small; can D) small; cannot E) large; might be able to Answer: C Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 63) Product differentiation means A) making a product that has perfect substitutes. B) making a product that is entirely unique. C) the inability to set your own price. D) making a product that is slightly different from products of competing firms. E) making your demand curve horizontal. Answer: D Topic: Product differentiation Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

64) Firms in monopolistic competition compete on i. quality. ii. price. iii. marketing. A) i and ii B) ii only C) ii and iii D) i and iii E) i, ii, and iii Answer: E Topic: Product differentiation Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 65) A firm in monopolistic competition has ________ demand curve. A) a downward sloping B) an upward sloping C) a vertical D) a horizontal E) a U-shaped Answer: A Topic: Monopolistic competition, demand curve Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 66) The absence of barriers to entry in monopolistic competition means that in the long run firms A) make an economic profit. B) make zero economic profit. C) incur an economic loss. D) make either an economic profit or zero economic profit. E) make either zero economic profit or incur an economic loss. Answer: B Topic: Monopolistic competition, long run profit Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

67) If the four-firm concentration ratio for the market for pizza is 28 percent, then this industry is best characterized as A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) oligopolistic competition. Answer: B Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 68) Each of the ten firms in an industry has 10 percent of the industry's total revenue. The fourfirm concentration ratio is A) 80. B) 100. C) 1,000. D) 40. E) 10. Answer: D Topic: Four-firm concentration ratio Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking 69) Each of the four firms in an industry has a market share of 25 percent. The HerfindahlHirschman Index equals A) 3,600. B) 100. C) 625. D) 25. E) 2,500. Answer: E Topic: Herfindahl-Hirschman Index Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

70) The larger the four-firm concentration ratio, the ________ competition within an industry; the larger the Herfindahl-Hirschman Index, the ________ competition within an industry. A) more; more B) more; less C) less; more D) less; less E) The premise of the question is wrong because the four-firm concentration ratio applies only to markets with four firms in it and these markets are, by definition, not competitive. Answer: D Topic: Herfindahl-Hirschman Index Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 71) Girlfriend's Salon is the only hair salon in Sunnyvale, a small town. Which of the following statements correctly describes a concentration measure for salons in Sunnyvale? A) The measure would incorrectly show an uncompetitive market structure because many firms could open in Sunnyvale without any restrictions. B) The measure would incorrectly show an uncompetitive market because the measure does not reflect the low prices charged at Girlfriend's Salon. C) The measure would correctly show a monopoly exists in town because there are so few residents. D) The measure would correctly show a monopoly exists because Girlfriend's revenues are low. E) The measure would incorrectly show a perfectly competitive market exists because new salons can open and compete with Girlfriend's. Answer: A Topic: Limitations of concentrations ratios Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking 17.2 Output and Price Decisions 1) For a monopolistically competitive firm, the demand curve A) is a horizontal line. B) has a positive slope. C) is vertical. D) has a negative slope. E) is the same as the marginal revenue curve. Answer: D Topic: Monopolistic competition Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 25 Copyright © 2021 Pearson Education, Inc.

2) The marginal revenue curve facing a monopolistically competitive firm A) lies on its demand curve. B) lies above its demand curve. C) lies below its demand curve. D) is equal to its price curve. E) is parallel to its demand curve. Answer: C Topic: Monopolistic competition Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 3) When a firm maximizes its profit, which of the following is correct for firms in monopolistic competition and perfect competition? A) P = MC for both types of firms. B) P = MR = MC for firms in perfect competition, and P > MR = MC for firms in monopolistic competition. C) MR = MC for firms in perfect competition and MR > MC for firms in monopolistic competition. D) P > MR = MC for firms in both perfect competition and monopolistic competition. E) P = ATC always for firms in both perfect competition and monopolistic competition. Answer: B Topic: Monopolistic competition Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 4) Firms in monopolistic competition determine the profit-maximizing level of output by producing A) the same output level as rivals do. B) where average total cost is minimized. C) at the point of minimum average fixed cost. D) where marginal revenue equals marginal cost. E) where price equals average total cost. Answer: D Topic: Monopolistic competition, output and price Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

5) In monopolistic competition, profit is maximized by producing so that marginal revenue A) equals price. B) is negative. C) equals marginal cost and which are less than price. D) equals average total cost but not marginal cost. E) equals marginal cost and equals price. Answer: C Topic: Monopolistic competition, output and price Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 6) A firm in monopolistic competition makes its decisions on quantity and price by A) taking price as given from the market and producing where MR = MC. B) taking both price and quantity as given from the market. C) producing where MR = MC and setting the price for this quantity from the demand curve. D) taking quantity as given from the market and setting the price for this quantity from the demand curve. E) producing where MR = MC and setting the price so that P = MR = MC. Answer: C Topic: Monopolistic competition, output and price Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 7) To maximize profit, a firm in monopolistic competition will produce the quantity where marginal revenue A) is greater than marginal cost. B) equals zero. C) is less than marginal cost. D) equals marginal cost. E) equals average total cost. Answer: D Topic: Monopolistic competition, output and price Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

8) If a monopolistically competitive seller's marginal cost is $3.56, the firm will increase its output if A) its marginal revenue is less than $3.56. B) its marginal revenue is equal to $3.56. C) its marginal revenue is more than $3.56. D) average total cost is less than $3.56. E) Both answers A and D are correct. Answer: C Topic: Monopolistic competition, output and price Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 9) If a monopolistically competitive seller's marginal cost is $3.56, the firm will decrease its output if A) its marginal revenue is less than $3.56. B) its marginal revenue is equal to $3.56. C) its marginal revenue is more than $3.56. D) its average total cost is equal to $4.00. E) Both answers B and D are correct. Answer: A Topic: Monopolistic competition, output and price Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 10) If a monopolistically competitive seller's marginal cost is $3.56, the firm will not change its output if A) its marginal revenue is less than $3.56. B) its marginal revenue is equal to $3.56. C) its marginal revenue is more than $3.56. D) its average total cost is equal to $3.56. E) Both answers B and D are correct. Answer: B Topic: Monopolistic competition, output and price Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

11) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. Kevin will train how many clients per day? A) 4 B) 6 C) 10 D) between 2 and 4 E) None of the above answers is correct. Answer: A Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 12) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. What price will Kevin charge per session? A) $100 B) $60 C) $40 D) $20 E) $80 Answer: B Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 29 Copyright © 2021 Pearson Education, Inc.

13) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. If Kevin trains 5 clients per day, he will ________ his profit and will ________. A) maximize; make zero economic profit B) not maximize; make zero economic profit anyway C) maximize; make an economic profit D) not maximize; make an economic profit anyway E) not maximize; incur an economic loss Answer: D Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

14) The figure above shows a firm operating in a monopolistically competitive market. If the firm stays open, to maximize profit, the firm produces A) 80 units sold at $80 per unit and incurs an economic loss of $20 per unit. B) 100 units sold at $60 per unit. C) 80 units sold at $40 per unit and makes an economic profit of $60 per unit. D) 120 units in order to minimize cost. E) 80 units sold at $40 per unit and incurs an economic loss of $60 per unit. Answer: A Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Revised AACSB: Application of knowledge 15) The figure above shows a firm operating in a monopolistically competitive market. If nothing changes, in the long run this firm A) should increase production to 120 units in order to reduce its cost. B) should stay open but decrease production below 80 units in order to reduce its cost. C) will exit the market because it is currently incurring an economic loss in the short run. D) will produce 100 units to eliminate the deadweight loss. E) will charge $100 per unit to eliminate the loss. Answer: C Topic: Monopolistic competition, economic loss Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Revised AACSB: Application of knowledge 31 Copyright © 2021 Pearson Education, Inc.

16) The above figure shows a restaurant engaged in monopolistic competition with other restaurants. The equilibrium price at this restaurant is ________ per meal. A) $20 B) $30 C) $50 D) less than $20 E) more than $50 Answer: C Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 17) The above figure shows a restaurant engaged in monopolistic competition with other restaurants. The equilibrium quantity at this restaurant is ________ meals per day. A) less than 150 B) between 151 and 250 C) between 251 and 350 D) between 451 and 450 E) more than 451 Answer: B Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

18) The above figure shows a motel engaged in monopolistic competition with other motels. The equilibrium price at this motel is ________ per room. A) $20 B) $30 C) $40 D) $50 E) $10 Answer: D Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 19) The above figure shows a motel engaged in monopolistic competition with other motels. The equilibrium quantity at this motel is ________ rooms per day. A) 200 B) 300 C) 400 D) 500 E) 100 Answer: B Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

20) The above figure shows a motel engaged in monopolistic competition with other motels. The figure above shows the ________ equilibrium in which the motel is ________. A) short-run; making an economic profit B) short-run; making zero economic profit C) long-run; making an economic profit D) long-run; making zero economic profit E) short-run; incurring an economic loss Answer: A Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

21) The figure above shows Firm X, a firm that is maximizing profit. When it maximizes its profit (or minimizes its loss), the firm is making an economic ________ because it produces ________ units and charges ________ per unit. A) loss; 100; $20 B) profit; 100; $10 C) profit; 100; $30 D) loss; 120; $28 E) loss; 110; $20 Answer: A Topic: Monopolistic competition, economic loss Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Revised AACSB: Analytical thinking

22) The figure above shows Firm X. The firm stays open, so we know that it is operating in the ________ because it ________. A) short run; minimizes its loss when it produces 100 units B) short run; maximizes profit when it produces 110 units C) short run; minimizes its loss when it produces 110 units D) long run; minimizes its loss when it produces 100 units E) long run; maximizes profit when it charges $30 per unit Answer: A Topic: Monopolistic competition, economic loss Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Revised AACSB: Analytical thinking 23) The figure above shows Firm X. The firm is a monopolistically competitive market. The firm makes an ________ in the short run if it is open but will ________ in the long run. A) economic loss of $10 per unit; go out of business or make a zero economic profit B) economic loss of $2 per unit; make an economic profit C) economic profit $10 per unit; make zero economic profit D) economic profit of $1,000; definitely go out of business E) economic loss of $10 per unit; definitely face more competition Answer: A Topic: Monopolistic competition, economic loss Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Revised AACSB: Analytical thinking 24) The major difference between monopolistic competition and monopoly is A) monopoly is a price setter, and a firm in monopolistic competition is a price taker. B) only a monopoly can make an economic profit in the long run. C) only a firm in monopolistic competition can make an economic profit in the short run. D) how the quantity of output is determined. E) only firms in monopolistic competition are protected by barriers to entry. Answer: B Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

25) In the long run in monopolistic competition, firms A) can make an economic profit. B) incur an economic loss. C) make zero economic profit. D) shut down if they are making zero economic profit. E) make either an economic profit or zero economic profit. Answer: C Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 26) If firms in monopolistic competition are making economic profits, eventually A) they shut down. B) they exit the industry. C) the market turns into a monopoly. D) new firms enter the industry. E) the firms in the market increase their production so that their economic profit disappears. Answer: D Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 27) If a firm in monopolistic competition is making an economic profit A) it is in the long run. B) other firms can enter the market. C) it can do so because it is "monopolistic" and other firms will have a hard time competing with it. D) its average cost must exceed its marginal cost. E) The question errs because firms in monopolistic competition cannot make an economic profit. Answer: B Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

28) In the long run, firms in monopolistic competition make zero economic profit because A) firms are free to enter and exit. B) their products are similar but slightly different. C) of over-reliance on product marketing. D) of collusion among the various sellers. E) their demand curves are horizontal. Answer: A Topic: Monopolistic competition, efficiency Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 29) In long-run equilibrium, a firm in monopolistic competition makes A) an economic profit but the economic profit is less than it would be if the firm was a monopoly. B) an economic profit that is higher than what it would be if the firm was a monopoly. C) zero economic profit. D) an economic profit that is the same amount as it would be if the firm was a monopoly. E) an economic profit, an economic loss, or zero economic profit. Answer: C Topic: Monopolistic competition, long run profit Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 30) In monopolistic competition there are ________ barriers to entry, so therefore in the long run, economic profit ________. A) no; is substantial B) no; equals zero C) many; equals zero D) many; is substantial E) many; might be earned depending on the degree of product differentiation Answer: B Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

31) In monopolistic competition, there are ________ barriers to entry and so firms in monopolistic competition ________ make an economic profit in the long run. A) high; can B) high; cannot C) no; can D) no; cannot E) sometimes; can sometimes Answer: D Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 32) Entry and exit continue in monopolistic competition until the remaining firms are A) making an economic profit. B) incurring an economic loss. C) making less than a normal profit. D) making zero economic profit. E) producing the normal amount of product differentiation. Answer: D Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 33) A firm in monopolistic competition is similar to a firm in perfect competition because they both A) can make only zero economic profit in the long run. B) can make only zero economic profit in the short run. C) maximize their profits by producing where P = MR = MC. D) Both answers A and C are correct. E) Both answers B and C are correct. Answer: A Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

34) The primary reason why monopolistically competitive firms cannot make an economic profit in the long run is because A) there are barriers to entry. B) there is freedom of entry. C) the antitrust laws prevent profit from increasing. D) recessions occur. E) they collude to make a normal profit. Answer: B Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 35) In monopolistic competition, the entry of new firms A) shifts existing firms' demand curves rightward. B) shifts existing firms' demand curves leftward. C) only results in a movement along the existing firms' demand curves. D) has no effect on the existing firms' demand curves. E) shifts existing firms' supply curves rightward. Answer: B Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 36) When a monopolistically competitive firm's demand curve shifts leftward, what happens to its marginal revenue curve? A) Nothing, the marginal revenue curve is unchanged. B) It disappears. C) It shifts rightward. D) It shifts leftward. E) None of the above is correct because the effect on the marginal revenue curve depends on whether the demand was initially elastic or inelastic. Answer: D Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

37) If firms in monopolistic competition are making economic profits, then A) they can expect to earn the profits indefinitely. B) new rivals enter the industry and the demand for any seller's good decreases. C) the market demand becomes more inelastic. D) the industry is in long-run equilibrium. E) new rivals enter the industry and the demand for any seller's good increases. Answer: B Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 38) Nike is a firm in monopolistic competition. If Nike is making an economic profit from new cross-training shoe, over time the demand for these shoes A) increases as new firms enter the market. B) decreases as new firms enter the market. C) does not change as new firms enter the market. D) decreases as firms exit the market. E) increases as firms exit the market. Answer: B Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 39) In the long run, firms in monopolistic competition make zero economic profit. When firms make zero economic profit, in the long run they exit the industry. A) The first sentence is correct and the second sentence is incorrect. B) The first sentence is incorrect and the second sentence is correct. C) Both sentences are correct. D) Both sentences are incorrect. E) More information about the presence or absence of barriers to entry and exit is needed to determine if the statements are true or false. Answer: A Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

40) When firms in monopolistic competition incur an economic loss, some firms will A) enter the industry and produce more products. B) exit the industry, and demand will increase for the firms that remain. C) exit the industry, and demand will decrease for the firms that remain. D) enter the industry, and demand will become more elastic for the original firms. E) exit the industry and other firms will enter. Answer: B Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 41) When firms in monopolistic competition are making an economic profit, firms will A) enter the industry, and demand will increase for the original firms. B) exit the industry, and demand will increase for the firms that remain. C) exit the industry, and demand will decrease for the firms that remain. D) enter the industry, and demand will decrease for the original firms. E) enter the industry and then will exit the industry. Answer: D Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 42) At a long-run equilibrium in monopolistic competition, price equals A) average total cost. B) marginal cost but not marginal revenue. C) marginal revenue but not marginal cost. D) zero. E) marginal revenue and marginal cost. Answer: A Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

43) In the long run, a firm in monopolistic competition will produce A) where average total cost is minimized. B) where price equals average total cost, but average total cost is not at its minimum. C) zero output. D) any possible amount of output. E) where price equals marginal cost. Answer: B Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 44) Which of the following is NOT a characteristic of long-run equilibrium in monopolistic competition? A) The firm makes zero economic profit. B) Price is equal to average total cost. C) Production occurs at minimum average total cost. D) Marginal revenue is equal to marginal cost. E) Price exceeds marginal revenue. Answer: C Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 45) In the long run, a firm in monopolistic competition will A) produce so that its price equals marginal cost. B) operate at the minimum of the long-run average cost. C) overutilize its insufficient capacity. D) produce so that its price equals average total cost. E) be dependent on the other firms in the industry. Answer: D Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

46) Which of the following is TRUE about a firm in monopolistic competition in the long run? A) P = MC B) P = MR C) ATC = MC D) P = ATC E) MC = ATC Answer: D Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 47) In the long-run, a firm in monopolistic competition produces at an output level where A) P > ATC and MR = MC. B) P > ATC and MR > MC. C) P = ATC and MR = MC. D) P = ATC and MR > MC. E) P = ATC and MC = ATC. Answer: C Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 48) Which of the following is TRUE of monopolistic competition in long-run equilibrium? A) P = MR and P = MC B) P > ATC and MR = MC C) P = ATC and MR = MC D) P = ATC and P = MC E) P > ATC and P > MR Answer: C Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

49) In monopolistic competition in the long run, firms A) make zero economic profit and require more capacity. B) incur an economic loss and require more capacity. C) make an economic profit and have excess capacity. D) make zero economic profit and have excess capacity. E) make an economic profit and require more capacity. Answer: D Topic: Monopolistic competition, excess capacity Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 50) A monopolistically competitive firm ________ have excess capacity because its ________. A) does; demand curve is downward sloping B) does not; demand curve is downward sloping C) does; average total cost curve is U-shaped D) does not; average total cost curve is U-shaped E) does; marginal revenue curve lies below its demand curve Answer: A Topic: Monopolistic competition, excess capacity Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

51) The figure above shows Firm X. The ________ firm charges a markup of ________. A) monopolistically competitive; $10 per unit because price exceeds marginal cost B) monopolistically competitive; $20 per unit because prices exceeds average total cost C) perfectly competitive; $10 per unit because price equals average total cost D) perfectly competitive; $20 per unit because price exceeds average total cost E) monopolistically competitive; $10 per unit because the demand curve lies above the marginal revenue curve Answer: A Topic: Monopolistic competition, markup Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 52) Excess capacity is the A) difference between a perfectly competitive firm's short-run output and a monopolistically competitive firm's short-run output. B) difference between a perfectly competitive firm's long-run output and a monopoly's long-run output. C) output at the maximum point of the ATC curve. D) difference between the price charged by a monopoly and a monopolistically competitive firm with the same costs. E) None of the above answers is correct. Answer: E Topic: Monopolistic competition, excess capacity Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Revised AACSB: Reflective thinking

53) In the long run, firms in monopolistic competition produce at a level that is ________ the efficient scale of output. A) less than B) equal to C) more than D) not comparable to E) All of the above are possible depending on market conditions. Answer: A Topic: Monopolistic competition, excess capacity Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 54) For a firm in monopolistic competition, the efficient scale is the amount of output at which ________ is a minimum. A) fixed cost B) average total cost C) average variable cost D) average fixed cost E) marginal cost Answer: B Topic: Monopolistic competition, excess capacity Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 55) Excess capacity exists when a firm produces A) more than the profit-maximizing level of output. B) less than the quantity that minimizes average total cost. C) less than the quantity that minimizes marginal cost. D) more than the quantity that minimizes marginal cost. E) None of the above answers is correct. Answer: B Topic: Monopolistic competition, excess capacity Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

56) If a firm is maximizing its profit and producing less output than the amount that minimizes its average total cost, then that firm A) must be suffering an economic loss. B) must be earning an economic profit. C) has excess capacity. D) is producing at its capacity output. E) must be earning a normal profit. Answer: C Topic: Monopolistic competition, excess capacity Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Revised AACSB: Reflective thinking 57) Which of the following is correct? A) A firm in monopolistic competition does not have excess capacity in the long run. B) A firm in perfect competition operates at maximum average total cost in the long run. C) In the long run, a firm in monopolistic competition that maximizes its profit has price equal to average total cost but the average total cost is not minimized. D) In the long run, a firm in monopolistic competition makes zero economic profit and its price is equal to the minimum average total cost. E) In the long run, a firm in monopolistic competition can make an economic profit because of product differentiation. Answer: C Topic: Monopolistic competition, excess capacity Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Revised AACSB: Reflective thinking 58) Which of the following statements about a firm in long-run equilibrium is TRUE? A) P > MC for a firm in monopolistic competition, and P = ATC for a firm in perfect competition B) MR > P for a firm in monopolistic competition, and P = ATC for a firm in perfect competition C) P = MC for firms in both monopolistic competition and perfect competition D) P = MC for a firm in perfect competition, and P < ATC for a firm in monopolistic competition E) Both answers A and B are correct. Answer: A Topic: Monopolistic competition versus perfect competition Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

59) A firm in monopolistic competition is A) efficient because in the long run it makes zero economic profit. B) efficient because it produces at the minimum average total cost. C) inefficient because price exceeds marginal cost. D) efficient because of the ease of entry. E) efficient because it produces where MR = MC. Answer: C Topic: Monopolistic competition, efficiency Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 60) A monopolistically competitive firm is inefficient because the A) firm makes positive economic profit in the long run. B) firm produces the quantity that sets marginal cost equal to price. C) is not maximizing its profits. D) firm produces a product identical to that of its competitors. E) production is not the amount that minimizes its average total cost. Answer: E Topic: Monopolistic competition, efficiency Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Revised AACSB: Reflective thinking 61) Monopolistic competition is judged to be economically inefficient because A) the price is greater than marginal cost. B) firms make zero economic profit in the long run. C) marginal revenue equals marginal cost. D) firms have deficient capacity in the long run. E) firms make an economic profit in the long run. Answer: A Topic: Monopolistic competition, efficiency Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

62) One of the major benefits to society of monopolistic competition is A) high prices. B) restricted output. C) product differentiation. D) the excess capacity. E) the markup. Answer: C Topic: Monopolistic competition, efficiency Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 63) In monopolistic competition, there is inefficiency because price is greater than marginal cost. What brings about this inefficiency? A) high concentration, as indicated by the large concentration ratio B) product differentiation C) freedom of entry and exit D) marginal cost rises as more output is produced E) the fact there are many firms in the market Answer: B Topic: Monopolistic competition, efficiency Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 64) Even though monopolistic competition results in inefficiency, it does have which of the following benefits for society? A) Firms make zero economic profit in the long run. B) Firms can make an economic profit in the short run. C) Product variety benefits consumers. D) Marginal cost equals price in the long run. E) The premise of the question is incorrect because nothing in monopolistic competition justifies any economic inefficiency. Answer: C Topic: Monopolistic competition, efficiency Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

65) Which of the following is an advantage to society of monopolistic competition? A) production at the lowest possible average cost B) product variety C) Only essential costs are incurred. D) long-run profitability E) The firms have excess capacity so they are always willing to increase their production. Answer: B Topic: Monopolistic competition, efficiency Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 66) A firm in monopolistic competition maximizes profit by equating A) price and marginal revenue. B) price and marginal cost. C) demand and marginal cost. D) marginal revenue and marginal cost. E) price and average total cost. Answer: D Topic: Monopolistic competition, output and price Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 67) Once a firm in monopolistic competition has determined how much to produce, the firm determines its price by referring to its A) demand curve. B) marginal cost curve. C) marginal revenue curve. D) average total cost curve. E) average variable cost curve. Answer: A Topic: Monopolistic competition, output and price Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

68) A firm in monopolistic competition definitely incurs an economic loss if A) price equals marginal revenue. B) price is less than average total cost. C) marginal revenue equals marginal cost. D) marginal revenue is less than average total cost. E) price is greater than marginal cost. Answer: B Topic: Monopolistic competition, economic loss Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 69) In the long run, a firm in monopolistic competition A) makes zero economic profit. B) produces at a minimum average total cost. C) has deficient capacity. D) makes an economic profit. E) produces a quantity where its demand curve is upward sloping. Answer: A Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Revised AACSB: Reflective thinking 70) A firm's efficient scale of production is the amount of output at which its A) marginal cost is at a minimum. B) average total cost is at a minimum. C) profit is maximized. D) marginal revenue is at a maximum. E) marginal revenue equals marginal cost. Answer: B Topic: Monopolistic competition, excess capacity Skill: Level 1: Definition Section: Checkpoint 17.2 Status: Revised AACSB: Reflective thinking

71) In the long run, a firm in monopolistic competition ________ excess capacity and a firm in perfect competition ________ excess capacity. A) has; has B) has; does not have C) does not have; has D) does not have; does not have E) might have; might have Answer: B Topic: Monopolistic competition versus perfect competition Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 72) In the long run, a firm in monopolistic competition ________ a markup of price over marginal cost, and a firm in perfect competition ________ a markup of price over marginal cost. A) has; has B) has; does not have C) does not have; has D) does not have; does not have E) might have; might have Answer: B Topic: Monopolistic competition versus perfect competition Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking 73) Monopolistic competition is efficient when compared to A) perfect competition. B) complete product uniformity. C) the short run. D) the long run. E) None of the above answers is correct. Answer: B Topic: Monopolistic competition, efficiency Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Reflective thinking

74) The graph shows a profit-maximizing monopolistically competitive firm producing ________ units in a ________ equilibrium with ________. A) 80; long-run; an excess capacity B) 80; short-run; an excess capacity C) 120; long-run; no excess capacity D) 110; long-run; no excess capacity E) 120; short-run; an excess capacity Answer: A Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Application of knowledge 75) The graph above shows a A) monopolistically competitive firm in the short run because there is excess capacity. B) monopolistically competitive firm in the short run making an economic profit of $60 per unit. C) perfectly competitive firm in the long run earning $0 economic profit. D) monopolistically competitive firm in the long run making $0 economic profit. E) monopolistically competitive firm in the short run making an economic profit of $80 per unit. Answer: D Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Application of knowledge

76) Which of the following characteristics describe the competitive market shown in the graph above? i. The market has easy entry and exit. ii. A firm in this type of market has many competitors. iii. The graph show the long run for this firm. A) i, ii and iii B) i and ii only C) iii only D) i and iii only E) ii and iii only Answer: A Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Revised AACSB: Application of knowledge 77) The graph above shows a monopolistically competitive firm. Which of the following statements is TRUE? A) To maximize profit, the firm makes 80 units at a price of $80 per unit. B) The firm is operating in the long run. C) There is excess capacity of 40 units. D) A, B and C are true statements. E) Only A and B are true. Answer: D Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Application of knowledge 78) Use the graph above to answer this question. The firm is maximizing profit if it produces ________ units and as a result ________ occurs. A) 80; inefficiency B) 120; inefficiency C) 110; inefficiency D) 120; efficiency E) 80; efficiency Answer: A Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Application of knowledge

17.3 Product Development and Marketing 1) For a firm in monopolistic competition, innovation and product development are A) senseless because economic profit is always zero in the long run. B) necessary in order to have a chance of making at least a short-run economic profit. C) inconsequential because each firm produces a different product. D) necessary to allow new firms to enter. E) uncommon because other firms already produce similar products. Answer: B Topic: Innovation and product development Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 2) To maintain their economic profits, firms in monopolistic competition must continually engage in A) product development and marketing. B) lowering their product's price. C) raising their product's price. D) realizing short-run losses. E) making the demand for their product more elastic. Answer: A Topic: Innovation and product development Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 3) Bounty paper towels is an example of a good produced in ________ market. This means that the firm ________ engage in advertising which will ________. A) a monopolistically competitive; will; increase average total cost B) a monopolistically competitive; will; not change average total cost C) a perfect competitively; will; increase average total cost D) a perfect competitively; will not; create an efficient outcome E) an oligopolistic; will not; create an efficient outcome Answer: A Topic: Monopolistic competition - innovation & advertising Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Application of knowledge

4) Crest toothpaste, produced by Proctor & Gamble, is produced in a ________ market. This means that Proctor & Gamble must advertise in order to ________. A) perfectly competitive; differentiate their product B) monopolistically competitive; increase excess capacity C) monopolistically competitive; differentiate their product D) perfectly competitive; decrease the deadweight loss E) monopoly; differentiate their product Answer: C Topic: Monopolistic competition - innovation & advertising Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Application of knowledge 5) Smart phone manufacturers differentiate their products because A) it is cheaper than using advertising. B) this is required to keep operating in an oligopoly. C) average total cost would otherwise increase. D) they want to prevent competition from driving their economic profit to $0 in the long run. E) it's the best way to signal their product's quality. Answer: D Topic: Monopolistic competition - innovation & advertising Skill: Level 5: Critical thinking Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking 6) Nike hires professional athletes to advertise their products. What is Nike trying to accomplish with this advertising? i. Increase the elasticity of demand for its product. ii. Signal the products' quality. iii. Decrease the products' markup. A) ii only B) i and ii C) i, ii and iii D) i and iii E) ii and iii Answer: A Topic: Monopolistic competition - innovation & advertising Skill: Level 5: Critical thinking Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

7) Which of the following could occur when a monopolistically competitive firm decides to advertise? A) Demand will become more elastic and average total cost will increase. B) The firm's markup will increase. C) Excess capacity will be eliminated. D) A two-sided market can be created. E) Decrease the market's deadweight loss. Answer: A Topic: Monopolistic competition - innovation & advertising Skill: Level 5: Critical thinking Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking 8) The shampoo industry is constantly coming out with new products. The reason is that when a firm introduces a new shampoo into the market, the demand for the shampoo becomes ________ temporarily and economic profit ________. A) more elastic; decreases B) less elastic; increases C) more elastic; increases D) less elastic; decreases E) unit elastic; increases Answer: B Topic: Innovation and product development Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 9) A firm is spending the profit-maximizing amount on product development when A) people perceive the firm's product to be better than those of its competitors. B) the marginal cost of product development is equal to the marginal revenue from product development. C) the price of the good is higher than its marginal cost. D) the advertising costs are covered. E) the firm's total revenue exceeds its total costs. Answer: B Topic: Innovation and product development Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

10) Firms decide how much to spend on product development and marketing by A) spending the same amount as they did in previous years. B) spending the historical average of 1/4 of total production cost. C) determining what it will take to eliminate excess capacity. D) balancing the marginal cost and the marginal benefit of product development and marketing. E) ensuring that the marginal cost of product development and marketing is less than or equal to the marginal cost of producing the good or service. Answer: D Topic: Innovation and product development Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Revised AACSB: Reflective thinking 11) For a firm in monopolistic competition to undertake product development, the marginal cost to consumers of the development must be ________ the marginal benefit of the development to consumers. A) greater than B) less than C) not comparable to D) equal to or less than E) None of the above because a monopolistically competitive firm undertakes product development if the marginal cost of the development is less than or equal to the marginal benefit to the firm from the development. Answer: E Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Revised AACSB: Reflective thinking 12) Which of the following statements about product development in monopolistic competition is correct? i. Firms in monopolistic competition undertake too much product development for efficiency. ii. Firms in monopolistic competition undertake too little product development for efficiency. iii. Product development might allow the firm to make a temporary economic profit. A) i only B) ii only C) ii and iii D) i and iii E) iii only Answer: C Topic: Innovation and product development Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 58 Copyright © 2021 Pearson Education, Inc.

13) A firm in monopolistic competition A) has no control over the price of the product it is selling. B) might be selling a brand name product. C) does not advertise nor market its product. D) Both answers A and B are correct. E) Answers A, B, and C are correct. Answer: B Topic: Selling costs Skill: Level 1: Definition Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 14) Firms attempt to create a consumer perception of product differentiation through i. packaging. ii. marketing. iii. advertising. A) i only B) ii only C) ii and iii D) i and iii E) i, ii, and iii Answer: E Topic: Selling costs Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 15) Advertising is a ________ cost that is incurred by ________. A) variable; monopolies B) variable; perfectly competitive firms C) fixed; perfectly competitive firms D) fixed; monopolistically competitive firms E) marginal; monopolistically competitive firms Answer: D Topic: Selling costs Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

16) How do advertising and other selling costs affect a firm? A) They shift the marginal cost curve upward. B) The only effect is that the excess capacity is reduced. C) The only effect is that the demand for the product increases. D) They shift the average total cost curve upward. E) They do not change demand and shift the average total cost curve downward. Answer: D Topic: Selling costs Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking 17) In which of the following ways do advertising and other selling costs affect a firm's cost curves? i. Advertising expenditures increase total fixed costs. ii. Selling costs increase total fixed costs. iii. Advertising and other selling costs per unit of output decrease as output increases. A) i only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Selling costs Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking 18) In the long run, advertising by all firms in a monopolistically competitive industry A) increases all firms' demand. B) decreases all firms' demand. C) lowers all firms' costs. D) might increase or decrease the firms' prices. E) lowers all firms' prices. Answer: D Topic: Selling costs Skill: Level 4: Applying models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

19) A sunglass manufacturer spends a lot of money to promote its brand name. This promotion ________ consumers because it ________. A) helps; lowers marginal cost B) harms; definitely increases average total cost C) helps; provides a signal and information about the sunglasses D) harms; increases the elasticity of demand E) helps; is a fixed cost and not a variable cost Answer: C Topic: Efficiency of advertising Skill: Level 4: Applying models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 20) When weighing the efficiency of monopolistic competition, which of the following should be considered? i. the information provided by advertising ii. product variety iii. the extra cost of excess capacity A) ii only B) i and iii C) ii and iii D) i, ii, and iii E) iii only Answer: D Topic: Efficiency of advertising Skill: Level 4: Applying models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 21) Because economic profits are eliminated in the long run in monopolistic competition, to make an economic profit, firms continuously A) shut down. B) exit the industry. C) develop and market new products. D) declare bankruptcy. E) decrease their costs by decreasing their selling costs. Answer: C Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

22) A firm in monopolistic competition that introduces a new and differentiated product will temporarily have a ________ demand for its product and is able to charge ________. A) less elastic; a lower price than before B) less elastic; a higher price than before C) more elastic; a lower price than before D) more elastic; a higher price than before E) less elastic; the same price as before Answer: B Topic: Innovation and product development Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking 23) The decision to innovate A) depends on the marketing department's needs. B) depends on whether the firm wants to benefit its customers. C) is based on the marginal cost and the marginal revenue of innovation. D) is unnecessary in a monopolistically competitive market. E) None of the above answers is correct. Answer: C Topic: Innovation and product development Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 24) Advertising costs and other selling costs are A) efficient. B) fixed costs. C) variable costs. D) marginal costs. E) considered as part of demand because they affect the demand for the good. Answer: B Topic: Selling costs Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

25) For a firm in monopolistic competition, selling costs A) increase costs and reduce profits. B) always increase demand. C) can change the quantity produced and lower the average total cost. D) can lower total cost. E) have no effect on the quantity sold. Answer: C Topic: Selling costs Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 26) If advertising increases the numbers of firms in an industry, each firm's demand A) increases. B) does not change. C) decreases. D) might increase or decrease depending on whether the new firms produce exactly the same product or a product that is slightly differentiated. E) None of the above answers is correct. Answer: C Topic: Advertising Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 27) One reason a company advertises is to A) signal consumers that its product is high quality. B) lower its total cost. C) produce more efficiently. D) lower its variable costs. E) lower its fixed costs. Answer: A Topic: Advertising Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

28) The efficiency of monopolistic competition A) is as clear-cut as the efficiency of perfect competition. B) depends on whether the gain from extra product variety offsets the selling costs and the extra cost that arises from excess capacity. C) comes from its excess capacity. D) is eliminated in the long run. E) is equal to that of monopoly. Answer: B Topic: Efficiency, the bottom line Skill: Level 5: Critical thinking Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 29) Consider the monopolistically competitive market for blue jeans. The lack of efficiency of the blue jean market is evidenced by ________ which may be offset by ________. A) excess capacity; variety and innovation B) variety and innovation; excess capacity C) the firms making zero economic profit; excess capacity D) signalling; economic profits E) advertising; economic profits Answer: A Topic: Monopolistic competition, efficiency Skill: Level 5: Critical thinking Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking 30) Consider the monopolistically competitive market for running shoes. The market is considered inefficient because ________ but runners ________ which may make the inefficiency worthwhile. A) excess capacity occurs; pay lower prices B) a deadweight loss occurs; enjoy variety and innovation C) consumers obtain variety; pay lower prices D) demand is elastic; enjoy variety and innovation E) signalling occurs; pay lower prices Answer: B Topic: Monopolistic competition, efficiency Skill: Level 5: Critical thinking Section: Checkpoint 17.3 Status: Old AACSB: Analytical thinking

17.4 Chapter Figures

The figure above illustrates a firm's demand and marginal revenue curves and its cost curves. 1) If the firm in the figure above attempted to minimize its average total cost by producing 100 pairs of Tommy jeans per day at an average total cost of $20 per pair and it sold those jeans for $80 per pair, the firm would A) make zero economic profit. B) make a larger economic profit than a firm that produced 125 jeans because the ATC of producing 125 jeans is higher than the ATC of producing 100 jeans. C) incur an economic loss. D) make a smaller economic profit than a firm that produced 125 jeans. E) achieve an efficient use of resources. Answer: D Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

2) To maximize its profit, the firm in the figure above will produce ________ jeans and set a price of ________ per pair of jeans. A) 150; between $50 and $25 B) 125; $25 C) 125; $50 D) 125; $75 E) None of the above answers is correct. Answer: D Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 3) When the firm in the figure above maximizes its profit, it makes an economic profit of A) $3,125. B) $6,250. C) $9,375. D) $5,625. E) None of the above answers is correct because the firm incurs an economic loss. Answer: B Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 4) The darkened area in the figure above is the A) deadweight loss. B) firm's economic profit. C) consumer surplus. D) firm's total cost. E) firm's total revenue. Answer: B Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

The figure above shows a firm's demand and marginal revenue curves and its cost curves. 5) As long as the firm illustrated above remains open, it will set a price of ________ per month and it will ________. A) $50; make an economic profit B) $50; incur an economic loss C) $40; make an economic profit D) $40; incur an economic loss E) less than $20; incur an economic loss Answer: B Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 6) The firm illustrated above is A) making an economic profit of $400,000 per month. B) making an economic profit of $2,000,000 per month. C) making an economic profit of $1,600,000 per month. D) incurring an economic loss of $400,000 per month. E) incurring an economic loss of $1,600,000 per month. Answer: D Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 67 Copyright © 2021 Pearson Education, Inc.

7) The darkened area in the figure above is the A) deadweight loss. B) firm's economic loss. C) consumer surplus. D) firm's total cost. E) firm's total revenue. Answer: B Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 8) If all firms in the industry have similar demand, marginal revenue, and cost curves as the firm in the figure above, in the long run A) nothing changes. B) some firms exit the industry, and the economic losses of the remaining firms decrease. C) some firms exit the industry, and the economic profits of the remaining firms increase. D) new firms enter the industry, and the economic losses of the original firms decrease. E) new firms enter the industry, and the economic profits of the original firms increase. Answer: B Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking 17.5 Integrative Questions 1) In a market in which firms operate in monopolistic competition A) the HHI for a single firm exceeds 2,500. B) firms compete on price, quality and marketing. C) in the long run, firms produce at their efficient scale. D) in the long run, firms are not able to charge a markup. E) advertising is nonexistent. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

2) Firms in monopolistic competition A) face a downward-sloping demand curve. B) cannot charge a markup because there are no dominant firms. C) definitely do not benefit from advertising. D) produce at the efficient scale in the long run. E) generally have low to nonexistent selling costs. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 3) The clothing industry has many firms with differentiated products and no barriers to entry. The cereal industry has a few firms with either identical or differentiated products and moderate barriers to entry. The food industry is characterized as ________, and the cereal industry is characterized as ________. A) perfect competition; monopolistic competition B) monopolistic competition; oligopoly C) oligopoly; monopolistic competition D) perfect competition; perfect competition E) monopolistic competition; monopoly Answer: B Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking 4) Advertising costs A) make the marginal revenue more elastic. B) shift the ATC curve upward. C) shift the marginal cost curve rightward. D) indirectly shift the marginal cost curve upward. E) affect the marginal cost but not the total cost. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Analytical thinking

5) The above figure definitely shows A) a long-run equilibrium for a monopolistically competitive firm. B) an industry with few firms. C) a long-run equilibrium for a perfectly competitive firm. D) a long-run equilibrium for a perfectly competitive market. E) a short-run equilibrium for a monopoly. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 6) The firm in the above figure has excess capacity of ________ meals per day. A) 0 B) between 1 and 10 C) between 11 and 20 D) more than 21 and 30 E) more than 31 Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

7) The firm in the above figure has a markup of ________ per meal. A) $0 B) $4 C) $8 D) $10 E) more than $10 Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 8) The firm in the above figure has an economic profit of A) $0. B) $80. C) $160. D) more than $161. E) less than zero, that is, the firm has an economic loss. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 9) Which of the following characterize a firm in monopolistic competition in the long run? i. operating at the minimum efficient scale ii. markups of price over marginal cost iii. zero economic profit A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) only ii Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

10) Firms in which of the following industries can make an economic profit in the long run? A) both monopolistic competition and monopoly B) perfect competition C) monopoly D) monopolistic competition E) monopolistic competition and perfect competition Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 11) If a firm has excess capacity, it A) produces less than its efficient scale. B) should advertise to maximize profits. C) should decrease its markup to increase its profit. D) is a perfectly competitive firm. E) must face a horizontal demand curve. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 12) If a firm in the long run produces less than its efficient scale, it A) should raise its markup to increase its profit. B) should lower its markup to increase its profit. C) cannot be a perfectly competitive firm. D) should not advertise to increase its profit. E) must have its markup equal to zero. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

13) A firm's markup is A) the difference between average total cost with and without advertising. B) the difference between demand and marginal revenue. C) a signal of product quality. D) the difference between price and marginal cost. E) the result of producing less than the efficient scale. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 14) Crest Toothpaste offers new whitening toothpaste one year, a new gel swirl design the next year, and an improved cleaning formula the year after. Crest Toothpaste does this because it is A) a monopoly trying to decrease its costs. B) a perfectly competitive firm trying to increase its price. C) a monopolistically competitive firm trying to maintain its economic profit. D) driving its competitors out of business. E) a perfectly competitive firm trying to increase its costs so it can increase its price. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 17.6 Essay: What Is Monopolistic Competition? 1) List four characteristics of monopolistic competition. Answer: There are a large number firms; each produces a slightly different product; firms compete on price, quality and marketing; and firms are free to enter and exit. As a result of these characteristics, there are no dominant firms and each firms have a small market share. Because the firms produce differentiated products, firms can charge a markup and, in the long run, firms have excess capacity. Topic: Monopolistic competition, definition Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Written and oral communication

2) "One of the defining features of monopolistic competition is product variety." Is the previous statement correct or incorrect? Answer: The statement is correct. In monopolistic competition firms compete by producing similar but slightly differentiated products. Topic: Monopolistic competition, definition Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 3) How do the characteristics of perfect competition and monopolistic competition differ? Answer: In monopolistic competition, the products sold are similar but differentiated, thereby enabling firms to compete on the basis of product development and marketing to further differentiate their products. In perfect competition the products are identical, thereby eliminating the opportunity for firms to compete by differentiating their product. Topic: Monopolistic competition, definition Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Written and oral communication 4) Why is collusion about the price and amount of output impossible in monopolistic competition? Answer: The smaller the number of firms, the more likely collusion is to occur. Monopolistic competition has too many firms for collusion to be successful. Topic: Monopolistic competition, definition Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking

5) What do demand and marginal revenue curves look like in monopolistic competition? How do they compare to the demand and marginal revenue curves in perfect competition and monopoly? Answer: In monopolistic competition, the product is differentiated. This fact gives each firm some control over price, so each firm's demand curve is downward sloping. Because there are many close substitutes for these firms' goods, demand is elastic. These firms must lower their price to sell more; therefore the marginal revenue curve is beneath the demand curve. In perfect competition, the product is homogeneous, which makes firms price-takers, able to sell as much as they wish at the market price. Therefore, marginal revenue equals price, and the marginal revenue curve and the demand curve are the same and are horizontal. In monopoly, there is only one firm. The firm faces the market demand, which is steep, because there are no close substitutes for the good. The firm must lower its price to sell more, so for a single-price monopoly, the marginal revenue curve is beneath the demand curve. Topic: Monopolistic competition, definition Skill: Level 5: Critical thinking Section: Checkpoint 17.1 Status: Old AACSB: Written and oral communication 6) How would a merger between Coca-Cola and Pepsi Cola affect the four-firm concentration ratio for the soft drink market? How would it affect the Herfindahl-Hirschman Index for the soft drink market? Answer: Both Coca-Cola and Pepsi Cola are among the four largest firms in the soft drink market, so a merger between the two firms would (drastically) raise the four-firm concentration ratio and (drastically) raise the Herfindahl-Hirschman Index. Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Written and oral communication 7) What is the Herfindahl-Hirschman Index and what does it measure? Answer: The Herfindahl-Hirschman Index, or HHI, is an index used to measure the extent to which a market is dominated by a small number of firms. The HHI equals the sum of the squared percentage market shares of each of the 50 largest firms in the market. A monopoly will have a HHI of 10,000 whereas perfect competition will have a small HHI. Topic: Herfindahl-Hirschman Index Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Written and oral communication

8) If the Herfindahl-Hirschman Index for an industry is 8,528, is the industry competitive or concentrated? Answer: With a Herfindahl-Hirschman Index of 8,528, the industry is quite concentrated or, in other words, the industry is not very competitive. Topic: Herfindahl-Hirschman Index Skill: Level 2: Using definitions Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 9) What is the difference between a four-firm concentration ratio and a Herfindahl-Hirschman Index? Answer: A four-firm concentration ratio is the percentage of the total revenue in an industry accounted for by the four largest firms in the industry. The Herfindahl-Hirschman Index sums the squares of the market shares of the 50 largest firms. Topic: Herfindahl-Hirschman Index Skill: Level 1: Definition Section: Checkpoint 17.1 Status: Old AACSB: Reflective thinking 10) The four largest firms in an industry account for the following value of industry revenues: 12 percent, 8 percent, 5 percent and 4 percent. Calculate the four-firm concentration ratio. Would this industry be regarded as competitive or concentrated? Answer: The four-firm concentration ratio is 29 percent. The four-firm concentration ratio is less than 40 percent, so the industry would be regarded as competitive. Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

11) An industry's total revenue is $100 million. The above table shows the total revenue of the four largest firms in an industry. a. Calculate this industry's four-firm concentration ratio. b. Is this industry competitive? c. What market type does it most likely represent? Answer: a. The four-firm concentration rate is 30 percent. b. Because the four-firm concentration ratio is relatively low, the industry is competitive. c. The industry is most likely monopolistic competition. Topic: Four-firm concentration ratio Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking 12) An industry has only four firms, who have market shares of 45 percent, 25 percent, 20 percent, and 10 percent. What is the Herfindahl-Hirschman Index? Answer: The Herfindahl-Hirschman Index is 3,150. Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

13) Suppose there are ten firms that occupy the Odell, Oregon cherry pie market. The market share of each firm is listed in the above table. a. What is the Herfindahl-Hirschman Index for this market? b. If Firm H and Firm A merge, what is the new Herfindahl-Hirschman Index for this market? c. A severe winter causes every firm except A, B, and E to close. With only these three firms operating, Firm A's market share is 71 percent, Firm B's market share is 23 percent, and Firm C's market share is 6 percent. What is the Herfindahl-Hirschman Index for this market now? Answer: a. The Herfindahl-Hirschman Index is 1,782. b. Once firms H and A merge, the new Herfindahl-Hirschman Index is 2,038. c. The Herfindahl-Hirschman Index is now 5,606. Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

14) Listed in the above table are the total revenues for the firms in two different industries. Each industry has only eleven firms. Find the four-firm concentration ratio and the HerfindahlHirschman Index for each industry. Answer: Industry A has a four-firm concentration ratio of 59 percent and a HerfindahlHirschman Index of 1,186. Industry B has a four-firm concentration ratio of 39 percent and Herfindahl-Hirschman Index of 914. Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

15) There are 9 firms in an industry with market shares in the table above. Calculate the HHI for the industry. What kind of market does this operate in and why? Answer: The HHI equals 202 + 202 + 152 + 102 + 102 + 82 + 72 + 52 + 52 = 1388. With this HHI, the concentration ratio is low and so the market is monopolistic competition. Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking

16) The Herfindahl-Hirschman Index is used as a guideline to determine if a market is competitive or concentrated. Calculate the index value for each market described below. a. 100 firms, each of which produces 1 per cent of market output b. 50 firms, each of which produces 2 per cent of market output c. 25 firms, each of which produces 4 per cent of market output d. 20 firms, each of which produces 5 per cent of market output e. 10 firms, each of which produces 10 per cent of market output f. 5 firms, each of which produces 20 per cent of market output g. 2 firms, each of which produces 50 per cent of market output Answer: a. 100 × 1 = 100 b. 50 × 4 = 200 c. 25 × 16 = 400 d. 20 × 25 = 500 e. 10 × 100 = 1,000 f. 5 × 400 = 2,000 g. 2 × 2,500 = 5,000 Topic: Herfindahl-Hirschman Index Skill: Level 3: Using models Section: Checkpoint 17.1 Status: Old AACSB: Analytical thinking 17.7 Essay: Output and Price Decisions 1) "A firm in monopolistic competition maximizes its profit by producing where its price is equal to its marginal cost." Is the previous statement correct or incorrect? Answer: The statement is incorrect. A firm in monopolistic competition maximizes its profit by producing where its marginal revenue equals its marginal cost. Because the marginal revenue is less than the price for a firm in monopolistic competition, it DEFINITELY is not the case that the firm produces where its price equals its marginal cost! Topic: Monopolistic competition, output and price Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Written and oral communication

2) How does a firm in monopolistic competition determine its price and quantity? What type of profit can it make in the short run and the long run? Answer: The firm produces where its marginal cost equals its marginal revenue. Then the price is determined from the demand curve and is the highest price at which people will buy the quantity produced. The firm can make an economic, make zero economic profit, or incur an economic loss in the short run. In the long run, the firm cannot make an economic profit; it can only make zero economic profit. Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Written and oral communication 3) What type of profit can a firm in monopolistic competition make in the long run? Explain your answer. Answer: In the long run, a firm in monopolistic competition can make only zero economic profit, that is, its owners earn only a normal profit. It will not incur an economic loss in the long run because it will close. It cannot make a positive economic profit because there are no barriers to entry. So if a firm in monopolistic competition is making an economic profit, in the long run new firms enter the market, produce a similar product, and decrease the demand for the initial firm's product. Entry continues until the firms make zero economic profit, so its owners earn a normal profit. Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Written and oral communication 4) Why are firms in monopolistic competition unable to make an economic profit in the long run? Answer: While firms in monopolistic competition do not produce an identical product, such as perfectly competitive firms, they face the same problem other competitive firms face: freedom of entry. When firms in monopolistic competition are making an economic profit, other firms will enter the market. Entry decreases the demand for the products of the existing firms and thereby decreases their economic profit. Firms will continue to enter the market until the economic profit equals zero. Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Written and oral communication

5) Why does a firm in monopolistic competition make zero economic profit rather than an economic profit in the long run? Answer: Entry into monopolistically competitive markets is easy because there are no barriers to entry. So when firms in monopolistic competition have an economic profit, other firms are attracted to enter the industry, thereby decreasing profits for everyone. Entry continues as long as there is an economic profit so, in the long run when all entry is completed, the firms make zero economic profit. Topic: Monopolistic competition, long run Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Written and oral communication 6) What is excess capacity? What industry has excess capacity in the long run: perfect competition or monopolistic competition? Answer: The efficient scale of output is the level that minimizes the average total cost. Excess capacity occurs if the firm produces less than the amount of output that minimizes average total cost. In this case, the firm could boost its output and lower its average total cost. Firms in monopolistic competition have excess capacity. Firms in perfect competition produce at the minimum of the average total cost. They produce at the efficient scale of output and so do not have excess capacity. Topic: Monopolistic competition, excess capacity Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Written and oral communication 7) For a firm in monopolistic competition, define efficient scale and excess capacity. Briefly explain each. Answer: The efficient scale is the quantity produced when average total cost is at its minimum. In the long run, a firm in monopolistic competition operates BELOW the efficient scale when maximizing profits. The difference between the efficient scale and the quantity produced by a firm is the excess capacity. Because the firm is not producing at the efficient scale, its average total cost is higher than if it produced at the efficient scale. Topic: Monopolistic competition, excess capacity Skill: Level 2: Using definitions Section: Checkpoint 17.2 Status: Old AACSB: Written and oral communication

8) The demand and cost schedules for a firm in monopolistic competition are in the above tables. What is the profit-maximizing level of output and price? What amount of profit is the firm making? Is this firm in a short-run or long-run equilibrium? Why? Answer: To determine the quantity produced, the firm will set marginal cost equal to marginal revenue. Therefore it is necessary to determine the marginal revenue. The marginal revenue going from 3 to 4 units is $12 and the marginal revenue going from 4 to 5 units is $8. Thus the marginal revenue at 4 units is $10, which equals the marginal cost. Therefore the firm produces 4 units. The demand schedule shows that for 4 units, the price will be $16 per unit. The firm's economic profit per unit equals the price, $16, minus its average total cost, $10.50, or an economic profit of $5.50 per unit. The firm produces 4 units, so its total economic profit is $22.00. The firm is in a short-run equilibrium because it is able to make an economic profit. In the long run, entry will decrease its demand so that it no longer can make an economic profit. Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

9) The above figure represents Tony's Pizza Parlor, a firm in monopolistic competition. a. What quantity will be produced? b. What price will be charged? c. What is Tony's total cost? d. What is Tony's total revenue? e. What is Tony's economic profit or loss? f. Is this a long-run equilibrium? Why or why not? Answer: a. 40 pizzas per day b. $12.00 per pizza c. $320 d. $480 e. Tony has an economic profit of $160. f. This is not a long-run equilibrium because Tony is making an economic profit. In the long run, new firms will enter and Tony's economic profit will be eliminated. Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

10) Draw an example of a firm in monopolistic competition that is earning an economic profit. Be sure to label all the curves. Indicate the area that equals the firm's economic profit. Answer:

The completed figure is above. Topic: Monopolistic competition, output and price Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

11) The above figure represents a restaurant operating in monopolistic competition. a. What is the profit-maximizing level of output? b. What price will the firm charge? c. What is the firm's profit (or loss)? d. Is this a long-run equilibrium? Why or why not? e. Is this firm producing its efficient scale of output? Answer: a. The quantity is 20 meals a day. b. The price is $12 per meal. c. The firm is making zero economic profit, that is, the firm is earning a normal profit. d. This is a long-run equilibrium because the firm is making zero economic profits so there is no incentive for either entry or exit. e. No, the firm is not producing its efficient scale of output. It is producing less than the efficient scale. The efficient scale, where the average total cost is at is minimum, is 50 meals a day. Hence the firm has excess capacity. Topic: Monopolistic competition, long run Skill: Level 3: Using models Section: Checkpoint 17.2 Status: Old AACSB: Analytical thinking

17.8 Essay: Product Development and Marketing 1) How do product development and marketing affect a firm in monopolistic competition? Answer: Product development and marketing have two effects on a firm. First, because these activities are costly, they increase the firm's costs and shift its costs curves upward. Second, they can increase the demand for the firm's products. Topic: Innovation and product development Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 2) Why would a firm in a monopolistically competitive industry advertise? Answer: Similar to virtually every other business decision, advertising carries with it benefits and costs. While advertising causes the fixed costs to increase, and thereby shifts the average total cost curve upward, advertising also might increase the demand for the company's product by temporarily making people believe that the product is better than some other firm's product. Firms in monopolistic competition frequently advertise extensively in order to differentiate their product from those of their competitors and thereby increase the demand for their particular version of the product. Topic: Advertising Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 3) Explain the role of advertising in monopolistic competition. Describe how advertising by all firms in a monopolistically competitive industry impacts a firm's ATC curve, its MC curve, its demand curve, and its MR curve. Answer: In order to maintain (or regain) economic profit, a firm in monopolistic competition must continually develop new products that are unique and/or of high quality (or make consumers believe this). Advertising lets firms signal this information. So all firms in monopolistic competition tend to advertise extensively. Advertising is a fixed cost and it shifts the ATC curve upward. Even though it shifts to the ATC curve upward, the total average cost might be lower if it increases the amount sold by enough. Because advertising is a fixed cost, it has no effect on the marginal cost, so the MC curve does not change. Because all firms advertise, advertising might or might not increase demand for a specific firm. When all firms advertise, the demand curve and marginal revenue curve for a specific firm become more elastic. Topic: Advertising Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

4) Why are selling costs high in monopolistic competition? Answer: In monopolistic competition, there are a large number of small firms producing differentiated products. Each firm's output is a substitute for other firms' output; therefore demand for any firm's product is very elastic. If firms can further differentiate their product in the eyes of the consumer, they might be able to both increase demand and decrease demand elasticity, at least temporarily. In this case, the firm could then charge a higher price and, temporarily at least, make an economic profit. This differentiation occurs through innovation, product development and marketing, which contribute to selling costs. Topic: Selling costs Skill: Level 3: Using models Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking 5) Explain how selling costs in monopolistic competition affect the efficiency of monopolistic competition. Answer: The additional selling costs from product differentiation and marketing increase consumer choice by providing variety. This benefits society and weighs in favor of the efficiency of monopolistic competition. However, selling costs can add to the product's price. Also, at times the product differentiation is more apparent than real. These factors harm society and count against the efficiency of monopolistic competition. Topic: Selling costs and efficiency Skill: Level 2: Using definitions Section: Checkpoint 17.3 Status: Old AACSB: Reflective thinking

Foundations of Microeconomics, 9e (Bade) Chapter 18 Oligopoly 18.1 What Is Oligopoly? 1) A firm faces a small number of competitors. This firm is competing in A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) a perfect multi-firm monopoly. Answer: C Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 2) Sammy's Inc. competes with a few other firms because there are natural barriers to entry. Sammy's operates in A) a perfectly competitive market. B) an oligopoly. C) a monopolistically competitive market. D) a monopoly. E) a natural monopolistically competitive market. Answer: B Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 3) Herb's Inc. has a large share of its market and is tempted to collude with the few firms that are in its market. Herb's operates in A) an oligopoly. B) a monopolistically competitive market. C) a monopoly market. D) a perfectly competitive market. E) a collusively protected market. Answer: A Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

4) Which of the following is found ONLY in oligopoly? A) producers who sell identical products B) one firm's actions affect another firm's profit C) entry into the industry is blocked D) sellers face a downward sloping demand curve for their product E) the firm's demand curve is horizontal Answer: B Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 5) Firms in an oligopoly i. are independent of each other's actions. ii. can each influence the market price. iii. charge a price equal to marginal revenue. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: B Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 6) In an oligopoly, there are A) many firms and barriers to entry. B) many firms and no barriers to entry. C) barriers to entry and only a few firms. D) few firms and no barriers to entry. E) barriers to entry and only one firm. Answer: C Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Revised AACSB: Reflective thinking

7) A cartel is A) a market structure with a small number of large firms. B) a market structure with a large number of small firms. C) a group of firms acting together to raise price, decrease output, and increase economic profit. D) a market with only two firms. E) another name for an oligopoly. Answer: C Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 8) A group of firms acting together to limit output, raise price, and increase economic profit is a called a A) duopoly. B) monopolistic oligopoly. C) competitive oligopoly. D) cartel. E) multi-firm competitive monopoly. Answer: D Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 9) A cartel is a collusive agreement among a number of firms that is designed to A) expand output and lower prices but not to a predatory level. B) decrease output and lower prices to a predatory level. C) decrease output and raise prices. D) expand output and raise prices. E) expand output and lower prices to a predatory level. Answer: C Topic: Cartel regulation Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Revised AACSB: Reflective thinking

10) A cartel is A) a group of firms selling identical products but at slightly different prices. B) an agreement among firms to limit output, raise prices, and increase economic profit. C) the automobile producing industry. D) the only firm selling a particular product. E) an illegal agreement among firms which most often arises in monopolistically competitive markets. Answer: B Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 11) A group of firms that has entered into an agreement to restrict output and increase prices and profits is called A) a compliance. B) a cartel. C) an oligopoly. D) a duopoly. E) a multi-firm monopoly. Answer: B Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 12) If a few oil-producing countries in the Middle East jointly decide to limit the production of oil A) they are forming a cartel. B) they would like the price of oil to be the same as if the market were perfectly competitive. C) game theory does not apply to their actions because they are nations, not firms. D) they will try to operate as a large, monopolistically competitive firm. E) they will agree to lower the price of oil in order to increase their profits. Answer: A Topic: Cartel Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

13) Daryl's Inc. has formed a cartel with the two other firms in its industry. In which of the following market structures does Daryl's operate? A) monopolistic competition B) oligopoly C) perfect competition D) monopoly E) legally protected monopoly Answer: B Topic: Cartel Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 14) Energizer and Duracell dominate the battery market. It is possible that they could ________ because they operate in ________. A) form a cartel and collude; an oligopoly B) earn $0 profit in the long run; a monopolistically competitive market C) form a cartel; a monopolistically competitive market D) collude; a perfect competitive market E) have excess capacity; a natural monopoly Answer: A Topic: Oligopoly Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Application of knowledge 15) Travel Trains and The Trolley are the only 2 firms that provide tourist transportation in a resort town. These two firms know that A) their actions affect each others' profits. B) they have no control over the prices they charge. C) they must price discriminate in order to earn a profit. D) they cannot earn an economic profit in the long run. E) it is legal for them to jointly determine their prices because they are the only two firms in the market. Answer: A Topic: Oligopoly, definition Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Revised AACSB: Application of knowledge

16) Two doctors are the only veterinarians in town. These vets operate in ________ and can ________. A) an oligopoly; increase production to achieve economies of scale B) a natural monopoly; eliminate excess capacity by decreasing their production C) a duopoly; form an cartel to increase their profits (even though this would be illegal) D) duopoly; increase consumer surplus by forming a cartel (even though this would be illegal) E) a duopoly; decrease the deadweight loss in the market by forming a cartel (even though this would be illegal) Answer: C Topic: Oligopoly Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Application of knowledge 17) A cartel is most likely to occur in A) perfect competition as firms compete by reducing cost. B) oligopoly as firms act together to raise prices and increase profits. C) monopolistic competition where firms collude to increase profits. D) oligopoly as firms compete to lower price and increase their own profits. E) monopoly because it faces no competition. Answer: B Topic: Cartel Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 18) "Duopoly" is A) another name for monopoly. B) a special type of monopolistic competition. C) a two-firm oligopoly. D) a game with three players. E) the situation when a firm sets a duo (two) of different prices for its customers. Answer: C Topic: Duopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

19) A two-firm oligopoly is called a A) double monopoly. B) cartel. C) duopoly. D) monopolistic oligopoly. E) dual-market. Answer: C Topic: Duopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 20) An oligopoly created because of economies of scale is called a A) natural oligopoly. B) legal oligopoly. C) public oligopoly. D) monopolistic oligopoly. E) scale oligopoly. Answer: A Topic: Natural oligopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 21) When economies of scale limit the number of firms in an industry to 3, there is a A) natural monopoly. B) natural oligopoly. C) legal oligopoly. D) legal cartel. E) natural monopolistic competition. Answer: B Topic: Natural oligopoly Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

22) There are two bookstores in a college town. If another bookstore opened, each of the stores would incur an economic loss. This bookstore market is A) a natural monopoly. B) a monopoly. C) monopolistic competition. D) a natural oligopoly. E) a legal oligopoly. Answer: D Topic: Natural oligopoly Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 23) A firm faces a small number of competitors. This firm is competing in A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) a perfect multi-firm monopoly. Answer: C Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 24) If an industry has an HHI of 2,900, the market structure is that of A) a monopoly. B) monopolistic competition. C) an oligopoly. D) perfect competition. E) either monopoly or perfect competition, depending on the existence or absence of barriers to entry. Answer: C Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Revised AACSB: Reflective thinking

25) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the efficient scale for one firm is ________ units per hour. A) 2,000 B) 4,000 C) 8,000 D) 10,000 E) more than 10,000 Answer: A Topic: Natural oligopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

26) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the lowest price at which a firm could stay in business in the long run is ________ per unit and the quantity demanded in the market at that price is ________ units per hour. A) $20; 4,000 B) $10; 8,000 C) $10; 4,000 D) $20; 2,000 E) $20; 8,000 Answer: B Topic: Natural oligopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking 27) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the figure shows a ________ can profitably operate. A) natural monopoly in which 1 firm B) natural oligopoly in which 2 firms C) natural oligopoly in which 3 firms D) natural oligopoly in which 4 firms E) natural oligopoly in which 5 or more firms Answer: D Topic: Natural oligopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking 28) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, economies of scale limit the market to ________ firm(s). A) 1 B) 2 C) 3 D) 4 E) 8 Answer: D Topic: Natural oligopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

29) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the efficient scale for one firm is ________ units per hour. A) 2,000 B) 4,000 C) 8,000 D) 6,000 E) 10,000 Answer: B Topic: Natural oligopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

30) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the lowest price at which a firm could stay in business in the long run is ________ per unit and the quantity demanded in the market at that price is ________ units per hour. A) $15; 6,000 B) $10; 8,000 C) $10; 6,000 D) $25; 2,000 E) $10; 4,000 Answer: B Topic: Natural oligopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking 31) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the figure shows a ________ can profitably operate. A) natural monopoly in which 1 firm B) natural monopoly in which 2 firms C) natural oligopoly in which 3 firms D) natural oligopoly in which 2 firms E) natural oligopoly in which 8 firms Answer: D Topic: Natural oligopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking 32) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, economies of scale limit the market to ________ firm(s). A) 1 B) 2 C) 3 D) 4 E) 8 Answer: B Topic: Natural oligopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

33) In the figure above, ________ firms will share the market and the ________. A) 2; efficient scale is 80 units B) 2; efficient scale is 40 units C) 3; efficient scale is 40 units D) 2; lowest possible price is $20 E) 2; lowest possible price is $15 Answer: B Topic: Natural oligopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

34) The figure above shows a ________ where ________ firm(s) produce(s) ________. A) natural oligopoly; 3; 30 units each B) natural duopoly; 2; 45 units each C) natural monopoly; 2; 90 units D) monopoly; 1; 90 units E) natural monopoly; 3; 90 units each Answer: A Topic: Natural oligopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

35) The figure above shows that ________ occurs at ________ units and that ________ firms should share the market. A) the efficient scale; 30; 3 B) the lowest marginal cost; 30; 3 C) the efficient scale; 45; 2 D) the highest level of demand; 45; 2 E) an economic profit; 45; 2 Answer: A Topic: Natural oligopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Analytical thinking

36) The figure shows the market for the tourist trolley service in a resort town. These trolley services provide transportation to tourists to alleviate parking shortages and traffic congestion. The figure shows A) a natural monopoly where the efficient scale is 100 riders per day. B) a natural duopoly where the efficient scale is 200 riders per day. C) a natural duopoly where the efficient scale is 100 riders per day. D) an oligopoly where 3 competing firms achieve minimum cost. E) an oligopoly where 3 competing firms create excess capacity. Answer: C Topic: Natural duopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Application of knowledge 14 Copyright © 2021 Pearson Education, Inc.

37) The figure shows the market for the tourist trolley service in a resort town. These trolley services provide transportation to tourists to alleviate parking shortages and traffic congestion. If ________ operated in the market ________. A) one firm; it would earn an economic profit and a new firm would be encouraged to enter B) two firms; the efficient scale for each firm is 200 riders C) two firms; the efficient scale for each firm is 100 riders D) three firms; costs would fall and all firms would earn an economic profit E) both A and C are correct. Answer: E Topic: Economies of scale Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Application of knowledge 38) The figure shows the market for the tourist trolley service in a resort town. These trolley services provide transportation to tourists to alleviate parking shortages and traffic congestion. The figure shows that in order to stay in business A) two firms can share the market and charge a minimum of $24 per ticket. B) three firms must operate charging at least $32 per ticket. C) only one firm can operate to avoid economic losses. D) two firms can share the market but there will be excess capacity. E) only one firm is needed to serve the market efficiently. Answer: A Topic: Oligopoly Skill: Level 3: Using models Section: Checkpoint 18.1 Status: Old AACSB: Application of knowledge 39) Light bulbs are made by firms in an oligopoly. This occurs because i. the market's size and cost structure limit the number of firms that can operate profitably. ii. the market has excess capacity. iii. the firms are unwilling to work interdependently. A) i only B) i, ii and iii C) i and iii D) ii and iii E) ii only Answer: A Topic: Oligopoly, definition Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Application of knowledge 15 Copyright © 2021 Pearson Education, Inc.

40) When a city licenses only 3 firms to serve the market, the city has created a A) cartel. B) legal monopoly. C) monopolistically competitive market. D) legal oligopoly. E) natural oligopoly. Answer: D Topic: Legal oligopoly Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 41) One way to identify oligopoly is to A) determine the market's minimum price. B) determine the market's maximum price. C) determine whether the firm's ATC exceeds price. D) use the Herfindahl-Hirschman Index (HHI). E) use the Efficiency test. Answer: D Topic: Determination of oligopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 42) Oligopoly is a market structure in which A) many firms each produce a slightly differentiated product. B) one firm produces a unique product. C) a small number of firms compete. D) many firms produce an identical product. E) the number of firms is so small that they do not compete with each other. Answer: C Topic: Oligopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

43) The fact that firms in oligopoly are interdependent means that A) there are barriers to entry. B) one firm's profits are affected by other firms' actions. C) they can produce either identical or differentiated goods. D) there are too many of them for any one firm to influence price. E) they definitely compete with each other so that the price is driven down to the monopoly level. Answer: B Topic: Interdependent Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 44) Collusion results when a group of firms i. act separately to limit output, lower prices, and decrease economic profits. ii. act together to limit output, raise prices, and increase economic profits. iii. in the United States legally fix prices. A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: B Topic: Collusion Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 45) A cartel is a group of firms A) acting separately to limit output, lower price, and decrease economic profit. B) acting together to limit output, raise price, and increase economic profit. C) legally fixing prices. D) acting together to erect barriers to entry. E) that compete primarily with each other rather than the other firms in the market. Answer: B Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

46) A market with only two firms is called a A) duopoly. B) two-firm monopolistic competition. C) two-firm monopoly. D) cartel. E) two-firm quasi monopoly. Answer: A Topic: Duopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 47) The efficient scale of one firm is 20 units and the average total cost at the efficient scale is $30. The quantity demanded in the market as a whole at $30 is 40 units. This market is A) a natural duopoly. B) a legal duopoly. C) a natural monopoly. D) a legal monopoly. E) monopolistically competitive. Answer: A Topic: Natural duopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 48) Even though four firms can profitably sell hotdogs downtown, the government licenses only two firms. This market is a A) natural duopoly. B) legal duopoly. C) natural monopoly. D) legal monopoly. E) market-limited oligopoly. Answer: B Topic: Legal duopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

49) To determine if a market is an oligopoly, we need to determine if A) the market's HHI is less than 900. B) there are many firms in the market. C) the firms are so few that they recognize their mutual interdependencies. D) the firms make identical or differentiated products. E) cartels are legal in their market. Answer: C Topic: Determination of oligopoly Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking 18.2 The Oligopolists' Dilemma 1) When oligopolies seek to operate as a single-price monopoly, the firms produce at the point where A) P = MC. B) MR = MC. C) P < ATC. D) P = MR. E) MC = ATC. Answer: B Topic: Monopoly outcome Skill: Level 2: Using definitions Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 2) When firms in an oligopoly successfully collude and do not cheat on a cartel agreement, they can make a long-run economic profit similar to A) perfect competition. B) monopoly. C) monopolistic competition. D) non-colluding oligopolies. E) the firms in regulated industries. Answer: B Topic: Monopoly outcome Skill: Level 2: Using definitions Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

3) If firms in an oligopolistic industry successfully collude and form a cartel, what price and output will result? A) the monopoly price and output B) the competitive price and output C) the monopolistically competitive price and output D) a price higher than the monopoly price and, because there is more than one firm in the industry, more output than the monopoly amount E) a price lower than the competitive price and, because there are only a few firms in the industry, less output than the competitive amount Answer: A Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 4) When oligopolies operate like firms in perfect competition, the firms produce at the point where the A) price is less than the marginal cost. B) marginal cost equals the price. C) price exceeds the marginal cost by the greatest amount. D) price equals the average total cost. E) marginal cost equals the average total cost. Answer: B Topic: Competitive outcome Skill: Level 2: Using definitions Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 5) If firms in an oligopolistic industry consistently cut their price to sell more output, what price and output will result? A) the monopoly price and output B) the competitive price and output C) the monopolistically competitive price and output D) a price lower than the competitive price and less output than the competitive amount E) a price lower than the competitive price and more output than the competitive amount Answer: B Topic: Competitive outcome Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

6) The range in which a duopoly's output falls is less than or equal to the output level in ________ and more than or equal to the output level in ________. A) monopolistic competition; monopoly B) monopolistic competition; perfect competition C) perfect competition; monopoly D) monopoly; monopolistic competition E) monopoly; perfect competition Answer: C Topic: Range of outcomes Skill: Level 2: Using definitions Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 7) In an oligopoly, output is A) less than the output in monopoly. B) greater than the output in perfect competition. C) in all circumstances the same as the output in perfect competition. D) somewhere between the output in monopoly and that in perfect competition outcomes. E) in all circumstances the same as the output in monopoly. Answer: D Topic: Range of outcomes Skill: Level 2: Using definitions Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 8) The possible alternatives for an oligopoly range from the monopoly case with ________ to the perfectly competitive case with ________. A) high output; low output B) low prices; high prices C) low profits; high profits D) low output; high output E) no cooperation among the firms; much cooperation among the firms Answer: D Topic: Range of outcomes Skill: Level 2: Using definitions Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

9) The above figure shows the market demand curve for telephone calls. Suppose the marginal cost of a telephone call is 2¢ a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as perfect competitors, there are ________ minutes of calls made per hour. A) between 0 and 3 million B) more than 3 million and less than or equal to 5 million C) more than 5 million and less than or equal to 7 million D) more than 7 million and less than or equal to 9 million E) more than 9 million Answer: D Topic: Competitive outcome Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Revised AACSB: Analytical thinking

10) The above figure shows the market demand curve for telephone calls. Suppose the marginal cost of a telephone call is 2¢ a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as a monopoly, there are ________ minutes of calls made per hour. A) between 0 and 3 million B) more than 3 million and less than or equal to 5 million C) more than 5 million and less than or equal to 7 million D) more than 7 million and less than or equal to 9 million E) more than 9 million Answer: B Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Revised AACSB: Analytical thinking 11) The above figure shows the market demand curve for telephone calls. Suppose the marginal cost of a telephone call is 2¢ a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as perfect competitors, the price of a call is ________ per minute and if the firms in the industry operate as a monopoly, the price of a call is ________ per minute. A) 2 cents; more than 3 cents and less than 4 cents B) more than 3 cents and less than 4 cents; more than 3 cents and less than 4 cents C) 1 cent; 2 cents D) 2 cents; either equal to or more than 4 cents E) either equal to or more than 4 cents; 2 cents Answer: A Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Revised AACSB: Analytical thinking

12) The figure above shows a market that a cartel controls. If the firms in the cartel produce ________ units, they will ________. A) 5; maximize joint profits B) 5; minimize joint costs C) 10; create a deadweight loss D) 10; maximize joint profits E) between 5 and 10; generate an efficient outcome Answer: A Topic: Cartel Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

13) The graph shows the market for the two zipline firms that operate in a resort city. If the firms decide to ________, they will ________. A) compete; serve 400 riders together B) compete; serve 200 riders together C) collude; serve 400 riders together D) act like a cartel; be operating illegally E) A and D are both correct. Answer: E Topic: Cartel Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Application of knowledge 14) The graph shows the market for the two zipline firms that operate in a resort city. If the firms maximize profit and decide to collude, together they will produce ________ rides at a price of ________ per ride. A) 200; $50 B) between 200 and 400; between $30 and $50 C) 200; $30 D) 400; $50 E) 400; $30 Answer: A Topic: Cartel Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Application of knowledge 25 Copyright © 2021 Pearson Education, Inc.

15) The graph shows the market for the two zipline firms that operate in a resort city. If the firms decide to compete, the together they will produce ________ rides at a price of ________ per ride. A) 400; $30 B) 200; $50 C) between 200 and 400; between $30 and $50 D) 400; $50 E) 200; $30 Answer: A Topic: Cartel cheating Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Application of knowledge 16) Which of the following statements is correct? A) A firm in oligopoly will charge a price that is lower than the price charged in perfect competition. B) If firms in oligopoly look only at their own self-interest in deciding the output they should produce, the total market output will exceed that of a monopoly. C) If one oligopolist reduces the price of its product, its demand curve shifts leftward. D) Because many producers join to form a cartel, the market becomes monopolistic competition. E) It is in the self-interest of each firm in an oligopoly to take the actions that maximize all the firms' joint profit. Answer: B Topic: Duopolists' dilemma Skill: Level 2: Using definitions Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 17) The major dilemma facing Boeing and Airbus is the A) fact that neither will respond to the behavior of the other. B) certainty surrounding the reaction of each firm to the behavior of the other firm. C) fact that if each firm separately tries to maximize its profit, it might wind up with less profit that otherwise. D) competition from other firms that drives their economic profit to zero. E) fact that when they collude to maximize their profit, the other firm's profit might be larger than its profit. Answer: C Topic: Duopolists' dilemma Skill: Level 2: Using definitions Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 26 Copyright © 2021 Pearson Education, Inc.

18) Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing output and equally share the economic profit. If firm A increases output A) both firms' profits increase. B) firm A's profits increase and firm B's profits decrease. C) firm B's profits increase and firm A's profits decrease. D) both firms' profits decrease. E) firm A's profits increase and firm B's profits do not change. Answer: B Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 19) Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing output and equally share the economic profit. If firm A increases its output, the market price ________ and total economic profit of the two firms combined ________. A) falls; decreases B) falls; increases C) rises; decreases D) rises; increases E) falls; does not change Answer: A Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 20) If one firm in a duopoly increases its production by one unit beyond the monopoly output, that firm's profit ________, the other firm's profit ________, and the TOTAL profit of the duopoly ________. A) increases; increases; increases B) does not change; does not change; does not change C) increases; decreases; does not change D) increases; does not change; increases E) increases; decreases; decreases Answer: E Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

21) Which of the following is TRUE? In the above figure, if the market is A) a monopoly, output will be Q1 and price will be P3. B) a monopoly, output will be Q3 and price will be P3. C) perfect competition, output will be Q2 and price will be P2. D) perfect competition, output will be Q1 and price will be P1. E) perfect competition, output will be Q3 and price will be P3. Answer: C Topic: Competitive outcome Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking 22) In the above figure, the output of an oligopoly will range between A) 0 and Q1. B) Q1 and Q2. C) Q1 and Q3. D) Q2 and Q3. E) 0 and Q2. Answer: B Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

23) Boeing and Airbus have entered into a cartel agreement that will enable them to boost their profits. What occurs if Boeing decides to cheat on the agreement? i. Boeing lowers the price of its airplanes. ii. The total industry output increases. iii. The total profits in the airplane industry will decrease. A) i only B) ii only C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 24) For a duopoly, the highest price is charged when the duopoly achieves A) the competitive outcome. B) the monopoly outcome. C) an outcome between the competitive outcome and the monopoly outcome. D) its noncooperative Nash equilibrium. E) Both answers A and D are correct because both refer to the same price. Answer: B Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 25) For a duopoly, the smallest TOTAL quantity is produced when the duopoly achieves A) the competitive outcome. B) the monopoly outcome. C) an outcome between the competitive outcome and the monopoly outcome. D) its noncooperative Nash equilibrium. E) Both answers A and D are correct because both refer to the same amount of output. Answer: B Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

26) For a duopoly, the maximum TOTAL profit is reached when the duopoly produces A) the same amount of output as the competitive outcome. B) the same amount of output as the monopoly outcome. C) an amount of output that lies between the competitive outcome and the monopoly outcome. D) more output than the competitive outcome. E) less output than the monopoly outcome. Answer: B Topic: Monopoly outcome Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 27) If a duopoly has reached the monopoly outcome, a firm can increase its profit by if it and it alone ________ its price and ________ its production. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases E) raises; does not change Answer: C Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 28) If a duopoly has reached the monopoly outcome and only one firm increases its production, that firm's profit ________ and the other firm's profit ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: B Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

29) Suppose a duopoly had reached the monopoly outcome and then the first firm increased its production. If the second firm next increases its production, the second firm's profit ________ and the first firm's profit ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Answer: B Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 30) If both firms in a duopoly increase their production by one unit beyond the monopoly output, each firm's profit ________ and the TOTAL profit of the duopoly ________. A) increases; increases B) does not change; does not change C) decreases; decreases D) does not change; increases E) decreases; does not change Answer: C Topic: Duopolists' dilemma Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking 31) The very best joint outcome possible for the firms in a duopoly is to produce the A) monopoly level of output. B) perfectly competitive level of output. C) amount of output that maximizes total revenue. D) amount of output that minimizes total cost. E) Nash equilibrium level of output IF the game is not repeated. Answer: A Topic: Duopolists' dilemma Skill: Level 2: Using definitions Section: Checkpoint 18.2 Status: Old AACSB: Reflective thinking

32) In the 1970s, OPEC was able to maintain its cartel power and ________. By 2015, the cartel's power decreased and ________. A) oil prices increased; oil prices decreased B) oil prices increased; OPEC was charged with violating antitrust law C) oil prices decreased; oil prices increased D) economies of scale were attained; OPEC was charged with violating antitrust law E) diseconomies of scale occurred; oil prices increased Answer: A Topic: Eye on the Global Economy: OPEC Skill: Level 5: Critical thinking Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking 18.3 Game Theory 1) The tool that economists use to analyze the mutual interdependence of oligopolies is A) economies of scale. B) the four-firm concentration ratio. C) game theory. D) the HHI. E) the efficient scale. Answer: C Topic: Game theory Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 2) Game theory is the tool that economists use to analyze strategic behavior, which is behavior that takes into account the ________ behavior of others and the mutual recognition of ________. A) unexpected; interdependence B) unexpected; independence C) expected; interdependence D) expected; independence E) random; profit Answer: C Topic: Game theory Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

3) Game theory is used to analyze the interactions among firms in A) oligopoly. B) perfect competition. C) monopoly. D) monopolistic competition. E) Both answers A and D are correct. Answer: A Topic: Game theory Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 4) Economists use game theory to analyze strategic behavior, which takes into account A) monopoly situations. B) the expected behavior of others and the recognition of mutual interdependence. C) the price-taking behavior of oligopolists. D) non-price competition. E) that increased demand decreases the market power of the firms in the market. Answer: B Topic: Game theory Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 5) The concepts of mutual interdependence and game theory illustrate the fact that firms competing in oligopoly A) consider the actions of the rivals before changing the price of their product. B) ignore the actions of their rivals when considering price changes. C) engage in frequent price changes. D) never change prices. E) will mutually determine the combined best outcome for all players. Answer: A Topic: Game theory Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

6) All games have which features? A) prices, rules, and payoffs B) rules, markets, and prices C) rules, strategies, and payoffs D) rules, strategies, and costs E) equilibrium, prices, and quantities Answer: C Topic: Game theory Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 7) The players in a game theory situation often do not act in their joint interest because of which of the following? A) They do not realize the benefit of cooperation. B) Players strive to minimize their opponents' profits. C) Players do not understand the game and its payoffs. D) It is not in each player's self-interest to cooperate. E) Players understand the game but they do not know which action(s) will benefit their joint interest. Answer: D Topic: Game theory Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 8) A Nash equilibrium i. is named after the Nobel prize winning economist, John Nash. ii. occurs when each player chooses the best strategy given the strategy of the other player. iii. must give the best possible outcome for both players. A) i only B) ii only C) iii only D) i and ii E) ii and iii Answer: D Topic: Nash equilibrium Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

9) A Nash equilibrium is defined as A) making zero economic profit in the long run. B) forming a cartel with strong penalties for cheaters. C) relying on other game players to realize the benefit of cooperation. D) each player taking the best possible action given the action of the other player. E) each player taking the action that is best for all the players. Answer: D Topic: Nash equilibrium Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 10) A Nash equilibrium occurs when each player in a game takes the ________ given the action of the other player. A) worst possible action for himself or herself B) best possible action for himself or herself C) most unpredictable possible action D) most mutually beneficial possible action E) best possible action for the other player Answer: B Topic: Nash equilibrium Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 11) A Nash equilibrium in the duopoly game A) means that one player has greater market power. B) occurs when each player takes the best possible action regardless of the strategy chosen by other firms. C) will always lead to equilibrium in which the firms' total profit is the largest. D) can occur only if firms cooperate with each other. E) means that a firm must be able to determine its actions AND the actions of its competitor. Answer: B Topic: Nash equilibrium Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

12) The prisoners' dilemma is an example of A) product differentiation. B) collusion. C) game theory. D) monopolistic competition. E) decision making in a monopoly. Answer: C Topic: Prisoners' dilemma Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 13) The prisoners' dilemma is A) an example of a duopoly game. B) a theory about why firms break the law. C) competition that can occur among firms in monopolistic competition. D) an example of the monopolist charging high prices. E) an example of a game that does not have a Nash equilibrium. Answer: A Topic: Prisoners' dilemma Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 14) In the prisoners' dilemma, each player is ________ regardless of the other player's actions. A) forced to confess B) forced to deny C) better off confessing D) better off denying E) going to go free Answer: C Topic: Prisoners' dilemma Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

15) The equilibrium in the prisoners' dilemma i. minimizes the prisoners' combined jail time. ii. has one prisoner confessing and the other denying. iii. is a Nash equilibrium. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: C Topic: Prisoners' dilemma Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 16) In a prisoners' dilemma game, in the Nash equilibrium A) neither player gets his or her best outcome. B) both players get their best outcome. C) one player gets his or her best outcome and the other player does not. D) collusion would not alter the outcome. E) Either answer A or C might be correct depending on whether the players communicate with each other or do not communicate with each other. Answer: A Topic: Prisoners' dilemma Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

17) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is that Bonnie ________ and Clyde ________. A) confesses; denies B) confesses; confesses C) denies; denies D) denies; confesses E) denies; either confess or denies, either outcome is consistent with the Nash equilibrium Answer: B Topic: Prisoners' dilemma Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking 18) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is A) Bonnie confesses only if she thinks Clyde denies committing the crime. B) Clyde confesses only if he thinks Bonnie denies committing the crime. C) both Bonnie and Clyde confess to the crime. D) both Bonnie and Clyde deny committing the crime. E) Clyde confesses and Bonnie might either confess or not confess, either outcome is consistent with the Nash equilibrium. Answer: C Topic: Prisoners' dilemma Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking

19) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Which of the following statements correctly describes the equilibrium choices made by Bonnie and Clyde? A) The Nash equilibrium is the best outcome for Bonnie and Clyde. B) There is no equilibrium in this game. C) In the Nash equilibrium, both Bonnie and Clyde deny committing the crime. D) Bonnie and Clyde could improve upon the Nash equilibrium if they could communicate. E) Bonnie and Clyde get the best outcome for themselves because they are not allowed to communicate. Answer: D Topic: Nash equilibrium Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking

20) The table above shows the payoff matrix for two firms operating a Zipline duopoly in a resort town. If the firms can collude, industry profits equal ________ and both firms would offer ________ rides each. A) $10,000; 60 B) $6,000; 100 C) $5,000; 60 D) $5,000; 100 E) $10,000; 320 Answer: A Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Application of knowledge

21) The table shows the payoff matrix for two firms operating a Zipline duopoly in a resort town. If the firms decide to compete, industry profits equal and both firms would offer ________ rides each. A) $6,000; 100 B) $5,000; 60 C) $9,000; 100 D) $9,000; 60 E) $10,000; 320 Answer: A Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Application of knowledge 22) The table shows the payoff matrix for two firms operating a Zipline duopoly in a resort town. The Nash equilibrium for this MARKET produces ________ rides per week with Firm X earning a profit of ________ and Firm Y earning a profit of ________. A) 200; $3,000; $3,000 B) 220; $3,000; $3,000 C) 200; $5,000; $3,000 D) 120; $10,000; $6,000 E) 220; $4,000; $5,000 Answer: A Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Application of knowledge 23) The prisoners' dilemma is similar to the problem faced by firms in an oligopoly in the United States because A) mutual interdependence exists, and collusion is illegal in the United States, so the firms cannot legally communicate. B) collusion is legal in the United States, and firms can communicate their pricing decisions to each other. C) failure to cooperate leads to better outcomes than cooperation. D) private prisons are run by oligopolies. E) the firms can communicate but mutual interdependence exists. Answer: A Topic: Nash equilibrium Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

24) In an oligopoly in which the firms have entered into a cartel agreement, the Nash equilibrium exhibits which of the following? A) firms jointly maximizing profits B) the firms cheating on the cartel agreement, which benefits society C) production at a price and output level close to monopolistic competition in the long run D) the firms cheating on the cartel agreement, which harms society E) one firm cheating on the cartel agreement and the other firms complying with the cartel agreement Answer: B Topic: Nash equilibrium Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

25) Suppose Intel and AMD can each charge either $300 or $200 for a CPU (the computing unit of a computer). The above table illustrates the payoffs, in millions of dollars, from each of the four possible outcomes that could occur in their duopoly setting. If Intel charges $300 and AMD charges $300, then Intel's profit will be ________ million and AMD's profit will be ________ million. A) $320; $160 B) $200; $180 C) $500; $100 D) $450; $220 E) $320; $220 Answer: A Topic: Payoff matrix Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking 42 Copyright © 2021 Pearson Education, Inc.

26) Suppose Intel and AMD can each charge either $300 or $200 for a CPU (the computing unit of a computer). The above table illustrates the payoffs, in millions of dollars, from each of the four possible outcomes that could occur in their duopoly setting. What must Intel's price be for AMD to earn $220 million in profit? A) $200 B) $400 C) $220 D) either $300 or $400 because AMD earns $220 million in profit either way E) None of the above answers is correct because the payoff matrix shows that it is not possible for AMD to earn $220 million in profit. Answer: A Topic: Payoff matrix Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking 27) Suppose Intel and AMD can each charge either $300 or $200 for a CPU (the computing unit of a computer). The above table illustrates the payoffs, in millions of dollars, from each of the four possible outcomes that could occur in their duopoly setting. If Intel charges $200 and AMD charges $300, then Intel's profit will be ________ million and AMD's profit will be ________ million. A) $200; $180 B) $320; $160 C) $500; $100 D) $450; $220 E) $500; $220 Answer: C Topic: Payoff matrix Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking 28) Long-run economic profits are most likely to be earned in A) perfect competition and oligopoly. B) perfect competition and monopoly. C) monopoly and oligopoly. D) oligopoly and monopolistic competition. E) perfect competition and monopolistic competition. Answer: C Topic: Duopoly game Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 43 Copyright © 2021 Pearson Education, Inc.

29) If two duopolists can stick to a cartel agreement to boost their prices, then both A) make greater economic profits than if they did not collude. B) price at marginal cost. C) price below average total cost. D) decrease their economic profits. E) increase their production so that each produces more than if they did not collude. Answer: A Topic: Duopoly game Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 30) If an oligopolistic game is repeatedly played, which of the following can occur? A) Players can learn ways to cooperate and make an economic profit. B) The competitive price and output consistently is the final result. C) Firms can learn how to cheat more effectively on the other player. D) One firm will be driven out of business. E) An implicit agreement is reached in which one firm constantly cheats on the cartel and the other firm complies with it. Answer: A Topic: Repeated games Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

31) The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. In the Nash equilibrium, Firm A will set a price of ________ and Firm B will set a price of ________. A) $10; $20 B) $20; $10 C) $10; $10 D) $20; $20 E) $20; something, but more information is needed to determine Firm B's price Answer: C Topic: Nash equilibrium Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking 32) The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. In the above game, in the Nash equilibrium A) Firm A and Firm B are both making $40,000 in economic profit. B) Firm A and Firm B are both making $55,000 in economic profit. C) Firm A is making $60,000 and Firm B is making $55,000 in economic profit. D) Firm A and Firm B are both making $60,000 in economic profit. E) Firm A and Firm B are both making $35,000 in economic profit. Answer: A Topic: Nash equilibrium Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking

33) The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. Which of the following statements is correct? A) If the firms play this game repeatedly, one would end up charging $20 and the other $10. B) If the firms cooperate, both could make $55,000 in economic profit. C) The Nash equilibrium in this game is for both firms to set P = $20 because that maximizes their combined profit. D) Firm B's strategy is to ALWAYS set P = $20 because that gives Firm B the highest possible profit. E) If Firm B sets P = $20, then Firm A will maximize its profit by setting its P = $20. Answer: B Topic: Repeated games Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking

34) Intel and AMD are a duopoly that produces CPU chips.Intel and AMD must choose whether to conduct R&D or not conduct R&D. The table above shows the payoff matrix for the two firms. The numbers are millions of dollars of profit. The Nash equilibrium is for Intel to ________ and for AMD to ________. A) conduct R&D; conduct R&D B) conduct R&D; not conduct R&D C) not conduct R&D; conduct R&D D) not conduct R&D; not conduct R&D E) conduct R&D; either conduct R&D or not conduct R&D, the equilibrium could be either choice for AMD Answer: A Topic: Nash equilibrium Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Revised AACSB: Analytical thinking 46 Copyright © 2021 Pearson Education, Inc.

35) Intel and AMD are a duopoly that produces CPU chips. Intel and AMD must choose whether to conduct R&D or not conduct R&D. The table above shows the payoff matrix for the two firms. If AMD is playing a tit-for-tat strategy, then if Intel conducted R&D last period, AMD A) definitely conducts R&D this period. B) definitely does not conduct R&D this period. C) might conduct R&D or might not conduct R&D, depending on Intel's profit. D) might conduct R&D or might not conduct R&D, depending on its profit. E) might conduct R&D or might not conduct R&D, but more information is needed to determine its action. Answer: A Topic: Repeated games Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Revised AACSB: Analytical thinking 36) Intel and AMD are a duopoly that produces CPU chips. Intel and AMD must choose whether to conduct R&D or not conduct R&D. The table above shows the payoff matrix for the two firms. AMD is playing a tit-for-tat strategy and Intel did not conduct R&D last period. Then, of the following answers, Intel's total profit for the next two periods is the highest if Intel ________ R&D this period and ________ R&D next period. A) conducts; conducts B) does not conduct; conducts C) conducts; does not conduct D) does not conduct; does not conduct E) conducts; either conducts or does not conduct because the profit is the same in either case Answer: B Topic: Repeated games Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Revised AACSB: Analytical thinking 37) One of the main tools economists use to analyze strategic behavior is A) the Herfindahl-Hirschman Index. B) game theory. C) cartel theory. D) the collusion index. E) dual theory, which is used to study duopolies. Answer: B Topic: Game theory Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

38) Game theory reveals that A) the equilibrium might not be the best solution for the parties involved. B) firms in oligopoly are not interdependent. C) each player looks after what is best for the industry. D) if all firms in an oligopoly take the action that maximizes their profit, then the equilibrium will have the largest possible combined profit of all the firms. E) firms in an oligopoly choose their actions without regard for what the other firms might do. Answer: A Topic: Game theory Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 39) A Nash equilibrium occurs A) when each player acts without considering the actions of the other player. B) when each player takes the best possible action given the action of the other player. C) only when players use the tit-for-tat strategy. D) only when the game is played in Nashville, TN. E) when each player takes the action that makes the combined payoff for all players as large as possible. Answer: B Topic: Nash equilibrium Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 40) The prisoners' dilemma game A) shows that prisoners are better off if they cooperate. B) shows it is easy to cooperate. C) has an equilibrium in which both prisoners are made as well off as possible. D) would have the same outcome even if the prisoners can communicate and cooperate. E) has an equilibrium in which one prisoner is made as well off as possible and the other prisoner is made as worse off as possible. Answer: A Topic: Prisoners' dilemma Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

41) A collusive agreement to form a cartel is difficult to maintain because A) each member firm can increase its profit by cutting its price and selling more. B) forming a cartel is legal but frowned upon throughout the world. C) supply will decrease because of the high cartel price. D) demanders will rebel once they realize a cartel has been formed. E) each firm can increase its profit if it decreases its production even more than the decrease set by the cartel. Answer: A Topic: Duopolists' dilemma Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 42) Firms in oligopoly can achieve an economic profit A) always in the long run. B) if they cooperate. C) only if the demand for their products is inelastic. D) only if the demand for their products is elastic. E) if they reach the non-cooperative equilibrium. Answer: B Topic: Duopoly game Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking 43) When duopoly games are repeated and a "tit for tat" strategy is used A) the competitive outcome is more likely to be reached than when the game is played once. B) the monopoly outcome is more likely to be reached than when the game is played once. C) both firms begin to incur economic losses. D) one firm goes out of business. E) because the game is repeated it is impossible to predict whether the competitive or the monopoly outcome is more likely. Answer: B Topic: Repeated games Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

44) Oligopoly is A) always efficient. B) efficient only if the firms cooperate. C) efficient only if the firms play non-repeated games. D) generally not efficient. E) efficient only if the firms innovate. Answer: D Topic: Efficiency of oligopoly Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking 45) The smart-phone market can be considered a(n) ________ because ________. A) oligopoly; there are large profits for the firms that dominate the market B) monopoly; Apple makes the largest profit in the market C) monopolistically competitive market; the few firms make a profit and produce a variety of phones D) oligopoly; there are few barriers to entry E) monopolistically competitive market; the firms charge a markup over marginal cost Answer: A Topic: Eye on the cell-phone oligopoly Skill: Level 5: Critical thinking Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking 18.4 Antitrust Law 1) The focus of antitrust legislation is to A) encourage cartels to form because they are easier to regulate. B) maintain competition. C) force society to act in the best interest of producers. D) limit the power of regulatory bodies. E) ensure that producers earn enough profit to stay in business so that consumers are not harmed by too many businesses closing. Answer: B Topic: Antitrust law Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

2) Which of the following are U.S. antitrust laws? i. The Rockefeller Act ii. The Sherman Act iii. The Natural Monopoly Act A) i and ii B) ii and iii C) ii only D) i, ii, and iii E) i only Answer: C Topic: Sherman Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 3) The first antitrust law in the United States was the A) Sherman Act, passed in 1960. B) Clayton Act, passed in 1914. C) Clayton Act, passed in 1830. D) Sherman Act, passed in 1890. E) Sherman Act, passed in 1933. Answer: D Topic: Sherman Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 4) Section 1 of the Sherman Antitrust Act declares what to be illegal? A) every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations B) mergers of a horizontal nature C) any attempt to monopolize an industry D) sharing of technology among competing firms or mergers where the effect is to lessen competition E) exiting an industry if the remaining firm or firms have a market share that is too large Answer: A Topic: Sherman Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

5) According to Section 2 of the Sherman Act, which of the following is a felony? A) mergers of a vertical nature B) horizontal mergers C) attempts to monopolize an industry D) price increases among competing firms that occur simultaneously E) using the HHI to justify a merger Answer: C Topic: Sherman Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 6) Which antitrust law has two main provisions, one against conspiring with others to restrict competition and the other making it a felony to monopolize or attempt to monopolize? A) Sherman Act B) Clayton Act C) Robinson-Patman Act D) Celler-Kefauver Act E) Bade-Parkin Act Answer: A Topic: Sherman Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 7) As a result of a wave of mergers in the early part of the twentieth century, which act was passed? A) the Anti-Merger Act of 1900 B) the Sherman Act of 1909 C) the Clayton Act of 1914 D) the Horizontal Merger Act of 1919 E) the Pro-Competition Act of 1912 Answer: C Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

8) In the United States, antitrust laws A) do not allow one person to be a director of two competing firms if being a member "substantially lessens competition." B) break up a company if it is too large because "size itself is an offense." C) do not always prosecute firms if they have fixed their prices. D) regard excess competition as a felony under Section 3 of the Sherman Act. E) place a maximum limit of 125 firms that are allowed to compete in any market. Answer: A Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 9) Which of the following does antitrust law prohibit if it substantially lessens competition or creates a monopoly? i. acquiring a competitor's shares or assets ii. territorial confinement iii. becoming a director of a competing firm A) i only B) iii only C) i and iii D) i and ii E) i, ii, and iii Answer: E Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 10) Under the Clayton Act and its amendments, which of the following activities is illegal if it creates monopoly? A) exit of a firm from a market with 4 or fewer surviving firms B) price hikes among competing firms C) price discrimination D) patents that result in price hikes E) entry of a firm into a new market Answer: C Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

11) Under the Clayton Act and its amendments, which of the following activities is illegal if it creates monopoly? i. contracts that require other goods to be bought from the same firm ii. contracts that prevent a buyer from reselling a product outside a specified area iii. becoming a director of a competing firm A) i only B) ii only C) ii and iii D) i and iii E) i, ii, and iii Answer: E Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 12) Tying arrangements A) require retailers to charge a specific price determined by the manufacturer. B) require a buyer to purchase one product in order to buy another, different product. C) are illegal under the Sherman Act. D) always allow a firm to increase its market power. E) are always illegal under the Clayton Act. Answer: B Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 13) Which of the following is an example of a tying arrangement? A) preventing a buyer from reselling a product outside a specific area B) selling one product only if another product is purchased C) forcing the purchase of all necessities from a single firm D) prohibiting a seller from selling a competing item E) selling different units of a good to the same buyer at different prices Answer: B Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

14) Tying arrangements A) work only in perfectly competitive markets. B) are illegal under the Sherman Act. C) are illegal under the Clayton Act if they create monopoly. D) are illegal under the Clayton Act and the Sherman Act only if they used along with predatory pricing. E) are always illegal under the Clayton Act. Answer: C Topic: Clayton Act Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 15) If a firm, Best Computer Buys, requires its customers to buy software from it whenever the customers purchase a computer, the company's policy is called A) an exclusive deal. B) a territorial confinement. C) a tying arrangement. D) pricing discrimination. E) predatory pricing. Answer: C Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 16) In the 1970s, when a gasoline price ceiling was imposed that was below the equilibrium price of gasoline, some gas stations required that buyers of gas also purchase other products sold at the station. This policy is an example of which of the following? A) price discrimination B) tying arrangements C) exclusive dealing D) requirements contract E) resale price maintenance Answer: B Topic: Clayton Act Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

17) Which of the following is an example of exclusive dealing? A) preventing a buyer from reselling a product outside a specific area B) forcing a buyer to buy other goods from a supplier C) forcing the purchase of all necessities from a single firm D) prohibiting a seller from selling a competing item E) selling different units of a good to the same buyer at different prices Answer: D Topic: Clayton Act Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 18) If Polka Cola prevents all of its retail outlets from selling any other competing soft drink, it is engaged in A) a tying agreement. B) a requirement contract. C) an exclusive deal. D) territorial confinement. E) resale price maintenance. Answer: C Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 19) Which of the following is an example of a territorial confinement? A) preventing a buyer from reselling a product outside a specific area B) selling one product only if another product is purchased C) forcing the purchase of all necessities from a single firm D) prohibiting a seller from selling a competing item E) selling different units of a good at different prices to the same customer Answer: A Topic: Clayton Act Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

20) Which of the following provisions requires a firm to buy all of a particular item from a single firm? A) tying arrangement B) requirements contracts C) exclusive dealing D) territorial confinement E) quantity discrimination Answer: B Topic: Clayton Act Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 21) Which of the following is ALWAYS a violation of the antitrust law? A) price fixing B) price discrimination C) resale price maintenance D) predatory pricing E) tying arrangements Answer: A Topic: Price fixing Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 22) Price fixing A) ALWAYS is a violation of the law. B) is allowed only if otherwise a firm would go bankrupt. C) is one of the business practices prohibited by the Clayton Act. D) is a violation of the law only when it is combined with predatory pricing. E) is legal if the businesses have received prior clearance from the Justice Department. Answer: A Topic: Price fixing Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

23) Under what conditions would it be legal for two bakeries in Minneapolis to explicitly agree to raise their prices by 5 percent? A) if the price rise was not predatory B) if the price rise did not measurably increase producer surplus C) never D) if the price rise did not harm consumers in the long run by reducing competition E) if the price rise was necessary to keep one or both bakeries from closing Answer: C Topic: Price fixing Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 24) Setting a price so low that competitors are driven out of a market and then boosting the price is called A) predatory pricing. B) a tying arrangement. C) resale price maintenance. D) price fixing. E) price discrimination. Answer: A Topic: Predatory pricing Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 25) When an oligopoly reduces its price with the intent of driving away its competitors, it is said to be engaging in A) pricing differential. B) predatory pricing. C) price fixing. D) a price-tying agreement. E) price discrimination. Answer: B Topic: Predatory pricing Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

26) Economists are skeptical that ________ occurs very often because firms engaging in it are certain to suffer an economic loss for a period of time. A) a tying arrangement B) inefficient resale price maintenance C) predatory pricing D) efficient resale price maintenance E) exclusive dealing Answer: C Topic: Predatory pricing Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 27) ________ is an agreement between a manufacturer and a distributor on the price at which a product will be resold. A) Resale price maintenance B) Price discrimination C) Price fixing D) Predatory pricing E) A tying arrangement Answer: A Topic: Resale price maintenance Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 28) The manufacturer of perfume enters into an agreement with several distributors about the price at which the distributors can resell the perfume. The distributors who do not agree to the pricing suggestion are not able to sell the perfume. The agreement between manufacturers and distributors is A) resale price maintenance. B) an interlocking dealership chain. C) always inefficient. D) a tying arrangement. E) an example of an exclusive deal. Answer: A Topic: Resale price maintenance Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

29) Resale price maintenance can be illegal A) under the Clayton Act. B) under the Sherman Act. C) only if the distributors engage in predatory pricing. D) if distributors tell the manufacturer the maximum price at which they will sell the product. E) only when it is combined with territorial confinement. Answer: B Topic: Resale price maintenance Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 30) Resale price maintenance is efficient if A) it is used in conjunction with a tying arrangement. B) the manufacturer does not engage in predatory pricing. C) retailers charge the lowest price for the product. D) it enables a manufacturer to induce an efficient standard of service from retailers. E) it takes the place of an exclusive deal. Answer: D Topic: Resale price maintenance Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 31) The Shiny Watch company, a manufacturer of expensive watches, requires all of its retailers to sell its watches for a specific price. Which of the following statements are TRUE? i. The Shiny Watch company is engaged in predatory pricing. ii. The Shiny Watch company is definitely violating the law iii. The Shiny Watch company creates an efficient outcome it its retailers provide an efficient level of service. A) i, ii and iii B) ii only C) iii only D) i and ii E) ii and iii Answer: C Topic: Resale price maintenance Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

32) A group of firms in Sunnyvale have a complaint about one of their competitors. They charge that Big Box Building Supply charges such low prices that they can't stay in business. Which of the following is the most likely response from an economist? A) Big Box Building Supply isn't engaged in predatory pricing because new firms can always enter and compete away any monopoly profits. B) Big Box Building Supply is engaged in price fixing and should be prosecuted for violating antitrust law. C) The firms have a valid complaint against Big Box Building Supply because it is engaged in resale price maintenance. D) The firms don't have a valid complaint against Big Box Building Supply because it is operating like a natural monopoly. E) Big Box Building Supply is engaged in resale price maintenance but most likely is providing efficient service. Answer: A Topic: Antitrust law Skill: Level 5: Critical thinking Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking 33) The government believes that which entry barrier has allowed Microsoft to gain monopoly power? A) ownership of the entire supply of a resource B) patents C) trademarks D) economies of scale and network economies E) territorial confinement Answer: D Topic: United States versus Microsoft Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 34) The U.S. courts found Microsoft A) did not violate antitrust law. B) violated the Sherman Act. C) violated the Cellar-Kefauver Act. D) engaged in predatory pricing. E) violated the price discrimination clause of the Clayton Act. Answer: B Topic: United States versus Microsoft Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 61 Copyright © 2021 Pearson Education, Inc.

35) If the Herfindahl-Hirschman Index in an industry is above 1,500, a merger that increases the Herfindahl-Hirschman Index by over 100 points will A) be allowed by the government. B) be challenged by the government. C) be encouraged by the government. D) increase competition in that industry. E) never be allowed to happen. Answer: B Topic: Merger rules Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Revised AACSB: Reflective thinking 36) The Federal Trade Commission uses ________ to help determine whether to challenge a possible merger. A) the Sherman Act B) the Clayton Act C) the Herfindahl-Hirschman Index D) the antitrust law of natural monopolies E) the four-firm concentration ratio Answer: C Topic: Merger rules Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 37) If an industry has a Herfindahl-Hirschman index of 800, it is considered a A) competitive market. B) moderately concentrated market. C) concentrated market. D) monopoly. E) small market. Answer: A Topic: Merger rules Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

38) If the Herfindahl-Hirschman Index (HHI) for a market is between 1,500 and 2,500, the Federal Trade Commission will examine A) all mergers. B) no mergers. C) mergers that raise the HHI by 100 or more points. D) mergers that raise the HHI by 100 or fewer point. E) mergers that lower the HHI by 100 or more points. Answer: C Topic: Merger rules Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Revised AACSB: Reflective thinking 39) Suppose there are 6 firms in an industry with the following market shares. If the two smallest firms want to merge, how will the Federal Trade Commission reply? Firm 1: 30 Firm 2: 25 Firm 3: 25 Firm 4: 10 Firm 5: 7 Firm 6: 3 A) The firms will be allowed to merge and compete with the larger firms. B) The firms will be challenged because the merger will raise the HHI by more than 50 points. C) The firms will not be allowed to merge. D) The firms will be challenged because the merger will raise the HHI by more than 100 points. E) The firms will be challenged because the merger will raise the HHI by more than 250 points. Answer: A Topic: Merger rules Skill: Level 4: Applying models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

40) Federal Trade Commission guidelines state that it will challenge mergers in markets for which the Herfindahl-Hirschman Index is A) a positive number. B) below 1,000 points. C) between 1,500 and 2,500, and the merger would reduce the index by 100 points. D) between 1,500 and 2,500, and the merger would increase the index by 100 points. E) more than 1,800. Answer: D Topic: Merger rules Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Revised AACSB: Reflective thinking 41) Suppose that an industry has an HHI of 1,900. Two firms in the industry want to merge. Under which conditions will the Federal Trade Commission challenge the merger? A) The market is considered competitive, so the merger will not be challenged. B) The merger will be challenged if it raises the HHI by 50 or more points. C) The merger will be challenged if it raises the HHI by 100 or more points. D) The merger will be challenged if it raises the HHI by 200 or more points. E) The merger will be challenged if it raises the HHI by 500 or more points. Answer: C Topic: Merger rules Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Revised AACSB: Reflective thinking 42) The Federal Trade Commission ________ the merger between AT&T and T-Mobile because the merger was projected to ________. A) did not approve; increase the HHI by at least 700 points and reduce market competitiveness B) approved; increase the HHI by only 700 points and not substantially affect market competitiveness C) approved; decrease the HHI by almost 500 points D) did not approve; increase the four-firm concentration ratio by 20 percent E) did not approve; cause the firms to engage in predatory pricing Answer: A Topic: Eye on the U.S. Economy: Wireless Service Merger Decisions Skill: Level 5: Critical thinking Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

43) The first antitrust act was ________ passed in ________. A) the Clayton Act; 1890 B) the Sherman Act; 1890 C) the Clinton Act; 1999 D) the Rockefeller Act; 1890 E) the Clayton Act; 1914 Answer: B Topic: Sherman Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 44) The Clayton Act A) replaced the Sherman Act. B) along with its amendments, outlawed several business practices if they substantially lessened competition or created monopoly. C) along with its amendments, prohibited all business practices that substantially lessen competition or create monopoly. D) was the first anti-trust law in the United States. E) was repealed in 1985. Answer: B Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 45) Which of the following is (are) prohibited if it substantially lessens competition or creates a monopoly? i. price discrimination ii. tying arrangements iii. exclusive dealing A) i only B) ii only C) ii and iii D) iii only E) i, ii, and iii Answer: E Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

46) If Polka Cola agrees to sell its cola to a retailer only if the retailer also buys a lemon-lime drink, Polka Up, then Polka Cola is engaged in A) a tying arrangement. B) a requirement contracts. C) an exclusive deal. D) territorial confinement. E) price discrimination. Answer: A Topic: Tying arrangements Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 47) Which of the following is ALWAYS illegal? A) possessing a very large market share B) selling at a price below other producers because of efficiency C) price fixing D) attempting to merge with a competitor E) price discrimination Answer: C Topic: Price fixing Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 48) Resale price maintenance A) can lead to efficiency by preventing low-price shops from being free riders. B) can lead to inefficiency by preventing low-price shops from being free riders. C) is always legal. D) is a clear example of predatory pricing. E) is an example of a tying arrangement. Answer: A Topic: Resale price maintenance Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

49) Predatory pricing occurs when a firm sets a ________ price to drive competitors out of business with the intention of then setting a ________ price. A) monopoly; high B) monopoly; low C) low; monopoly D) low; low E) high; monopoly Answer: C Topic: Predatory pricing Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 50) In the case against Microsoft, it was claimed that combining Internet Explorer and Windows was A) predatory pricing. B) an illegal tying agreement. C) creating one product that is convenient for the consumers. D) illegal territorial confinement. E) an inefficient resale maintenance agreement. Answer: B Topic: United States versus Microsoft Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 51) In a concentrated industry with a Herfindahl-Hirschman Index that exceeds 1,800, the Federal Trade Commission will challenge any merger that increases the Herfindahl-Hirschman index by a minimum of A) 50 points. B) 100 points. C) 1,000 points. D) 1,800 points. E) 10,000 points. Answer: A Topic: Merger rules Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking

52) In 2016, Disney thought about buying Netflix. Before the firms will be allowed the merge, the Justice Department will decide if the merger A) violates the Sherman Act. B) results in predatory pricing. C) violates the Robinson-Patman Act. D) results in resale price maintenance. E) creates excess capacity. Answer: A Topic: Sherman Act Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Application of knowledge 53) In 2016, a federal judge prohibited Staples and Office Depot from merging because A) the resulting HHI would have been too high. B) the resulting HHI would have been too low. C) the firms' cost would have increased too much. D) too many employees would have to be fired. E) there would be too many office supply stores. Answer: A Topic: Herfindahl-Hirschman Index Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Application of knowledge

18.5 Chapter Figures

The figure above shows the market for airplanes. 1) Suppose the airplane market is an oligopoly. If the firms act as a monopolist, the price will be ________ and if the firms act as competitors the price will be ________. A) $13 million per plane; $1 million per plane B) $1 million per plane; $13 million per plane C) $13 million per plane; $13 million per plane D) $1 million per plane; $1 million per plane E) None of the above answers is correct. Answer: A Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

2) Suppose the airplane market is an oligopoly. According to the figure above, if the firms act as a monopolist, the quantity produced will be ________ planes per week, and if the firms act as competitors, the quantity produced will be ________ planes per week. A) 6; 12 B) 12; 6 C) 0; 6 D) 12; 0 E) None of the above answers is correct. Answer: A Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking 3) Suppose the airplane market is an oligopoly. According to the figure above, the price can range as high as ________ and as low as ________. A) $13 million per plane; $1 million per plane B) $30 million per plane; $13 million per plane C) $13 million per plane; $13 million per plane D) $1 million per plane; $1 million per plane E) None of the above answers is correct. Answer: A Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking 4) Suppose the airplane market is an oligopoly. According to the figure above, the quantity produced can range as high as ________ planes per week and as low as ________ planes per week. A) 10; 4 B) 12; 6 C) 6; 0 D) 12; 0 E) None of the above answers is correct. Answer: B Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

18.6 Integrative Questions 1) A characteristic common in both oligopoly and monopolistic competition is A) a small number of firms compete in the market. B) natural or legal barriers prevent the entry of new firms into the market. C) each firm faces a downward-sloping demand curve. D) the firms in the market are interdependent. E) each firm has a large share of the market. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 2) If the HHI for an industry equals 3,200 A) firms in the industry must enter a cartel in order to earn an economic profit. B) firms in the industry are most likely to make zero economic profit. C) the industry is probably an oligopoly. D) firms in the industry are likely to act independently of each other. E) the industry is almost surely monopolistic competition. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 3) Which of the following are characteristics of an oligopoly? i. The HHI for an oligopoly is between 100 and 3500. ii. There are a few firms that compete. iii. The firms can increase their profit by forming a cartel. A) i and ii B) i and iii C) ii and iii D) i, ii, and iii E) i only Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

4) When a market has barriers to entry A) then in the long run it is possible for the firms to incur economic losses. B) then in the long run the only possible outcome for the firms to make zero economic profit. C) then in the long run it might be possible for the firms to make a positive economic profit. D) oligopolies cannot be created. E) the HHI almost always falls below 1,000. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

5) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, then ________ limit(s) the market to 3 firms. A) economies of scale B) a "tit for tat" strategy C) collusion D) a Nash equilibrium E) legal requirements Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking

6) The figure above shows the market demand curve and the ATC curve for a firm. Each firm in the market has the same ATC curve. If the firms in the industry agree to form a cartel, the firms in the industry make an economic profit if there are ________ firms, each producing ________ units per hour. A) 3; 4,000 B) 4; 3,000 C) 2; 6,000 D) 2; 4,000 E) 2; 12,000 Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Analytical thinking 7) If a legal oligopoly exists A) the firms always engage in a "tit for tat" strategy. B) there is the possibility that the market is large enough for more firms. C) the firms never collude. D) monopoly profits cannot be earned. E) the firms may legally merge and become a monopoly. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 8) A cartel is A) another name for a firm in an oligopoly. B) a collusive agreement among a number of firms. C) a government body that regulates an industry. D) an antitrust law. E) a type of regulation that focuses on quantities rather than price. Answer: B Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

9) Firms operating in an oligopoly A) always compete on price. B) always compete on price, product quality and marketing. C) can make the same profit as a monopoly but there is no assurance that they will do so. D) usually achieve the competitive outcome. E) always make the same profit as a monopoly. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 10) The range of output for a duopoly ranges between the A) perfectly competitive outcome and the monopolistically competitive outcome. B) efficient scale and the perfectly competitive outcome. C) minimum of ATC and the efficient scale. D) monopoly outcome and the perfectly competitive outcome. E) short-run perfectly competitive outcome and the long-run perfectly competitive outcome. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 11) What is the conclusion in the prisoners' dilemma? A) Firms should not enter a legal duopoly. B) Two prisoners acting in their own best interest harm their joint interest. C) There is no Nash equilibrium available to the prisoners. D) Prisoners do not act interdependently. E) Duopolies almost always reach their best outcome. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

12) Which of the following can be games played by firms in an oligopoly? i. choosing how much to spend on advertising ii. choosing how much to spend on R&D iii. choosing to enter a legal duopoly A) i and ii B) i and iii C) ii and iii D) ii only E) iii only Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 13) Tying arrangements are A) illegal if they substantially lessen competition. B) used by regulators to force a monopoly to produce an efficient amount of production. C) used by regulators to force a monopoly to charge an efficient price. D) illegal according to the Sherman Act. E) necessary in order for a firm to price discriminate. Answer: A Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 14) Resale price maintenance is a form of A) regulation. B) marginal cost pricing. C) average cost pricing. D) agreeing about the price that will be charged. E) setting the price cap under price cap regulation. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

15) If a firm engages in predatory pricing, it A) is following marginal cost pricing. B) is following average cost pricing. C) sets a low price to drive rivals out of business. D) has been regulated using a price cap. E) is guilty of price fixing. Answer: C Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 16) Because it was found guilty of violating the Sherman Act, Microsoft will be subject to A) rate of return regulation. B) marginal cost pricing. C) price cap regulation. D) predatory pricing. E) None of the above answers is correct. Answer: E Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking 17) When the Federal Trade Commission decides whether to allow firms in an industry to merge, it uses the ________ to guide its decision. A) social interest theory B) HHI C) capture theory D) Sherman Act E) predatory pricing theory Answer: B Topic: Integrative Skill: Level 1: Definition Section: Integrative Status: Old AACSB: Reflective thinking

18.7 Essay: What Is Oligopoly? 1) Describe the characteristics of an oligopoly. Answer: There are a small number of firms that act interdependently. They are tempted to form a cartel and collude to increase profits. They can compete on price only (if they produce identical products) or compete on price, product quality and marketing (if they produce slightly different products). Natural or legal barriers prevent the entry of new firms. Topic: Oligopoly, definition Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication 2) "Because firms in an oligopoly are so large, they do not need to consider each other's actions." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is most definitely incorrect. Oligopoly is an industry in which only a few firms compete. Because there are only a few firms, the hallmark of oligopoly is mutual interdependence, that is, one firm's action will affect the other firms. The fact that in oligopoly each firm's actions affect its rivals is unlike the case in perfect competition or monopolistic competition, in which there are so many firms that one firm's actions have no effect on its rivals, or monopoly, in which there is only one firm and hence no rivals. Topic: Oligopoly Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication 3) What market structures other than oligopoly have the characteristic of one firm's actions affecting the actions of its competitors? Explain your answer. Answer: No other market structure has the characteristic that one firm's actions can affect the actions of its competitors. In monopoly, there are no competitors to affect. And in perfect competition and monopolistic competition, there are so many competitors that any one firm's actions have no measurable impact on its competitors. Oligopoly is unique in that it is the only market structure in which one firm's actions affect the actions of its competitors. Topic: Oligopoly Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication

4) What is a cartel? Answer: A cartel is a group of firms acting together to limit output, raise price and increase economic profit. Cartels are illegal in the United States. Cartels operate in a market structure with oligopolies. If firms can stick to the cartel agreement, the firms can earn an economic profit. However, cartels tend to break down because firms are tempted to cheat on their cartel partners and increase their own profit at the expense of their partners. Topic: Cartel Skill: Level 1: Definition Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication 5) Explain what a cartel is and the difficulties faced in maintaining a cartel. Answer: A cartel is a group of firms acting together to decrease output, raise price, and increase economic profit. The difficulty faced by a cartel is the fact that each member has the incentive to cheat on the cartel and increase its output. If a member increases its output and the rest of the cartel members do not, the cheating members' profits will increase substantially. Each member reasons that if it is the only cheater, it can significantly increase its profit and so each firm has an incentive to cheat. Topic: Cartel Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication 6) Why are cartels among firms usually kept secret? Answer: Cartels are typically kept secret because they are illegal. In the United States and many other countries, it is illegal for firms to collude to form a cartel. It is illegal because when firms collude they do so in order to restrict output, raise prices, and capture consumer surplus in order to increase their economic profit. Topic: Cartel Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Written and oral communication 7) What is the legal status of a cartel among firms in the United States? Answer: Cartels are illegal in the United States and in many other countries. Topic: Cartel Skill: Level 2: Using definitions Section: Checkpoint 18.1 Status: Old AACSB: Reflective thinking

18.8 Essay: The Oligopolists' Dilemma 1) "If firms in an oligopoly operate as a monopoly, the industry produces the most output and if they operate as perfect competitors, the industry produces the least output." Is the previous statement correct or incorrect? Why? Answer: The statement is incorrect; it reverses the outcomes. If the firms in an oligopoly operate as a monopoly, the industry produces the LEAST output and if they operate as perfect competitors, the industry produces the MOST output. Topic: Range of outcomes Skill: Level 2: Using definitions Section: Checkpoint 18.2 Status: Old AACSB: Written and oral communication 2) What is the best outcome for society: When firms in an oligopoly operate as a monopoly or when they act as perfect competitors? Briefly explain your answer. Answer: The best outcome for society is when the firms act as perfect competitors. Perfect competition produces the efficient quantity of output. A monopoly restricts the quantity of output it produces and creates a deadweight loss, which harms society. Society is better off if the firms compete rather than collude and operate as a monopoly. Topic: Range of outcomes Skill: Level 5: Critical thinking Section: Checkpoint 18.2 Status: Old AACSB: Written and oral communication 3) In the Boeing/Airbus oligopoly example discussed in the text, why did Boeing and Airbus have an incentive to produce more planes than the monopoly outcome? Answer: Both Boeing and Airbus wanted to produce more planes than the monopoly outcome because each realized that if and if alone produced an additional plane, its profit increased. Of course, the profit of its competitor would decrease, but that does not matter to the calculations made by Boeing and Airbus. Topic: Range of outcomes Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Written and oral communication

4) The above figure shows the market for the three moving companies in a small nation. If the movers act as perfect competitors, what is the price per mile and the number of miles per year? If the movers collude and act as a single monopoly, what is the price per mile and the number of lines per year? Answer: If the movers compete, production will be where the demand and supply curves intersect, 300 million miles of moving per year. The price will be 8¢ per mile. If the movers can successfully collude, then production is at the point where MR = MC, only 200 million miles of moving per year, and the price is 12¢ per mile. Topic: Range of outcomes for an oligopoly Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

5) The figure above shows the market demand curve for a market with three firms. It also shows a firm's marginal cost curve. In this oligopoly, what is the range of output and prices? Why does this range of outcomes exist? Answer: If the firms operate as a monopoly, they produce a total of 200 units per day and set a price of $12 per unit. If the firms compete and operate as perfect competitors, they produce 400 units per day and the price is $4 per unit. The range of possible outcomes exists because firms in oligopoly have the choice of colluding to decrease output to monopoly levels or cheating on the cartel and increase output to its efficient level. A range of prices also exists between the monopoly price and the perfectly competitive price. Topic: Range of outcomes for an oligopoly Skill: Level 3: Using models Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking

6) The table above has the market demand schedule in an industry that has two firms in it. The marginal cost of this product is zero because these two firms have exclusive ownership of the resource and it does not cost any additional amount to produce additional units. a. If the firms cooperate with each other so that they operate as a monopoly, what price will they charge and what (total) output will they produce? b. If the firms cannot cooperate but instead behave as perfect competitors, what will be the price and the (total) output they produce? Answer: a. As a monopoly, the price will be $15 and the total output will be 30 units. This price and output combination is where they maximize their total profit because it is here that the marginal revenue equals zero. (The marginal revenue equals zero because this is the price and output combination for which total revenue is maximized and marginal revenue equals zero when total revenue is maximized.) b. The perfectly competitive price is equal to marginal cost. Because marginal cost is equal to zero, the price will be $0 and the output will be 60 units. Topic: Range of outcomes for an oligopoly Skill: Level 4: Applying models Section: Checkpoint 18.2 Status: Old AACSB: Analytical thinking 18.9 Essay: Game Theory 1) What three characteristics do all games have in common? Answer: The all have rules, strategies, and payoffs. Topic: Games Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Reflective thinking

2) What is a Nash equilibrium? Is this equilibrium the best outcome for the players? Give an example. Answer: John Nash proposed the concept of an equilibrium in a game where each player takes the best possible action given the action of other players. A Nash equilibrium is not necessarily the best one for the players. This can be seen in the prisoners' dilemma. Typically the prisoners' dilemma is a game where two prisoners are given rules and payoffs to encourage them to confess to a crime. The prisoners, acting in their own self-interest, confess to the crime to minimize their jail time and so confession is the Nash equilibrium. But if the players can communicate with each other, they can improve their position. If they can communicate, they both deny the crime and so both wind up doing less time in jail. Topic: Nash equilibrium Skill: Level 1: Definition Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication 3) "A Nash equilibrium occurs when both parties to a game end up worse off as a result of the decisions that are made." Is the previous definition of a Nash equilibrium correct or incorrect? Answer: The definition is incorrect. A Nash equilibrium is an equilibrium in which each player takes the best possible action given the action of the other player. Topic: Nash equilibrium Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication

4) OPEC, the Organization of Petroleum Exporting Countries, was formed in Baghdad in 1960. Since its formation, this cartel has suffered from a major problem with respect to the quota (limit) of output it assigns each member nation. What is OPEC's goal and what sort of quota do you think the cartel assigns? How and why do nations cheat on their quota? What happens when a nation cheats on its quota? Answer: In order to keep oil prices high, as has been the case since 2003, OPEC creates a target level of output designed to achieve a particular high price. OPEC's goal is to set a price high enough so that its member nations earn the maximum economic profit. Once the target output is set, OPEC assigns a production quota to each member. As long as each member adheres to its quota the price will remain high and stable. However, from time to time, individual nations cheat on the agreement by producing more oil than they are allowed. Nations cheat because they realize that if they alone cheat, the impact on oil prices will be slight but the impact on their profit will be large. Once this oil shows up on world markets, the supply of oil increases and prices begin to fall. Then, once prices begin to fall other members begin to panic and they start selling more oil too in order to get the highest price they can before a collapse takes place. If every nation cheats, the supply will increase more than if just a few do and the collapse in price becomes a self-realizing prophecy. Topic: Cartel cheating Skill: Level 5: Critical thinking Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication 5) Why do oligopoly firms find it difficult to cooperate and not cheat on a cartel agreement? Answer: Firms in an oligopoly have large market shares. When they change their output or price, the firm affects not only its own revenue and profit but also the revenue and profit of other firms. For example, if a firm cheats on a cartel agreement by lowering its price, it will capture a larger market share. The competitors will see a decrease in their total revenue and their profit but the cheating firm's profit increases. If the firms cooperate, they could act like a monopoly and have the maximum joint profit but each firm has the temptation to cheat and produce more than its share. This temptation is strong because cheating will increase the cheater's revenue and profit substantially. Topic: Cartel cheating Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication

6) In a cartel, how does the number of firms affect the likelihood that the cartel will be able to successfully maintain a high price? Answer: The more firms that are involved in the cartel, the lower the likelihood that the cartel will be able to maintain a high price. Essentially, the larger the number of firms, the greater the probability that someone will cheat! Topic: Cartel cheating Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication 7) What is the dilemma faced by firms in oligopoly? Answer: Because there are just a few large firms in an oligopoly, output and pricing decisions made by one firm affect the demand for other firms' goods. To maximize the total joint profit, the firms must cooperate, act like a monopoly so as to restrict output and earn monopoly profits. But each firm has an incentive to cheat on an agreement to restrict output because if it increases production it can (temporarily, at least) earn higher profits. But if all firms increase production, total profits will fall and the market will move toward the competitive equilibrium. Topic: Oligopolists' dilemma Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication 8) "The duopolists' dilemma occurs when firms in a duopoly coordinate their decisions to achieve the best possible outcome." Is the previous statement correct or incorrect? Why? Answer: The statement is incorrect. The duopolists' dilemma occurs precisely because the firms do not coordinate their decisions and so the duopolists attain the worst combined outcome. Topic: Duopolists' dilemma Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication 9) What is game theory and what light does it shed on the duopolists' dilemma? Answer: Game theory is a tool economists use to analyze the behavior of oligopolistic firms because game theory is a tool to study strategic behavior. Game theory shows that because these firms are interdependent, the decisions they make to promote their own self-interest can wind up harming all the firms. Thus the duopolists' dilemma is illustrated using game theory: Firms looking to earn for themselves the maximum possible profit can wind up earning less profit than if they had behaved less self-interestedly and more cooperatively. Topic: Duopolists' dilemma Skill: Level 2: Using definitions Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication 85 Copyright © 2021 Pearson Education, Inc.

10) Does an oligopoly produce the efficient quantity of output or does it create a deadweight loss? Do the firms want to produce the efficient quantity of output? Explain your answer. Answer: An oligopoly might or might not operate efficiently. It operates efficiently if the firms cheat on any agreement and increase output so that it is the same as the perfectly competitive level. In this case, price equals marginal cost and the outcome is efficient. There is no deadweight loss. From the firms' perspectives, this outcome is undesirable because the firms make zero economic profit. If the firms can play repeated games, detecting and punishing overproduction, the oligopoly is more likely to restrict output to the monopoly level. This outcome is inefficient because marginal cost does not equal marginal benefit. A deadweight loss is created. From the firms' perspective, this outcome is more desirable because the firms make an economic profit. Topic: Efficiency of oligopoly Skill: Level 3: Using models Section: Checkpoint 18.3 Status: Old AACSB: Written and oral communication

11) Sally's Mom is pretty sure her twins, Tim and John, together cut the hair off Sally's Barbie doll. She talks to them separately and gives them the following options. If they both confess they will have to pay Sally $10 each. If Tim confesses and John does not confess, Tim pays $15 and John pays $8. If Tim does not confess and John confesses, Tim has to pay $8 and John $15. If both do not confess, they both pay her $14. Sally's Mom has them in separate rooms and they cannot talk to each other. a. Complete the payoff matrix below.

b. If they reach the Nash equilibrium, what will Tim and John do? Answer:

a. The complete payoff matrix is above. b. Tim and John will both deny involvement. Sally's doll remains bald, but Tim and John each pay Sally $14 so Sally has $28 for a new doll. Topic: Prisoners' dilemma Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking

12) Two competing firms in a duopoly must decide whether or not to offer consumers a coupon for their good. The payoff matrix above represents the daily profit available to the firms under the different coupon strategies. a. What strategies and payoffs are represented by quadrant A? b. What strategy will Firm 1 pursue if it believes that Firm 2 is offering a coupon? c. What quadrant represents the equilibrium that will result if the firms act independently (compete)? d. What quadrant represents the equilibrium that will result if the firms successfully collude? Answer: a. In quadrant A, Firm 1 offers a coupon while Firm 2 does not. As a result, Firm 1 earns $150 in profits and Firm 2 earns $60. b. If Firm 2 is offering a coupon and Firm 1 does not, Firm 1 will earn $75. If Firm 1 also offers a coupon, it will earn $100. Therefore, Firm 1 will also offer a coupon. c. Quadrant C. d. Quadrant B. Topic: Duopolists' dilemma Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking

13) Two firms are introducing an improved version of their toothpastes. They must decide whether or not to advertise their products. The table above gives the payoff matrix in terms of the economic profits they expect in each case. The payoffs are in terms of millions of dollars. a. What is the Nash equilibrium for the game? b. If they could cooperate, what strategy would they prefer? What would be the payoff? Answer: a. The Nash equilibrium has each firm advertising and hence each firm receiving $100 million in economic profit because both decided to advertise. b. If they could cooperate, they would both choose not to advertise. In this case, each would make $140 million in economic profit. Topic: Duopolists' dilemma Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking

14) Two firms are competing in a duopoly and are trying to decide which price to set. The two prices under consideration are a high monopoly price and a low competitive level. If both seller A and seller B chose the monopoly price, each will make $20 million of economic profit. However, if one picks the monopoly price while the other picks the competitive price, the highprice firm will lose $1 million while the low-price firm will make $32 million. If both sell at the competitive level, they both make zero economic profit. Complete the payoff matrix below and determine the Nash equilibrium.

Answer:

The completed payoff matrix is above and has the economic profits in millions of dollars. The Nash equilibrium is for both to charge the competitive, low, price and make zero economic profit. Topic: Duopolists' dilemma Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking

15) Suppose two companies, Sony and Magnavox, are competing in a duopoly. If both companies charge a high price, they each make $700 million in economic profit. If both companies charge a low price, they each make $500 million in economic profit. If one company charges a high price and the other a low price, the company charging the higher price makes $450 million in economic profit and the company charging the lower price makes $800 million in economic profit. a. Complete the payoff matrix below for Sony and Magnavox.

b. Find the Nash equilibrium. Answer:

a. The completed payoff matrix is above, with the entries in millions of dollars. b. The Nash equilibrium has each firm charging a low price and earning $500 million in economic profit. Topic: Duopolists' dilemma Skill: Level 4: Applying models Section: Checkpoint 18.3 Status: Old AACSB: Analytical thinking

18.10 Essay: Antitrust Law 1) Does section 2 of the Sherman Act make it a felony to "attempt" to monopolize an industry, or must the attempt succeed before it is a felony? Answer: Section 2 of the Sherman Act makes attempting to monopolize an industry a felony. It is not necessary for the attempt to succeed. Topic: Sherman Act Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 2) "The Clayton Act repealed the Sherman Act so that only the Clayton Act remains in force." Is the previous statement correct or incorrect? Answer: The statement is incorrect. The Sherman Act remains part of the law of the land. Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 3) What are the actions that are prohibited according to the Clayton Act and its amendments? What conditions must be met for these actions to be prohibited? Answer: The Clayton Act prohibits certain practices only if they substantially lessen competition or create monopoly. These practices are: 1. Price discrimination. 2. Tying arrangements. 3. Requirements contracts. 4. Exclusive dealing. 5. Territorial confinement. 6. Acquiring a competitor's shares or assets. 7. Becoming a director of a competing firm. Topic: Clayton Act Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

4) Briefly explain resale price maintenance. Is it legal or illegal? Does it create efficiency or inefficiency? Answer: Resale price maintenance is a form of price fixing. It is an agreement between a manufacturer and a distributor on the price at which a product may be resold. Resale price maintenance AGREEMENTS are illegal under the Sherman Act. But it is NOT illegal for a manufacturer to refuse to supply a retailer who does not accept the manufacturer's guidance on what price the retailer should charge. Resale price maintenance might create efficiency or it might create inefficiency. Resale price maintenance creates efficiency when it enables a manufacturer to induce dealers to provide the efficient level of service. It leads to inefficiency when it enables dealers to operate a cartel and charge the monopoly price. Topic: Resale price maintenance Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication 5) What is meant by the term "exclusive dealing"? Give an example of an exclusive deal. When is it illegal? Answer: Exclusive dealing is a contract that prevents a firm from selling competing items. For instance, Taco Bell has a contract with Pepsi that only Pepsi products will be sold at Taco Bell. Hence Pepsi has arranged an exclusive deal with Taco Bell. Exclusive deals are illegal under the Clayton Act only if they substantially lessen competition or create a monopoly. Topic: Clayton Act Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication 6) If Sony required all its retailers not to sell televisions from other companies, Sony would be engaging in what kind of activity? Is Sony's requirement legal or does it violate the Clayton Act? Answer: Sony is engaged in an exclusive deal. The question of whether Sony's requirement is legal depends on whether it substantially lessens competition or creates a monopoly. If it does either, it is illegal under the Clayton Act. If it does neither, it is legal under the Clayton Act. Topic: Clayton Act Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

7) Explain how the courts have ruled on price fixing. Answer: Price fixing is ALWAYS a violation of the antitrust law. Price fixing, in and of itself, is a violation of the law. If the government can prove the existence of price fixing, the accused firms are guilty because there are no mitigating circumstance allowed. Topic: Price fixing Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication 8) If price fixing is necessary because without it a firm will go bankrupt, is the price fixing legal? Answer: No, price fixing is always illegal. Regardless of whether a firm will go bankrupt or not, price fixing is illegal. Topic: Price fixing Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Reflective thinking 9) Describe the Department of Justice's claims against Microsoft. Answer: The Department of Justice claims that Microsoft has a monopoly in the operating systems market, and that it engages in predatory pricing behavior by lowering its price to drive competitors out of business. Further, the Department of Justice claims that Microsoft uses tying agreements and anti-competitive practices to strengthen its monopoly power in the Web browser market and in the operating system market. Topic: United States versus Microsoft Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication 10) What are the merger rules used by the Federal Trade Commission to help decide whether firms are allowed to merge? Answer: The Federal Trade Commission uses guidelines based on the Herfindahl-Hirschman Index (HHI). If a market's HHI is less than 1,500, the government will not challenge a merger. If the HHI is between 1,500 and 2,500 (a moderately concentrated market), the department will examine the merger if it increases the HHI by 100 points. If the HHI is greater than 2,500, the market is considered concentrated. The commission will challenge the merger if it raises the HHI by 100 points. Topic: Merger rules Skill: Level 1: Definition Section: Checkpoint 18.4 Status: Revised AACSB: Written and oral communication

11) In a market with a Herfindahl-Hirschman Index of 2,000, according to their guidelines, will the Department of Justice challenge a merger that would increase the index by 250? Answer: Yes, according to their guidelines the Federal Trade Commission will examine a merger that increases the Herfindahl-Hirschman Index by more than 100 points if the initial index is greater between 1,500 and 2,500. Topic: Merger rules Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Revised AACSB: Written and oral communication 12) "If an industry's Herfindahl-Hirschman Index is below 1,500, a merger between any two firms in that industry will be disallowed." Comment on the accuracy of the previous statement. Answer: The statement is incorrect in at least three dimensions. First, the lower the HerfindahlHirschman Index, the more competitive the industry and hence the more likely the government will allow a merger to occur. Second, even if the Herfindahl-Hirschman Index is high, a merger that increases it only a small bit will not be challenged. And third, the Herfindahl-Hirschman Index is only part of the information considered when the government is determining whether to challenge a merger. Topic: Merger rules Skill: Level 2: Using definitions Section: Checkpoint 18.4 Status: Revised AACSB: Written and oral communication 13) In 1911, Standard Oil Co. was declared a monopoly by the government under the Sherman Act and the company was ordered to break itself up into competing companies. Two oil companies, Exxon and Mobil, were the result of this breakup. A few years ago, Exxon and Mobil merged again to form ExxonMobil Corporation. Why did the government allow this merger now? Answer: When the government declared Standard Oil to be a monopoly and asked for its break up, the oil market was extremely concentrated. The government (and then the courts) concluded that Standard Oil had monopolized the oil trade. The merger of Exxon and Mobil was allowed because there are many more oil companies in the market now. The government concluded that the oil market was sufficiently competitive and that the merger was acceptable. Topic: Merger rules Skill: Level 5: Critical thinking Section: Checkpoint 18.4 Status: Old AACSB: Written and oral communication

14) Suppose the industry for washing machines has only four firms. The market shares are: Firm A, 40 percent; Firm B, 20 percent; Firm C 20, percent; and Firm D, 20 percent. a. What is the Herfindahl-Hirschman Index (HHI)? b. If Firms C and D were to announce a merger, would the Federal Trade Commission oppose the merger? Answer: a. The HHI is 2,800. b. Yes, the Federal Trade Commission would oppose the merger. If the merger occurred, the new HHI would be 3,600. The merger would increase the HHI by 800 points. The Federal Trade Commission's guidelines are to challenge a merger if the initial HHI exceeds 2,500 and the merger raises the HHI by more than 200 points. The merger considered in the problem easily falls under these guidelines. Topic: Merger rules Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Revised AACSB: Analytical thinking

15) A market has ten firms, whose market shares are given in the table above. a. If firms I and J wanted to merge, according to the Department of Justice guidelines, would the Federal Trade Commission challenge the merger? b. If firms A and B wanted to merge, according to the Federal Trade Commission guidelines, would the Federal Trade Commission challenge the merger? Answer: a. The decision whether to challenge the merger depends, in part, on the market's HerfindahlHirschman Index (HHI). The HHI for the market initially is 1,150. Thus the Federal Trade Commission guidelines say it will not challenge a merger even if the merger raises the HHI by 100 or more points. If firms I and J merge, the HHI becomes 1,200. The Federal Trade Commission will not challenge this merger. b. If firms A and B merge, the HHI becomes 1,600. The Federal Trade Commission will not challenge this merger. Topic: Merger rules Skill: Level 3: Using models Section: Checkpoint 18.4 Status: Old AACSB: Analytical thinking

Foundations of Microeconomics, 9e (Bade) Chapter 19 Markets for Factors of Production 19.1 The Demand for a Factor of Production 1) The four factors of production that produce goods and services are A) labor, money, machinery, and land. B) labor, capital, money, and entrepreneurship. C) labor, capital, land, and entrepreneurship. D) labor, investment capital, machinery, and land. E) labor, stocks, money, and bonds. Answer: C Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 2) Which of the following is NOT a factor of production? A) labor B) capital C) entrepreneurship D) bonds E) land Answer: D Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 3) Entrepreneurship differs from the other factors of production because it A) is not real. B) is the most important. C) has only existed since the new economy of the 1990s. D) is not traded in a factor market. E) is not paid. Answer: D Topic: Entrepreneurship Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

4) As a factor of production, any of the gifts of nature are called A) land. B) labor. C) capital. D) entrepreneurial ability. E) physical capital. Answer: A Topic: Land markets Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 5) In the labor market A) households demand labor. B) firms demand labor. C) firms supply labor. D) wage are determined only by firms alone. E) None of the above answers is correct. Answer: B Topic: Derived demand Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 6) The demand for a factor of production is called a derived demand because it is derived from A) the demand for goods and services produced by the factor of production. B) a table of specific prices and quantities. C) the ideas of an entrepreneur. D) a financial market. E) the supply of the factor of production. Answer: A Topic: Derived demand Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

7) Derived demand means that the demand for a factor of production is derived from the A) supply of that factor of production. B) price of that factor of production. C) demand for the goods and services the factor of production is used to produce. D) costs of production. E) government, which forces large firms to hire at least some minimum number of different resources. Answer: C Topic: Derived demand Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 8) The demand for a resource is derived from the A) price of the resource. B) supply of the resource. C) supply of substitute resources. D) demand for the good or service that the resource is used to produce. E) supply of complement resources. Answer: D Topic: Derived demand Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 9) What is meant by derived demand? A) The demand is derived from income, tastes, etc. of sellers. B) The demand for a resource is derived from the demand for what it can produce. C) The demand is derived from the price elasticity of demand. D) The demand exists because the government mandates production of the good. E) The demand for a good is derived from the supply of the good. Answer: B Topic: Derived demand Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

10) Which of the following factors have a derived demand? i. labor ii. capital iii. raw materials A) i and ii B) ii and iii C) i and iii D) i, ii, and iii E) i only Answer: D Topic: Derived demand Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 11) Which of the following represents a derived demand? Demand for A) a taco by Sam when she is hungry. B) golf balls by Jose, who is planning on going golfing with his boss. C) a grocery clerk by the local Safeway. D) an automobile by Jack, who wants a car to get to school. E) new clothing by Shaniq, who is starting a new job. Answer: C Topic: Derived demand Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 12) Hot Coffee Inc. hires workers and buys coffee roasting machines so it can serve fresh roasted coffee to its customers. The demand for ________ is a derived demand because ________. A) both workers and roasting machines; both are used to produce and sell coffee B) only workers; there is a limited number of people willing to work in coffee shops C) only roasting machines; capital equipment can be resold in other markets D) neither workers nor roasting machines; derived demand only applies to actual products produced for customers E) only workers; workers can actually negotiate their wages Answer: A Topic: Derived demand Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Application of knowledge

13) Sky High Camping offers overnight camping in tree houses built on its 10-acre property. Workers are hired to build and maintain the tree houses. Which of the following are TRUE statements? i. The land and the trees grown are considered natural resources. ii. The demand for trees and land is not a derived demand because supply is limited. iii. The demand for workers is considered a derived demand because they help produce the service of tree house camping. A) i and iii B) i, ii and iii C) i only D) iii only E) ii and iii Answer: A Topic: Derived demand Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Application of knowledge 14) The demand for carpenters needed to build houses represents a A) direct demand. B) derived demand. C) marginal demand/cost for input. D) supplied demand. E) directed supply. Answer: B Topic: Derived demand Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 15) If the demand for a good increases, the demand for the factors used to produce the good A) increases. B) decreases. C) stays the same. D) could increase, decrease, or stay the same depending on whether the demand for the good is elastic, inelastic, or unit elastic. E) None of the above answers is correct. Answer: A Topic: Derived demand Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

16) The value of marginal product is equal to A) marginal product × marginal cost. B) marginal product × product price. C) marginal revenue × marginal cost. D) marginal cost × product price. E) marginal product ÷ product price. Answer: B Topic: Value of marginal product Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 17) The value of marginal product of labor is calculated by multiplying the ________ by the ________. A) quantity of labor; wage rate B) total product; wage rate C) marginal product of labor; price of a unit of the output D) wage rate; price of a unit of the output E) marginal product of labor; wage rate Answer: C Topic: Value of marginal product Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 18) The value of marginal product is equal to the A) additional revenue from selling one more unit of the product. B) change in total revenue from selling one more unit of product. C) additional cost of hiring one more unit of a factor of production. D) change in revenue from hiring one more unit of a factor of production. E) change in total cost when one more unit of the product is produced. Answer: D Topic: Value of marginal product Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

19) If UPS hires another worker, UPS will be able to deliver an additional 20 packages an hour. The price of each package is $5. The value of this worker's marginal product is equal to A) $5. B) $100. C) $4. D) 20 packages. E) $20. Answer: B Topic: Value of marginal product Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 20) The total output of candles in Nick's Wicks candle shop increases from 20 per hour to 30 per hour as he hires the second worker. The price of each candle is $2. The A) marginal product of the second worker is 20 candles. B) marginal product of the second worker is 30 candles. C) value of marginal product of the second worker is $20. D) value of marginal product of the second worker is $30. E) value of marginal product of the second worker is $60. Answer: C Topic: Value of marginal product Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 21) The value of marginal product of labor A) always increases as more labor is hired. B) is constant as long as each worker is paid the same wage rate. C) declines only if each worker is paid more than the previous worker. D) at some point declines as more workers are hired. E) at first decreases and then increases as more workers are hired. Answer: D Topic: Value of marginal product Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

22) As the quantity of land used increases, its value of marginal product A) decreases and then eventually increases. B) increases and then eventually decreases. C) remains constant. D) might increase, decrease, or remain constant depending if the rent for the land rises, falls, or does not change. E) The premise of the question is wrong because land does not have a value of marginal product. Answer: B Topic: Value of marginal product Skill: Level 4: Applying models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

23) Kevin owns a personal training gym in Laredo, Texas. He charges $41 per session. The above table shows the marginal product of trainers in Kevin's gym. If Kevin hires one trainer, the value of marginal product of this trainer equals A) 4 clients. B) $164. C) $410. D) $41. E) None of the above answers is correct. Answer: B Topic: Value of marginal product Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

24) Kevin owns a personal training gym in Laredo, Texas. He charges $41 per session. The above table shows the marginal product of trainers in Kevin's gym. If Kevin hires three trainers, the value of marginal product of the third trainer equals A) 2 clients. B) $82. C) 9 clients. D) $369. E) $123. Answer: B Topic: Value of marginal product Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 25) Kevin owns a personal training gym in Laredo, Texas. He charges $41 per session. The above table shows the marginal product of trainers in Kevin's gym. If Kevin hires four trainers, the value of marginal product of the fourth trainer equals A) 10 clients. B) $410. C) $41. D) 1 client. E) $10.25. Answer: C Topic: Value of marginal product Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

26) The table above shows the total product schedule of Piece a' Pi, a producer of pizza in a nearby college town. Suppose workers are paid $10 per hour and the price per pizza is $10. The marginal product of the third worker is A) 5 pizzas per hour. B) 17 pizzas per hour. C) $220 per hour. D) 7 1/3 pizzas per hour. E) None of the above answers is correct. Answer: A Topic: Value of marginal product Skill: Level 4: Applying models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 27) The table above shows a the total product schedule of Piece a' Pi, a producer of pizza in a nearby college town. Suppose workers are paid $12 per hour and the price per pizza is $10. The value of marginal product of the fourth worker is ________ per hour. A) $240 B) $220 C) $20 D) $12 E) $24 Answer: C Topic: Value of marginal product Skill: Level 4: Applying models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

28) The table above shows a the total product schedule of Piece a' Pi, a producer of pizza in a nearby college town. Suppose workers are paid $12 per hour and the price per pizza is $10. The value of marginal product of the fifth worker is ________ per hour. A) $240 B) $220 C) $24 D) $10 E) $12 Answer: D Topic: Value of marginal product Skill: Level 4: Applying models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

Number of workers 1 2 3 4 5

Marginal product (bats per hour) 8 7 6 5 4

The table has the marginal products for workers at Bart's Bats, a baseball bat factory. 29) Using the above table, if the price of a bat is $8, then the value of marginal product of labor of the fourth worker is A) $40. B) $0.625. C) $1.375. D) 5 bats. E) None of the above answers is correct. Answer: A Topic: Value of marginal product Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

30) Using the above table, if the wage rate for a worker in a baseball bat manufacturing plant is $18 an hour, and the price of a bat is $3, then the firm will hire ________ workers. A) 1 B) 2 C) 3 D) 4 E) More information is needed to determine how many workers will be hired. Answer: C Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 31) Using the above table, if the wage rate for a worker in a baseball bat manufacturing plant is $12 an hour, and the price of a bat is $3, then the firm will hire ________ workers. A) 1 B) 2 C) 3 D) 4 E) 5 Answer: E Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 32) Using the above table, suppose the price of a bat is $3. If the wage rate for a worker in a baseball bat manufacturing plant is $18 an hour, then the firm will hire ________ workers; if the wage rate falls to $12 an hour, then the firm will hire ________. A) 1; 2 B) 2; 4 C) 3; 3 D) 5; 4 E) 3; 5 Answer: E Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

A B C D E F

Quantity of Labor 0 1 2 3 4 5

Total Product (gymnasts trained per hour) 7 13 17 19 20

33) The table shows information for Jen's Gymnastics. Jen hires coaches and can charge $20 per hour for gymnastics lessons. The value of marginal product for the second coach is ________ because ________. A) 13; 2 coaches can train 13 gymnasts B) 6; the second coach can train an extra 6 gymnasts C) $120; the second coach's marginal product is 6 gymnasts and lessons cost $20 D) $260; the first two coaches can earn $20 for each of the 13 gymnasts E) $40; each coach can charge $20 per student Answer: C Topic: Value of marginal product Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

34) The table above shows information for Jen's Gymnastics. Jen hires coaches and charges $20 per hour for gymnastics lessons. Using the information in the table, which of the following shows the correct demand for labor for Jen's Gymnastics? A) Quantity of Labor Value of Marginal Product 1 $140 2 $120 3 $80 4 $40 5 $20 B) Quantity of Labor Value of Marginal Product 1 7 2 6 3 4 4 2 5 1 C) Quantity of Labor Value of Marginal Product 1 7 2 13 3 17 4 19 5 20 D) Quantity of Labor Value of Marginal Product 1 $140 2 $260 3 $340 4 $380 5 $400 E) Quantity of Labor Value of Marginal Product 1 $0 2 $20 3 $40 4 $60 5 $80 Answer: A Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 14 Copyright © 2021 Pearson Education, Inc.

35) The table shows information for Jen's Gymnastics. Jen hires coaches and can charge $20 per hour for gymnastics lessons. Jen's Gym pays coaches $30 per hour. The table shows that Jen's Gym will hire ________ coaches because ________. A) any number less than 5; the marginal product stops increasing with the fifth coach B) 4; the gym will earn a profit because the value of marginal profit exceeds the wage rate., but hiring a fifth coach will reduce profit C) 1; the value of marginal product is the highest D) 5; the marginal product is at its maximum E) 5; total product reaches its maximum Answer: B Topic: Value of marginal product Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 36) The table shows information for Jen's Gymnastics. Jen's hires coaches and can charge $20 per hour for gymnastics. If the demand for Jen's Gymnastics coaching services increases and the price for coaching increases, Jen A) will hire more coaches because the value of marginal product has increased. B) will hire fewer coaches because the higher price will decrease the number of gymnasts trained. C) will hire fewer coaches in order to make a higher profit. D) will hire more coaches because there will be movement up along the demand for labor curve. E) may hire more or fewer coaches depending on how the higher price of lessons affects the business. Answer: A Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 37) When hiring labor, to maximize profit a firm hires labor A) until the value of marginal product equals the wage rate. B) if the workers are not unionized. C) until the value of marginal product is less than the wage rate. D) until the value of marginal product is greater than the wage rate. E) until the value of marginal product equals the marginal revenue from hiring the worker. Answer: A Topic: Profit maximization Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

38) A profit-maximizing firm hires labor up to the point where A) price of the product equals the value of marginal product. B) price of the product equals the wage rate. C) the wage rate multiplied by the quantity of labor equals the marginal product. D) the wage rate equals the value of marginal product. E) marginal revenue equals the wage rate. Answer: D Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 39) The rule for employing a profit-maximizing amount of labor is to continue to hire additional workers until the additional worker's value of marginal product is A) less than the wage rate. B) equal to the wage rate. C) greater than 1. D) less than the price of the product. E) equal to the price of the product. Answer: B Topic: Profit maximization Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 40) Suppose the Miami Dolphins are considering adding another backup quarterback to their roster. If the salary the Dolphins would have to pay equals $10,000,000 and the value of marginal product of the new quarterback equals $12,000,000, to maximize their profit the Dolphins should A) add the new quarterback. B) add two new quarterbacks. C) not add the new quarterback. D) not add the new quarterback and, in fact, get rid of at least one other backup quarterback. E) Not enough information is given to determine if the Dolphins should hire the quarterback. Answer: A Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Revised AACSB: Reflective thinking

41) Suppose Mongo runs a glue factory in Knuckle, North Dakota. Mongo wants to fire his cousin Beevo for not working very hard at making glue. If firing Beevo would save Mongo $6.11 per hour in wages and the value of Beevo's marginal product equals $7.29 per hour, to maximize his profit, Mongo should A) fire Beevo. B) keep Beevo employed. C) add another worker, Teevo, Beevo's sister, whose value of the marginal product would be $4.83 per hour and whose wage would be $6.11 per hour. D) increase the wage he pays Beevo to $7.29 per hour. E) There is not enough information given to determine what Mongo should do. Answer: B Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 42) If the value of marginal product of the 10th worker is $60, then the A) quantity of labor demanded when the wage rate is $60 will be 10 workers. B) wage rate of the 10th worker will be $6. C) firm will not hire the worker if the wage rate is less than $60. D) marginal cost of the 10th worker will be $6. E) quantity of labor demanded when the wage rate is $6 will be 10 workers. Answer: A Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 43) If a firm finds itself at the point where the value of marginal product of labor is greater than its wage rate, then the firm A) stops hiring more workers but does not fire any because the firm is maximizing its profit. B) decreases the number of workers it has hired in order to increase its profit. C) increases the number of workers it hires in order to increase its profit. D) increases sales to keep its employees busy. E) changes its employment of workers and maximizes its profit by hiring the number of workers that makes the difference between the value of the marginal product and the wage rate as large as possible. Answer: C Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

44) If the wage rate exceeds the value of marginal product, a firm A) is maximizing its profit. B) can increase its profit by hiring more workers. C) can increase its profit by firing some workers. D) can increase its profit by increasing the wage rate and not changing its employment. E) can increase its profit by increasing the wage rate and increasing its employment. Answer: C Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 45) A company finds that the value of marginal product for the current level of employment is $53 and the wage rate is $45. Which of the following is correct? A) The firm is employing the profit-maximizing quantity of labor. B) Too much labor is currently employed and the firm will lay off some workers. C) Too few workers are currently employed and the firm will hire more workers. D) The firm should shut down and produce nothing. E) More information about the price of the product is needed to determine if the firm is hiring the profit-maximizing amount of labor. Answer: C Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 46) A company finds that the value of marginal product for the current level of employment is $53 and the wage rate is $53. Which of the following is correct? A) The firm is employing the profit-maximizing quantity of labor. B) Too much labor is currently employed and the firm will lay off some workers. C) Too few workers are currently employed and the firm will hire more workers. D) The firm should shut down and produce nothing. E) More information about the price of the product is needed to determine if the firm is hiring the profit-maximizing amount of labor. Answer: A Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

47) A company finds that the value of marginal product for the current level of employment is $53 and the wage rate is $75. Which of the following is correct? A) The firm is employing the profit-maximizing quantity of labor. B) Too much labor is currently employed and the firm will lay off some workers. C) Too few workers are currently employed and the firm will hire more workers. D) The firm should shut down and produce nothing. E) More information about the price of the product is needed to determine if the firm is hiring the profit-maximizing amount of labor. Answer: B Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 48) The demand curve for labor is the same as the firm's A) marginal revenue curve. B) marginal cost curve. C) value of marginal product of labor curve. D) wage rate curve. E) supply of output curve. Answer: C Topic: Demand for labor curve Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 49) A firm's demand for labor curve is also A) its value of marginal product of labor curve. B) the demand curve for the good it produces. C) the supply of labor curve. D) its marginal cost curve. E) the supply curve for the good it produces. Answer: A Topic: Demand for labor curve Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

50) The demand curve for a factor of production is A) the same as the factor's supply curve. B) upward sloping. C) the same as the factor's value of marginal product curve. D) vertical. E) None of the above answers is correct. Answer: C Topic: Demand for labor curve Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 51) If we compare the value of marginal product of labor curve and the demand for labor curve we see that A) they are the same thing. B) the value of marginal product curve is twice as steep. C) the demand for labor curve has no relationship to the value of marginal product curve. D) the demand for labor curve is twice as steep but they share the same axes. E) the demand for labor curve lies above the value of marginal product curve. Answer: A Topic: Demand for labor curve Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 52) Which of the following statements about a firm's demand for labor curve and its value of marginal product of labor curve is TRUE? A) The value of marginal product curve slopes upward and the demand for labor curve slopes downward. B) The demand for labor curve shows the amount of labor firms will hire based on the wage rate while the value of marginal product curve shows the amount of output supplied based on the wage rate. C) The value of marginal product curve is steeper than the demand for labor curve. D) The demand for labor curve is the same as the value of marginal product curve. E) The value of marginal product curve lies above the demand for labor curve. Answer: D Topic: Demand for labor curve Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

53) The demand for labor curve slopes downward because A) it takes more workers to produce more output. B) the value of marginal product of labor diminishes as the quantity of labor employed increases. C) at lower wages, people are not willing to work as many hours. D) wages are fixed. E) the supply of labor curve is upward sloping. Answer: B Topic: Demand for labor curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 54) For a firm selling its product in a perfectly competitive market, the demand curve for a factor of production is downward sloping because A) of the diminishing marginal product of the factor. B) to sell more output, the firm must lower the price of its product. C) firms must hire more factors of production if they want to increase their output. D) a factor's marginal product increases when the price of the factor increases. E) None of the above answers is correct. Answer: A Topic: Demand for labor curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 55) A firm's demand for labor curve shifts when there is a change in i. the supply of labor. ii. population. iii. the equilibrium wage rate. A) i only B) ii only C) i and iii D) i and ii E) ii and iii Answer: B Topic: Demand for labor curve Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

56) If the marginal product of labor increases, the firm's demand for labor curve A) does not shift, and there is no movement along it. B) shifts leftward. C) shifts rightward. D) does not shift but there is a movement along it. E) might shift leftward or rightward depending on whether the demand for the firm's product is elastic or inelastic. Answer: C Topic: Demand for labor curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 57) In part, the demand for labor depends on the A) supply of labor. B) number of workers available. C) price of the firm's output. D) workers' income. E) wage rate at which the labor supply curve starts to bend backwards. Answer: C Topic: Demand for labor curve Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 58) If the price of the firm's output increases, the demand for labor curve A) shifts rightward. B) shifts leftward. C) remains constant. D) could shift rightward, leftward, or remain constant. E) might shift leftward or rightward depending on whether the demand for the firm's product is elastic or inelastic. Answer: A Topic: Demand for labor curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

59) If the price of a firm's product falls, the firm's demand for labor curve A) does not shift and there is no movement along it. B) shifts leftward. C) shifts rightward. D) does not shift but there is a movement along it. E) might shift leftward or rightward depending on whether the demand for the firm's product is elastic or inelastic. Answer: B Topic: Demand for labor curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 60) If a firm uses new technology that increases its demand for labor, the firm's demand for labor curve A) shifts leftward. B) shifts rightward only if the demand for labor is elastic. C) shifts rightward no matter if the demand for labor is elastic or inelastic. D) does not shift, but there is a movement along it. E) shifts rightward only if the demand for labor is inelastic. Answer: C Topic: Demand for labor curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 61) If the wage rate increases, a firm's demand for labor curve A) does not shift, and there is no movement along it. B) shifts leftward. C) shifts rightward only if the elasticity of demand for labor is elastic. D) does not shift, but there is a movement along it. E) shifts rightward only if the elasticity of demand for labor is inelastic. Answer: D Topic: Demand for labor curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

62) The price of capital falls. Assuming that the firm does not increase the quantity it produces, in the long run the firm's demand for labor curve usually A) does not shift, and there is no movement along it. B) shifts leftward. C) shifts rightward only if the elasticity of demand for labor is elastic. D) does not shift, but there is a movement along it. E) shifts rightward only if the elasticity of demand for labor is inelastic. Answer: B Topic: Demand for labor curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Revised AACSB: Reflective thinking

63) The above figure shows the demand for labor curve for workers at a Pizza Hut in Canada. If the wage rate is $6 per hour, then the i. quantity of workers Pizza Hut demands is 10 workers. ii. Pizza Hut would have been willing to hire the 6th worker even if they had to pay $7 per hour rather than $6 per hour. iii. value of the marginal product of the 10th worker is $6 per hour. A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: E Topic: Demand for labor curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

64) The above figure shows the initial demand for labor curve at a Pizza Hut in Canada. The wage rate is $6 an hour. If the demand for pizzas increases so that the price of a pizza rises A) at the wage rate of $6 per hour, Pizza Hut hires fewer than 10 workers. B) Pizza Hut's demand for labor curve shifts rightward. C) the supply of labor curve shifts rightward. D) Pizza Hut's demand for labor curve shifts leftward. E) the supply of labor curve shifts leftward. Answer: B Topic: Demand for labor curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 65) If the price of movie tickets increases, there is A) an increase in the demand for actors and actresses. B) a decrease in the demand for actors and actresses. C) no change in the demand for actors and actresses. D) a decrease in the supply of actors and actresses. E) an increase in the supply of actors and actresses. Answer: A Topic: Demand for labor Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 66) Robotic technology is a substitute for labor in many manufacturing processes. If the price of robotic technology decreases and the scale of the firm's production does not change, there is A) a decrease in the demand for labor. B) an increase in the demand for labor. C) no change in the demand for labor. D) an increase in the supply of labor. E) a decrease in the supply of labor. Answer: A Topic: Demand for labor Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

67) If the price of capital falls, in the long run under what circumstance could the demand for labor increase? A) The demand for labor can never increase when the price of capital falls. B) The demand for labor will always increase when the price of capital falls. C) It increases if the scale of production increases enough. D) It increases if the demand for labor is inelastic. E) None of the above answers is correct. Answer: C Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 68) Which of the following is a correct statement of the relationship between advances in technology and the demand for labor? A) The demand decreases for some types of labor and increases for other types of labor. B) The demand for labor always decreases when technology advances. C) The demand for labor always increases when technology advances. D) Technology advances when the demand for labor advances. E) None of the above answers is correct. Answer: A Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 69) The four factors of production that produce goods and services are A) labor, capital, profits, and entrepreneurship. B) money, labor, rent, and profit. C) labor, capital, land, and entrepreneurship. D) wages, interest, rent, and profit. E) wages, prices, quantities, and employment. Answer: C Topic: Factors of production Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

70) The wage paid to labor is A) a factor output. B) a factor price. C) a factor input. D) an input of the workforce. E) part of the firm's normal profit. Answer: B Topic: Labor market Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 71) The demand for labor is derived from the A) supply of labor. B) wage rate. C) supply of the good the labor is used to produce. D) demand for the goods and services the labor helps produce. E) supply of all the other factors of production that can be substituted for labor. Answer: D Topic: Derived demand Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 72) Which of the following is TRUE? A) The value to a firm of hiring another worker is the worker's value of marginal product. B) A firm will hire more workers if the wage rate is greater than the value of marginal product. C) The value of marginal product is the cost of hiring a worker. D) The value of marginal product increases as more workers are hired. E) The value of marginal product equals the price of the good produced divided by the marginal product. Answer: A Topic: Value of marginal product Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

73) The value of marginal product of labor is equal to the marginal product of labor ________ the price of a unit of output. A) divided by B) multiplied by C) minus D) plus E) squared and then multiplied by Answer: B Topic: Value of marginal product Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 74) The rule for maximizing profit is to hire labor up to the point at which the value of marginal product A) equals the wage rate. B) is greater than the wage rate. C) is less than the wage rate. D) is a mirror image of the wage rate. E) equals the price of the product produced. Answer: A Topic: Profit maximization Skill: Level 1: Definition Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 75) An increase in the price of the firm's output leads to a A) movement up along the demand for labor curve. B) movement down along the demand for labor curve. C) rightward shift of the demand for labor curve. D) leftward shift of the demand for labor curve. E) rightward shift of the supply of labor curve. Answer: C Topic: Demand for labor curve Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

19.2 Labor Markets 1) As the wage rate rises, the quantity of labor an individual supplies A) decreases at all wage rates. B) initially decreases at low wage rates and then increases at high wage rates. C) increases at all wage rates. D) initially increases at low wage rates and then decreases at high wage rates. E) does not change. Answer: D Topic: Supply of labor, backward bending Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 2) The supply of labor curve for an individual is A) upward sloping at all wage rates. B) downward sloping at all wage rates. C) upward sloping for lower wage rates and begins to slope downward at higher wage rates. D) downward sloping for lower wage rates and begins to slope upward at higher wage rates. E) an upside-down U-shape. Answer: C Topic: Supply of labor, backward bending Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 3) Because leisure time has value to many workers, as wages increase, the labor supply curve A) has a positive slope. B) bends backwards and has a negative slope. C) becomes a horizontal line. D) becomes a vertical line. E) bends forward and has a positive slope. Answer: B Topic: Supply of labor, backward bending Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

4) Which of the following statements about the supply of labor is correct? A) It is perfectly inelastic at whatever quantity individuals are willing to work. B) An individual's supply of labor curve is always upward sloping, like the supply curves of other items. C) It is perfectly price elastic at the current wage rate. D) An individual's supply of labor curve can bend backwards. E) The supply of labor curve is shaped like an upside-down U. Answer: D Topic: Supply of labor, backward bending Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

5) Peyton is a personal trainer and works at several gyms in her neighborhood. Peyton's labor supply curve is shown above. Which of the following statements is TRUE regarding Peyton's labor supply? i. Peyton is willing to supply more labor and give up leisure at wages between $50 and $75 per hour. ii. Peyton will not work for less than $30 per hour. iii. If the wage increases higher than $75 per hour, Peyton will choose to take more leisure. A) i, ii and iii B) ii only C) iii only D) i and ii E) ii and iii Answer: A Topic: Supply of labor, backward bending Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

6) When more people remain in school for full-time education and training, the supply of lowskilled labor ________ and the supply of high-skilled labor ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: C Topic: Supply of labor curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 7) What is the effect on the supply of low-skilled labor of an increase in the number of people pursuing higher education? A) It becomes more inelastic. B) The supply of low-skilled labor decreases. C) The supply of low-skilled labor increases. D) It becomes more elastic. E) None of the above answers is correct. Answer: B Topic: Supply of labor curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 8) According to a recent prediction in The Wall Street Journal the adult population of Russia will decline dramatically over the next few decades. If this prediction is correct, the supply of labor in Russia will A) increase. B) not change. C) decrease. D) become less elastic. E) become more elastic. Answer: C Topic: Supply of labor Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

9) If the wage rate increases, then A) the quantity of labor supplied definitely decreases. B) there is a movement upward along the supply of labor curve. C) the supply of labor curve shifts rightward. D) the supply of labor curve shifts left ward. E) the quantity of labor supplied definitely increases. Answer: B Topic: Supply of labor curve Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 10) A change in the wage rate A) shifts the supply of labor curve so that the supply becomes more elastic. B) shifts the supply of labor curve leftward. C) shifts the supply of labor curve rightward. D) does not shift the supply of labor curve but instead leads to a movement along it. E) either shifts the supply of labor curve leftward or rightward depending whether the demand for labor curve shifts rightward or leftward. Answer: D Topic: Supply of labor curve Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 11) Which of the following shift the supply of labor curve leftward? i. an advancement in technology ii. a decrease in the price of the product that the labor produces iii. a decrease in the adult population A) i and ii B) ii and iii C) ii only D) iii only E) i, ii, and iii Answer: D Topic: Supply of labor curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

12) The figure above shows the market supply of labor curve. Which of the following might be the reason the labor supply curve shifted from S0 to S1? A) an increase in technology B) a decrease in technology C) an increase in the number of women in the work force D) a decrease in the adult population E) an increase in the wage rate Answer: C Topic: Supply of labor curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking 13) The figure above shows the market supply of labor curve. Which of the following might be the reason the labor supply curve shifted from S0 to S1? A) an increase in technology B) a decrease in technology C) a decrease in the number of women in the work force D) an increase in the adult population E) an increase in the wage rate Answer: D Topic: Supply of labor curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

14) Suppose in Chicago, at the going wage rate of $16.00 an hour, the quantity of lifeguards demanded exceeds the quantity supplied by 13,000 lifeguards. As a result A) there is a surplus of lifeguards in Chicago. B) there is a shortage of lifeguards in Chicago. C) the lifeguard labor market is in equilibrium in Chicago. D) wage rates will probably fall in this market. E) the demand for labor of lifeguards in Chicago will decrease. Answer: B Topic: Labor market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 15) A surplus of workers occurs A) when the wage rate exceeds the equilibrium wage rate. B) when the wage rate is less than the equilibrium wage rate. C) at the equilibrium wage rate. D) whenever there is a shortage of goods. E) whenever there is a surplus of goods. Answer: A Topic: Labor market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 16) Suppose in Philadelphia the quantity of economists demanded is less than the quantity supplied by 2,000 economists. As a result A) there is a shortage of economists in Philadelphia. B) salaries for economists fall. C) there is equilibrium in this market. D) the labor supply curve for economists in Philadelphia is vertical. E) the labor demand curve for economists in Philadelphia shifts rightward. Answer: B Topic: Labor market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

17) If the supply of labor increases, then the equilibrium wage rate ________ and the equilibrium quantity of labor ________. A) rises; increases B) might rise, fall, or not change; increases C) rises; might increase, decrease, or not change D) falls; increases E) falls; does not change Answer: D Topic: Labor market equilibrium Skill: Level 4: Applying models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking 18) If the demand for labor decreases, then the equilibrium wage rate ________ and the equilibrium quantity of labor ________. A) falls; increases B) might rise, fall, or not change; increases C) rises; might increase, decrease, or not change D) falls; decreases E) falls; does not change Answer: D Topic: Labor market equilibrium Skill: Level 4: Applying models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking 19) If both the demand for labor and the supply of labor increase, then the equilibrium wage rate ________ and the equilibrium quantity of labor ________. A) rises; increases B) might rise, fall, or not change; increases C) rises; might increase, decrease, or not change D) falls; increases E) falls; decreases Answer: B Topic: Labor market equilibrium Skill: Level 4: Applying models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

20) If a union is able to organize workers in a competitive labor market but the union cannot affect the demand for its members' labor, then the wage rate ________ and the quantity of labor hired ________. A) rises; increases B) rises; decreases C) rises; does not change D) does not change; increases E) falls; decreases Answer: B Topic: The effect of a union in the labor market Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 21) If a union restricts the supply of labor, it ________ the wage rate and ________ the level of employment. A) raises; decreases B) raises; increases C) raises; does not change D) lowers; decreases E) lowers; increases Answer: A Topic: The effect of a union in the labor market Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking 22) Unions ________ import restrictions and ________ a higher minimum wage. A) favor; favor B) are neutral toward; oppose C) favor; oppose D) oppose; favor E) oppose; oppose Answer: C Topic: How unions try to change the demand for labor Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Revised AACSB: Reflective thinking

23) Which of the following is a method used by unions to increase the demand for their members' labor? A) Support import restrictions. B) Decrease the marginal product of union members. C) Increase imported goods and services D) Oppose immigration restrictions. E) Oppose minimum wage laws. Answer: A Topic: How unions try to change the demand for labor Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 24) Which of the following methods is used by unions to increase the demand for the labor of its members? A) Decrease the marginal product of union members B) Support minimum wage laws C) Support free trade D) Support laws that increase immigration into the country E) Decrease demand for the good produced Answer: B Topic: How unions try to change the demand for labor Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 25) A rise in the minimum wage increases the demand for union labor because this policy change A) lowers the wage rate paid to union labor. B) raises the productivity of union labor. C) lowers the cost of a substitute for union labor. D) lowers the productivity of union labor. E) raises the cost of a substitute for union labor. Answer: E Topic: How unions try to change the demand for labor Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

26) The medical field requires doctors to pass exams in order to earn a license to practice medicine. This requirement ________ doctors' salaries because ________. A) increases; the supply of doctors decreases and fewer doctors are employed B) increases; the supply of doctors increases and as a result they are better trained C) increases; the demand for doctors decreases because they charge higher prices D) decreases; the supply of doctors decreases due to the tougher requirements E) decreases; fewer people go to doctors because of the high prices Answer: A Topic: Supply of labor curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking 27) Unions support immigration restrictions because the restrictions create A) an increase in the supply of union labor. B) a decrease in the supply of union labor. C) unemployment. D) an increase in the demand for union labor. E) a decrease in the demand for union labor. Answer: D Topic: How unions try to change the demand for labor Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 28) Which of the following decreases the supply of labor that competes with union labor? A) an increase in the minimum wage B) an increase in the demand for imported goods C) an increase in union members' productivity D) new laws that restrict immigration E) All of the above would decrease the supply of labor. Answer: D Topic: How unions try to change the demand for labor Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

29) Which of the following is NOT a method used by union to increase their members' wages? A) Limit the supply of non-union workers. B) Increase the demand for union workers. C) Support minimum wage increases. D) Increase union members' productivity. E) None of the above because they are all methods unions use to increase their members' wages. Answer: E Topic: How unions try to change the demand for labor Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 30) Which of the following is NOT a method by which unions try to increase the demand for the labor of their members? A) increasing the marginal product of union members B) increasing the supply of the goods produced by union labor C) supporting minimum wage laws D) supporting import restrictions E) supporting immigration restrictions Answer: B Topic: How unions try to change the demand for labor Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 31) An individual's labor supply curve eventually bends backward because at a high enough wage rate A) people are willing to work more hours. B) employers are willing to hire more workers. C) people desire more leisure time. D) very few workers are hired. E) more people enter the labor market to search for jobs. Answer: C Topic: Supply of labor, backward bending Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

32) How does an increase in the adult population affect the labor market? A) The demand for labor will become more inelastic. B) The supply of labor will decrease. C) The supply of labor will increase. D) The demand for labor will decrease. E) The demand for labor will increase. Answer: C Topic: Supply of labor curve Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 33) The supply of labor curve shifts leftward if A) the population increases. B) the demand for labor curve shifts leftward. C) the supply of labor increases. D) the wage rate falls. E) the supply of labor decreases. Answer: E Topic: Supply of labor curve Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking 34) If the wage rate is above the equilibrium wage rate, the quantity of labor demanded is ________ the quantity of labor supplied. A) greater than B) less than C) equal to D) the negative of E) not comparable to Answer: B Topic: Labor market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

35) The more people who remain in school for full-time education and training, the ________ is the ________ low-skilled labor. A) smaller; demand for B) smaller; supply of C) larger; supply of D) larger; demand for E) less elastic; demand for Answer: B Topic: Training Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking 36) If the supply of labor decreases, then the equilibrium wage rate ________ and equilibrium employment ________. A) does not change; decreases B) rises; increases C) rises; decreases D) falls; increases E) falls; decreases Answer: C Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking 37) Of the following, a union is LEAST likely to support A) an increase in the minimum wage rate. B) laws that restrict immigration into the country. C) on-the-job training that makes their members more productive. D) laws that increase the quantity of the nation's imports. E) programs that boost the demand for the goods and services their members produce. Answer: D Topic: How unions try to change the demand for labor Skill: Level 1: Definition Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking

19.3 Capital and Natural Resource Markets 1) Other things remaining the same, the A) higher the rental rate of capital, the greater the quantity of capital demanded. B) lower the rental rate of capital, the smaller the quantity of capital demanded. C) higher the rental rate of capital, the smaller the quantity of capital demanded. D) rental rate of capital and the quantity of capital demanded are not related. E) higher the rental rate of capital, the more the demand for capital decreases. Answer: C Topic: Demand for capital Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 2) When the rental rate for capital falls, the ________ capital ________. A) demand for; increases B) demand for; decreases C) quantity demanded of; increases D) quantity demanded of; decreases E) supply of; increases Answer: C Topic: Demand for capital Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 3) An increase in the rental rate of capital ________ the quantity of capital demanded and ________ the quantity of capital supplied. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; does not change Answer: C Topic: Demand and supply of capital Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

4) A technological change that raises the value of marginal product of capital ________ the rental rate for capital because the ________. A) raises; supply curve of capital shifts leftward B) lowers; supply curve of capital shifts rightward C) raises; demand curve for capital shifts leftward D) raises; demand curve for capital shifts rightward E) lowers; demand curve for capital shifts leftward Answer: D Topic: Capital market equilibrium Skill: Level 4: Applying models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 5) Which of the following is TRUE about the market for capital? A) The demand for capital curve is upward sloping and the supply of capital curve is downward sloping. B) The supply of capital is perfectly elastic. C) The supply of capital curve is upward sloping and the demand for capital curve is downward sloping. D) The supply of capital curve is vertical and the demand for capital curve is downward sloping. E) None of the above answers is correct. Answer: C Topic: Loanable funds markets Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 6) Land A) is a nonrenewable resource. B) has an elastic supply but not perfectly elastic. C) is the only factor of production that is not traded in a market. D) has a perfectly inelastic supply. E) has a perfectly elastic supply. Answer: D Topic: Natural resources Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

7) Which of the following is a renewable resource? i. a forest of pine trees grown by Georgia-Pacific ii. oil reserves in Saudi Arabia iii. salmon farmed in Norway A) i and ii B) ii and iii C) i and iii D) i, ii, and iii E) i only Answer: C Topic: Natural resources Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Revised AACSB: Reflective thinking 8) Considered as a factor of production, coal is a A) form of physical capital. B) type of embodied labor. C) nonrenewable natural resource. D) renewable natural resource. E) form of financial capital. Answer: C Topic: Natural resources Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 9) The rental rate of land is the payment for the resource land. The lower the rental rate, the greater the A) demand for land. B) quantity demanded of land. C) supply of land. D) elasticity of supply for land. E) quantity supplied of land. Answer: B Topic: Market for land, demand Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

10) If the supply of a factor is perfectly inelastic, then A) no more than the existing quantity can be supplied. B) the supply curve is horizontal. C) sellers will provide whatever quantity is demanded at the going price. D) a rise in price results in NO quantity being supplied. E) a fall in price results in NO quantity being supplied. Answer: A Topic: Market for land, supply Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 11) The aggregate quantity of land supplied A) varies depending on its price. B) depends on the buying and selling decisions of individuals. C) is constantly increasing. D) is fixed. E) is perfectly elastic. Answer: D Topic: Market for land, supply Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 12) The market for land A) has an elastic supply. B) has a perfectly inelastic supply. C) determines the equilibrium interest rate. D) has an upward sloping supply curve. E) has no equilibrium because both the demand curve and the supply curve are vertical. Answer: B Topic: Market for land, supply Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

13) Refer to the figures above to answer this question. Figure ________ represents the market for ________ because its supply is ________. A) A; land; perfectly inelastic because the quantity of land is fixed B) A; a nonrenewable resource; inelastic because reserves can always be discovered C) B; land; inelastic given only a limited amount of land is available D) B; a nonrenewable resource; demand changes as the economy changes E) B; land; elastic as predicted by the Hotelling Principle Answer: A Topic: Land markets Skill: Level 4: Applying models Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking 14) Refer to the figures above to answer this question. Figure B represents the market for ________ because ________, all else held the same. A) land; landowners respond to higher rental rates by making more land available B) a nonrenewable resource; as the interest rate increases, less of the resource is supplied C) capital; the Hotelling Principle predicts that prices will vary inversely with the interest rate D) land; the Hotelling Principle states rental rates will increase predictably over time E) capital; as the rental rate increases, the quantity of capital supplied increases and the quantity of capital supplied decreases Answer: E Topic: Capital market Skill: Level 4: Applying models Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

15) The supply of land is perfectly ________ because no matter the amount of rent offered for land, the quantity of land is ________. A) elastic; fixed B) inelastic; fixed C) elastic: renewable D) inelastic; nonrenewable E) elastic; nonrenewable Answer: B Topic: Market for land, supply Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 16) In the market for land, the supply curve is A) upward sloping. B) downward sloping. C) horizontal. D) vertical. E) U-shaped. Answer: D Topic: Market for land, supply Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 17) As the price of land rises, the quantity supplied A) increases. B) decreases. C) at first increases and then decreases. D) stays the same. E) at first decreases and then increases. Answer: D Topic: Market for land, supply Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

18) In the market for land, an increase in demand ________ the equilibrium rent of land and ________ the equilibrium quantity. A) raises; does not change B) lowers; increases C) raises; increases D) does not change; increases E) does not change; does not change Answer: A Topic: Market for land Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking 19) The supply of nonrenewable natural resources is A) perfectly inelastic. B) perfectly elastic. C) always elastic but not necessarily perfectly elastic. D) inelastic at high prices and elastic at low prices. E) elastic at high prices and inelastic at low prices. Answer: B Topic: Supply of a nonrenewable natural resource Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 20) The proposition that the price of a resource is expected to rise at a rate equal to the interest rate is called the A) Discounted Value Proposition. B) derived demand for productive resources. C) diminishing marginal revenue product. D) Interest Rate Theory. E) Hotelling Principle. Answer: E Topic: Hotelling principle Skill: Level 1: Definition Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

21) According to the Hotelling Principle, the price of an nonrenewable resource is expected to A) fall slowly over time. B) fall at a rate equal to the interest rate. C) fluctuate randomly. D) rise at a rate equal to the interest rate. E) remain constant over time. Answer: D Topic: Hotelling principle Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 22) The price of an nonrenewable resource is expected to rise at a rate equal to the A) rate of supply. B) rate of population growth. C) rate of technological change. D) rate of demand. E) interest rate. Answer: E Topic: Hotelling principle Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 23) According to the Hotelling Principle, the price of a nonrenewable resource is expected to A) rise at a rate higher than the interest rate. B) fall at a rate greater than the interest rate. C) rise at a rate less than the interest rate. D) rise at a rate equal to the interest rate. E) fall at a rate equal to the interest rate. Answer: D Topic: Hotelling principle Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

24) If a nonrenewable natural resource's price is expected to increase at a rate faster than the interest rate, then the A) owners will sell all that they can today. B) owners will sell nothing today. C) consumers will demand nothing today. D) owners will sell their entire supply. E) current price will probably fall. Answer: B Topic: Price and the hotelling principle Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 25) If Saudi Arabia expects the price of oil to rise by a larger percentage than the interest rate, Saudi Arabia will ________. If Saudi Arabia expects the price of oil to rise by a smaller percentage than the interest rate, Saudi Arabia will ________. A) hold oil off the market; want to sell oil today B) want to sell oil today; hold oil off the market C) decrease its demand for oil; increase its demand for oil D) increase its demand for oil; decrease its demand for oil E) None of the above answers is correct because the interest rate has nothing to do with Saudi Arabia's decisions in the oil market. Answer: A Topic: Price and the hotelling principle Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking 26) The price of coal is currently $80 per ton and the interest rate is 10 percent per year. If next year's expected price is $86 per ton, a firm that owns 1,000 tons of coal A) will sell all its coal now. B) will sell none of its coal now but will sell it all next year regardless of the price next year. C) will sell none of its coal now but might sell it all next year. D) will sell half of the coal today and half of it next year. E) might or might not sell the coal today, depending on the price the firm paid for the coal. Answer: A Topic: Price and the hotelling principle Skill: Level 4: Applying models Section: Checkpoint 19.3 Status: Old AACSB: Analytical thinking

27) Over time, the actual (not expected) price of a nonrenewable natural resource A) falls. B) rises. C) stays the same. D) could rise, fall, or stay the same. E) first rises and then falls. Answer: D Topic: Natural resources prices Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 28) The equilibrium quantity of capital is A) determined by only the supply of capital because the supply is perfectly inelastic. B) determined by only the supply of capital because the supply is perfectly elastic. C) expected to increase at the same rate as the interest rate. D) determined by the supply of capital and the demand for capital. E) the only factor of production whose quantity is not determined in a market. Answer: D Topic: Capital market Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 29) The supply of each particular block of land is A) perfectly elastic. B) unit elastic. C) elastic but not perfectly elastic. D) perfectly inelastic. E) inelastic but not perfectly inelastic. Answer: D Topic: Market for land, supply Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

30) Oil is an example of A) a nonrenewable natural resource. B) a renewable natural resource. C) physical capital. D) a resource for which the true value cannot be measured. E) a resource with a perfectly inelastic demand. Answer: A Topic: Nonrenewable natural resources Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 31) The demand for a nonrenewable resource is A) determined by the value of its marginal product. B) fixed and cannot change. C) perfectly inelastic. D) perfectly elastic. E) not defined because the resource can be used only once. Answer: A Topic: Nonrenewable natural resources Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 32) A producer's supply of a nonrenewable natural resource is A) always decreasing because the resource is always being used. B) perfectly inelastic. C) perfectly elastic. D) not relevant because nonrenewable resources are used only once. E) determined by the value of the resource's marginal product. Answer: C Topic: Nonrenewable natural resources Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking

19.4 Chapter Figures

The figure above shows a firm's VMP curve. 1) Suppose that a new technology doubles the marginal product of the workers and the price of the product does not change. As a result, the value of marginal product of the second worker A) remains $12. B) becomes $6. C) becomes $24. D) becomes $30. E) More information about the supply of labor is needed to answer the question. Answer: C Topic: Value of marginal product Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

2) Suppose that the price of the product doubles and the marginal product of the workers does not change. As a result, the value of marginal product of the second worker A) remains $12. B) becomes $6. C) becomes $24. D) becomes $30. E) More information about the supply of labor is needed to answer the question. Answer: C Topic: Value of marginal product Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 3) Suppose that the price of the product rises. As a result A) there is a movement upward along the curve, such as a movement from point C to point B. B) there is a movement downward along the curve, such as a movement from point C to point D. C) the curve shifts rightward. D) the curve shifts leftward. E) More information is needed to answer the question. Answer: C Topic: Value of marginal product Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 4) Suppose that new technology raises the workers' marginal product. As a result A) there is a movement upward along the curve, such as a movement from point C to point B. B) there is a movement downward along the curve, such as a movement from point C to point D. C) the curve shifts rightward. D) the curve shifts leftward. E) More information is needed to answer the question. Answer: C Topic: Value of marginal product Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

The figure above shows a labor market in which a union has formed. 5) Labor unions' support for import restrictions represents an attempt to shift the A) labor demand curve from LD0 to LD1. B) labor demand curve from LD1 to LD0. C) labor supply curve from LS0 to LS1. D) labor supply curve from LS1 to LS0. E) None of the above answers is correct. Answer: A Topic: Labor unions Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

6) Labor unions' support for increasing the minimum wage represents an attempt to shift the A) labor demand curve from LD0 to LD1. B) labor demand curve from LD1 to LD0. C) labor supply curve from LS0 to LS1. D) labor supply curve from LS1 to LS0. E) None of the above answers is correct. Answer: A Topic: Labor unions Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking 7) Labor unions' support for programs that increase their members' marginal products represents an attempt to shift the A) labor demand curve from LD0 to LD1. B) labor demand curve from LD1 to LD0. C) labor supply curve from LS0 to LS1. D) labor supply curve from LS1 to LS0. E) None of the above answers is correct. Answer: A Topic: Labor unions Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking 19.5 Integrative Questions 1) The value of marginal product of labor curve A) is upward sloping because firms want to hire more workers to increase production. B) shows the price of a factor of production multiplied by the amount of the factor employed. C) is the same as a firm's supply of labor curve. D) is downward sloping if each additional worker's marginal product is decreasing. E) is U-shaped. Answer: D Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking

2) Which rule does the United Corporation use when maximizing profit? A) Employ all resources until the value of their marginal products is equal. B) If the value of the marginal product of labor exceeds the wage rate, hire fewer workers. C) Hire labor up to point at which the value of marginal product of labor equals the wage rate. D) Reduce the wage rate until it equals the marginal product of labor. E) Hire labor up to point at which the value of marginal product of labor equals the price of the good or service the labor produces for United Corporation. Answer: C Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 3) The supply of labor curve for nurses shifts if A) the wage rate paid nurses increases. B) there is an increase in the time spent in nursing school. C) the value of marginal product of nurses increases. D) the value of marginal product of nurses decreases. E) the marginal product of nurses decreases. Answer: B Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 4) The demand for labor curve of nurses shifts rightward if the A) value of marginal product of nurses increases. B) wage rate paid to nurses rises. C) supply of labor curve for nurses shifts leftward. D) wage rate paid to nurses falls. E) supply of labor curve for nurses shifts rightward. Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking

5) Which of the following curves is most inelastic? A) the supply of land B) the supply of labor for an individual worker C) the supply of labor for all workers D) the demand for capital E) the demand for labor Answer: A Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 19.6 Essay: The Demand for a Factor of Production 1) Why is the demand for labor a "derived demand"? Answer: The demand for labor arises because we need to use labor to produce a good or service. The demand for a good, for example an apple, is a direct demand. However, the demand for an apple picker is a derived demand. It is derived from our need to use labor to produce the good we demand, the apple. Topic: Derived demand Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 2) What is the value of marginal product of labor? What is the formula that can be used to calculate? How does the value of the marginal product affect how much labor a firm hires? Answer: The value of marginal product of labor is the value to the firm of hiring one more unit of labor and so it equals the additional amount of revenue the firm earns by hiring an extra unit of labor. The value of marginal product equals the price of a unit of output multiplied by the marginal product of labor. The firm maximizes its profit by hiring up to the point where the value of marginal product equals the wage rate. Topic: Value of marginal product Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Written and oral communication

3) "As the quantity of labor hired increases, the value of marginal product stays constant as long as the wage rate is constant for all workers." Is the previous statement correct or incorrect? Explain your answer. Answer: The statement is incorrect. The value of marginal product equals the price of a unit of output times the marginal product. As more workers are employed, the marginal product decreases, and so the value of marginal product decreases. Topic: Value of marginal product Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Written and oral communication 4) "The decision to employ an additional unit of labor depends on whether the value of marginal product of labor is greater than or less than the wage rate." Is the previous statement correct or incorrect? Answer: The statement is correct. If the value of marginal product of labor exceeds the wage rate, the worker is hired; if the value of marginal product of labor is less than the wage rate, the worker is not hired. Topic: Value of marginal product Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 5) What is the relationship between a firm's value of marginal product curve of labor and its demand for labor curve? Explain why this relationship exists. Answer: The value of marginal product curve for labor is the same as the demand for labor curve. The curves are the same because of the firm's profit-maximizing decisions. In order to maximize its profit, a firm hires the number of workers that sets the wage rate equal to the value of marginal product of labor. So at any wage rate, the firm uses its value of marginal product curve of labor to determine how many workers to hire. But that is what the demand for labor curve shows: how many workers the firm hires at any wage rate. As a result, the value of marginal product of labor curve is the same as the firm's demand for labor curve. Topic: Demand for labor curve Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Written and oral communication

6) What factors other than the wage rate influence the demand for labor? How is demand affected by changes in these factors? Answer: The demand for labor is influenced by changes in the price of the firm's output, the prices of other factors of production, and technology. The demand for labor is based on the value of marginal product of labor, which is equal to the marginal product times the price. When the price of the firm's output increases, the value of marginal product of labor increases, making hiring more workers profitable. So when the price of the firm's output increases, so does its demand for labor. The prices of other factors of production also influence the demand for labor. The different factors of production can be substitutes for each other. For instance, if the price of capital falls relative to the wage rate, a firm will substitute capital for labor, which will decrease the demand for labor. However, if the cheaper capital results in a large increase in production, it is possible that the demand for labor will increase. Technology can either increase or decrease the demand for labor, depending on whether the technology allows firms to replace workers with capital (which decreases the demand for labor) or makes the labor more productive (which increases the demand for labor). Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Written and oral communication 7) What factors shift the demand for labor curve? Briefly describe the effect of each. Answer: Three factors shift the demand for labor curve: the price of the firm's output, the prices of other factors of production, and technology. When the price of the firm's output rises, the firm's demand for labor increases and its demand for labor curve shifts rightward. These changes occur because when the price of output rises, the value of marginal product of labor increases, which means the value to the firm of hiring additional workers rises. When the prices of other factors of production change, the demand for labor changes. When the price of capital rises, the firm is motivated to use more labor and less capital. The firm's demand for labor increases and the demand for labor curve shifts rightward. When the price of capital falls, more capital is demanded and, unless the fall in the price of capital increases the scale of the firm's operations, less labor is demanded. The demand for labor curve shifts leftward. Changes in technology affect the demand for labor in a more complex way. Depending on the type of advance in technology, the demand for different types of labor might increase or decrease. If the demand for a type of labor increases, its demand curve shifts rightward; if the demand for another type of labor decreases, its demand curve shifts leftward. Topic: Demand for labor Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Written and oral communication

8) "In order for Charlie Trotter's, an upscale restaurant in Chicago, to maximize profit from the employment of chefs, the restaurant should hire chefs up to the point where the value of marginal product of chefs equals the wage rate for chefs." Is the statement correct or incorrect? Answer: The statement is correct. In order for ANY firm to maximize its profit, it hires workers until the wage rate equals the value of marginal product of labor. Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking 9) Why does a profit-maximizing firm hire labor up to the point where the value of marginal product equals the wage rate? Answer: If a company stopped adding workers at the point where the wage rate was less than the value of marginal product of labor, the firm could hire more workers and its profit would increase. Why? Because the return from the workers, the value of marginal product of labor, exceeds the cost of hiring the workers. Because the marginal product of labor decreases as more workers are employed, as more workers are added, the marginal product of labor and hence the value of marginal product decreases. Eventually the firm will reach the point at which the value of marginal product of labor equals the wage rate. If still more workers are employed, then the wage the firm must pay the workers exceeds the value of marginal product of labor. These workers would contribute losses to the firm. So only when the value of marginal product of labor equals the wage rate can the firm not increase its profit by changing the quantity of workers it employs. Topic: Profit maximization Skill: Level 3: Using models Section: Checkpoint 19.1 Status: Old AACSB: Written and oral communication

10) Why do baseball players make so much money, while kindergarten teachers in private schools make so much less? In your answer, discuss the value of marginal product and the actions of profit-maximizing firms. Answer: Let us consider the value of the marginal product of two workers, Alex Rodriguez, shortstop for the New York Yankees, and any kindergarten teacher in the United States. The value of marginal product of labor is the marginal product of labor multiplied by the price of the output the laborer produces. While it is fairly difficult to measure the marginal product of a kindergarten teacher (the benefits of his or her work take years to appear), it is clear that the price that can be charged is much lower than the price that can be charged for baseball games. Why? Mr. Rodriguez works in front of thousands upon thousands of people each night who have paid, in some cases, large sums of money to watch him play baseball. Businesses are willing to pay millions to advertise their products in the stadium where Mr. Rodriguez works. Even more businesses are willing to pay millions of dollars to advertise their products on television when Mr. Rodriguez appears in a game. This means networks are willing to pay hundreds of millions if not billions of dollars to have the right to show him and other players work. When is the last time a kindergarten teacher taught in front of 40,000 screaming fans? How often do cookie and milk companies pay huge sums to advertise in his or her classroom? Have you ever seen a corporation pay millions to advertise on a televised presentation of his or her kindergarten lectures? How many networks clamor to show the lessons he or she offers to the kids? Because Alex Rodriguez generates far more revenue for his employer than any kindergarten teacher, his value of marginal product is far greater. The result? The intense competition from profit-maximizing baseball team owners for "A-Rod's" services mean that in December 2007 Mr. Rodriguez signed a contract that will pay him $275,000,000 over the next 10 years to play baseball. A kindergarten teacher, making an average of $25,000 per year would have to teach for more than 1,000 years to earn that much money. Topic: Profit maximization Skill: Level 5: Critical thinking Section: Checkpoint 19.1 Status: Old AACSB: Written and oral communication 11) How does a firm's demand for labor change if the price of the firm's product increases? Relate your answer to the value of marginal product. Answer: An increase in the price of the firm's product increases the firm's demand for labor. The value of marginal product of labor equals the marginal product multiplied by the price of the product. Hence an increase in the price of the product increases the value of marginal product of labor and thereby increases the demand for labor. Topic: Demand for labor Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Reflective thinking

12) The table below has the marginal product schedule for a firm. If the price of the product is $2 a unit, complete the table. If the wage rate is $8 an hour, how many workers does the firm hire?

Answer:

If the wage rate is $8 an hour, the firm hires 4 workers because that is the quantity that sets the value of marginal product equal to the wage rate. Topic: Value of marginal product Skill: Level 4: Applying models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

13) The table above shows the total product schedule for Shines Car Wash. The market for car washes is perfectly competitive and car washes sell for $5 each. The labor market is competitive and the wage rate is $50 per day. What is the value of marginal product for each worker? How many workers does the firm hire to maximize profit? Answer:

The value of marginal product is the marginal product multiplied by the price of a car wash. The value of marginal product schedule is given in the table above. To maximize its profit, when the wage rate is $50 per day, Shines Car Wash hires 2 workers because at this point the value of marginal product equals the wage rate. Topic: Value of marginal product Skill: Level 4: Applying models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

14) The table below has the marginal product schedule for Nick's Pizza. a. If pizza sells for $8 each, complete the last column of the table.

b. If Nick can hire workers at the going wage rate of $16 an hour, how many workers does Nick hire? Answer:

a. The completed table is above. b. Nick hires 4 workers because that is the quantity of workers that sets the value of the marginal product equal to the wage rate. Topic: Value of marginal product Skill: Level 4: Applying models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

15) Tom and Mary grow tomatoes. They can hire different numbers of college students to help plant, cultivate, and harvest the tomatoes. The table below gives their marginal product schedule.

a. If the price of a pound of tomatoes is $2 a pound, complete the first value of marginal product column in the table. If Tom and Mary must pay their workers $10 an hour, how many workers do they hire? b. If the price of a pound of tomatoes falls to $1 a pound, complete the second value of marginal product column in the table. If Tom and Mary still must pay their workers $10 an hour, how many workers do they hire? c. When the price of a pound of tomatoes falls, what happens to Tom and Mary's demand for labor curve? Answer:

a. The completed table is above. Tom and Mary hire 4 workers because that is the number of workers that sets the value of marginal product equal to the wage rate. b. The completed table is above. Tom and Mary hire 2 workers because that is the number of workers that sets the value of marginal product equal to the wage rate. c. When the price of a pound of tomatoes falls, Tom and Mary's demand for labor decreases and their demand for labor curve shifts leftward. Topic: Value of marginal product Skill: Level 4: Applying models Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking

16) A worker has a marginal product of 15 units a day, each of which can be sold for $10. Is it profitable to hire this worker if the wage rate is $100 a day? Briefly explain your answer. Answer: It is profitable to hire this worker because the worker's value of marginal product is $150 a day (the price, $10, times the marginal product, 15 units), which exceeds the wage rate of $100 a day. The worker creates $150 more revenue for the firm at a cost of only $100. Hence it is profitable to hire this worker. Topic: Profit maximization Skill: Level 2: Using definitions Section: Checkpoint 19.1 Status: Old AACSB: Analytical thinking 19.7 Essay: Labor Markets 1) Why might an individual decrease the quantity of labor he or she supplies when the wage rate increases? Briefly explain your answer. Answer: A worker might decrease the quantity of labor he or she supplies if he or she values additional leisure time more than additional income. It is this reaction that leads to the backwardbending labor supply curve, which shows that above a certain wage, as the wage rate increases, the individual's quantity of labor supplied decreases. Topic: Supply of labor Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication 2) In order to spend more time with her children, a young mother decides to work fewer hours as her pay increases. What does her labor supply curve look like? Answer: The young mother's labor supply curve is backward bending. In other words, her labor supply curve is positively sloped at lower wage rates, indicating that a higher wage rate increases the quantity of labor she supplies. But when her wage rate reaches a certain amount, further increases in the wage rate decrease the quantity of labor she supplies and her labor supply curve becomes negatively sloped. Topic: Supply of labor Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication

3) Explain why an individual's labor supply curve is backward bending. Answer: An individual's labor supply curve bends backward when an increase in the wage rate decreases the quantity of labor the worker supplies. The labor supply curve bends backwards because workers have alternative uses for their time that they prefer to working. So if a worker is offered a high enough wage rate, the worker figures that with the higher income from the higher wage rate, he or she can afford to decrease the quantity of labor supplied in order to take additional time off from work to enjoy more leisure time. Topic: Supply of labor Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication 4) As the population of Las Vegas increased, what happened to the supply of labor and the supply curve of labor in Las Vegas? Answer: As the population of Las Vegas increased, the supply of labor increased and the supply curve of labor shifted rightward. Topic: Supply of labor Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Reflective thinking 5) What happens to the supply of labor when more people pursue education and training? Be sure to discuss what happens to both the supply of low-skilled and high-skilled labor. Answer: The supply of low-skilled labor decreases, and the supply curve of low-skilled labor shifts leftward. Then, after people complete their training, the supply of high-skilled labor increases and the supply curve of high-skilled labor shifts rightward. Topic: Supply of labor Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication

6) The Small Bookshop hires teenagers who love books. How does each of the following changes affect the supply and demand for workers for the Small Bookshop? a. The Big Bookshop, a chain bookstore down the street, offers a higher wage rate. b. More people buy books from Amazon.com. c. People watch more television and read fewer books. d. More older people who love to read move into the area where the Small Bookshop is located. Answer: a. The supply of workers for Small Bookshop decreases and the supply curve shifts leftward. b. The demand for books from Small Bookshop decreases. The price of books at the Small Bookshop falls and so the demand for workers decreases. c. Similar to part (c), the demand for workers decreases. d. An increase in the population of readers increases the demand for books and thus increases the demand for workers at the Small Bookstore. Topic: Demand and supply of labor Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication 7) What tools can unions use to increase the demand for union labor? Answer: The main tools that unions use to increase the demand for union labor are: increased training and education for its members; lobbying for import restrictions; supporting minimum wage laws; supporting immigration restrictions; and increasing the demand for the goods produced. Topic: How unions try to change the demand for labor Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication 8) Why does an increase in the minimum wage increase the demand for union labor? Answer: An increase in the minimum wage raises the cost of unskilled labor, which is typically nonunionized. By making this type of labor, which can be substituted for union labor, more expensive, an increase in the minimum wage increases the demand for union labor. Topic: How unions try to change the demand for labor Skill: Level 2: Using definitions Section: Checkpoint 19.2 Status: Old AACSB: Written and oral communication

9) The above figure represents the market for professional minor-league baseball umpires. a. If umpires are offered $90 a game, what is the quantity of umpires supplied? b. If umpires are offered $90 a game, is there a surplus or shortage of games umpired? What does the shortage or surplus equal? c. What is the equilibrium wage rate and quantity of umpires? Answer: a. The quantity of umpires supplied is 20 umpires. b. At $90 a game, there is a shortage of umpires. The shortage equals the quantity demanded, 50 umpires, minus the quantity supplied, 20 umpires, for a shortage of 30 umpires. c. The equilibrium wage rate is $120 a game and the equilibrium quantity is 40 umpires. Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

10) The above figure represents the market for teenage workers at fast-food restaurants in Kansas City. a. What is the equilibrium wage rate and employment? b. Describe the market at a wage rate of $6 per hour. c. Describe the market at a wage rate of $12 an hour. d. How would an increase in the number of young, married college graduates, who tend to eat at fast-food restaurants, affect the figure, the equilibrium wage rate, and employment? Answer: a. The equilibrium wage rate is $8 an hour and the equilibrium quantity of employment is 4,000 workers. b. If the wage rate is $6 an hour, the quantity of labor supplied is less than the quantity of labor demanded. There is a shortage in the market. c. If the wage rate is $12 an hour, the quantity of labor supplied is greater than the quantity of labor demanded. There is a surplus in the market. d. An increase in the number of people who eat in fast-food restaurants will increase the demand for workers at fast-food restaurants. As a result the demand for labor curve will shift rightward and the equilibrium wage rate and equilibrium quantity of employment will both increase. Topic: Labor market equilibrium Skill: Level 3: Using models Section: Checkpoint 19.2 Status: Old AACSB: Analytical thinking

19.8 Essay: Capital and Natural Resource Markets 1) If the quantity of capital supplied exceeds the quantity of capital demanded, what takes place? Answer: If the quantity of capital supplied exceeds the quantity of capital demanded, the rental rate of capital falls in order to restore equilibrium. As the rental rate falls, the quantity of capital supplied decreases and the quantity of capital demanded increases. Topic: Loanable funds market equilibrium Skill: Level 2: Using definitions Section: Checkpoint 19.3 Status: Old AACSB: Reflective thinking 2) Why is the supply of an nonrenewable natural resource perfectly elastic? Answer: The supply of an nonrenewable natural resource is perfectly elastic at the price that makes the current price that makes next year's expected price higher than the current price by the same percentage as the interest rate. If the current price is below that, the owner is better off storing his or her current supply and bringing it to market next year. Why? If the owner sells the resource this year and saved the proceeds, the owner will have less next year than if the owner waited and sold the resource next year at the higher price. Topic: Supply of a nonrenewable natural resource Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Written and oral communication 3) What is the Hotelling Principle? Have resource prices behaved as the principle predicts? Answer: The Hotelling Principle states that the price of a nonrenewable natural resource will rise at a rate equal to the interest rate. In reality, resource prices have not behaved this way. In addition to interest rates, technology and cost of extracting the resources affect the price of resources and so in reality, the prices of nonrenewable natural resources have fluctuated during the past years. Topic: Hotelling principle Skill: Level 3: Using models Section: Checkpoint 19.3 Status: Old AACSB: Written and oral communication

Foundations of Microeconomics, 9e (Bade) Chapter 20 Economic Inequality 20.1 Measuring Economic Inequality 1) In the United States, the poorest 20 percent of the household receive approximately ________ percent of total money income. A) 3.1 B) 9.5 C) 11.8 D) 17.6 E) 20.0 Answer: A Topic: Inequality in the United States, income Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Revised AACSB: Reflective thinking 2) In the United States, the richest 20 percent of households receive approximately ________ percent of total money income. A) 33 B) 12 C) 50 D) 75 E) 20 Answer: C Topic: Inequality in the United States, income Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 3) In the United States, the poorest 20 percent of households receive about ________ percent of total money income while the richest 20 percent receive about ________ percent of total money income. A) 3; 50 B) 8; 71 C) 12.; 32 D) 13; 68 E) 20; 20 Answer: A Topic: Inequality in the United States, income Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 1 Copyright © 2021 Pearson Education, Inc.

4) Which of the following statements is TRUE regarding the distribution of income in the United States? A) The Lorenz curve shows that incomes are distributed fairly. B) The line of equality shows that incomes are distributed equally. C) The inequality in the distribution of income can be seen because the Lorenz curve lies below the line of equality. D) The inequality in the distribution of income can be seen because the Lorenz curve lies above the line of equality. E) Both answers A and B are correct. Answer: C Topic: Inequality in the United States, income Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 5) In 2013 the wealthiest 1 percent of all U.S. households owned what percentage of total wealth? A) about 37 percent B) less than 10 percent C) about 46 percent D) more than 50 percent E) about 14 percent Answer: A Topic: Inequality in the United States, wealth Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Revised AACSB: Reflective thinking 6) As a tool that is used to measure inequality in the distribution of income, the Lorenz curve graphs A) the cumulative percentage of money income against the cumulative percentage of households. B) the percentage of total money income received by each given percentage of households. C) the mean income, median income, and mode income against the percentage of households. D) the mean money income received by households over time. E) the cumulative percentage of money income against the mean and median money income. Answer: A Topic: Lorenz curve Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

7) A Lorenz curve for income shows the A) demand for Lorenz cough drops. B) average income graphed against the average number of people in the household. C) cumulative percentage of income graphed against cumulative percentage of households. D) relationship between income and wealth. E) total amount of income graphed against the total number of households. Answer: C Topic: Lorenz curve Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 8) Lorenz curves are A) horizontal. B) vertical. C) upward sloping. D) downward sloping. E) straight lines. Answer: C Topic: Lorenz curve Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 9) A Lorenz curve A) is identical to the straight line sloping up at a 45° angle. B) lies above the straight line sloping up at a 45° angle. C) lies below the straight line sloping up at a 45° angle. D) starts below the straight line sloping up at a 45° angle and then ends above this line. E) starts above the straight line sloping up at a 45° angle and then ends below this line. Answer: C Topic: Lorenz curve Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

10) If the Lorenz curve for income moves upward toward the 45° line, then the A) distribution of income has become more unequal. B) distribution of income has become more equal. C) mean (average) household income increased. D) total household income increased. E) total household income decreased. Answer: B Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 11) If all households in a nation receive the same income, the nation's Lorenz curve A) is horizontal. B) is vertical. C) is a 45° line. D) runs along the horizontal axis until it reaches 50 percent of households and then runs vertically up to 100 percent of income. E) runs along the horizontal axis until it reaches 100 percent of households and then runs vertically up to 100 percent of income. Answer: C Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 12) Country A has a more equal distribution of income than country B if A) country A's Lorenz curve is closer to the line of equality than is country B's Lorenz curve. B) country B's Lorenz curve is closer to the line of equality than is country A's Lorenz curve. C) country A's Lorenz curve is just as close to the line of equality as is country B's Lorenz curve. D) country A's Lorenz curve lies below country B's Lorenz curve at low levels of income and above it at high levels of income. E) None of the above because it is impossible to compare income inequalities across countries. Answer: A Topic: Lorenz curve Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

13) Looking at the Lorenz curves for income distribution in all the world's nations, we would find that A) some nations have Lorenz curves that lie above the 45° line, other nations have Lorenz curves that lie below the 45° line, but no nation has a Lorenz curve that lie on the 45° line. B) all nations have Lorenz curves that lie above the 45° line. C) all nations have Lorenz curves that lie below the 45° line. D) some nations have Lorenz curves that lie above the 45° line, other nations have Lorenz curves that lie below the 45° line, and still other nations have a Lorenz curve that lies on the 45° line. E) None of the above answers is correct. Answer: C Topic: Lorenz curve Skill: Level 5: Critical thinking Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

Group Poorest 20% Second poorest 20% Middle 20% Second richest 20% Richest 20%

Percent of income 5 10 15 25 45

The table gives the distribution of income in Miseria. 14) What percent of income is earned by the richest forty percent? A) 5 percent B) 20 percent C) 70 percent D) 55 percent E) More information is needed to answer the question. Answer: C Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

15) What percent of income is earned by the richest 60 percent of the population? A) 25 percent B) 30 percent C) 55 percent D) 85 percent E) More information is needed to answer the question. Answer: D Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking 16) What percent of income is earned by the poorest 60 percent of the population? A) 25 percent B) 30 percent C) 55 percent D) 15 percent E) More information is needed to answer the question. Answer: D Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking 17) What percent of income is earned by the richest 80 percent of the population? A) 25 percent B) 95 percent C) 100 percent D) 5 percent E) More information is needed to answer the question. Answer: B Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

18) The above table shows the distribution of income in two countries, Alpha and Beta. Based on these distributions of income A) Country Beta has more equal income distribution than does Country Alpha. B) both countries have equal distributions because 100 percent of the incomes are accounted for. C) the Lorenz Curve for country Beta is closer to the line of equality. D) Country Alpha has a more equal distribution of income than does Country Beta. E) It is impossible to answer the question without more information. Answer: D Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking 19) The above table shows the distribution of income in two countries, Alpha and Beta. In Country Alpha, the poorest 20 percent receive ________ percent of total income. A) 5 B) 9 C) 1 D) 19 E) 14 Answer: B Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

20) The above table shows the distribution of income in two countries, Alpha and Beta. In Country Beta, the richest 40 percent of households receive ________ percent of total income. A) 20 B) 40 C) 60 D) 80 E) 100 Answer: D Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

21) In the figure above, the nation with the most EQUAL distribution of income is nation A) A. B) B. C) C. D) The distribution of income is the same in all three nations because their Lorenz curves can be plotted on the same diagram. E) It is impossible to determine with the information given. Answer: C Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

22) In the figure above, the nation with the LEAST equal distribution of income is nation A) A. B) B. C) C. D) The distribution of income is the same in all three nations because their Lorenz curves can be plotted on the same diagram. E) It is impossible to determine with the information given. Answer: A Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking 23) In the figure above, the nation with the highest average income is nation A) A. B) B. C) C. D) The average income is the same in all three nations because their Lorenz curves can be plotted on the same diagram. E) It is impossible to determine with the information given. Answer: E Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking 24) In the United States, it is the case that A) both income and wealth are equally distributed. B) wealth is equally distributed but income is distributed unequally. C) income is equally distributed but wealth is distributed unequally. D) both income and wealth are unequally distributed and wealth is distributed more unequally than is income. E) both income and wealth are unequally distributed and income is distributed more unequally than is wealth. Answer: D Topic: Wealth and income distribution Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

25) Comparing the wealth and income distribution in the United States, we see that A) wealth is distributed less equally than income. B) because wealth and income are different terms for the same thing, the distributions are the same. C) income is distributed less equally than wealth. D) we cannot compare the distribution of wealth and income. E) None of the above answers is correct. Answer: A Topic: Wealth and income distribution Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 26) In the United States, the A) distribution of income has become more equal since 1970. B) Lorenz curve for income and the Lorenz curve for wealth are equally close to the line of equality. C) Lorenz curve for income is closer to the line of equality than is the Lorenz curve for wealth. D) Lorenz curve for wealth is closer to the line of equality than is the Lorenz curve for income. E) None of the above answers is correct. Answer: C Topic: Wealth and income distribution Skill: Level 4: Applying models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 27) Which of the following statements is correct? A) Wealth inequality in the United States is greater than income inequality. B) Income inequality in the United States is greater than wealth inequality. C) Income includes all the things owned by a household at a certain point in time. D) The top fifth of households have a greater share of the nation's income than the nation's wealth. E) The fraction of wealth owned by the bottom 20 percent of households is larger than the fraction income earned by the bottom 20 percent of households. Answer: A Topic: Wealth and income distribution Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

28) Looking at the income distribution in the United States since 1970, we see that A) only the lowest 20 percent and highest 20 percent increased their shares of income. B) the lower 50 percent increased its share of income and the upper 50 percent stayed the same. C) the highest 20 percent increased its share of income. D) all the 20 percent groups increased their shares of income. E) the lower 50 percent increased its share of income and the upper 50 percent decreased its share of income. Answer: C Topic: Economic mobility Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 29) In the United States, since 1970 the share of income received by the richest 20 percent of households has ________ and the share received by the other 80 percent of households has ________. A) increased; increased B) increased; decreased C) decreased; increased D) not changed; not changed E) increased; not changed Answer: B Topic: Economic mobility Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 30) Since 1970 in the United States, the distribution of income has changed and the group that benefited the most has been the A) better educated. B) less educated. C) low-skilled workers. D) middle class, that is the group in the middle 20 percent of the income distribution. E) None of the above answers is correct because all groups benefited equally. Answer: A Topic: Economic mobility Skill: Level 5: Critical thinking Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

31) The factor that leads to the LARGEST difference in households' incomes is A) race. B) education. C) gender. D) size of household. E) location of household. Answer: B Topic: Income distribution by characteristic Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 32) ________ is the single biggest factor affecting income distribution in the United States. A) Location of household B) Type of household C) Education D) Age of household E) Gender Answer: C Topic: Income distribution by characteristic Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 33) Of the following major characteristics that lead to income disparity, the factor with the SMALLEST impact is A) sex. B) race. C) region of the country. D) education. E) number of people in the household. Answer: C Topic: Income distribution by characteristic Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

34) The highest-income household in the United States today is likely to be a college-educated A) married white couple. B) single white female. C) married Asian couple. D) single black male. E) single black female. Answer: A Topic: Income distribution by characteristic Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 35) Measured annual income inequality overstates actual lifetime inequality because A) poverty levels vary across states. B) homeless people are not always counted. C) different households are in different stages in the life cycle. D) people tend to overstate their incomes. E) people differ in the amount of education they have attained. Answer: C Topic: Annual versus lifetime income Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 36) The measured inequality of annual income ________ the actual inequality of lifetime income because ________. A) overstates; different households are at different stages in the life cycle B) overstates; the Lorenz curves differ for income and wealth C) understates; people live in different geographic areas D) understates; people have different levels of education E) overstates; different households have different amounts of wealth Answer: A Topic: Annual versus lifetime income Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

37) Poverty for a household is defined as the state of A) having a total income that is below the median total income. B) having an income that can be spent on food, shelter, and clothing that is below the median for food, shelter, and clothing. C) income below what is thought fair. D) income below what is thought necessary for food, shelter, and clothing. E) having an income that is below average. Answer: D Topic: Poverty Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 38) In the United States in 2010, a family of four was considered to be living below the poverty line only if its household income was less than approximately A) $400 per year. B) $4,000 per year. C) $11,900 per year. D) $22,800 per year. E) $35,800 per year. Answer: D Topic: Poverty Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 39) In the United States in 2017, the Census Bureau determined that approximately ________ million Americans lived in households that had incomes below the poverty line. A) 40 B) 22 C) 84 D) 11 E) 112 Answer: A Topic: Poverty Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Revised AACSB: Reflective thinking

40) In 2017, the poverty rate in the United States level was approximately ________ percent. A) 3 B) 12 C) 32 D) 20 E) 26 Answer: B Topic: Poverty Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Revised AACSB: Reflective thinking 41) Looking at the U.S. poverty rate by race, we see that A) the poverty rates by race are now equal. B) whites have a higher poverty rate than do blacks. C) Hispanics and blacks have a higher poverty rate than whites. D) whites have a nearly zero poverty rate while Hispanics and blacks are near 20 percent. E) whites and blacks have higher poverty rates than do Hispanics. Answer: C Topic: Poverty Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 42) Which type of household has the lowest poverty rate? A) black B) Hispanic C) white D) White and Hispanic are almost tied. E) White and black are almost tied. Answer: C Topic: Poverty Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

43) Which of the following is correct about the United States? A) Income is equally distributed. B) Wealth is equally distributed. C) Income is equally distributed but wealth is unequally distributed because of inheritances. D) Both wealth and income are unequally distributed. E) Both wealth and income are equally distributed. Answer: D Topic: Inequality in the United States Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 44) If the income distribution is more unequal than the wealth distribution, then the A) Lorenz curve for income will be farther away from the line of equality than the Lorenz curve for wealth. B) government has imposed a higher tax rate on income. C) Lorenz curve for wealth will be farther away from the line of equality than the Lorenz curve for income. D) Lorenz curve for wealth will lie above the Lorenz curve for income. E) It is not possible to draw the Lorenz curve for wealth on the same figure with the Lorenz curve for income. Answer: A Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 45) In the United States since 1970, the share of money income received by the richest 20 percent of households has ________ and the share of income received by the lowest 20 percent of households has ________. A) increased; not changed B) not changed; increased C) not changed; decreased D) decreased; increased E) increased; decreased Answer: E Topic: Economic mobility Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

46) Of all the characteristics that lead to income inequality, the factor with the largest impact is A) race. B) sex. C) age. D) education. E) location. Answer: D Topic: Income distribution by characteristic Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 47) The inequality of annual income A) overstates the amount of lifetime inequality. B) understates the amount of lifetime inequality. C) cannot change from one year to the next. D) is about the same as the amount of lifetime inequality. E) cannot be compared to the amount of lifetime inequality. Answer: A Topic: Annual versus lifetime income Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 48) Which of the following statements about poverty is (are) correct? i. Blacks and Hispanics have higher poverty rates than whites. ii. Over the last 40 years, poverty rates for all groups have generally increased. iii. Most household spells of poverty last well beyond 9 months. A) i only B) ii only C) iii only D) ii and iii E) i, ii, and iii Answer: A Topic: Poverty Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

20.2 How Economic Inequality Arises 1) Workers who have invested in education and training A) are more likely to find jobs that are not rewarding. B) have a higher value of marginal product. C) have a more difficult time finding a job because their wage rate is higher. D) have identical supply curves to otherwise similar workers who have not invested in education and training. E) None of the above answers is correct. Answer: B Topic: Demand for high-skilled labor Skill: Level 1: Definition Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 2) The demand for labor i. depends on the availability of labor. ii. decreases when the supply of labor increases. iii. depends on the value of marginal product of labor. A) i only B) i and ii C) iii only D) i and iii E) i, ii, and iii Answer: C Topic: Demand for high-skilled labor Skill: Level 1: Definition Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 3) One reason why economists earn more than Taco Bell workers is because economists have a ________ value of marginal product of labor than Taco Bell workers. A) lower B) higher C) similar D) more convex E) more concave Answer: B Topic: Demand for high-skilled labor Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

4) The gap between the salary of Tom Cruise and an unknown actor is over $15 million per movie. This difference means that Mr. Cruise's value of marginal product is A) over $15 million greater than the value of the marginal product of the unknown actor. B) less than $15 greater than value of the marginal product of the unknown actor. C) $15 million greater than the value of the marginal product of the unknown actor. D) equal to the value of the marginal product of the unknown actor. E) More information is need to make the comparison. Answer: A Topic: Demand for high-skilled labor Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking 5) If a firm is willing to pay a high-skilled worker $25 per hour and a low-skilled worker $10 per hour then the value of marginal product of skill is A) $15. B) $40. C) $10. D) $25. E) There is not enough information to answer this question. Answer: A Topic: Demand for high-skilled labor Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking 6) Which of the following is TRUE? At a given quantity of employment, if the i. value of marginal product of a high-skill worker is $35 and the value of marginal product of a low-skill worker is $10, the value of marginal product of the skill is $25. ii. value of marginal product of a high-skill worker is $35 and the value of marginal product of a low-skill worker is $10, the cost of acquiring the skill is $25. iii. value of marginal product of a skill is $25, then the wage rate must be $25. A) i only B) ii only C) iii only D) i and iii E) ii and iii Answer: A Topic: Demand for high-skilled labor Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

7) Which of the following is (are) a difference between high-skilled workers and low-skilled workers? i. High-skilled workers have a higher value of marginal product. ii. High-skilled workers have incurred lower opportunity costs to acquire their skills. iii. The demand for high-skilled workers exceeds that for low-skilled workers. A) i only B) ii and iii C) i and ii D) i and iii E) i, ii, and iii Answer: D Topic: Demand for high-skilled labor Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 8) The demand curve for high-skilled workers A) lies to the right of the demand curve for low-skilled workers. B) lies to the left of the demand curve for low-skilled workers. C) is vertical. D) is horizontal. E) lies to the right of the demand curve for low-skilled workers at high wages and to the left of the demand curve for low-skilled workers at low wages. Answer: A Topic: Demand for high-skilled labor Skill: Level 1: Definition Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 9) Suppose a supply curve for high-skilled labor is drawn in the same graph as a supply curve for low-skilled labor. The vertical distance between these two curves represents the A) wage rate paid to a high-skilled worker. B) wage rate paid to a low-skilled worker. C) compensation the high-skilled worker requires for the cost of acquiring the skill. D) number of high-skill workers that will be hired. E) difference in the value of marginal product between the high-skilled workers and the lowskilled workers. Answer: C Topic: Supply of high-skilled labor Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

10) Skills are costly to acquire. What forms can these costs take? i. out-of-pocket expenditures to pay for more education ii. a higher value of marginal product iii. forgone earnings while attending higher education A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii Answer: D Topic: Supply of high-skilled labor Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 11) How does the supply curve of high-skilled workers compare to the supply curve of lowskilled workers? A) Because skills are costly to acquire, at a given wage rate the quantity supplied of high-skilled workers is greater than that of low-skilled workers. B) Because skills are costly to acquire, at any given wage rate the quantity supplied of highskilled workers is less than that of low-skilled workers. C) Because skills are inexpensive to acquire, at any given wage rate the quantity supplied of high-skilled workers is less than that of low-skilled workers. D) Because skills are inexpensive to acquire, at any given wage rate the quantity supplied of high-skilled workers is greater than that of low-skilled workers. E) None of the above answers is correct. Answer: B Topic: Supply of high-skilled labor Skill: Level 1: Definition Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 12) What determines the position of the supply curve of high-skilled workers relative to that of low-skilled workers? A) the cost of acquiring the skill B) the difference in the demand curves for the two groups C) Bureau of Labor Standard guidelines D) the difference in the value of the marginal products E) None of the above answers is correct. Answer: A Topic: Supply of high-skilled labor Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 21 Copyright © 2021 Pearson Education, Inc.

13) The ________ distance between the supply curve of low-skilled labor and the supply curve of high-skilled labor is the ________. A) horizontal; value of marginal product of skill B) horizontal; compensation for cost of acquiring skill C) vertical; value of marginal product of skill D) vertical; compensation for cost of acquiring skill E) vertical; difference in the price of the product produced b y high-skilled labor minus the price of the product produced by low-skilled labor Answer: D Topic: Supply of high-skilled labor Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking 14) The higher the cost of acquiring skills, the ________ are the high-skilled and low-skilled labor ________ curves. A) closer together; demand B) farther apart; demand C) closer together; supply D) farther apart; supply Answer: D Topic: Supply of high-skilled labor Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 15) Pete just started a new job as an assembler and is earning a wage of $20 per hour. Sam, who is an experienced assembler assigned to train Pete, earns $25 per hour. The opportunity cost to Pete of acquiring this skill is A) $45 per hour. B) $25 per hour. C) $20 per hour. D) $5 per hour. E) $0 per hour because Pete is being paid a wage. Answer: D Topic: Supply of high-skilled labor Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Revised AACSB: Reflective thinking

16) High-skilled workers earn more relative to low-skilled workers because the demand for highskilled workers is ________ that for low-skilled workers and the supply is ________ that for low-skilled workers. A) greater than; greater than B) greater than; lower than C) lower than; greater than D) lower than; lower than E) greater than; the same as Answer: B Topic: High-skilled and low-skilled wages Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 17) The demand curve for high-skilled workers lies ________ the demand curve for low-skilled workers and the supply curve of high-skilled workers lies ________ the supply curve of lowskilled workers. A) above; above B) above; below C) below; above D) below; below E) above; on Answer: A Topic: High-skilled and low-skilled wages Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 18) High-skilled workers earn more than low-skilled workers in part because the high-skilled workers have A) a higher value of marginal product. B) a lower value of marginal product. C) better health. D) fewer deductions. E) a greater supply than do low-skilled workers. Answer: A Topic: High-skilled and low-skilled wages Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

19) Compared to low-skilled workers, high-skilled workers have a ________ value of marginal product and ________ opportunity cost of obtaining their skills. A) higher; a higher B) higher; a lower C) lower; a higher D) lower; a lower E) higher; the same Answer: A Topic: High-skilled and low-skilled wages Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 20) The ________ the value of marginal product of skill, the ________. A) smaller; larger is the wage differential between low-skilled workers and high-skilled workers B) larger; more elastic the supply curve of labor C) larger; larger is the wage differential between low-skilled workers and high-skilled workers D) smaller; less elastic the supply curve of labor E) smaller; larger is the cost of acquiring the skill Answer: C Topic: High-skilled and low-skilled wages Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking 21) The larger the value of marginal product of a skill, the A) larger the vertical difference between the demand curves for high- and low-skilled labor. B) smaller the vertical difference between the demand curves for high- and low-skilled labor. C) larger the vertical distance between the supply curves for high- and low-skilled labor. D) smaller the vertical distance between the supply curves for high- and low-skilled labor. E) higher is the wage rate at which the demand curve for high-skilled workers crosses the demand curve for low-skilled workers. Answer: A Topic: High-skilled and low-skilled wages Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

22) The more costly it is to acquire a skill, the A) more people will go to school to learn the skill. B) less employers are willing to pay for the skill. C) greater the wage differential between high-skilled and low-skilled workers. D) smaller the wage differential between high-skilled and low-skilled workers. E) more the demand for workers with that skill exceeds the demand for workers without that skill. Answer: C Topic: High-skilled and low-skilled wages Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking 23) The rates of return on high school and college educations have A) not been estimated, but are assumed to be high. B) been estimated as negative, but these are still good options for most. C) been estimated at 50 percent per year. D) been estimated at between 5 to 10 percent per year. E) been estimated to be essentially zero. Answer: D Topic: Eye on the U.S. economy, does education pay? Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 24) Discrimination by customers creates a wage differential between two groups by creating a difference in the two groups' A) supply of labor. B) value of marginal product. C) marginal cost of labor. D) minimum wage. E) opportunity cost of acquiring skills. Answer: B Topic: Discrimination Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

25) Increased discrimination results in ________ of the workers discriminated against being hired and being paid ________ wage rates. A) more; higher B) more; lower C) fewer; higher D) fewer; lower E) the same number; lower Answer: D Topic: Discrimination Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 26) If buyers discriminate against women and minorities i. the value of marginal product of women and minorities is less than otherwise. ii. the wage rate paid to women and minorities is less than otherwise. iii. more women and minorities are hired than otherwise. A) i only B) ii only C) ii and iii D) i and ii E) i, ii, and iii Answer: D Topic: Discrimination Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 27) What economic effect works to eliminate sex and race discrimination? A) Firms hire only the preferred races and sex. B) Lower paid races and sexes give up working and drop out of the labor supply. C) Customers who discriminate pay higher prices to buy from preferred races and sex. D) The value of marginal product of the less preferred races and sexes eventually increases. E) Lower paid races and sexes decrease their demand for goods and services. Answer: C Topic: Discrimination Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

28) Looking at wage differentials between white men and other groups in the United States, we see that A) white men and black men earn about the same but women of all races earn less. B) white men earn more than black men but white women earn less than black men. C) black men earn less than white men and less than white women. D) white men and white women earn about the same but minorities earn less. E) black men and men of Hispanic origin earn about the same amount and both groups of men are paid more than black women and women of Hispanic origin. Answer: C Topic: Eye on the U.S. economy, sex and race earnings differences Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 29) Looking at wage differentials between white women and white men in the United States since 2000, we see that the amount of the difference A) has not changed. B) has increased. C) has decreased. D) at first increased but in the last decade it decreased. E) at first decreased but in the last decade it increased. Answer: C Topic: Eye on the U.S. economy, sex and race earnings differences Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 30) Which of the following is correct? On the average i. the wage differential between white males and white females has narrowed since 2000. ii. black females are paid more than black males. iii. Hispanic males are paid more than black males. A) i only B) ii only C) ii and iii D) i and iii E) i, ii, and iii Answer: A Topic: Eye on the U.S. economy, sex and race earnings differences Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

31) Differences in skills i. can arise partly from differences in education and/or partly from differences in on-the-job training. ii. can lead to large differences in earnings. iii. result in different demand curves for high-skilled and low-skilled labor. A) i only B) ii only C) ii and iii D) i and iii E) i, ii, and iii Answer: E Topic: Demand for high-skilled labor Skill: Level 1: Definition Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 32) Other things being equal, the demand curve for low-skilled workers ________ the demand curve for high-skilled workers. A) lies below B) lies above C) is the same as D) is not comparable to E) at high wages lies below and at low wages lies above Answer: A Topic: Demand for low-skilled labor Skill: Level 1: Definition Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking 33) The cost of acquiring a skill accounts for why the A) demand for high-skilled workers is different from the demand for low-skilled workers. B) supply of high-skilled workers is different from the supply of low-skilled workers. C) demand for high-skilled workers is different from the supply of high-skilled workers. D) demand for high-skilled workers is different from the supply of low-skilled workers. E) supply curves of high-skilled and low-skilled workers cross. Answer: B Topic: Supply of high-skilled labor Skill: Level 1: Definition Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking

34) The vertical distance between the supply curves for neurosurgeons and the supply curve for fast-food servers A) represents the difference in the demand for these two occupations. B) is the compensation that neurosurgeons require for the cost of acquiring this skill. C) is the difference in the value of marginal product of the two professions. D) is the difference in on-the-job training. E) equals the difference in the equilibrium wages paid these two professions. Answer: B Topic: Supply of high-skilled labor Skill: Level 1: Definition Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking 35) The wage rate that high-skilled workers receive is ________ the wage rate that low-skill workers receive. A) greater than or equal to B) equal to C) less than or equal to D) greater than E) less than Answer: D Topic: Supply of high-skilled labor Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 36) If discrimination against women decreases their value of marginal product, then women will have ________ wage rate than men and there will be ________ high-paying jobs for women. A) a lower; more B) a higher; fewer C) a lower; fewer D) a higher; more E) the same; fewer Answer: C Topic: Discrimination Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

37) Inequality in the distribution of income and wealth is increased by A) the point that the children of the poorest find it difficult to get into college. B) saving to redistribute an uneven income over the life cycle. C) marrying outside one's own socioeconomic class. D) donating money to charities. E) the U.S. income tax. Answer: A Topic: Choices Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 38) One reason economic ________ occurs is because high-skilled workers ________. A) inequality; have a higher value of marginal product than low-skilled workers and earn higher wages B) inequality; pay higher income taxes on their higher wages C) income redistribution; have a higher value of marginal product than low-skilled workers D) equality; earn higher wages so firms demand less high-skilled labor E) equality; have a lower value of marginal product due to higher wages Answer: A Topic: High-skilled and low-skilled wages Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

39) The figure above shows the market for high and low-skilled labor. Demand curve DA represents the demand for ________ labor because ________. A) low-skilled; low-skilled labor has a lower value of marginal product of labor than high-skilled labor B) low-skilled; firms can afford to hire more low-skilled labor at lower wages C) low-skilled; low-skilled labor's marginal product declines faster than high-skilled labor D) high-skilled; firms cannot afford to hire as many high-skilled workers E) high-skilled; high-skilled workers pay higher wages so they have lower disposable income Answer: A Topic: High-skilled and low-skilled wages Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

40) The figure above shows the market for high and low-skilled labor. Supply curve SB represents the supply of ________ labor because ________. A) high-skilled; these workers must receive higher pay in return for acquiring their skills B) high-skilled; firms supply more jobs for high-skilled workers C) low-skilled; low-skilled labor must work more hours to compensate for their lower wage D) low-skilled; firms supply fewer jobs for low-skilled labor E) low-skilled; low-skilled labor has a lower value of marginal product Answer: A Topic: High-skilled and low-skilled wages Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking 20.3 Income Redistribution 1) The three main ways that governments in the United States redistribute income are A) using the rule of law, subsidized services, and income taxes. B) private property rights, income taxes and the minimum wage. C) income taxes, income maintenance programs, and subsidized services. D) income taxes, rent control, and food stamps. E) sales taxes, food stamps, and subsidized services. Answer: C Topic: Income redistribution Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking

2) Which of the following currently helps redistribute income in the United States? i. negative income tax ii. progressive income taxes iii. Social Security A) ii and iii B) i and ii C) i and iii D) i, ii, and iii E) iii only Answer: A Topic: Income redistribution Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 3) A progressive income tax is a tax for which the average tax rate A) increases as income increases. B) becomes negative as income decreases. C) decreases as income increases. D) stays the same regardless of the income level. E) first slowly decreases and then rapidly increases as income increases. Answer: A Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 4) A tax is progressive if the average tax rate A) increases as income increases. B) increases as income decreases. C) is negative. D) is positive. Answer: A Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking

5) A ________ tax is one that taxes income at an average rate that decreases with the level of income. A) regressive B) progressive C) flat D) Social Security E) proportional Answer: A Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 6) A regressive income tax is a tax for which the average tax rate A) increases as income increases. B) becomes negative as income decreases. C) decreases as income increases. D) stays the same regardless of the income level. E) first increases and then decreases as income increases. Answer: C Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 7) A ________ has a constant tax rate regardless of the level of income. A) regressive tax B) progressive tax C) state tax D) proportional tax E) subsidy tax Answer: D Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking

8) In the United States, the federal and state income tax system is A) progressive. B) proportional. C) regressive. D) a flat-rate tax. E) None of the above answers is correct. Answer: A Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 9) Suppose a government imposes the following tax rates on its citizens. Income below $20,000 $20,001 - $40,000 above $40,000

Tax Rate 5% 3% 2%

The government has imposed a ________ tax system because the tax rate ________ with the level of income. A) regressive; decreases B) regressive; increases C) progressive; decreases D) progressive; increases E) proportional; falls proportionally Answer: A Topic: Taxes Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Analytical thinking

10) Suppose a government of LaLa Land imposes the following tax rates on its citizens. Income below $30,000 $30,001 - $70,000 above $70,000

Tax Rate 9% 12% 17%

The government has imposed a ________ tax system because its citizens will pay a ________ portion of their income as taxes as incomes increase. A) progressive; larger B) progressive; smaller C) regressive; larger D) regressive; smaller E) proportional; larger Answer: A Topic: Taxes Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Analytical thinking 11) Tax Payer Angela Bob Carmen

Income $10,000 $100,000 $1,000,000

Income Taxes Owed $1,000 $10,000 $100,000

The table above shows three taxpayers, their incomes, and taxes owed. The data reflect a ________ income tax system because people pay ________. A) regressive; a larger portion of their income as taxes B) progressive; a smaller portion of their income as taxes C) proportional; the same proportion of their income as taxes regardless of their level of income. D) flat rate; the same AMOUNT of taxes regardless of their income E) negative; a smaller portion of their income as taxes Answer: C Topic: Taxes Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Analytical thinking

12) Which of the following is (are) an example of an income maintenance program? i. unemployment compensation ii. welfare programs iii. Social Security programs A) i and iii B) ii and iii C) iii only D) i and ii E) i, ii, and iii Answer: E Topic: Income maintenance programs Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 13) Three types of income maintenance programs used by the United States are A) income taxes, Social Security, and the earned income tax credit. B) Social Security programs, OASDHI, and income taxes. C) Social Security programs, unemployment compensation, and welfare programs. D) welfare programs, income taxes, and the earned income tax credit. E) income taxes, Social Security, and subsidized services. Answer: C Topic: Income maintenance programs Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 14) Social Security is a ________ program paid for by ________. A) compulsory; payroll taxes B) compulsory; government money C) voluntary; payroll taxes D) voluntary; income taxes E) compulsory; voluntary taxes on income Answer: A Topic: Income maintenance programs Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking

15) Social Security and unemployment compensation A) are paid only to the poorest households. B) are both funded by income taxes. C) are distributed by individual states. D) both redistribute income. E) make the distribution of income less equal. Answer: D Topic: Income maintenance programs Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 16) ________ is a component of welfare programs. A) A progressive income tax B) Unemployment compensation C) Medicaid D) Social Security payroll taxes E) The negative income tax Answer: C Topic: Income maintenance programs Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 17) Looking at the results of government income redistribution programs, we find that the income received by the A) lowest 20 percent of households is almost unchanged because most don't work. B) highest 20 percent is left unaffected because they are able to shelter income from taxes. C) lowest 20 percent increases, and the income received by the highest 20 percent decreases. D) lowest 20 percent increases somewhat, but the income received by the next 20 percent increases the most. E) lowest 20 percent decreases because of government taxes, and the income received by the highest 20 percent increases because of government subsidies. Answer: C Topic: Sources of income Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking

18) Passing the TANF welfare program has A) made welfare programs more open-ended entitlement programs. B) limited assistance to five years. C) eliminated work and public service requirements. D) hurt economic incentives to work. E) made it into a negative income tax program. Answer: B Topic: Welfare trap Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 19) A negative income tax is a system that, in part A) taxes lower-income households at a higher rate. B) taxes higher-income households at a higher rate. C) guarantees a minimum level of income for all households. D) gives money from taxes paid by the poor to wealthy investors. E) guarantees a minimum level of taxation for all households. Answer: C Topic: Negative income tax Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 20) Which of the following characterizes the negative income tax concept? A) It is a flat tax that lower-income households do not pay. B) It is a progressive tax structure with enough deductions to provide refunds to some. C) It is a regressive tax with low-income earners getting a refund back when taxes are filed. D) It is a guaranteed annual income with earned incomes taxed at a flat rate. E) It is an income tax that eliminates all the inefficiency that occurs with the current tax system. Answer: D Topic: Negative income tax Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking

21) A negative income tax A) is a regressive income tax. B) is currently in use in the United States. C) makes the redistribution of income efficient. D) provides every household with a guaranteed minimum annual income. E) cannot be enacted in the United States because it is unconstitutional. Answer: D Topic: Negative income tax Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 22) With a negative income tax that has a $10,000 guaranteed income and a 25 percent tax rate, a household that has a market income of $4,000 has a total income of A) $15,000. B) $14,000. C) $13,000. D) $10,000. E) $7,000. Answer: C Topic: Negative income tax Skill: Level 3: Using models Section: Checkpoint 20.3 Status: Old AACSB: Analytical thinking 23) Which of the following is a way income is redistributed in the United States? i. subsidizing services ii. income taxes iii. income maintenance programs A) i only B) ii only C) ii and iii D) i and iii E) i, ii, and iii Answer: E Topic: Redistribution Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking

24) If you attended public school in your hometown, you have received ________ because the government has provided ________. A) a subsidized service; a service below the cost of its production B) a TANF grant; you a free education C) the benefit of a negative tax; you an education without having to pay taxes D) a subsidized service; a free education using a negative income tax E) a utilitarian benefit; an education to help promote equality Answer: A Topic: Subsidies Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Analytical thinking 25) A ________ tax is one that taxes income at an average rate that increases with the level of income. A) regressive B) progressive C) flat D) consumption E) proportional Answer: B Topic: Taxes Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 26) Of the following types of income tax systems, the one that provides the greatest amount of redistribution from the rich to the poor is a A) progressive income tax. B) proportional income tax. C) regressive income tax. D) flat-rate income tax. E) money-income tax. Answer: A Topic: Taxes Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking

27) The three major types of income maintenance programs are A) Social Security programs, unemployment compensation, and welfare programs. B) food stamps, unemployment compensation, and agricultural price supports. C) student loans, rent control, and welfare programs. D) corporate welfare, minimum wages, and affirmative action laws. E) minimum wages, food stamps, and student loans. Answer: A Topic: Income maintenance programs Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 28) A household's income earned from the markets for factors of production and with no government redistribution is A) money income. B) welfare. C) market income. D) exploitative income. E) factored income. Answer: C Topic: Market income, money income Skill: Level 1: Definition Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking 29) When government redistributes income, one dollar collected from a rich person translates into ________ received by a poor person. A) exactly one dollar B) less than one dollar C) more than one dollar D) zero dollars E) either exactly one dollar or, with some programs, more than one dollar Answer: B Topic: Big tradeoff Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Reflective thinking

30) With a negative income tax that has a $10,000 guaranteed minimum income and a 25 percent tax rate, a household that has earned income of $16,000 has a total income of A) $16,000. B) $22,000. C) $26,000. D) $24,000. E) $10,000. Answer: B Topic: Negative income tax Skill: Level 3: Using models Section: Checkpoint 20.3 Status: Old AACSB: Analytical thinking 31) The ________ explains that the redistribution of income occurs because ________. A) median voter theory; a political party is more likely to retain power by enacting laws that make its supporters as well off as possible B) utilitarian theory; the big tradeoff favors efficiency C) excess burden theory; utilitarianism favors equality over efficiency D) Lorenz curve; the lowest quintile of households receives the smallest level of benefits E) progressive tax theory; higher taxes are best at equalizing income Answer: A Topic: Median voter theory Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Application of knowledge 32) The median voter theory predicts income redistribution ________ occur because the median voter ________. A) will; wants to be made as well off as possible B) will; will only vote for the political party that supports a utilitarian proposal C) will not; has his/her disposable income reduced to inefficient levels D) will not; faces the big tradeoff E) will not; usually favors a negative income tax Answer: A Topic: Median voter theory Skill: Level 3: Using models Section: Checkpoint 20.3 Status: Old AACSB: Application of knowledge

20.4 Chapter Figures

The figure above shows Lorenz curves for a nation. 1) Based on the figure above, if the poorest 20 percent group of households increased the share of the nation's income they receive, then A) there is a movement up along the Lorenz curve for income. B) there is a movement down along the Lorenz curve for income. C) the Lorenz curve for income shifts toward the line of equality. D) the Lorenz curve for income shifts away from the line of equality. E) Both answers A and C are correct. Answer: C Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

2) Based on the figure above A) the average household's income exceeds its wealth. B) the average household's wealth exceeds its income. C) income is distributed more equally than wealth. D) wealth is distributed more equally than income. E) Both answers A and C are correct. Answer: C Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking 3) Based on the figure above A) wealth is distributed more equally than income. B) the Lorenz curve for wealth shows that the poorest 40 percent of households receive about 40 percent of the nation's wealth. C) average income exceeds average wealth. D) average wealth exceeds average income. E) the Lorenz curve for income shows that the richest 20 percent of households receive about 50 percent of the nation's income. Answer: E Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking 4) Based on the figure above, which of the following can cause a movement from point C to point D on the Lorenz curve for income? A) an increase in income for the bottom 60 percent of households B) an increase in income for the bottom 80 percent of households C) a decrease in income for the bottom 60 percent of households D) a decrease in income for the bottom 80 percent of households E) None of the above answers is correct. Answer: E Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

The figure above shows the demand and supply curves for high-skilled (indicated by an "H" subscript) and low-skilled (indicated by an "L" subscript) workers. 5) In the figure above, the value of the marginal product of skill creates the difference between the ________ curves and ________. A) SL and SH; is equal to $10 per hour B) SL and SH; exceeds $10 per hour C) DL and DH; is less than $10 per hour D) DL and DH; is equal to $10 per hour E) DL and DH; exceeds $10 per hour Answer: E Topic: High-skilled and low-skilled wages Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

6) In the figure above, the compensation for the cost of acquiring the skill creates the difference between the ________ curves and ________. A) SL and SH; is equal to $10 per hour B) SL and SH; is less than $10 per hour C) DL and DH; is less than $10 per hour D) DL and DH; is equal to $10 per hour E) SL and SH; exceeds $10 per hour Answer: B Topic: High-skilled and low-skilled wages Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking 7) In the figure above, the equilibrium wage differential between high-skilled workers and lowskilled workers is A) zero. B) $5.00 or less per hour. C) between $5.01 and $10.00 per hour. D) between $10.01 and $20.00 per hour. E) more than $20.01 per hour. Answer: C Topic: High-skilled and low-skilled wages Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking 8) In the figure above, if the value of the marginal product of skill increased, then the A) SL curve shifts leftward. B) SH curve shifts leftward. C) DH curve shifts rightward. D) DH curve shifts leftward. E) DL curve shifts leftward. Answer: C Topic: High-skilled and low-skilled wages Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking

9) In the figure above, if the cost of acquiring the skill decreased, then the A) SL curve shifts leftward. B) SH curve shifts leftward. C) SH curve shifts rightward. D) DH curve shifts leftward. E) DL curve shifts leftward. Answer: C Topic: High-skilled and low-skilled wages Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Analytical thinking 20.5 Integrative Questions 1) The wage differential between high-skilled and low-skilled workers is the result of A) a difference in the value of marginal product. B) the cost of acquiring skills. C) a negative income tax. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Integrative Skill: Level 3: Using models Section: Integrative Status: Old AACSB: Reflective thinking 2) Discrimination A) can be corrected by imposing a negative income tax. B) cannot explain economic inequality. C) immediately results in an unequal ownership of capital. D) is more likely to occur in a business where customers come into contact with minority employees. E) means that the costs paid by people who discriminate are lower than otherwise. Answer: D Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking

3) Which of the following statements correctly describes how taxes redistribute income across different households in an economy? A) The richest 40 percent of households increase their share of income. B) The poorest 60 percent of households increase their share of income. C) Taxes have no effect on the distribution of income. D) The poorest 20 percent of households receive 20 percent of their income from the government. E) The richest 20 percent of households increase their share of income and the poorest 20 percent decrease their share of income. Answer: B Topic: Integrative Skill: Level 2: Using definitions Section: Integrative Status: Old AACSB: Reflective thinking 4) Suppose a state charges an in-state student $12,000 in tuition for a college education and charges an out-of-state student $20,000 in tuition. This differential A) is a result of the state subsidizing education for its residents. B) explains the difference between the demand curve for high-skilled and low-skilled labor. C) explains the difference between the supply curve for high-skilled and low-skilled labor. D) can be corrected via a negative income tax. E) is an example of the positive theories of income redistribution. Answer: A Topic: Integrative Skill: Level 4: Applying models Section: Integrative Status: Old AACSB: Reflective thinking 20.6 Essay: Measuring Economic Inequality 1) What is the difference between wealth and income? Answer: Wealth is a stock of assets, that is, wealth is what is owned at a point in time. Income is a flow of earnings over time. Thus a person's wealth can be measured on, say December 31, 2012, whereas a person's income is measured over a time period, say during 2012. Topic: Wealth versus income Skill: Level 1: Definition Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

2) In the United States, do the poorest 20 percent of the households receive more or less than 5 percent of money income? Answer: The poorest 20 percent of households receive less than 5 percent of money income. Topic: Inequality in the United States Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 3) Which is distributed more equally: income or wealth? Answer: The income distribution is much more equal than the wealth distribution. The poorest 60 percent of wealth holders own only 1.8 percent of wealth and the richest 20 percent own about 89 percent of wealth. For income, the poorest 60 percent of households receive about 25 percent of money income and the richest 20 percent of households receive about 50 percent of money income. Topic: Inequality in the United States Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Revised AACSB: Written and oral communication 4) What is a Lorenz curve? Answer: A Lorenz curve is a curve that graphs the cumulative percentage of income (or wealth) against the cumulative percentage of households. The further the Lorenz curve is from the 45° line measuring equal incomes (or wealth), the greater the inequality of income (or wealth). Topic: Lorenz curve Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 5) "If the distribution of income was equal, the Lorenz curve would be a straight, 45° line." Is the previous statement correct or incorrect? Answer: The statement is correct. Topic: Lorenz curve Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

6) What do the Lorenz curves for wealth and income in the United States look like? Which is closer to the line of equality? Answer: Both the Lorenz curve for wealth and the Lorenz curve for income are bowed outward from the line of equality because neither wealth nor income is equally distributed. The Lorenz curve for income is closer to line of equality than the Lorenz curve for wealth because income, while unequally distributed, is more equally distributed than is wealth. Topic: Lorenz curve Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication 7) "Over the past two decades, the distribution of income in the United States has become more equal." Is the previous statement correct or incorrect? Briefly explain your answer. Answer: The statement is incorrect. In recent years, higher income groups have gained relatively more than the lower income groups. The share of income going to the richest 20 percent of households has increased and so the share of income going to the other 80 percent of households has decreased. Topic: Inequality over time Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication 8) Of age, marital status, family size, education, and race, which is the single biggest factor affecting the household income distribution? Answer: The single most important factor affecting the distribution of income is education, with more highly educated people earning significantly more than less-educated people. Topic: Income distribution by characteristic Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking 9) Describe the characteristics of the typical lowest income household in the United States and the characteristics of the typical richest household in the United States. Answer: The typical lowest income household has less than a 9th grade education, is headed by single black woman over 65. The family lives in the South. The highest income household lives in the West. It is headed white married couple between 45 and 54 years of age. Both parents have college educations. The family has two children. Topic: Income distribution by characteristic Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Written and oral communication

10) Is the poverty rate the lowest among Hispanic households, black households, or white households? Answer: The poverty rate is lowest among white households. About 12 percent of white households live in poverty whereas about 25 percent of Hispanic and black households live in poverty. Topic: Poverty Skill: Level 2: Using definitions Section: Checkpoint 20.1 Status: Old AACSB: Reflective thinking

11) The above table shows the distribution of income in two imaginary countries, Alpha and Beta. a. What does the table tell you about the second 20 percent group in each country? b. Calculate the cumulative percentage for both countries. c. Interpret the cumulative percentage for the third 20 percent group in both countries. Answer: a. The second 20 percent group earns 10 percent of the income in country Alpha and 6 percent of the income in country Beta.

b. The table above has the cumulative percentages. c. In country Alpha, the poorest 60 percent of households earns 35 percent of income. In country Beta, the poorest 60 percent of households earns 21 percent of income. Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

12) The above table shows the distribution of income in two imaginary countries, Alpha and Beta. a. In the figure below, draw the Lorenz curves for Alpha and Beta.

b. Compare the distribution of income in Alpha with that in Beta. Which distribution is more unequal? c. What would be the distribution of income in a country with perfect income equality? Answer:

a. The Lorenz curves are above. b. The distribution of income in Beta is more unequal than the distribution of income in Alpha because the Beta Lorenz curve lies further from the line of equality. c. Each 20 percent group would earn 20 percent of the income, so the Lorenz curve would lie on the line of equality. Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking 53 Copyright © 2021 Pearson Education, Inc.

13) The table above gives the average income received by each 20 percent group of households. Complete the table by finding the percentage of income earned by each group and the cumulative percentage of income. Label the figure below and then plot the Lorenz curve.

Answer:

The completed table is above. The Lorenz curve is below.

Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking

14) The table above gives cumulative percent of income received by each 20 percent group of households. Label the figure below and then plot the Lorenz curves. In which nation is income more equally distributed?

Answer:

The Lorenz curves are above. Income is distributed more equally in Country A. Topic: Lorenz curve Skill: Level 3: Using models Section: Checkpoint 20.1 Status: Old AACSB: Analytical thinking 20.7 Essay: How Economic Inequality Arises 1) What is "human capital" and why is it considered an investment? Answer: Human capital is the accumulated skill and knowledge of human beings. The cost of acquiring skills, say by obtaining a college degree, requires expenditures prior to earning a higher income. The higher income is the return for investing the time and money to obtain the degree. Whenever the return from an activity generates future streams of income, it can be considered an investment. Topic: Human capital Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Written and oral communication

2) What is "human capital"? How is it important in the determination of a worker's wage rate? Answer: Human capital is the skill, education, and training that a person acquires. The more human capital a person has, the higher the person's productivity and hence the higher the person's value of the marginal product. A higher value of the marginal product increases the demand for the worker and leads to a higher wage rate. Topic: Human capital Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Written and oral communication 3) How is human capital acquired? Answer: Human capital can be acquired either through formal education and/or through on-thejob training. Topic: Human capital Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 4) How does the demand for high-skilled workers compare to the demand for low-skilled workers? Why does this difference exist? Answer: The demand for high-skilled workers exceeds the demand for low-skilled workers because the value of marginal product of high-skilled workers exceeds the value of marginal product of low-skilled workers. Topic: Demand for high-skilled labor Skill: Level 2: Using definitions Section: Checkpoint 20.2 Status: Old AACSB: Reflective thinking 5) How does an increase in the cost to acquire a skill affect the vertical distance between the supply curves of high-skilled and low-skilled workers? Answer: The vertical distance between the supply of high-skilled labor curve and the supply of low-skilled labor curve is the amount necessary to compensate high-skilled workers for the cost of acquiring the skill. An increase in the cost of acquiring the skill increases the amount needed to compensate the workers and so increases the vertical distance between the two supply curves. Topic: Supply of high-skilled labor Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Written and oral communication

6) At any wage rate, the quantity of welders willing to work is less than the quantity of tomato pickers. Why? Answer: For the welder the cost of acquiring his or her skill is much higher than the cost incurred by the tomato picker. The cost of learning how to pick fruits and vegetables is so low that the supply of individuals who can do that activity is quite large. Welders must learn their trade on the job and/or through vocational training, which raises the costs of learning this skill and decreases the supply of welders. Topic: Supply of high-skilled labor Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Written and oral communication 7) Fully explain why it is a good idea for young people who are considering dropping out of high school to stay in school if the U.S. government pursues more liberal immigration policies over the next 20 years. Answer: Over the past several years, the number of illegal immigrants getting into the United States has increased sharply. If the United States makes it even easier for immigrants to enter the United States, it would be bad news for American high-school dropouts. An increase in immigration means the supply of labor increases. To the extent that immigrants are relatively low-skilled, their presence puts downward pressure on the wage rates of low-skilled Americans. Hence, dropping out of high school means that the young person basically faces a lifetime of low wages and low income. Topic: High-skilled and low-skilled wages Skill: Level 5: Critical thinking Section: Checkpoint 20.2 Status: Old AACSB: Written and oral communication 8) Describe the effect education and training have on outcomes in the labor market. Answer: Education and training affect both the supply and demand sides of the labor market. On the supply side, because education and training takes time and money to acquire, the number of people available for high-skilled work is less than those available for low-skilled work. As a result, the supply curve of high-skilled labor is left of the supply curve of low-skilled labor. On the demand side, education and training increases the productivity of workers, giving them a higher value of marginal product. The higher value of marginal product means that the demand curve for high-skilled labor lies right of the demand curve for low-skilled labor. With a decrease in supply and an increase in demand, the wage rate for high-skilled workers is higher than the wage rate for low-skilled workers. The effect on the quantity of labor employed, however, is indeterminate. Topic: High-skilled and low-skilled wages Skill: Level 3: Using models Section: Checkpoint 20.2 Status: Old AACSB: Written and oral communication 59 Copyright © 2021 Pearson Education, Inc.

20.8 Essay: Income Redistribution 1) What are the three ways that the government redistributes income in the United States? Briefly discuss each. Answer: The government redistributes income using income taxes, income maintenance programs, and subsidized services. Income taxes redistribute income because they are generally progressive so that higher-income households pay more in income taxes than lower-income households. In addition, poor households receive money from the income tax through the earned income credit. Income maintenance programs are programs such as Social Security, unemployment compensation, and welfare. These programs tend to give more income to poorer households than richer households. Finally, the government provides subsidized services, such as below-cost health care and below-cost schooling. Topic: Income redistribution Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Written and oral communication 2) What are three programs that redistribute income in the United States by making direct payments to people? Who benefits from each program? Answer: Three programs are Social Security, unemployment compensation, and welfare programs. Social Security is a public insurance system under which employers and employees pay payroll taxes. Recipients of Social Security include older persons, retirees, disabled persons and Medicare patients. Almost fifty million people receive Social Security benefits. Each state offers unemployment benefits to those people without a job, but are looking for work. Unemployed workers benefit from these programs. Finally, government welfare programs include supplementary security income (SSI) (for old and/or disabled people); temporary assistance for needy households (TANF) for people in poverty; a food stamp program (also helps the poorest families); and Medicaid (pays for medical costs for those families receiving SSI and TANF). Topic: Income redistribution Skill: Level 2: Using definitions Section: Checkpoint 20.3 Status: Old AACSB: Written and oral communication

3) A government redistribution of income program is proposed with the aim of making the income distribution the same as the 45° line in a Lorenz curve diagram. What implications does the idea of the "big tradeoff" have for the program? Answer: If the distribution of income was the same as the 45° line in a Lorenz curve diagram, then there would be no income differences across all households; everyone would have the same income. While this proposition might be appealing on an emotional level, the big tradeoff points out a significant drawback with this program and this outcome. The problem with the program arises because to achieve the desired result, the government would need to remove income from people who otherwise would be in the upper end of the income distribution and give the income to people who otherwise would be near the bottom end of the income distribution. This redistribution would drastically reduce the incentives of successful people to create new products, technologies and jobs. It would tell people that education, skill and training, and hard work will not be rewarded. People would rationally assume that there is no relationship between effort and outcome and therefore work effort would decrease sharply. Topic: Big tradeoff Skill: Level 5: Critical thinking Section: Checkpoint 20.3 Status: Old AACSB: Written and oral communication 4) Describe how a negative income tax works. Answer: A negative income tax provides every household with a guaranteed minimum annual income. It taxes all income above the guaranteed minimum at a fixed rate (there is no progressive income tax). For example, suppose the guaranteed minimum income is $10,000 per year and the tax rate is 25 percent. If a household has no income, it receives the $10,000 from the government. If a household earns $40,000 annually, it also receives the $10,000 minimum income. But because it must pay a 25 percent tax on the income it earns, it returns $10,000 to the government as taxes. This household breaks even. If a household makes $100,000, it also receives $10,000 from the government. But it must pay taxes on its income of $25,000. So this household pays net taxes of $15,000 to the government. Topic: Negative income tax Skill: Level 3: Using models Section: Checkpoint 20.3 Status: Old AACSB: Written and oral communication

5) The table below shows the distribution of market income in an economy. The government redistributes income by collecting income taxes and paying benefits shown in the table. a. Calculate the income shares of each 20 percent of households after tax and redistribution.

b. In the figure below, draw the Lorenz curves for this economy, both before and after taxes and benefits.

Answer:

a. The completed table is above.

b. The completed figure is above. Topic: Income redistribution Skill: Level 4: Applying models Section: Checkpoint 20.3 Status: Old AACSB: Analytical thinking

6) Suppose the government implements a negative income tax with a minimum guaranteed income of $20,000 and a tax rate of 30 percent on market income. a. What amount of tax would be paid by a household with no market income? b. What amount of tax would be paid by a household earning $100,000 of market income? Answer: a. A household with no market income would "pay" -$20,000 tax, that is, the household would receive $20,000. b. The household would receive the $20,000, but would pay $30,000 ($100,000 × 30 percent), so the net tax would be $10,000. Topic: Negative income tax Skill: Level 3: Using models Section: Checkpoint 20.3 Status: Old AACSB: Analytical thinking 7) Assume a negative income tax is set up with a 20 percent tax rate on market income and a guaranteed minimum income of $9,000. a. What is the amount of taxes a household with $23,000 of market income pays or the amount of taxes this household receives? b. What is the amount of taxes a household with $65,000 of market income pays or the amount of taxes this household receives? Answer: a. The taxes paid with market income of $23,000 equal $23,000 × 0.20 = $4,600, minus the guaranteed income of $9,000, or $4,600 - $9,000 = -$4,400. Thus this household receives a net payment of $4,400 from the government. b. The taxes paid with market income of $65,000 equal $65,000 × 0.20 = $13,000, minus the guaranteed income of $9,000, or $13,000 - $9,000 = $4,000. Thus this household pays to the government $4,000 in taxes. Topic: Negative income tax Skill: Level 3: Using models Section: Checkpoint 20.3 Status: Old AACSB: Analytical thinking